1. Gareth Horsfall
Mr
+39 333 6492356 (w)
Viale Trastevere, 227
Rome (RM) 00153
Italy
Who's the Greater fool?
For those of you who
are wondering
whether this e-zine is
timely, you would be
forgiven for thinking
that it is not, because
it is in fact a week
later usual. I had to
take an unexpected
trip to the UK on
Tuesday last week
and was not able to
put the final
preparations to the e-
zine yogether before
leaving. Anyway, if
you are suffering from Gareth e-zine's withdrawal
symptoms, here is my latest offering to those of you who
might benefit from some more expert knowledge.
This week I wanted to focus on an official theory: The
Greater Fool Theory.
http://en.wikipedia.org/wiki/Greater_fool_theory
The link is the official definition for those interested in it.
Financial
Words of
Wisdom
Whilst in London last week, I
heard a conversation between
two people on the Tube
platform. They were
discussing when to start
investing. One person clearly
had started and the other
person wanted to hold on until
the economic picture
improved.
The investor said to the other
person: "So you want to wait
until prices go up before you
2. I would like to prepare you for the next great stockmarket
frenzy. I do not know when it will come but I know it will
come. I do not know which sector it will be in, but I do
know it will be isolated to a particular sector. In addition,
I do know that it will drive prices artificially high and there
will be people waiting to buy those assets with the hope
of bagging a quick and handsome profit, but will be
unlikely to do so.
However, before we go into specifics, let me start with a
question! Have you ever bought anything for more than it
is really worth? A share, real estate or something on
ebay?
The Greater Fool Theory is based on the belief that even
if you pay more than an item is actually worth, you can
always sell it to someone else for even more. The
problem with this theory is that you may become the
greatest fool and get stuck with the item at the highest
price.
There are a lot of doomsayers around the subject of
investing. They explain how they lost money when
buying particular investments in the past. The issue is
highly unlikely to be the performance of the asset itself,
but more likely to be that the person bought the asset for
too much or timed their purchase badly. They should be
blaming themselves for paying too much. In fact, the
person who sold it to them probably thinks it was a great
investment.
I have been one of these fools in the past (The Tech
boom of 2000), but thankfully I learnt my lesson quickly
and started investing again .
The history of foolishness
Investment foolishness is not new. There are plenty of
examples of this in the last past.
The Dutch “Tulip Mania” of the 1630s, was one of the first
examples of the rise and collapse of a speculative bubble
market. Other historical examples are the The
Mississippi Scheme of 1684,The South Sea Bubble of
1720, the stock market crash of 1929 or the silver crash
of 1980. More recent examples are the dot-com bubble
buy. I prefer to buy low".
I couldn't put it better myself.
Protecting the
family.
You need to ask yourself only
3 simple questions to
determine if you should insure
your life.
1. How many people depend
on your earnings?
2. How much would your
dependents need for living
expenses in the event of your
death?
3. How long would it take for
your dependents to become
self-sufficient again?
Based on your answers, you
need to work out how much
you need.
Inflation watch
The EU have just released
their inflation figures to the end
of March and there was a
surprise increase from 2.4%
(end Feb) to 2.7% (end
March).
3. of 2000 and the subprime mortgage crisis of 2008.
In all of these examples, the prices of these assets rose
to unsustainable levels, based only on the belief they
would keep going up. But, there was no fundamental
value to support those prices, only pure speculation.
History seems to repeat itself, because speculators are
still on the lookout for the next hot thing. And they have
already forgotten the hard lessons from the last crash.
So how can you protect yourself?
The simplest way to avoid speculation is to invest wisely
and not try to follow trends. What is HOT this year, next
year, more than likely will NOT be so. There is evidence
to support this fact. When assets become the best
performing in any one year, the following year they
become one of the worst. This is not always true, but the
statistics are stacked in its favour.
Buying assets which have good long term value with
opportunity for further appreciation is the best strategy,
whether it be shares, bonds, real estate, commodities,
hedge funds or other alternative assets. And when
markets intermittently go crazy and asset prices fall, see
this as an opportunity to purchase more of those value
assets at rock bottom prices.
There will be another crash, when, how, what, and for
how long I don't know. But trust your decision, that you
purchased good value assets that are currently under-
priced and the market will correct this in time. Don't get
caught in a bubble when it is about to pop.
The big bubble concerns right now are Gold,
Commodities and Technology stocks.
Italy has seen its rate increase
to 2.5% in line with these
increases.
If you are unlucky enough to
hold assets in Pounds
Sterling, the current RPI is
5.3% and US Dollar is 2.7%.
Of course, these are the
published rates and in reality
they are likely to be a lot
higher.
Disclaimer
The views expressed here are
my own. They are not
necessarily shared by AES
International. They are
subject to change at any time
based on market and other
conditions. This is not an offer
or solicitation for the purchase
or sale of any security and
should not be construed as
such. References to specific
securities are for illustrative or
informational purposes only
and are not intended to be,
and should not be interpreted
as, recommendations to
purchase or sell such
securities.
