Friday, May 14, 2010

Are you ready to face the financial world?

If you earn money and have savings you have to deal with the financial world, you don't have a choice. I know it sounds unfair but that is truth, with that reality let us examine the big picture.

We are innovating in finance faster than in any other field of science. It is not clear yet if we can sustain the pace of innovation without taking massive risks or causing heart attacks to the market. Neither is there a definitive answer to "is this level of financial innovation driven leveraging good for the world as a whole or is it just extremely lucrative for the traders who take risks with other people's money?". You can always come up with a "jaw dropping CAGR" or a "makes me wanna throw up CAGR" depending on the time period you pick.

Unfortunately saying "I am going to take my ball and go home" is no longer an option :-(. You can put your money under your bed and sooner or later inflation will wipe you out. You can put your money in safe investments such as pension funds or index averaged mutual funds but you have no way of knowing how much risk exposure they have since you don't know who the managers of these funds are working with to put the capital to good use. I DON'T HAVE THE ANSWER for you, but I hope to get you to start thinking for yourself in case you have been avoiding it. This post was inspired by Mark Cuban's latest blog post, more on that below.

Mark Cuban (his tactics as a NBA team owner aside) wrote a provocative blog post title "what business is wall street in". The timing is clearly influenced by the crazy market plunge and snap back from earlier this week.
It makes for an extremely interesting and thoughtful question for us imo. Is Wall Street playing its part in the large macro economic theater or is it a case of the tail wagging the dog. I highly encourage reading through the post and the comments, mainly for self education if not anything else :-). 
One of the key points for me from this post:
Regulators have got to start to recognize that traders are not investors and vice versa and treat them differently. Different regulations. Different tax structure.  Different oversight. Individual investors and the funds that just invest in stocks and bonds are not going to crash the market.  Big traders who are always leveraging up and maximizing the number of trades/hacks they make will always put the system at risk.  We need to recognize that they do not serve much of a purpose other than to add substantial risk to the global economy.  That their stated value add of liquidity does not compensate the US and World Economy nearly enough for the risk of collapse they introduce into the system.
What jumps out for you? 

Posted via email from Staysmall's posterous