Thursday, November 29, 2012

Lessons From The Economic Crisis;This Time It's The Same But How You Can Avoid It Next Time

Yes, this time it's the same. same as in 1929,1937,  all the "black swans" in-between till big black swans in 1987, 1991 and of course 2008.

I've lived through the 1987 ones onwards and read about the earlier ones and the same old same old just keeps rolling along. What is puzzling is why people just never seem to see what is right in front of their eyes,
bubble after bubble and crash after crash follow as sure as night follows day but the herd or lemmings goes over the cliff time after time.

Can "this time it's different" actually blind people-apparently so, but you are smarter than your predecessors but for those of your acquaintance perhaps the astonishingly obvious tips below might be of value. They work for me at least.

1. This time is not different. If there is a bubble in whatever-housing, gold, silver,wheat then it will burst.

2. If people jump on the bandwagon they may be very lucky and catch a rising tide, but often the average Joe will jump in at or near full tide.

3. If you jump in, the jump out with a profit. If you stay in you may be lucky but you may lose the lot. You can always use a portion of your profits to jump back in and repeat the process till the collapse comes.

4. Point three clarified. Greed is not good. Self-discipline and small profits will see you permanently on the plus side where, over time, re-investment of interest oninterest can be the adjunct to trading to bring substantial wealth.

5. Trust nobody. Don't trust relatives, tipsters, water cooler millionaires, that long time friend who has set up a financial advisory business. Don't trust money managers, ultra-groomed bankers in tailored suits, and  advisers who pose with blonds/BMW's/private planes, advisers with "knighthoods' from the West Indies. 

Television tipsters make huge amounts with no personal responsibility, follow them at your peril.The preceding from the dont trust lists includes crooks, fantasists, incompetents, and most are, at the very least, glorified commission agents and all have their own interests either superior to or at a minimum equal to yours (plus their management fees).

6. If you are offered interest or profits well above the norm, especially year in and year out without any periods of decline-just say no. 

7. There are no "secret" bank operations which you can gain access to as an "insider" nor do you have a long lost cousin in Nigeria who wants to give you millions.

8. Gold pays no dividends. yes it is on an extended rise and sensible people with managed investments (point three) will have done well. But when (point 1) it collapses there will be reduced value and no dividends.

9. Hugely successful finance companies who achieve massive profits (and whose staff earn big bonus payments) are sooner or later convicted of insider trading and/or a destroyed by "rogue traders" who operate with either tacit knowledge of management greedy for profits/bonus or incompetent ditto.

10. Iron rules of (Galbraith's "long dead") economists turn out to be false. Governments can print money endlessly without inflation as has been clearly the case since 2008. If it doesn't circulate, and there is a massive pool of "spare capacity" i.e. unemployed people, then the old saw of "too much money chasing too few goods" doesn't apply. All the doom and gloom inflationists missed out of a massive stock market rally subsequent to the 2008 crash. On the other hand those who urge endless printing of money will see how difficult, or not, it is to get the genie back in the bottle when the economy recovers.

11. The aforementioned stock market rally will not continue forever. When the next black swan comes all those people who would have kept their money safe in banks but who had to invest in the sharemarket, because of Bernanke's low interest policy will see their wealth destroyed (unless they followed point three). Then there will be hell to pay, which won't recover lost savings sadly.

12. Investment capital can be divided into equal sums of five and placed in term deposits for 1,2,3,4,5 years with interest payable monthly and as each deposit matures it is renewed for five years, The average interest rate will be higher than a shorter single term and, if there is renewed inflation the depositor will always be one year or less away from a maturity, which can be put at the highest rate available for whatever term is best suited to the prevailing rising interest rate scenario. 

The above is all about wealth maintenance and accumulation over time. Some, a lucky few, can do well by speculation but they are the minority. Greed, envy and listening to advertisers selling an impossible lifestyle are pitfalls to disaster. The former, allied to common-sense and self discipline leads to prosperity and a good nights sleep. All the above may seem simplistic but it is the simple who ignore it chasing the American nightmare.

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