Wall Street Financial Truth

Chapter 31 How the Common People Protect Their Wealth (1)
The circulation of wealth is like playing mahjong.Mahjong itself cannot create wealth, it is nothing more than your money in my pocket, and my money in his pocket.No matter who wins or loses, it is the money of the four of us.The same is true for the stock market and the real estate market. No matter how high the speculation is, no real wealth can be obtained. "When you come out to play, you have to pay back sooner or later." The bubble will burst sooner or later.If you want to ask where your money has gone, it must have flowed into the pockets of richer people.

1. Where did your money go?

When the global economy was hit by the US financial tsunami, the stock market, housing market, and commodity market were like free-falling balls, and even the most conservative currency market began to fall.Every day, the headlines of the media will report very exaggeratedly: "Stock market plummets, 8 trillion evaporates", "retirement account loses, 2 trillion evaporates", "housing market plummets, 5 trillion evaporates!" Because houses and stocks are almost It is related to everyone's vital interests. After hearing these astronomical figures evaporated, people can't help but ask: so much wealth has evaporated, so where did my money go?
It is very complicated to explain this issue clearly. It is very likely that ten books cannot explain it clearly, and there are different opinions and opinions.Next, let me try to simplify the most complicated problem, and borrow two of the most concise models to help you clear things up.In these two models, for the sake of clarity, all situations are assumed, and other irrelevant factors are omitted.Let's talk about the housing market first.

In 2009, the housing prices in the United States have fallen to the prices in 2003 and 2004, and have been falling continuously. It is expected that the housing prices will fall back to the prices after the September 2002 incident in 9. Experts say that the housing market in the United States will evaporate more than 11%. value.The average family of three in the United States, based on an average of one house per household, totals 40 million houses. At the end of 1, the average house price in the United States was 2006 US dollars, so the total value of the US housing market at that time was 30 trillion US dollars.Experts estimate that based on a 30% loss, the US will eventually evaporate $40 trillion.But don't so many houses still exist, so where did all the "money" go?
Let’s look at an example: There were 2002 houses in an area in 10, each of which was 10 (in this example, all in US dollars), and the total value of the housing market in this area was 100 million.Assume that these 10 houses are not sold.Subsequently, the developer built 5 houses at an asking price of 12 each, and speculators entered and bought them first, and changed hands several times.By the end of 2006, the house price rose to 20 a house (a total of 15 houses), and the total value of the housing market in that area became 300 million. It started to fall at the beginning of 2007, and then fell back to 10 a building, and the total value became 150 million.Compared with the highest point, it can be said that 150 million has evaporated.So where did the 150 million go?
1) Assume that the developer earns 2 yuan for each building, and 5 yuan for 10 houses.

2）从12万到20万，炒家们在每栋房子上赚8万，5栋房子共赚40万。

From these two points, it can be seen that 10 went into the developer's pocket, and 40 went into the pockets of speculators, a total of 50.And where did the 50 come from? Obviously, it came from the homeowners who finally "take over" and bought the five houses.As a result, of the 5 million that evaporated, 150 were paid by the last "fools".However, the first 50 houses have dropped from 10 to 20. The so-called evaporated 10 million has never been "realized" and has always been 'Paper Value' (paper value).

This is the first model, and we can see the "ins and outs" of the so-called wealth evaporated from the housing market.Of course, the above model has deducted government taxes, land transfers, transaction costs and other factors.

Some people may ask, if the house price is at the highest, which is 20, and the 15 homeowners sell their houses for cash, wouldn’t it be 300 million?But this is impossible.Because the region of this model is actually a microcosm of a large market.In fact, once everyone sells to cash out, the market will immediately oversupply. Before everyone sells, housing prices will drop sharply. This is the epitome of the decline in the housing market in the United States since the end of 2006.After all, the price drops go to certain speculators, and the losses are always borne by unwise individuals.

Let's talk about the stock market.

Let’s look at an example: I have a Hong Kong friend, Mr. H, who specializes in junk stocks and is known as the “God of Junk Stocks”.There was a high-tech stock whose price reached 30 yuan (in this case, Hong Kong dollars) at its highest price. Because of its lack of potential, the stock price plummeted. Later, it fell to a few cents and became a so-called junk stock. Although it has not been delisted, it is nothing. Volume up. Mr. H fell in love with it, and poured 10 yuan into this stock in batches, buying a total of 100 million shares, with an average of 1 dime per share.In the absence of any trading volume, its price naturally rose to 2 cents, a 2-fold increase.Those "technical" retail investors who looked at the graphics saw the sudden rise of this stock and the matching trading volume, thinking that the company had come back to life or was about to be acquired, so they rushed in regardless of the timing, and the stock went from zero to zero. A few cents rose back to a few dimes, skyrocketed, and rushed all the way to more than 21 yuan, and follow-up funds continued to follow up.At this time, Mr. H began to ship carefully. In the end, he made more than 1 yuan on such a hopeless stock!The return on investment is as high as 40% or more!After his funds were withdrawn, the price was back to pennies shortly after.Not long after, the company declared bankruptcy.

Assuming that this company has a total of 400 million shares, when there is one more share for 1 yuan, the total market value is more than 1 million.

This is the second model.After going through this story and reading the news that the company’s stock price has dropped from more than 30 yuan to a few cents, and how much the market value has evaporated, you will definitely think that this so-called “evaporation” is just the value that did not exist before. Evaporation" is nothing more than a surprise.

The above two models are basically like Chinese playing mahjong.Mahjong itself cannot create wealth, it is nothing more than your money in my pocket, and my money in his pocket.No matter who wins or loses, it is the money of the four of us.The same is true for the stock market and the real estate market. No matter how high the speculation is, no real wealth can be obtained. "When you come out to play, you have to pay back sooner or later." The bubble will burst sooner or later.So if you want to ask where your money has gone, it must have flowed into the pockets of richer people.

2. The difference between "investment" and "speculation"
When I first entered Wall Street, I was particularly curious about the words 'Investment' and 'Speculation'.Literally, the former is "investment" and the latter is "speculation".However, I have noticed that sometimes my colleagues buy a certain security and say it is Investing, even though they sometimes buy the same security, they say it is Speculating, which confuses me.I asked some colleagues about the difference, and their answers were unsatisfactory to me, and they were vague. After consulting a lot of financial books, they couldn't understand it.

In the summer of the second year, the banker trust where I worked was doing a project and invited Professor Youni from Harvard Business School.Taking the opportunity, I asked the question that puzzled me.He smiled and said: "Good question, it seems that you are thinking, then I will tell you a principle: 'The income of investment comes from the wealth generated by the investment object; while the income of speculation comes from the wealth generated by another speculator. Losses', you will experience it slowly, and you will get the answer."

With this principle, I gradually understand the difference between investment and speculation.In recent years, relatives and friends have often said to me: "We have read all the articles you wrote, and we have learned a lot of basic investment knowledge. You always warn that you should invest and not speculate, saying that speculation is no different from gambling, but investing and speculating Where is the difference?"

To borrow the words of Professor Youni: 'Good question! 'Because this question hits at the very root of personal finance.

Now people realize the importance of financial management.With the financialization of the market, there are so many financial products on the market. In addition to the most common stocks, there are also various funds and various financial derivatives.Every financial product claims to be the best investment tool.And various commodities, especially houses, even claim to be the best investment products, claiming that housing prices will only rise, not fall.This phenomenon is reflected in the United States in the past few years and China in the past two years.Recently, gold has been called the best store of value.It seems that as long as you buy these commodities, it is an investment.

In fact, it is very simple to distinguish between investment and speculation: if you buy a financial product and plan to sell it at a higher price, such as buying low and selling stocks and houses high, that is speculation; Continuously generating income, such as regular interest dividends, rental income, etc., is investment.In other words, the fundamental difference between investment and speculation lies in where you will get your future income after buying a financial product.

Judging by this definition, it is very easy to distinguish what is investment and what is speculation.Chinese people love buying a house the most, so take buying a house as an example.

If you buy an apartment for 100 million, you no longer care about the rise and fall of the house price, but just rent the apartment out, expecting the rent to bring you a stable return, this behavior is investment.In other words, the product you invest in can bring you stable and guaranteed income in the future.If the rented apartment has an annual income of 6, deducting the land tax property management fee of 1, it is equivalent to a net profit of 5, and the annual return on investment is 5%.But after buying this apartment, the annual rental income is only 2 yuan, and after deducting the land tax and property management fees, the net profit is only 1 yuan, which is lower than the regular interest of the bank, so this is a loss-making investment.If you clearly know that the income from buying a house and renting it out will definitely be lower than the bank’s interest, and you don’t expect a rental return, you just hope that the house price will rise, and you can sell it to make a difference. Such a house purchase behavior is speculation.

As can be seen from the above example, the same purchase of a house may be investment or speculation.Let’s use the simplest ratio of rent to sale in finance to measure it. When the ratio is less than 1:150 (the domestic situation is different, because the real estate tax has not been levied, so this ratio can reach 1:200), the behavior of buying a house is investment. Points are speculative.

However, there is a very important principle in investing in real estate, that is, it is only the land that really increases in value, not the house itself.In other words, if you buy a house and own land at the same time, it is an investment in the long run; and if you only buy the right to use the house without actually owning the land, in this case, even if you With a stable rental income, from a financial point of view, it can only be regarded as speculation.

For another example, you buy a senior blue chip stock, such as an American electric power company, which pays dividends every quarter, and its dividend dividend has been stable at around 5% per year for many years.If you don't care about the price rise or fall of this stock, and only care about the fixed dividend it can bring you, that is investment behavior.If you buy a high-tech stock, the company has not yet started to make profits, but only has the prospect of making profits, and you hope that its stock price will rise, and you can buy low and sell high, then it is obviously speculation.

For the investment in the big market, it is also easy to distinguish between investment and speculation.For example, in the first half of 2007, the yield of fixed-income bonds was generally 6% to 8%, while the dividend rate of stocks in the same period was only 2% to 4%. If you buy fixed-income bonds, it is called investment, while buying stocks It's called speculation.Because according to the law of the market, the stock market should fall at this time.In fact, if you had done that then, you would have survived this financial tsunami unscathed. In early 2009, common dividend yields on stocks rose to 7% to 9%, while fixed-income bonds fell to 1% to 3% because of ultra-low interest rates.At this time, if you buy stocks, it is called investment, but buying bonds becomes speculation instead.

Buying gold is even more of a speculative activity.Because gold itself not only does not bring fixed income, but also has to pay storage fees in the bank; the same is true for commodities such as antiques, famous paintings, diamonds, and stamps, because these things themselves do not bring any fixed income. To make a profit, you can only hope to sell at a higher price, which meets the basic definition of speculation.

Why do we repeatedly say that in financial management, we should invest as much as possible, and speculate less, or even not speculate.From the above examples, it can be clearly seen that investment focuses on income and is controllable; while speculation is uncontrollable, and it is essentially the same as a gambler's behavior.And due to the extreme asymmetry of information, just like gamblers always lose to casinos, most retail investors will lose to dealers.

These principles are easy to say, but very difficult to actually do.Because of the herd mentality, most people like to chase highs and kill lows.Therefore, the general public speculates a lot, but few people actually invest.This is the real reason why ordinary retail investors win less and lose more!

3. What are the best investment channels?

As mentioned above, due to the global financial tsunami, the global stock market and real estate market plummeted at the same time, causing everyone's net worth to shrink sharply, and it suddenly returned to 10 years ago.At this time of turmoil, people can't help but ask, should we still invest?
I once took a security analysis class at New York University, and I first talked about the 'Time Value' of money, the so-called "time value" of money.For example, in New York 100 years ago, it only cost 5 cents to ride the subway; 3 cents to buy a hot dog.Now, a subway ride and a hot dog are both $2.It can be seen that the same amount of money will continue to depreciate over time, and the current money is even less valuable.

I remember an impressive sentence that the professor Arthur said: "Investment may not necessarily make you money, but if you don't invest, you will definitely lose!" Why?Because if you don't invest, the money you put at home will definitely depreciate gradually with inflation.

There is an aunt in my hometown. There are many children in the family, and my uncle does not know how to do business. The economic conditions are relatively poor. My father and uncles often help her. In the early 20s, her eldest son got married. The house in my hometown was only 90 to 100 yuan per square meter, and it cost only 1 to 2 yuan to buy a 12 square meter house.But she only had 3 yuan left for her boss's wedding, which was not enough to pay the down payment.The brothers had already given her a lot of money, and I was ashamed to ask them again.She asked her son to get married first, saying that she would buy a house after saving enough money.Unexpectedly, when she saved 15, a house rose to [-]; when she saved [-], the house rose to [-].Her savings in the bank can't keep up with the increase in housing prices. If she buys a house, the money will be "wasted".In the end, it was her eldest son who joined the business with my uncles and bought the house after making money.

In the United States, almost every bank is a member of FDIC (Federal Insurance Corporation), and all deposit accounts have FDIC insurance, even if the bank where the money is deposited fails, every account under $10 (recently increased to $25) , will be paid and repaid by the Federal Insurance Company, so you can sit back and relax.

按这个统计报告，如果1925年放1千美元在银行，到2005年已经“变”成1万，这80年来的平均年利息是3%左右。听上去不错吧，涨了10倍。但不幸的是，这80年的平均通货膨胀率是3.5%。如今需要1万5千多才能抵得上1925年的1千。也就是说，将钱存银行的结果是亏了不少。

(End of this chapter)