Finance is Simple

document.write(" serif;">Money makes money. Money in motion makes more money. Money in the mattress molds.

If you have money, you lend it so it will work and make money for you, or you buy something. Either way you take a risk. When you invest your money you balance risk against return.

That’s it. It's not rocket science.

The Street will cry in outrage, and some will be sincere. But the truth is finance is complex only in invention and obfuscation.

All “financial instruments” are a combination of buying something or lending your money. If you lend the money you expect the principal to be protected and the interest to be paid as per the contract. If you buy something you want to enjoy it or watch it appreciate – perhaps both.

But there is always a risk. Your investment can be guaranteed or insured or blue chip. It can be conservative or rock solid. That changes nothing except the odds.

We are hopeful and therein gullible. If we are offered a “financial product” we would prefer to believe that the contract conditions (that 8% interest rate, for example) are guaranteed (or one of the other adjectives above). The reality is anything can happen. Ask the states and municipalities and pension funds about their mortgage-backed securities.

Investment banks and private equity funds and hedge funds have always been about making money for number one. Since September 15, 2008, when the Lehman Brothers bankruptcy ushered in the current downturn, the line between these institutions and regular banks and money managers has blurred. It is time we made our own risk assessments.

 

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