Market Reflections

Thoughts, ideas and musings on current state and evolution of financial markets

Rich did not get richer only members of US Congress did

A turbulent year proved wrong the bit of common belief that rich are always getting richer. Most of the wealthy lost a lot more than folks considering themselves poor and some lost all. Dramatic losses are attributable to lack of any risk management and due diligence by the folks who suffered. They failed to apply the simple investment 101 rule: “if an opportunity it sounds too good to be true, then it probably is not true”.

The other issue is perception of wealth versus reality. Futures traders usually make clear distinction between the open trade profit or loss and the actual account balance. Only cash account balance is counted for their wealth. Whatever profit a trade has on futures market is called open trade equity. Whatever profit a trade has at the time of trade closing counts for traders wealth. Equities traders and real-estate investors tend to consider current value of their shares in a company or value of the property they own to be their wealth. Length of a usual trade was probably a reason for this difference. Fast and wild market swings of 2008 proved this method wrong. Deep, rapid losses of share values wiped out substantial portions of perceived wealth. Likewise, the usually resilient real-estate market became illiquid and turned open trade profits into steep losses.

It is probably prudent to extend the futures traders wealth counting method to whatever market one trades. Count for your wealth only the money you have for certain – cash.

The members of US Congress were a rare group of rich people who got a pay raise this year. While adamant that CEO’s of troubled banks will not get the pay the owners (shareholders) promised they voted themselves a pay raise despite the country being in trouble. Think about it, aren’t we actually voting them in the office to make sure the country will do well? Perhaps it is time to pick up Ross Perot’s idea from nineties and pay members of Congress an average American salary.

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