To grasp what happened one has to visualise a large swimming pool full of people and a forest fire together. People individually can be at the deep end and enjoy the cool water without disturbing the persons around them. For any reason one person panics and grasp two different persons, with each hand. Had a solid support been available within reach the situation would have been controlled without much fuss. In the absence of such a support, the persons grasped would in turn try to hold on to persons around them, result total chaos. Likewise an out of control forest fire burns everything coming in its path.
Meltdown has two aspects:
- Physical destruction of asset.
- Asset is not destroyed but only its value is downgraded.
The first by definition has to be a local situation, maybe wide spread but not global in reach. The second has no boundary as it is not based on strict facts but on perceptions. Perceptions may or may not be based on facts. This peculiar but standard business practice has stood the test of time and asset values were upgraded or downgraded on principle of supply and demand. Like all good things this also had the potential to become a tool of the Devil. People the world trusted and respected, decided to become agents of Devil and start using this wonderful tool for devilish ends-- out of the main human failing-GREED. Since good always prevails over evil there is nothing to be afraid of. It will only take time to heal.
We all know that one should not buy based on the packaging alone but buy only if satisfied with the contents. This basic truth was kept aside and major transactions started based on packaging without due diligence of contents. Risky loans were given on higher rate of interests. These were then combined into exotic investment instruments and traded amongst the financial institutions as special packages. Since the rate of interest was high, institutions started making lots of profits. In turn these high profits justified higher pay packages and bonuses to the executives of the financial institutions. More risky the loan, higher the rate of interest resulting in more money going into the pockets of these people.
Since people entrusted with the responsibility of keeping a check and balance, like CEOs and Senior Executives, became a part of this greed, the entire phenomenon became as simple as taking away candy from a baby's hand. One of the positive fallout of this was busting of the myth that 'Capitalist Model' was superior to the 'Control Model' as market forces were the only honest reflection of what is good for the human race. For the first time a real level playing ground has been created. Both 'models' could be easily manipulated by GREED FOR MONEY OR GREED FOR POWER. Finally the State had to intervene to bring back stability and trust in the market. A combination of both models will show the way forward.
What is true for the economy is true for individuals also. I sympathise with persons who lost their shirt in the fall of the share markets. Those who lost all their savings when banks went bust will have to take solace from karma theory. They were in the wrong place when the forest fire approached. All others who would like to invest wisely, the following ideas may prove useful:
- Control your natural greed. Do not try for maximising your returns from investment. Higher the risk better the return. Be satisfied with reasonable return in keeping with your risk profile.
- Spread your resources within the asset classes, keeping the golden rule in mind always-50% in debt 50% in equity. To get better returns within this spread see my two blogs[ The Real Money Plant and Money Plant Revisited].
- If you plan to take loans for vehicle, house or any other purpose, do so only after building up bank fixed deposits equal to two years EMI for each loan. You will not regret as these FDs will prove useful in more ways than one in the future. Yes, you can take these FDs towards the debt component of your investment plan.
I know what I have suggested would appear as excess caution to many. I can only once again strongly recommend them as they saved my shirt in this meltdown. Wish there was a way to hold all these greedy persons accountable and prosecute them for criminal negligence atleast. I know this is wishful thinking.
DO NOT BE DISHEARTENED. YOU WILL ALSO MAKE MONEY THE WAY I HAVE.