Saturday, October 11, 2008

Finance Big Bang Theory

I have this Big Bang theory about Finance ...

At First, there Was Nothing,
Then there is Everything !



Long long time ago, we exchange goods for a living.  Sometimes I asked for 4 chickens to exchange my 1 bag of rice, but some other times, my friend is only willing to give 3 chickens.  So as times go, more and more people do not like this constant changing of 'price' and they want standardization.  So 'Money' is born.

We look down and there are some stones on the ground.  First we 'define' the chicken as 10 stones, since my bag of rice is 4 chickens then my bag of price is worth 40 stones.  So we started collecting stones instead of keeping too many cows and sheeps at home to represent our wealth.


It was all fine within our own family and friends because we trust each other.  Then some stranger came and just pick up stones from the ground to buy my rice.  Soon I ran out of rice and he has all the rice, so basically he took over my rice business and started to control pricing in my town.

So we need some special way to identify our special stones.  I started marking all the stones that I used to buy and sell things.  The chicken guy did the same.  Soon all sort of marking stones are in the market and guess what ?  A stranger came in and arbituary do some marking on the stone and took over the chicken business.

Then we learn that we have to 'standardize' the marking on the stones and it is too big a task for us because we are already full time producing rice and chicken.  The stranger volunteer, "Since I am able to twist all the systems you guy come up with, apparently I am a smarter guy in this area.  So if you let me come up with a special marking stones for you and everybody use that stones, there will be no problem !"  He ended with a strong .. " Trust me !".

So the first 'modern day money' is born. It is a piece of metal with hard to replicate marking represending the value of the stones we used before - the stranger called it coin.  So all of us including the rice and chicken producers keep our stones in the stranger's house.  For each stone we deposit there, the stranger gives us 100 coins.  Since then our buy and sell activities are better managed.

In case you haven't figured out yet,

the stone is called Gold today
and the stranger's house is called Bank

Our Stones


The Stranger's House



8 comments:

c0ok1e said...

I started getting interested in your blog and eventually read it from the first entry till this one because it is easy to understand for n00b like me...A few questions I have here is about the list on stocks..How are we going to find out what the bank buys as stocks? And also a general suggestion, after reading about the bonds and other stuff, it feels like you are talking about the positive points and how easy it is to gain money by following those steps.. Im actually more interested in the negative part of it such as risks and decrease in our investment as I feel that we can learn more by knowing how we can fail and what to watch out for.. By the way, great blog..hehe

Michael Tsen said...

thanks for your comment about this blog, I really appreciate that.

unfortunately bank's operation is a bit more complicated in real life, they invest more into derivatives and less interested in stocks. However, one of the common practice is they will 'assign' a mutual fund manager as part of their business service for us. You can find out the bank's related fund manager, each fund will have annual report, the report will list down all the stocks they bought and their performances.

if u read some posts correctly, quite a lot of them are actually mentioning the 'negative' points, I just end each post with 'what to do with it' so it may sound 'positive'.

however, I understand your approach to learn what to avoid, its just that accordingly to good NLP learning, there is a danger if we think too much about the negative, we become negative ourselves. so I may remain spreading the positives in public learning blog like this.

however, you can see me curse in my personal blog ... hee hee ..

** OUT OF TRACK 思 想 出 軌 ** said...

it is an interesting post!!!
It refreshes my memory in reading my history book during primary school :)

I think cook1e wants to find out the possible holes ahead while walking in dark alone :))
it is time up for the post namely RISK as promised :))

c0ok1e said...

Yup.. Thats exactly what I want to know.. What are the risks and things that we have to becareful and look out for.. Just like your post about mutual funds, you say like it is a sure win investment with some returns but there are many mutual funds that depreciate and not forgetting the fee that we have to pay before we buy the fund..Meaning we already lost some of our money even before we get the interests or whatever

Michael Tsen said...

indeed quite a few things need to be watched out in mutual fund, will release that next

You and me said...
This comment has been removed by the author.
** OUT OF TRACK 思 想 出 軌 ** said...

cook1e- make sure you send in ALL of your questionnaires and our teacher is happy to help us out. Im quite passive and I will and see what i can learn instead of asking :P

Michael Tsen said...

passive carries a lot of different implication, doesn't it ?

you can be passive after you invest into a right vehicle

but if you have done nothing and still passive about that, then ....