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Stock Market- Analogy Using Monkeys

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from stuck in customsOnce upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.

The villagers seeing that there were many monkeys around, went out to the forest, and started catching them.

The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20.

This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms.

The offer increased to $25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50!

However, since he had to go to the city on some business, his assistant would now buy on his behalf.

In the absence of the man, the assistant told the villagers. “Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each.”

The villagers rounded up with all their savings and bought all the monkeys.

Then they never saw the man nor his assistant ever again, only monkeys everywhere!

Now you have a better understanding of how the stock market works.

------- Year 2000 ---------

Years passed and one smart banker heard about the story of the monkeys and decided to visit the pitiful folks afflicted by the monkeys.

He put the monkeys in packs of 5 or more and told everyone in the village that since they are now sold together, people will want to buy them. His logic is that out of the 5 or more monkeys surely there must be one or two who can entertain people, do tricks or make funny noises and earn their owner some money as buskers.

After telling quite a few villagers that they are 'guaranteed' to make money, the monkey business slowly took off again. The villagers memories of the scam had faded and those who remembered were few and ignored.

The banker went around buying up the monkeys no one wanted for $5 each. He sold them off in packs of 5 to anyone who is interested at $50, making 100% profit. For people who could not afford to buy the monkeys he offered a loan to them but with high interest charged on the loan.

To make matters even more interesting, he offered bets on which of the villagers would be unable to pay off the loan and will default on the payment. The banker did a roaring trade, with one villager, Lehman Bother, having a record total bet of $5000 on him not being able to pay off the loan as he has no income, no job and no assets (aka ninja loans).

The banker also made money on the side by offering to transfer some of the risk of buying the monkeys, that is, he offered to buy the pack of monkeys back at $50 to the person buying the monkey in exchange for the person buying a contract at $10 which is valid for one year. He then sold some of these contracts to the local banker in the village for $2 in exchange for the local banker to underwrite and insure any potential buy back.

All the while, the banker lived it up and enjoyed tons of money and spurge the money he made from the monkey business.

But one day in year 2007, it all fell apart when the ninja loan defaulted, the smart banker couldn't pay off the bets on the default, all the villagers started getting scared and everyone started selling the packs of monkeys. The local banker couldn't pay off the contracts, the smart banker declared his business bankrupt and paid himself a $1000 compensation package.

And the villagers are left with more than monkeys, they were saddled with debt , no more local bank and with their hard earn deposits all gone and had to sell their furniture and in some cases even their houses.

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1 comments:
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serenitystocks.com said...
September 3, 2013 at 2:30 PM  

The villagers are what we call speculators, people who buy stocks only with the intention of selling them at a higher price without actually looking at what the stock is truly worth. These are people who are gambling on stocks for quick profits without doing much research, and there are plenty of companies out there selling them monkeys :)

Investors buy good, well-researched stocks and hold on to them. Investors look at stocks as growing, dividend-paying assets, and not as a shortcut to overnight riches.

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