31 July 2017
Do you get why Ronaldo costs more than a cupcake? What Peter Jones is up to on Dragon’s Den? And the basic idea of Risk? Well then you understand everything you need to know to master the markets and to see through the puffery of financial boffins. Here’s how.
Cristiano and the Cupcake
Most things in life have a price. Which very simply boils down to how much of that thing there is. And how much we want it. There’s only one Cristiano Ronaldo. And most managers want him. So he costs loads. Most of us like cupcakes. But there are loads of them and they’re not that hard to make. So they don’t cost loads. This basic concept applies to pretty much everything.
Hers’ an example. After Brexit, everyone thought Britain looked a bit more dodgy than before in terms of the short-term outlook and uncertainty. So no-one wanted us, they didn’t need sterling so the pound tanked. Here’s another. There’s quite a lot of oil in the world but when some countries hog it and limit supply, the price rises. Ronaldo and cupcakes.
Enter the Dragon stage-right
Now to Dragon’s Den. As investors, or people saving into a pension, we are the Dragons.
We make money by choosing to back companies, countries or institutions which we think are going to go up in value or pay us some income in return for the loan of our money. That’s all investment is. When we see the impact of Aldi and Lidl on the high street, we think Tesco is going to do worse. When we see fuel costs go up, we think BA will struggle to make so much profit. When see Pokemon go gangbusters, we back Nintendo. The City is just full of people making like Peter Jones every day – but with big global brands, not start-ups.
And a final game of Risk
Last up it’s risk. We have a make a call on risk - no pain no gain. Sitting in risk-free cash all our lives is like spending everyday in bed cos we’re worried about getting run over if we go outside. There are risks with investing yes but we have to balance them. How much can we stomach these investments falling and rising over the months and years? Does a blip today matter if we’re saving for something 10 years off?
Companies worry about risk too. Financial companies are basically juggling the odds – what are the odds of their customers crashing their cars, burning their houses down, living till they’re 123 and expecting an annual pension and so on. Everyone’s embroiled in a big guessing game of what is going to happen and when. And pricing up the odds.
Nothing in finance needs to be more complex than any of this. So next time someone’s waffling on and you’re losing the plot, just think of the Cupcake, Dragon’s Den and Risk.
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