Trading

I guess all cultures have in their canon of literature fables or parables that are used to inculcate moral or ethical mores. They often involve ordinary people making life choices and then having to bear the consequences. We are supposed to take a lesson from that story.

The New Testament gospels are full of such examples (the parables) and the pagan culture where I live in Eastern Europe has lots of stories of good sons, bad daughters (or vice versa!), hard working people, lazy people, greedy people, thieves and so on.

Here is my tale to help you make decisions about market timing, always a scary issue, with good reason.

The outline

As this is fable, we will assume that all investments are worth one exact ‘Goldcoin’ at the start.

6 cousins had inherited 20,000 Goldcoins each from their grandad after he went down with some sores and a chesty cough and never recovered. 3 brothers immediately went out and spent 10,000 on new horses and together bought a cider factory to start a business and then they invested the rest, 10,000 each. Their cousins, all sisters, decided to hang on to the money but have now invested half, so have 10,000 invested like their cousins but 10,000 still available.

The Bell brothers

These 3 siblings have each invested 10,000 and they have not got any cash left over. Like most brothers they disagree about a lot of things, including how to play the current investment market.

The Prudence sisters

The 3 sisters also think differently but they have all got 10,000 still in the bank in the distant big city as well as their investments, also 10,000 each, so are feeling very secure.

The markets

Those were simple times and there was only one investment, the Blacksmith (named after an enterprising operator called Terry) global all share collective fund. No need for any research – one size fits all. When they bought into the fund, all on the day the lawyer paid them out grandad’s money, one unit cost exactly one Goldcoin, the local unit of currency, divided into 100 cents.

There has been reports of new plague down the road in the next county and people are now a bit nervous about having investments but Terry had been surly about giving people their money back.

Actually, he had secretly used it to buy actual gold which he has painted black so it looks like the forged iron he uses, not the investments he has told people about. So he makes up the unit price based on what sounds reasonable – a valuation method that continued to work well even in the 21st century and has been used many times to disguise the hidden activities of more modern fund managers.

To avoid a liquidity crisis now that people are really scared and want to get some money to put under the mattress, he has wisely set up another business as a farmers’ and illicit liquor makers’ bank and is now using the bank deposits to repay investors. Because he knows people are desperate for their money back, he continues revaluing the fund units down every day.

As the nearest thing they had to a regulator in those days was the local lord of the manor’s groom and he had just been sacked because all the horses had bolted after he fell asleep and left the stable doors open, Terry generally makes up the rules as he likes.

When someone garrulous in the village points out that maybe grandad already had the new plague, everyone gets even more scared. Terry tells people he may have to suspend paying them back their money as he had not planned for this possibility.

On refection, knowing he has his gold, he thinks he can get away with lowering the price he will pay to 60 cents.

His secret hoard of gold is now going up nicely in value because gold is easier to keep under the mattress than loads of coins and looks more re-assuring than a piece of paper. Terry is also selling impressive certificates with red wax seals representing small shares in his ‘private premium gold reserve’ off to his farmer clients, so he is beginning to think he can give up the forge and call himself a merchant banker.

Terry is indeed a bright man, because when the village herbalist declares that his latest concoction will protect everyone from the plague, he gets a surge in demand for his investment fund again and he gradually jacks the price back up to 100 cents or one full Goldcoin. Selling units at 100 cents when he bought them back at 60 cents is a good business model.

He also offers the herbalist privileged ‘private banking’ account terms and sets up a business that will offer life assurance, but only to people who regularly take the medicines concocted by his latest prestige customer and fellow shareholder. But I digress….

3 decisions

Andy Bell and Anthea Prudence decide to do nothing with their existing investments and just leave things alone. They reckon things always turn out ok in the end. Anthea decides after the price of the fund falls that she might as well add to her portfolio and spends her 10,000 on buying units when the price is 80 cents. She is in it for the long term.

Billy Bell and Beatrice Prudence confer and decide they can outwit Terry the blacksmith, so they cash in units at 80 cents and then when he has lowered the price to 60 cents they buy them all back, with Beatrice also adding in her extra 10,000. This was not called shorting in those days – just a good wheeze.

Charlie Bell and Claire Prudence are the most nervous pair. The get scared when the price is 8o cents and sell out. They tease their cousins when the price is 60 cents as they are the only ones who were clever enough not to lose any more money! Then the price goes up and they wonder if Billy and Beatrice might not be so daft. Once the plague scare is over and the price goes over 80 cents they are looking like the mugs, so they hastily buy units at 88 cents, with Claire adding her extra 10,000.