Desert Island Risks
Imagine for a moment that you’re shipwrecked, and as the sole survivor find yourself washed up on the beach of a small Pacific island.
Once you get your strength back, you have a wander around in search of any signs of other human life.
Sadly, there’s none.
There are plenty of fruits and coconuts though, so at least you won’t starve.
And as you wander back along the golden beach you stub your toe on something sticking up from the sand. It’s golden too. In fact, it’s a Gold ingot!
Now, the first question here is: How much did the fruits/coconuts and the ingot cost?
In my local Tesco, a wee bag of easy peeling tangerines costs about £1.45p these days. I’m not sure about a coconut. Never seen one in years. They’re as rare as an enthusiastic economist.
As for a Gold ingot, right now I’m told that a 32.15 oz version would set you back around £45,000 in the open market.
Next question: How much do you pay for all these goodies on this desert island?
If you said “nothing,” then you’re right!
Why? Because there’s nobody else there competing with you to make a marketplace and set a price.
And that’s the simplest way I know of thinking about “supply and demand.”
It’s also an easy way to explain, in real life, how you’d go about getting bargains rather than paying through the nose when competing against crowds.
There are only three places you can be vis a vis the crowd (or the herd, if you prefer) when buying anything like houses, stocks and shares, and so on. You can either be in front of the herd, in the middle of it somewhere, or at the back.
So, where do you have to be to pick up a bargain? If you said, “in before the herd gets there,” then you’re right.
In front of the herd is where the bargains are.
That said, how do you think it feels being out on your own while the herd is over on the other side in their consensus, all of them convinced that you’re an idiot?
Let me tell you that, as a lifelong contrarian, it’s very uncomfortable.
But if you look back through history it’s those few who go against the herd who make the biggest gains. They need patience and sadly there’s not much of it around these days.
Master investor Howard Marks says that investing is the only thing he can think of where people won’t snap up bargains as they would willingly do in most other walks of life.
So next time you're told by the herd and the media (who revel in making a drama out of a crisis) that this time "the world really is ending," and you feel extreme pain or maybe just really stupid, you could interpret this as a sign that you may be on the right path; and you might consider snapping up the investment bargains the herd is offloading in the media-induced panic.
Then go and relax on that private beach and leave them to fight over the free coconuts.
Risk Warning: Past desert island adventures are no guarantee of future shipwrecks.
And if you found this note interesting and you want to chat about it, do get in touch!