Not sure if you remember these things:
which at the height of the NFT craze were changing hands upwards of $344,000 USD. At the time of writing you can pick them up for around $20,000 - and bear in mind this was one of the most successful NFT projects.
I of course, didn't get involved in this hype machine in spite of all the "money" that was being made. If you know anything about my investment style you'd know I consider this type of soulless profiteering both personally dangerous and unethical - buying something of little to no value in the hopes that someone else will pay you more for it - is less investing and more a strange game of financial hot potato.
When you buy something you should make sure what you are buying has more value to you than the money you are exchanging for it, otherwise you are getting short-changed. If you later change your mind and need to sell, or you add value to it and move it on, fair enough.
How did you know oh wise one
Yes indeed, how did I so brilliantly predict the demise of the NFT bubble? Well it wasn't very difficult really, I just looked at the actual benefits of owning an NFT, and deduced that basically, there were none.
This is something economists like to call "utility", which makes it sound much more spiffy. But benefit is an equally satisfactory word.
So it's important when analysing business and investment opportunities to separate out the two types of demand - real demand, and speculative demand.
Real demand is things people want, and will pay for, that has a benefit to their lives in excess of the money they need to exchange for it. This is great, because the seller also values the money more than the product, and so both people are benefiting from this type of exchange. It's what we call a win-win - we can both improve each others lives by trading with each other. How sweet.
Speculative demand is what we call a "zero sum game", in other words the total benefit sums to zero. In other, other words, one person must lose for the other to win. The person that "made" $344,000 on a stupid NFT only "made" that money by having some other poor fellow gambler holding a very expensive bag and basically losing some $300,000.
Or maybe there were a team of losers that collectively took the hit, nevertheless the outcome is the same.
But what about trading stocks?
The more astute readers among you may have thought you have caught me out here. Surely trading stocks is a zero-sum game, how can you justify that?
The even more astute readers will have anticipated my answer to this question already and not even bothered asking it.
The most astute readers of course already knew what I was going to write about and didn't even bother to read this article.
You certainly can play a zero-sum game on the stock market, and many people do. But that is not an inherent part of the stock market and isn't required to make money.
People buy and sell stocks for many, many reasons, so let's give another beautiful example from the land of rainbows and sunshine of how stock trading can be done right.
Let's say some guy, let's call him Alfie, has some money saved up. He wants to invest this money to get a return. He purchases some stock, and collects the dividends for many years.
The company he owns then makes some mistakes and runs into trouble, the dividend payments stop. The stock value goes down. Alfie considers his options. He could hold on for a recovery, but he also knows that he can't go on holiday to the Maldives again this year if his portfolio is not performing. He's getting on a bit, and while his previous holidays were rather forward looking, his life goals have changed and now he wants to live a little. He isn't going to live forever, so he decides he doesn't need the regular income in the way he used to, and they have rather smashing cocktails on the beach there, so he decides to cash in his stock and go on holiday.
That's where Jane comes in, she sees the price of the stock dip, but she believes that the company has good long-term prospects. She has money saved up, and she is a patient lady. She doesn't need a return from her portfolio now because she's working and generally just putting money into her account each month, so she buys.
2 years later the stock has recovered, Jane has made good capital gains and is now also collecting the dividends, Alfie is sipping Pino Colada's on a sandy beach - everyone is a winner.
I also invest in property, but I'm not doing so on the basis of trying to extract as much rent from my tenants with as little investment in the property as I can manage. In fact quite a bit of my cash goes into upgrading the property or doing repairs each year, and also paying down the mortgage. This benefits the tenants as they have a nicer place to live and also less risk of the house being repossessed. It benefits me as I now own something that was more valuable than before.
The third part of my portfolio is show-jumping horses. These we buy from breeders and train and add value before selling on to someone who wants a more capable jumper.
In all these examples investment returns are generated because of value creation and not speculation.
How to invest
So when you invest in something, think to yourself, how does this benefit people? Who is this helping?
I out-outmaneuvered an alluring pyramid scheme not long ago called "Hyper Fund". It was recommended to me by an acquaintance and so I read the prospectus. I'll spare you the details, but the thing that stuck out to me was this:
Despite them claiming that this product combined eCommerce, AI, Crypto and a whole bunch of other buzzwords, nowhere in the marketing material did they explain how it provided any value. Also when you looked at it, their main source of "revenue" was not from customers, but from "business partners" like myself who were being asked to "invest".
The main "value" I was supposedly to receive by investing, was a return on my investment. But how was that return generated? I was given another stream of buzzwords to that question instead of an actual value proposition.
So rather than getting dazzled by the "money" my friend was "making", I simply looked into the actual benefits this company provided.
I questioned him on these points but sadly he was too blinded by greed to understand what I was saying, and of course I was just another FUDDER in his mind and could be written off.
Suffice to say this scheme has now collapsed and the perpetrators facing jail time, but it's a good yardstick in any business venture of life in general in fact. Just ask yourself this:
How does it help?
And you'll get your answer.