Saturday, November 01, 2008

Segway investments

One of the best metaphors I've been able to come up with, for the current economic crisis, is the Segway.

Why does the economic system have to be like this? Why do we to have so much depend on a system that's prone to abrupt downturns and disruptions?

It's because investment is much like riding a Segway.

As a person (one of the lucky few, considering total sales less than 30.000 units) that have actually crashed a Segway, let me tell you: the transition from fully function space-age transporation device to full on faceplant, can be really sudden for all involved. One moment you feel like an astronaut, the next you're in pain and got a whole lot of explaining to do (it wasn't mine, and yes, I broke it).

Much like the economy.

In the current form prosperity is mandatory. Unless you wish to be left behind by the rest of the world moving at inflationary speeds, remaining stationary is Not An Option.

If you want to get ahead, you have to take risks. On the Segway, you shift your centre of gravity forward; well beyond recovery if you want really good speeds. In investment you put money into projects that "should be fine based on historical data" and leverage up, beyond recovery if you want really good yields.

This is all very well if everything keeps running smoothly. But if one wheel suddenly seizes up or the economic engine runs out of juice, you're in for a brutal landing.

As for who's to blame, it's a really easy systemic explanation. The supply of broker bonuses for short-term yield exceeding demand for long-time accountability, in short a lot of people pushing their Segway so far ahead, that a minor slowdown of the engine causes an all out wipeout with other people's money.

If all this isn't enough to convince of the Segway analogy, I'll present you with the 43rd President of the United States..

Wow, wouldn't you know it? Investing really IS a lot like riding a Segway.