Hedge Funds

... are investment vehicles which aims to hedge (aka minimize or eliminate) market risk. Some differences from traditional funds:

  • they are available to people with more than $1-5M
  • they are available to "accredited" investors, so they are less regulated
  • less regulation means they can invest in anything from stocks to Pokemon cards
  • they can also borrow a lot of money & bet against prices (shorting)ย 
  • they are quite expensive, charging a profit over a certain return threshold (hurdle rate)

Hedge funds have a bad rap for their unorthodox methods, but help keep prices in check for whole markets.ย 

Vladimir Oane (@vladimiroane) - Profile Photo




Money is about value, not time

You are paid in proportion to the perceived value of your work. Not based on how hard you work: A handyman may work hard, but his work is easily replaceable so he will make less money than a lazy accountant.

The most valuable employees are the ones working on the biggest problems. The richest people are those who solve a problem for billions.ย 

If you want money, stop chasing money. Look for big problems and come up with solutions. The market will reward you generously.ย 

James sani

If you want a million dollars, solve a million-dollar problem.

The myth of corrupt millionaires

We have grown up to see money as the tool of evil for corrupt individuals. However, more than 60% of millionaires are self-made. They started from 0 and built their empires one brick at a time.

This includes people like:

  • Warren Buffet
  • Howard Schultz (ex Starbucks CEO)
  • Oprah Winfrey
  • Jeff Bezos
  • Elon Musk
  • etc...

They worked hard, on problems that affected millions. And they came up with solutions that scale.ย 

Money = Freedom

Money is just a belief. A number on a screen. What we want is the feeling of freedom: The ability to do what we want, when we want it, without having to think if we afford it or not.

A history of the US fiat currency

1933 - President Franklin D. Roosevelt had gold confiscated and people were forced to accept paper money for their gold. The government needed people to adopt the inflated paper and they used force.ย 

1940s - Bretton Woods Agreement created a collective international currency peg to the U.S. dollar which was in turn pegged to the price of gold.

1971 - President Nixon unilaterally cancelled the direct international convertibility of the US dollars to gold. Making the US government in charge of money supply and world money master.ย 

Fractional Reserve & Money Supply

Banks loan money they don't have. Most hold a limited reserve to serve the few who decide to make redraws. When the majority decides to liquidate their bank accounts we have what is called a bank run.

In order to protect the banks, central banks were created to provide a guaranteed reserve for commercial banks. But once the government stepped in to protect the banks the fractional reserve mandates(only a fraction of deposits are backed by actual cash) began to be used to make up the money from thin air. Every dollar that a bank holds can be multiplied by at least 10x.ย ย 

Fiat money

Fiat moneyย is a government-issuedย currencyย that is not backed by a commodity such as gold. Most paper notes started as being backed by a reserve of valuable commodities, usually gold (the "Gold Standard"). Tying a currency to gold limits inflation and money supply.

But politicians hate the gold standard, so since Nixon's presidency, the US dollar was no longer tied to gold and money had value just because the government says so.

jay powell, Chief of FEDERAL RESERVE

We print money digitally. As a central bank, we have the ability to create money. And we do that by buying bonds for other government guaranteed securities. And that actually increases the money supply. We also print actual currency and we distribute that through the Federal Reserve banks.

Money Supply & Inflation

We can measure the supply of money that exists in the market with main metrics:

  • M1 money supplyย includes liquid money aka cash.ย 
  • M2 (which includesย M1)ย includes loans, deposits &ย market funds. This is mainly made up money.ย 

As the chart shows the US (and all other countries with central banks) have most of the monetary mass made up. An influx of money causes inflation and this is exactly what during the last decades.ย 

The Buffet Indicator

The Buffett Indicator is the ratio of total the United States stock market valuation to GDP. It is said to be the best predictor of market corrections or crashes.ย 

As of May 6, 2021:

  • Aggregate US Market Value: $51.8T
  • Current Quarter Annualized GDP: $22.6T
  • Buffett Indicator:ย $51.8T รท $22.6Tย =ย 229%

Historically, when the stock market went above GDP by 50-100% it crashed, going below GDP. 2021 is the year in the last 100 years when the ratio was over 2x the largest stock market in history.

The impact of tech on the Buffet indicator

In 2021, Elon Musk asked Cathie Wood, the famous tech-focused investor from Ark investments, what is her explanation for the high Buffet indicator (a ratio of US stock market/GDP). Cathie suggests a few reasons:

  • while the indicator maintained its pattern over the last 100 years, in the late 1800s was much higher, suggesting tech infection points (telephone. electricity & automobile back then)
  • the new tech is deflationary, making lowering the basket included in GDP. So denominator goes down while the numerator.
  • as bonds yields ~1-3%, money is gonna move to other assets, like stocks.

ยฉ Brainstash, Inc

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