Finance
Manage money and assets.
Notes
The Trap of Money
Understand what money is. Otherwise, you might fall into the trap of money.
I got the idea from this Japanese book, named "Who Do You Want to Earn Money For?" It claims that money is fundamentally worthless and that money cannot solve any problems. It’s not that it cannot solve some problems, it’s that money cannot solve any problems.
The book explains macroeconomics concepts really well with simple examples and almost no terminologies. Plus a touching and engaging storyline. Unfortunately, I can only find Japanese and Chinese copies, and links to it in book stores website, not even a Wikipedia page for it. So, I would like to share the key points:
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Money fundamentally worth nothing
- If it has value, then money will not be destroyed and printed again
- People want money because the society demand money for transaction and tax, people have to use it as a tool to trade
- The value of the money is to facilitate trade, and the value of trade is that the resources and energy went into producing the goods and services for someone in the society
- Money has value to individuals, but worth nothing from the perspective of society as a whole
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Money fundamentally cannot solve any problem
- Bring 100 billion to middle of nowhere is useless, money cannot be magically transformed to food
- You cannot pay to solve any problems without the natural resources and the human that put effort into transforming those resources to products and services
- Be reminded that it is the fellow human in the receiving end of the money that help you solved the problem, not the money itself
- Without the people, without the society, money can solve nothing
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If a business, government, or the whole society is to increase the amount of money one has, there is no actual gain for anyone
- Imagine a country has 100 people which need 2 bread per person, so total 200 bread each day
- If one day there is only 100 bread, bread price might double
- Printing money for each person, or people using their own saving, does not solve the problem
- Having more money is just competing for a bigger share of the limited resources
- When the total resources are limited, money is just a relative competition with others
- The true problem is the productivity dropped by half
- The true solution is to bring back production to 200 bread
- So, everyone all saving money is meaningless for everyone, because the society does not grow
Real value emerges when the society develop and the aggregate productivity grow. If one greedily hoards resources, one is simply acquiring a larger cut in an ever-shrinking pool. If you only think of earning money for yourself, then you fall into the trap of money. You are trying to compete with others for resources. A better way, is to think of it as what value can one provide, invest in the society and grow the pool together.
We all care about something, whether it's a partner, a child, an animal, nature, or anything else, we cannot protect them forever. Everyone has to leave eventually. To hope they will be okay after we are gone is for society as a whole to progress and protect each other.
Finance in the academic sense
The very basic is to understand the time value of money. That is the single most important concept and why finance exist. Once it's clear why interest exist and why assets appreciate and depreciate relatively, then the textbook way of finance study these:
- Money market, bonds, and stocks. Risk, return, volatility, yield, etc.
- Diversification, risk-free vs risky assets, Markowitz portfolio, efficiency frontier
- CAPM, single-index & multi-factor model, arbitrage pricing theory, Fama-french model, discounted cash flow
- Time-series: AR, MA, ARIMA, Vasicek model, ARCH, GARCH
- Derivatives: forwards, futures, swaps, options on financial assets, commodities, exchange rates, interest rates
Resources
- MIT 15.401 Finance Theory I | MIT OpenCourseWare
(YouTube Playlist)
- Good professor. An MBA course but started from the very basics of finance
- Present value, fixed income, equities, forward & futures, options, portfolio, CAPM, APT, efficient markets
Links
- 3 Lessons from Silicon Valley Bank's Failure
- If clients like tech start-ups are sensitive to interest rate hikes, long-dated bonds are not a good investment
- SVB's privileged place in the tech community shows relationships are valuable
- SVB's online clientele contributes to its downfall
- Regulations and centralization helped
- Bank Runs, Deposit Insurance, and Liquidity | Douglas W. Diamond, Philip H. Dybvig
- Winning the 2022 Nobel Prize in Economics
- A model to analyze the economics of banking
- A model of a systemic bank run | Harald Uhlig
- The economy does not consist of a single bank, bank runs can be analyzed from a systematical point of view
- Why markets are in an uproar over Swiss zeroed Credit Suisse AT1 bonds | Reuters
- AT1 bond: "Contingent Convertibles" (CoCo) act as shock absorbers if a bank's capital fall below a threshold. They are risky and they can be converted into equity or completely written off
- Under the current UBS and Credit Suisse deal, FINMA, the Swiss watchdog, has no obligation to follow the traditional capital structure. In this deal, AT1 bonds are ranked lower than equity, which means shareholders at least received something while AT1 bondholders got nothing
- Pricing Money
(HN)
- Targeting beginners, explained from money markets to bonds, futures, swaps, options, FX, etc.
- The problem with this is it missed the most fundamental concept: the time value of money and why finance exists
- Some people like these basic HTML looks, I prefer a little bit of formatting, setting a max width yourself would be better