Saturday, September 24, 2011

Reinvestment opportunities

Suppose you have made an investment three years ago at a cost of 100. Today, say the investment is worth 160. Your rate of return for 3 years is 60% and your compounded annual rate of return is (160/100)^(1/3) =16.96% per annum.
Suppose you expect the investment to go upto 165 in another quarter but under some risk that it may also go down, what do you do and what should you do? 
At the rate of 165, your profits would be 65 instead of the previous 60, at a new annualised rate of return of 18.16% from the previous ~17%. Should you now go for it?
It sure looks tempting to get a rate of return of 18.16% with a little risk, but this is identical to driving a car looking at the rear mirror. Let me explain. There are two ways to look at the rate of return. One rate of return based on the investment done 3 years ago and one assuming you are investing today. With the old investment, yes, your calculation comes to an attractive 18.16%. But assuming you are investing 160 today, you are expecting a rate of return of a mere 5/160= 3.125%. The truth is that you have already made most of your money till now and your marginal rate of return is only some 3 odd %. 
By keeping the investment, the truth is that you are actually wanting to make an investment giving a rate of return of ~3 % in a quarter with the risk of a downside too and not the 18.16% per annum that the calculation shows. The question to be asked is "Is this what you really want when you could have other more worthwhile investments to make which can give you better returns?". 
The comfort of previous returns makes people biased to calculating from a historical perspective and make them feel that the investment is good. By doing so, you are indifferent to reinvestment opportunities and are  missing real opportunities that will make you more money.

Sunday, September 18, 2011

Faith and fraud

Blind faith and fraud go together. Looking at the below 2 instances (out of many other miracles), I am led to believe what I have thought of many a times. The blind faith in God itself is a fraud perpetuated by our ancestors for personal gains. Separate the people based on religion and ask them to fight your wars. In short, divide and rule. Buy out shops/areas around a religious place, and then spin a story based on that temple and make throngs of people visit it daily and make super-normal profits by selling all things the people need there. In short, create demand where there is none by spinning a story.
Lets look at the two instances:
 I am not an atheist, but being an open and logical thinker, I am forced to question my faith in faith.