WEB EXCLUSIVE COLUMN: How big is the next “big” investment?

Michael J. Greenberg

To an average person, investing is kind of weird and hard to grasp because it’s often either made out to be too simple or too complex.

So, which is it, simple or complex?

Due to column-inch limitations here, we aren’t ready to get into a long discussion, which is the only way we can do justice to any answers to the above question.

But there is one thing about investing that we can discuss in today’s column: supply and demand.

The concept — or, rather, the harsh reality — of supply and demand is one of the most fundamental and powerful concepts in economics. And, like any such concept about any field, you don’t need a doctorate to grasp the idea. Such concepts are simple.

The higher (lower) the demand for something, the higher (lower) the price of that thing, all else equal. Ceteris paribus (or all else equal), the higher (lower) the supply of something, the lower (higher) its price. Plain and simple economics. We see it everyday.

For most people, they can clearly see it in their daily lives. Prices of houses and cars, prices of everything they see and touch and use every day.

But when it comes to financial markets, most people, surprisingly, can’t see things clearly.

In the realm of investment, you often hear people saying, some new product is going to be so big in society that investors are going to make big money in it. If you study history, people got excited about different new inventions or products in different eras. It was once the railroads, radios, airplanes, commercial airlines, televisions, VCRs, computers, and more recently in the late ’90s, the Internet. Every time the market’s getting excited about something, one thing is for sure: there will be a lot of so-called experts defending the investment as “the next big thing.”

We are not denying that those “next big things” above have improved our lives. They have greatly changed the ways we live, travel and work. What we’re trying to remind investors is that a new product may grow from zero to wide acceptance by everybody, yet still see investors in those companies lose money. It all depends on the forces of supply and demand. The more money that goes into any market, the lower the return to investment in that market. In fact, competition may get so fierce that the industry as a whole is losing money.

Warren Buffett, the legendary Midwestern investor, once calculated all the money made and lost by the airlines, aircraft manufacturers and automakers, from the first such companies till the present day. He found that overall, they hardly broke even. Each of the three industries actually lost money.

Of course, those Wall Street “experts” studied investment history. Problem is, when they are in the middle of pushing something (like real estate today), and you remind them of these harsh realities from yesteryears, they invariably will give you the same standard answer that their failed counterparts from yesteryears gave their naïve investors: “This time, it’s different!” And they will pull out reams of numbers and pages of arguments to “support” their claims.

The biggest question of all is: Will you buy it?

Michael J. Greenberg is a graduate student and a columnist for the Daily Kent Stater.

Editor’s note: Michael J. Greenberg is a pseudonym. He can be contacted through the editor at [email protected].