Saturday, May 21, 2005

Free lunch

The Prudent Investor - seeing too many bubbles: There is no free lunch - higher rates equal higher risk
Every trader knows the first rule of thumb in investment that goes as follows: Higher chances of return are equalled by a higher risk. If you go for a return of say 3 percent your positive expectations will be matched by an equal risk that your investment might result in a 3 percent loss. If you look for 10 percent gain you have to be prepared not to shed tears for an equal loss. And if you fancy returns of 100 percent, for example by speculating in the options market, you have to be prepared for a loss of the same size. There is no exception to this rule, history shows. And don't forget about the second rule in investing: As long as there has been fiat money the markets have worked in cycles from top to bottom and back. It was never different.