Tuesday, April 23, 2013

Growing wealthy without bubbles

Click on pic to read article.

Very clearly written piece and a breeze to read. I am putting this up for my elder child and my comments following to explain that real life is not like what Tan Chin Hwee has painted here. Can't be helped. If it is easy to read and understand, it doesn't capture the messiness of real life. That's why you can take away the nuggets of wisdom from Warren Buffett but you could most times not replicate even a little of his work yourself.

An economy can grow wealthy without asset bubbles for only so long. Wealth especially concentrated wealth make asset bubbles inevitable. Also from the risk-reward angle, trading assets will most times beat gathering wealth brick by brick. Come on, people are making money the hard way only because the easy way isn't available. However once cash or reserves is accumulated and need to find a home, they start to look for assets to park them. It could be anything judged to be durable and valuable. Now if as a government you refuse to entertain this the money will find ways to leave the country. No government ever allows that. There you have it: asset bubbles.

At best you can mitigate bubbles but never prevent them because in practice you only know one after it has appeared. For a while a bubble isn't universally recognized or accepted as such when it is forming.

My long term worry aren't about asset bubbles but as the pendulum swings the other way, how far would markets become more regulated and asset gains taxed. Very much depends on what society would permit seeing how frustrated people all over the world are with the huge and widening wealth gap. I am early. Nobody is talking about this yet and I hope ever. I know history echoes another story and an unhappy one.

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