In my capacity as cartoonist, I feel an obligation to simplify complicated discussions until two things happen simultaneously:
1. Absurdity is achieved.
2. The reader feels as if it all makes sense.
My comic from Saturday illustrates that principle.
According to Google Alerts that comic has been posted to more blogs than any comic I have ever created. It inspires me to more fully explain the theory of finance in this blog.
Think of financial theory as a stool. The stool is supported by three legs, or truisms.
- History always repeats.
- Past performance is no indication of future returns.
- Asshats are trying to steal your money.
These three truisms can explain any financial phenomenon. For example, if your financial advisor suggests that you invest in a market bubble that is about to burst, he will explain that the past is no indication of future results. Just because a Price/Earnings ratio of 45 has never been sustainable in the past doesn’t mean it won’t be perfectly safe in the future.
And when the bubble bursts and you lose half of your money, your advisor will explain it’s because history always repeats. In other words, he’s an asshat trying to steal your money.
This stool also explains the housing situation. Financial experts knew that making loans to hobos had never been a good idea in the past. On the other hand, past performance is no indication of future returns. Maybe this time would be different. Then history repeated and asshats stole your money. As a bonus, they even stole each other’s money this time. You have to admire their thoroughness.
One last thing you need to know: People who say it is a good time to invest are called bulls. The bulls are at the center of all financial problems.
In summary, if you want to understand financial markets find a bull and look at his stool.