Friday, December 25, 2009

CAN POSITIVE RETURN ON INVESTMENT IMPLY PROFITABILITY?

If you invest 100 Dollars and get 120 Dollars after 5-7 years is your investment really profitable, what a stupid question, read further on and it might not be the case.

Mark (frictional), a resident of New York, a normal person just like you and me had a dream of having a home of his own in the city, but his savings were not enough for him to materialize his dream, credit or borrowing were not the words present in his vocabulary, so he decided to stay off in his rented home and being a risk averse, invested his funds in US treasuries at early 2000, nominal house prices prevailing at that time were $225000, The collapse of the Nasdaq boom made sure he did not have to curse his decision, but while the Nasdaq lost its 70% and Dow Jones lost its 20% value by 2002, the housing prices just refused to retreat, and Mark decided to prolong his stay in the rented home, monetary easing by the US Federal Reserve, ultra low interest rates paved the way for housing boom, nominal home prices in New York doubled and topped out at just below $500000, Mark’s dream was shattered

What is the definition of investment, it could be generalized as, to divert our excess money from our safety to a person/institution who guarantees a return more than what was originally invested, Are we God, Knops, so we can have excess money at some timeframe, but we do have expenses in future which we cant just spend on for immediately, we can have excess money which would suffice future expenses real-time, but who knows about future, so now can we generalize an investment as a vehicle which will make sure that the excess money we invested now, which can suffice for expenses on items we might require in future but we cant spend on them right now, would be able to buy all those things which we can buy now, plus add some more.

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