Tuesday, November 9, 2010

Evolution of Finance in a Rapidly Changing World

Introduction

Hey everyone, this is the first post to begin a whole new string of high quality posts that are perfect for anyone who wants to get into an investor's mindset.  If you have been following this blog from the beginning, you may have remembered some of my memorable earlier posts, and my goal now is to go above and beyond and write awesome posts that will keep you coming back for more.

Whether you already consider yourself a financial guru, or know absolutely nothing about the topic, don't worry, I will keep it interesting day in and day out.

This post is just to get you thinking about the nature of finance and how you can start learning how to not get screwed by the system.  Now to begin....



E v o l u t i o n   o f   F i n a n c e   i n   a   R a p i d l y
C h a n g i n g   W o r l d
The reason why I based this post upon "Financial Darwinism," is because it is currently one of the books that I am re-reading, which I honestly think is a great book filled with a lot of interesting and thought provoking content.  If you want to check out the website, here is a link http://www.financialdarwinism.com/

If you are familiar with Darwin and his theory of evolution, then you might be wondering what the heck this has anything to do with the global financial markets........
"The central argument of Financial Darwinism is that businesses should replace the "old-regime economic performance equation" with a "risk-based economic performance equation." Economic performance under the old-regime is based on the difference between the sum of returns on assets and total fees, and the sum of returns on liabilities, expenses and the total cost of capital. Risk-based economic performance, on the other hand, is the difference between the sum of balance sheet arbitrage, principal investment activities, exposures to systematic risks, and fee-based businesses, and the sum of cost control and the cost of capital. The author points out that the new-regime applies to both financial and non-financial corporations."
Financial Darwinism 

Even though this book is suited more for the upper-graduate students in economics or finance, once you start learning more about the increasingly intricate world of global investing, it becomes difficult to stop.  I'm going to attempt to put some of the concepts into my own words.

When we tend to think about modern finance in today's world, we usually think of the extreme complexities that economists, bankers, accountants, and other professionals have to deal with on a daily basis to try and understand and anticipate the changes that will affect us all.

It is imperative to understand that obtaining a decent financial education is of unequivocal importance because as the financial markets become more complex and evolve in ways that we have yet to imagine, the risks grow exponentially  alongside any opportunities that may be created.

For example, think about how much the world has changed in just 20 years.  Back in 1990, there was no high speed internet (at least not to the general public) and mass media communications were in the infancy of their evolution.  Before the dot-com bubble, many investors relied on the already existing proven methods of allocating their assets into a seemingly balanced and well-diversified portfolio.  Even today, many investors preach the "Never keep your eggs in one basket," approach to investing.  Then from 1995-early 2000, the "dot-com bubble" emerged and many investors who were keen to jump onto the bandwagon ended up having their portfolio's obliterated by the sudden downturn that would stun economists and analysts alike.

"Today's Successes Will be Tomorrow's Failures..."





So now to a very interesting and thought provoking part to this post.  Beginning with the quote above that I used for my header, think about it first, and now apply it in a financial perspective.  What i'm trying to point out is that many of the methods being used today that are making people successful will evolve and merge with other existing strategies that will build the financial markets of tomorrow.

As the technology around us grows and the flow of information increases, the financial markets will have to evolve accordingly or else be lost in a chaotic system that will potentially cause world-wide problems that will affect nearly everyone in the world.

"Financial history is, in sum, the result of institutional mutation and natural selection ... Financial organisms are in competition with one another for finite resources (customers, clients, market share).  At certain times and in certain places, certain financial species may become dominant.   But innovations by competitors species, or the emergence of altogether new species, prevent any permanent hierarchy... from emerging... Institutions with a "selfish gene"... will tend to endure and proliferate....
Source - Tilman, Leo M. Financial Darwinism: Create Value or Self-destruct in a World of Risk. Hoboken, NJ: Wiley, 2009. 11. Print.


Final Words
So i'm choosing to end it off here for today, I hope that if you read this, it got you thinking about your own personal financial situation and how you will choose to evolve to meet the growing needs of the newest chapters of the world that have yet to be made.

13 comments:

  1. Thanks for the advice on the book... Good excerpts and advice... I'll have to look for it at the library definitely seems it would be worth the read.

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  2. recently heard of etrade.com on a picture board, would you recoomend it !? I wanna start trading stock but dont know where to start...

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  3. Investment is a great subject to explore. Are you planning to delve into stocks and options?

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  4. Very useful information! Thanks a lot!

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  5. Great information, it´s always necessary to get attention on financial stuff, it leads the structure of the economy to new ways

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  6. its hard seeing what direction you must travel for success

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  7. i'm getting season passes. great site!!

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  8. great post, looking forward to more from you

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  9. you write some very informative posts

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