Naked Economics by Wheelan Charles

Author:Wheelan, Charles [Wheelan, Charles]
Language: eng
Format: epub
Publisher: W. W. Norton & Company
Published: 2010-04-18T23:00:00+00:00

All that is well and good. But how does one get rich in the markets? One of my former colleagues at The Economist suggested that this book should be called Are You Rich Enough? His logic was that most people would answer no and rip the book off the shelves. Sadly, I’m not a big believer in surefire strategies to trade your way to riches. Just as miracle weight-loss programs violate nearly everything we know about health and nutrition, get-rich-quick schemes violate the most basic principles of economics.

Let me begin with an example. Suppose you are shopping for a home in the Lincoln Park neighborhood of Chicago. After many weeks of searching, you find that a three-story single-family brownstone will cost you somewhere in the range of $500,000. Some homes are listed for $450,000 but they need work; others are listed for $600,000 because they have extra amenities. Just when you begin to despair that you will have to spend $500,000 for a home, you find a brownstone listed for $250,000 that meets all of your specifications. When you investigate, you learn that this home is every bit as nice as the ones you’ve been looking at—same location, same size, same structural integrity. Still wary, you ask your real estate agent for her assessment. She assures you that this house is indeed a remarkable bargain and should be selling for $500,000. In her professional opinion, there is no doubt that you could buy this house for $250,000 and sell it only months later for $500,000 or more. Then you see the final piece of evidence. An article on page 3 of Crain’s Chicago Business has a screaming headline: “Bargain of the Month: Lincoln Park Brownstone Listed for $250,000.”

So you snap up the house for $250,000. Sure enough, six months later you sell it for $500,000—doubling your money.*

How many things are wrong with this story? Quite a few. A reasonable person might begin by asking some of the following questions:

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