“Derivatives are a huge, complex issue." - Judd Gregg
When you hear most people talk about the causes behind the Great Recession and the 2008 financial crisis, many people place the blame on derivatives. But when asked what exactly a derivative is, we're met with stutters and stammers. In a few words, a derivative is a bet on a bet.
“We've used derivatives for many, many years. I don't think derivatives are evil, per se, I think they are dangerous. ...So we use lots of things daily that are dangerous, but we generally pay some attention to how they're used. We tell the cars how fast they can go." - Warren Buffett
Derivative: something that is based on another source.
In the world of finance, it's a contract that derives it's value not from itself but based on the performance of an underlying asset. The price of the security is based from one, or a group of underlying assets, such as stocks, bonds, commodities, currencies, interest rates, and even market indices. The derivative itself is nothing more than a contract between two parties, with the value being determined by the fluctuations in value of its underlying asset or asset group. Legend has it that the original derivative contract was between Aristotle and Thales over an olive transaction, and Aristotle wound up on the profitable end of the deal.
One of the most attractive aspects of derivatives is the flexibility in their structuring.
Because the contract does not involve the purchase or holding of an actual asset, terms can be completely modified as the parties see fit. You simultaneously relieve yourself of ownership of an actual asset, while still being able to play in the market. There are a plethora of types of derivatives for all suits and purposes. In some cases, derivatives can be used to speculate the price of an asset, hedge against risk on an asset, or circumvent issues with exchange rates.
“What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so." - Alan Greenspan
The majority of derivatives on the market are traded OTC - or Over The Counter.
These are unregulated, and typically present a greater risk to the counter party than do standardized derivatives. Standardized derivatives are regulated and traded on an exchange.
“Derivative trading with mark-to-market accounting degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade." - Charlie Munger
There are however, certain risks and criticisms attached to derivatives. Too much hidden tail risk, and in a phenomena known as "phase lock in," your hedged position can become un-hedged at the worst moment- overnight. The double edged sword in the attractiveness of derivatives lies in leverage. Because of leverage an investor can use derivatives to turn a small amount of money into large returns rather quickly. However, just as quickly, one can suffer losses far greater than one's initial deposit, often greater than one can repay.
An impressive collective $39.5 billion was lost in the past decade by banks such as AIG.
"Derivatives are financial weapons of mass destruction." - Warren Buffett
Airbnb offers an affordable option for people looking to be more comfortable as they travel.
However, there are downsides to staying in a host's home rather than a hotel. Whereas hotels are designed for constant streams of visitors and often have furniture built to last, at an Airbnb, you may be staying on old or cheap furniture that a host is using in order to maximize their profits.
And while most reputable hotels will have regular room inspections from staff to check for any wear and tear, Airbnb damage disputes are oftentimes he said, she said situations. If you are in an Airbnb and something breaks, there are a few steps you should take in order to ensure that you are not on the hook for damages out of your control.
If you're keeping tabs on the art and tech worlds, you've probably been hearing whispers about "NFTs" for the past month. Just over the past week they've entered the mainstream lexicon.
Twitter founder Jack Dorsey made the news for selling his first ever tweet. The app has been teasing paid subscription models and newsletter-like features, but tweets for sale is "the next frontier."
just setting up my twttr— jack (@jack)1142974214.0
The 2006 tweet went up for auction as an NFT, and the current bid is $2.5 Million. But what does it mean to own that? Why would anyone want to? And what even is an NFT?
Long gone are the days when the majority of Americans dreamed about owning a home with a white picket fence.
The traditional American Dream may be on its deathbed, but that doesn't mean a core component of the vision can't survive. It simply takes a diverse perspective. People can still believe they can attain their own vision of success in society with hard work, knowledge, and risk-taking. Investing in today's American Dream may literally mean investing money in our modern economy, starting with our infrastructure.
Real estate investing in particular is a lucrative method that can boost income and secure a better financial future for many. There's always risk involved, but the payoffs can far outweigh the uncertainty. Selecting solid financial investments is about confidence and competence. If you're looking for some advice on this kind of investment, here are a few savvy tips for new real estate investors.
Stick To a Specific Strategy or Niche
Real estate is a challenging sphere of the business world, one that requires several key skills: groundwork knowledge, networking, perseverance, and organization. True knowledge of the real estate market will come with time and experience, but it's a smart idea to select one area of the market and stick to it. This is the best way to attain in-depth familiarity with your specific niche.
First, choose a geographical area close by and then a niche strategy within it, such as house flips, rental rehabs, or residential or commercial properties. By doing so, you can become aware of current inner working conditions in the market and you'll have a better idea of how these trends may change in the future.
Be Vigilant About Viable Financing Options
While it takes money to make money, you don't have to use all your own money. A common misconception about real estate investing is that you must be wealthy to start off. This isn't straight fact, however. A majority of people can test the waters of real estate investing without a lot of initial cash in their pocket.
Aside from traditional financing options from banks and institutions, private lending options can be worthy solutions. Hard money lenders are popular, reasonable choices, and they tend to have fewer qualification requirements upfront. However, be sure to strategically choose a hard money lender to find the best possible fit.
Master the Art of Finding Good Deals
There may be hundreds of thousands of available properties for sale on the current market, but the bulk of them will never amount to the final money-making result you desire. Another great tip for new real estate investors is to use good math to estimate profit. Taking risks is part of the process, but you have the ability to analyze properties and use networking sources to find the greatest deal. You can't win every deal, but you can steadily work towards a thriving financial future.