Adam Smith nailed it 200 years ago, both communist and capitalist alike have studied Smith and his invisible hand.
Here are some examples in action:
- When investors have negative equity renting out their real estate assets. We saw this 3-4 years ago in many markets. Specifically, if you own a condo with a mortgage of $1,600 and it rents for $800, the market needs to revalue itself.
- When a stock has a P/E ratio over 20, be cautious. Reality has little to do with stocks, yet when Google went over $700, the only chance for it was to double or triple revenue to meet expectations. Now it is a little over $300. Still not quite a bargain.
- When a Big Mac cost in excess of $5 in certain countries, their currency is probably over-valued. Japan in 1995, hit a peak in the value of the Yen, I know I was there with my small American Dollars. From there the economy and currency has been on a skid. Big Mac’s are more affordable now.
- When a country pegs their currency to keep exports flowing, this is artificial and the market will counter this quickly. China is starting to adjust to a globalized economy, yet it is said they have to have 7.5% growth or they will have social unrest among their 1 billion people.
- Baseball Cards – are they really worth the money? If you can find a buyer, yet discounts are the norm.
- eBay – this is the invisible hand. From Grilled Cheese with the Virgin Mary to Governor Palin’s Jet (did not sell) to the Pope’s Old Car. The free market of supply and demand can be seen in action every day.
- Education – is a Harvard MBA worth $200,000? Of course, if your ROI is regained in less than 5 years. Your earnings potential skyrockets and your ego. I chose the Thunderbird MBA as it allows me to further my economics, cultural and language studies while earning my MBA. I also get to travel to Dubai, Moscow, Beijing, Santiago and Geneva for my coursework. So if you have an international role that needs an excellent General Manager, hire me.
- When money is involved, the truth comes out. Money calls all BS to the table. I was in a meeting the other day and some guy was going on and on about how great a company was, so the other guy asked. Would you invest more in this company if I do? [Silence] The truth is now out.