YGOLANA|ANALOGY

A blog about analogies found on the web.

Stock Market is like Louis Vuitton Bag

One day, a plain-looking man came with a pretty-looking young woman to the Louis Vuitton store in Rockwell Makati.  He chose an LV bag worth P50,000 for the young woman.  When it came time to pay, the man took out a checkbook and wrote out a check.  The salesperson was hesitant because the couple hadn't shopped there before.       
  
The man discerned what the salesperson was thinking and he said calmly:  "I sense that you are concerned that this check may bounce, right?   Today is Saturday and the banks are closed.  Let me suggest that I leave the check and the handbag here. When the check clears on Monday, you can deliver the handbag to this lady.  How about that?"  The salesperson was reassured and gladly accepted the suggestion.   
  
On Monday, the salesperson took the check to the nearby bank.  The check was no good!  The irate salesperson called up the client and complained bitterly and called him names.  The client calmly told him:  "What is the big deal?  Neither you nor I have suffered any loss.  Last Saturday night, I went to bed with that girl and had a night of terrific sex.  Oh, by the way, I thank you for your cooperation. "   
  
This story reveals the nature of the stock market.  When people have high hopes for huge future returns, they lower their guard about the potential risks. This pretty girl thought that the P50,000 Louis Vuitton bag was going to come home on Monday, and so she lowered her guard.   She believed that her investment in the ONS (one night stand) was worth it even though it was based upon huge and highly uncertain risks.    The stock market speculators are like this pretty woman."

Although I beg to disagree.  The person who wrote this is probably a stock market loser, as he/she identifies with the pretty woman who lost one night's worth of sex with a manipulative man.  As with all replies to people who raise eyebrows at me and say, "why are you in stocks? That's bad! That's no good! That's Gambling".  I say the same to them as with my reply to this analogy, "not all are losers like you, just because you can't hack it doesn't mean nobody can".

Printing Money is like Making Bullets

 
Economic theory tells us that printing money will inevitably lead to inflation, so why we do not see hyperinflation yet? This article explains it, and here is the analogy used:
 
"My favorite analogy for how printing money doesn't always equal instant inflation is that you can make as many bullets as you want, but those bullets won't do any harm until they're actually fired. Right now, the Fed has printed trillions of bullets, but almost none have been fired. They're all sitting idly in excess reserves."
 
 

Goldman Sachs is like Estate Broker

There is no lack of analogies to explain the financial crisis. Here is another one:

Let’s say that you are buying a house in a foreign country where you do not know much about the real estate markets and therefore prices are fairly opaque to you. You decide to hire a real estate broker to help you find and buy a house and to act as a guide to the market. You know that real estate brokers sometimes represent the person selling a home as well as a person buying a home, but also know that your broker has a legal responsibility to act in your best interests and disclose as much about the house as possible. Ultimately, the broker makes money on the deal, but does not have a direct financial interest in the house.

So you meet with the broker, who shows you a plain apartment in a plain apartment building. You decide to go for it. He says he will hire an independent home inspector to appraise the home, to make sure it is sound and to help you determine your bid. The process moves forward, you buy the house and pay the broker his fee.

But just months later, you find out that the neighborhood is drug-addled and the apartment filled with leaks. You try to sell the apartment, but can only do so at a 90 percent loss. It turns out that the third-party independent home inspector had been hired by the seller; that the seller had made a bet with a bookie that the price of the house would go down; and that the broker knew it — he let them overvalue your house.

Covered Call is like Season Ticket

 

 

According to Wikipedia a covered call is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities. If the trader buys the underlying instrument at the same time as he sells the call, the strategy is often called a "buy-write" strategy. In equilibrium, the strategy has the same payoffs as writing a put option. 
The long position in the underlying instrument is said to provide the "cover" as the shares can be delivered to the buyer of the call if he decides to exercise. 
Writing a call generates income in the form of the premium paid by the option buyer. And if the stock price remains stable or increases, then the writer will be able to keep this income as a profit, even though the profit may have been higher if no call were written. The risk of stock ownership is not eliminated. If the stock price declines, then the net position will likely lose money. 
If you did not understand, perhaps this analogy helps:

Imagine that you are the season ticket holder of 4 good seats for a major league football team at the beginning of the season. A lot of people think the team is headed for the Superbowl, but you are pessimistic. You’d like to cash in on the current hype and get some money now for the last home game of the season. On craigslist you offer to sell the rights to this game. Your offer doesn’t force the buyer to buy the tickets, but gives the buyer the right to buy the tickets from you at face value any time before the game.

If your team is undefeated 4 games into the season the value of your offer will go up. If the last game of the season determines whether the team goes to the playoffs or not your offer could become quite valuable–essentially the difference between what the scalpers are charging for comparable tickets and the face price of the tickets.

On the other hand, if your team is near elimination from the playoffs halfway through the season your offer will be almost worthless—who would pay money for the right to buy tickets at face value that will probably be cheap on the street? If the last game of the season ends up being a meaningless contest between two loser teams you will probably have to sell your tickets at a discount if you don’t want to go yourself.

Your offer on Craig’s list has similar characteristics to selling stock options on stock you own—a covered call. You give up the upside on an asset you own in exchange for money upfront. No laws of nature have been broken—relax…

via sixfigureinvesting.com

 

Cloud Computing is like Money

The most common analogy for cloud computing is that it is like utility, although I would argue that cloud computing is the analogy in itself already...
 
Here is a new one, and quite good in fact:
Take the monetary system. In his address to the annual RSA Conference on computer security held in San Francisco on March 2nd, Art Coviello, president of EMC’s security division, noted how civilisation started with barter, then invented coins to make money more portable—even though people still had to carry their wealth around with them physically. The first step in the virtualisation of wealth came with the introduction of paper money. These promissory notes, with no intrinsic value, forced people to deal with the concept of attestation—certifying that something is genuine. And with that, the advent of financial instruments such as stocks, bonds and mutual funds created ways of sharing wealth—so that when one person wasn’t using it, another could. Today, virtual money dominates the money supply. In much the same way, virtual processing will one day dominate the computing supply.

Financial Market is like Entropy

If you are not familiar with the second law of thermodynamics or it has been too long since you studied it at school, you can read here about what entropy is. If you still remember the theory, here is an interesting analogy of financial markets from seekingalpha.com:

...As entropy is a measure of disorder or volatility, aren’t we due to deal only with messier and messier situations, meaning that new bubble should be an accumulation of long volatility products? I can draw a lot of parallels with innovation, productivity, or simply family. As time goes, it has become more and more difficult to cross the channel using the Eurostar (probability that you get stuck in the tunnel during a few hours has shifted upward significantly, some say because of bad weather conditions), it has become more and more difficult to fix a broken device (you’d rather buy the new one and you are incentived to do so most of the time)…

As a financial markets analogy, the entropy thought is useful. Remember though that entropy only is guaranteed to increase in a completely closed system. Thus, the universe always increases its entropy, but the sand on a beach is continually sorted into different-sized grains through the action of the waves. The car will keep running rougher unless one takes time to replace the oil and tighten the belts. And the same is certainly true of financial markets.
However, the engineer/physicist will remind us that the apparent decrease in entropy of those systems comes because we aren’t considering the full system. We need to consider how the sorting of sand grains on the beach uses energy from the waves, so that the waves are becoming less-ordered. Daddy is helping organize the family but losing his own sanity. And financial markets are artificially stabilized from time to time, at the cost of the sovereign becoming less ordered.

Tax cuts are like Greenhouse gases elimination

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"I really don't understand why newspapers feel they must go through the charade of writing seriously articles (which Milbank did not, to his credit) about people who walk around promising that a society can have no taxes -- except the regressive ones of course -- and no deficit and debt. It would be like science journalists taking seriously someone who said we could eliminate greenhouse gases and burn as much coal as we want.

Actually, that's a pretty good analogy. No science writer would ever bother calling up such a person to quote him, or attend his press conferences. Yet if the person is a politician -- and we have politicians in this country who say pretty much precisely that -- they have to be taken seriously, because of who they are. It's rather ridiculous."

Michael Tomasky

Picture: sciencedaily.com

Mortgage rates are like Blackjack

"I like a blackjack analogy. If a person hits on 18, it is possible the next card could be a 2 or 3 -- but it's unlikely. People who wait for mortgage rates to drop are hitting on 18. It is possible that mortgage rates could fall, but unlikely. It's far more likely, as the days pass, that the next move for mortgage rates will be toward higher rates."

Bob Walters, chief economist for Quicken Loans