08 Apr The Rock Story: Part ii…
Continuing on with the story…
So, Mark was wondering if there’s a possibility of making money by speculating that the so-called rock with diamonds will decline in value. Over the next few days, he came up with the perfect idea that supported his theory. Here’s what he did over the next few months:
- He took out $10,000 from his bank account and proceeded to go to the Rock Company which had a lot of rare rocks including the one that “supposedly” had diamonds in it. He told the clerk that he wanted to borrow a piece of the diamond rock. The clerk said it was not a problem and told Mark that he will need $10,000 as deposit and that he’ll be charged a borrowing fee of 1%. Mark paid the clerk and now has in his possession the so-called diamond rock.
- The next day, Mark drove to the Rock Market and this is where rocks from all around the world were being traded among investors. He found out that the diamond rock was still being bought and sold for $10,000 per rock. Due to the positive rumors swirling around about the further price appreciation of the rock, Mark had no problem finding a buyer who wanted to buy the rock for $10,000. Mark left the Rock Market that day with $10,000 cash in his pocket…
- Over the next few months, rumors circulated around the Internet and in the media that the so-called diamond rocks actually didn’t have any diamonds in them. This sent the prices of the rocks down sharply to as low as $1,000. Bingo! Mark proved his theory right, but while still remaining calm, he knew that there was still the possibility that the rumors weren’t true. There was still a chance the prices would shoot back up.
- The next week, Mark found out that there was an independent rock forensic company that conducted a test to determine whether in fact, these rocks actually contained diamonds in them. They didn’t and the diamond rock prices plunged further in value.
- Mark, feeling great about himself but feeling sorry for his friends and those who bought into the rock investment at incredibly expensive prices, went back to the Rock Market and found many sellers who were willing to sell the worthless rocks for as low as $100 a piece. Mark took out $100 from his pocket and bought the same rock that he sold a few months ago for $10,000.
- He then drove back to the Rock Company where he borrowed the rock from and returned it to them. The clerk returned his $10,000 deposit and charged him a 1% fee ($100) which Mark happily paid. So how much money or profit was in Mark’s pocket? It came to $10,000 less $100 (cost of the rock) less $100 (rock borrowing costs) equals $9,800. Not too shabby!
So, in the markets we’re trading stocks instead of rocks. An example of how traders made millions during the financial crisis. Next time, you see a crazily overvalued asset like the rock, let’s go make some moolah!