Monday, June 04, 2012

Why investments are like Schrodinger's cat

Investments remind me of Schrodinger's cat.

For those unfamiliar, the cat in question was part of a thought experiment dreamed up by the physicist Schrodinger. It involved, as you might imagine, a cat. It also involved a box; and the cat was in fact inside the box.

He was trying to make a point about quantum physics which is interesting in its own right, but the upshot was that as long as the box was closed the cat in the box was both dead and alive at the same time. It was the moment of opening the box and observing the cat which collapsed the two states into one and you could then observe whether the cat was in fact dead or alive.

Investments, be they real estate, commodities, stocks or what have you, tend to be a bit like that. As long as your money is invested you both have it and don't have it. You think you 're worth something, but in fact you might be worth nothing. It is only when you try to cash-out your investment that you finally discover whether you are prince or pauper. If the markets are kind, you could be worth a fortune, if not you could be on the dole.

This is important to understand. Investments are only worth something when you can sell them. And you can only sell them when somebody wants to buy them at the price you expect. All the gold in the world would not be sufficient you buy you a single meal if no one else in the world wants to make the exchange.

So, don't count your chicken before they hatch or you could well end up with a dead cat on your hands.

1 comment:

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