Investing In Shares

Venezuela: World’s Best Performing Stock Market

The thing most people fail to understand about investing is that money is a commodity too.

Like all commodities, there is fluctuating supply and demand for money.

Complicating the matter further is that money can be both tangible (cash in your wallet) or intangible in the form of credit (the mortgage on your house) which is money borrowed from the future to be spent in the present and to be repaid some day in the future.

Most assume that the value of money is fixed or is well regulated so that it only changes very slowly over time. Yet throughout history this assumption has been the ruin of many investors.

A great example of what affect money can have on asset prices is the Venezuelan stock market.

At face value, it has had an amazing year increasing 100%! And it’s increased 24,000% over the last 5 years!

venezuelan-stock-market-index

But like all things, price of money is set by supply and demand. So when local government began printing money (Venezuelan Bolivar) to pay for the goods and services it needed to support its socialist regime the value of money started dropping and in turn asset prices started increasing.

So in real terms the Venezuelan stock market is not really up 24,000% over the last 5 years, what’s actually happened is that its currency has been inflated 64,000% against the USD.

At the start of 2012 the Venezuelan stock market index was trading at 27.2 in USD terms whereas today its trading at 10.3 in USD terms…

So in USD terms it’s fallen 62.1%!

Ouch.

But of course the silver lining is that you would have lost 99.8% of your money if you’d kept your savings in cash…

So the supply and demand of money (including the credit in the economy) matters on an investment as much as anything.

If you want to be successful at investing in shares understanding this supply and demand dynamic will pay dividends in the long run (pun intended).