Friday, October 26, 2007

Role of Chance in Wealth Creation

I would like to open this blog with a little philosophical but the most cardinal point to wealth creation. 'Wealth cannot be created by planning' ofcourse it can wither away without proper planning but certainly can't be created by it.

'Wealth is created by chance'. You accidently discover a goldmine, oil well, invest in a stock that turns out to be a Microsoft (don't tell me you knew it would happen - no one can because it had never happened before) and why just wealth Sir Newton discovered gravity (world knows the story). All big things happen by accident.

Hey wait before you start wondering I am not suggesting you guys to surrender to fate, what I am asking is to recognize the key ingredient to wealth creation and work towards a way to expose yourself towards it. Sir Newton discovered gravity accidently but he was working towards something and so essentially he was ready to caputre the chance.

So now the question is how does one capture chance and create wealth. Well people try it a lot - they buy lottery tickets, play in casinos. However the problem with these mediums are that they follow a highly predictable normal curve probability distribution. What they lack is 'Unpredictability' or what we call 'Volatility'. While we shall discuss this topic in detail in time to come let me end this post post by stating one of the ways to capture volatility specially in equity markets.

'Form a Chalice' and thats where the name of this blog comes from. Form a cup to caputre chance/randomness/volatility and how is a chalice formed in markets - well simple buy an 'at the money' call and put. The rest later -----------

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