How Many Golden Eggs Would You Pay for the Golden Goose?

Making a living in the stock market

Photo by Sharon McCutcheon on Unsplash

Is it possible to make a living as investor/trader in the stock market?

Yes. Possible and easy. This is what I’ve been doing for more than 35 years. In fact, it is the only way I made money in my life, except when working as employee in my youth.

At this point of life, I would like to expose and discuss some thoughts, beliefs, experiences and financial strategies.

I hope you can use it somehow.

Let’s start!

Our special fairy tale

You dream a very pleasant dream. You are walking in a beautiful magical garden, rich colored, with pretty and strange animals and plants. Suddenly, a gnome appears in front of you and asks “Would you like to buy my golden goose?”.

Before you answer consider some facts.

1. The gnome is honest. There is no catch.
2. The golden goose is magical and extremely rare. Probably the unique in the universe. She is immortal. Never gets sick or suffer any problem. She only needs grass and water to stay well. She regularly puts one egg on the last day of each month; always a golden egg. And cannot reproduce.
3. Golden eggs are the most precious economical good in this kingdom. With golden eggs, you can buy anything that is for sale.
4. The gnome only accepts cash payment, in golden eggs.

Forget if you can afford or not the price. Just think which amount of golden eggs means a good trade for you. And don’t be very abusive. We never know what an angry gnome can do.

Perceiving your indecision the gnome explains that he doesn’t care about richness because the mother nature kindly provides everything his family needs (That’s life!). He needs to sell the golden goose because all the furniture, walls and floor in their home is made or covered with golden eggs; and his wife dislikes the color. Therefore, he is inclined to accept a low offer.

How many golden eggs would you pay for the golden goose?

The koan

My plan was to use this fairy tale as base for a lot of metaphors. And now that it is written, I have the strong feeling that I should leave it as it is. That what it expresses is so essential and useful that any word that I could use to expand, create a branch only would diminish its value, no matter how good could be this branch.

The worth of the golden goose should be a koan. A question to be never answered and never forgotten.

The value and the price

I am *NOT* here to advocate value investing. The fairy tale is just a reminder that you need to KNOW the value of the things you handle. Which is what any kid selling lemonade on the front yard of his house does.

Oscar Wilde said

“A cynic is a man who knows the price of everything but the value of nothing.”

I think “fool” fits better than “cynic”. Mainly because the word “cynic” reminds me the philosopher Diogenes, whom I admire very much.

Back to the fairy tale

Among the many possibilities, you reply to the gnome “It seems like the golden goose has been your pet through a long time and had an important role in your marriage. Why don’t you go home? Maybe your wife has changed her mind. You know like women are…”

You played the nice guy role. Maybe because you are a nice guy. Maybe because you are broke, starving and have only 2 bananas to offer. So, as you are unable to make a deal, your goal becomes raising your social rank. Maybe the gnome has 1 or 2 golden eggs to spare. Who knows?

The gnome says “You look a nice guy to me. I have this magical elven box. You only can place coins inside it. And then you cannot put or withdraw anything during a month. At the end of the month you realize that the number of coins inside the magical elven box has increased 6%. And it is ready for another month. And so on…”.

The gnome continues “I will give you this magical elven box as a gift if you correctly answer a simple question. You have only 15 seconds to answer and cannot be helped for any person or machine. I expect a rounded value.” And the gnome asks you. The question is

If today the magical elven box contains 10 thousand coins, and it is left alone, how many coins it will have after 10 years?

A profitability of 6% per month is good. But it is not going to make somebody rich. Right?

How many golden eggs is the worth of the golden goose?

I would love to know your offer, if you have the time to write it in the answers section.

How many coins will hold the elven magical box in 10 years?

I would like to know your guess before I write the answer. Don’t feel embarrassed if your number is very far from the correct. This kind of calculation most people are not used to. That’s why I am writing this article.

Elven box sold at Etsy

Capitalization

There is a very important difference between the golden goose and the magical elven box.

The golden goose is unique. You can’t accumulate golden eggs and buy a second one. You can’t use the first egg to buy a small piece of a golden goose. The golden goose yields always the same amount of value: one golden egg per month.

On the other hand, each amount of coins the magical elven box yields at the end of a month can be reinvested increasing the yield for the next month.

In financial math, we would say that the golden goose works by “simple interest”; and that the magical elven box works by “compound interest”.

The compound interest principle is also known as capitalization. In brief: you reinvest the profits in order to generate bigger profits.

Some people say that compound interest should be banned because it is evil, dishonest and not the natural math . I only have arguments to discuss what is natural math on this subject. I will wrote a special article about it.

The answers

I will start by the magical elven box riddle because it is just plain math. The answer is 10 million coins. That’s it. You start with 10 thousand coins and after ten years you have ten million coins (passive income), as long as you reinvest each month all the yield, and the yield (after expenses and taxes) represent 6% of the capital at start of the month.

If you don’t believe, follow me. You don’t need a computer or financial calculator. Warning: 10 million is not the true number. It is the rounded number. The true number is bigger.

Let’s use a neutral base. Instead of 10 thousand coins you start with 1. Why use a neutral base? Because we are not looking for an absolute value. We are looking for a factor, something that later you can apply to any absolute number.

1. start: $1
2. end of first month: $1 * 1.06 = $1.06
3. end of second month: $1.06 * 1.06 = $1.1236
4. end of third month: $1.1236 * 1.06 = $1.191016

We can go this way to the end of the twelfth month, but it would be boring, error-prone and not so educative as if we realize that the rate of 6% per month means the same as the rate of 19.1016 per quarter.

1. start: $1
2. end of first quarter: $1 * 1.191016 = $1.191016
3. end of second quarter: $1.191016 * 1.191016 = $1.418519112
4. end of third quarter: $1.418519112 * 1.191016 = $1.689478959
5. end of the fourth quarter: $1.689478959 * 1.191016 = $2.012196472

As we see, the monthly rate of 6% at compound interest means more than double the capital in 1 year. At simple interest, the capital would increase 72% (12 * 6%).

We know that the magical elven box is able to (more than) double your capital in a year. But what it could do in ten years? Let us be modest and pragmatic. 100% increase per year is enough. And now comes the fun part. We don’t even need a calculator ;)

1. start: $1
2. end of first year: $1 * 2 = $2
3. end of second year: $2 * 2 = $4
4. end of third year: $4 * 2 = $8
5. end of fourth year: $8 * 2 = $16
6. end of fifth year: $16 * 2 = $32
7. end of sixth year: $32 * 2 = $64
8. end of seventh year: $64 * 2 = $128
9. end of eighth year: $128 * 2 = $256
10. end of ninth year: $256 * 2 = $512
11. end of the tenth year: $512 * 2 = $1024

Any amount you capitalize at 100% per year will be 1024 times bigger after 10 years. For the modest and pragmatic ones: in 10 years the capital will be multiplied by 1 thousand.

How about 20 years?

Investing $10 thousands and doubling it year over year, after 20 years you have more than $10 Billions.

Too good to be true? Yes and no. We have a lot to talk!

There is no correct or wrong answer for the golden goose riddle. Its purpose is to call your attention to the point that it is important to consider the value of the things you buy or sell.

As INVESTOR, I would pay no more than 120 golden eggs. In other words no more than 10 times the annual profit for a solid, non growing business. Which means, at simple interest, that in 10 years the invested value would be returned, and I still would have the golden goose putting golden eggs.

If you are fast and alert you have realized that paying 120 golden eggs for a golden goose that yields 1 golden egg per month means a rate smaller than 1% (0.8333333%) per month and that magnificent source of fortune called magical elven box has a rate of 6% per month (we can ignore the distinction simple x compound interest, for a while, because the difference in the rates is huge).

Good! But you are missing two points.

First: it is not just about paying 120 golden eggs now and receiving 120 golden eggs along 10 years. You must also consider the remaining value of the golden goose after the 10 years (whatever it is).

Second: I said “as investor”. You rarely find an asset that SAFELY uses to double its value year over year. And even if you find one, this cannot be the only asset of your wallet. Because you are wise and don’t put all the eggs (golden or not) in the same basket. So we improve the annual profit rate with trading and maybe some sophisticated operations.

To be continued

This article is the first of a series.

The next article is The Magical Elven Box.