Derivatives in Sardines

 

2012-08-26 – My law school securities law professor told a story about an investor who had received a tip about a certain brand of sardines.

“Why are these sardines priced so high?” The man asked.

“These are very special sardines,” said the tipster. “Their price has been going up since the beginning of the year and there’s no telling how high they will go.” Convinced, the investor bought two cases for $150,000.

The man was still curious, however. There are 48 cans in my two cases, he thought, and these are very special. So he arranged a candlelit dinner with his wife and opened one of the cans, worth $3,000. They were terrible.

The next day the man called up the tipster to complain. But the tipster had an answer: “These are trading sardine,” the man said, “not eating sardines.”

Now I heard this story 36 years ago. And I don’t remember my professor’s point. But stock markets are still stock markets. And the fat cats are still trading and making billions on sardines.

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