A city businessman went to stay in a small village. During his stay, he learnt that the villagers liked keeping monkeys as pets.
He quickly worked out that there were around ten monkeys in the village, and came up with a cunning scheme of making money. He showed slight interest in buying a monkey from a poor villager, who had only one monkey.
The villager agreed to sell the monkey to the businessman at a price of Rs2,000. The businessman paid the villager, took the monkey and went back to the city.
The villager could not believe his luck and told his friends about the great price at which he had managed to sell his monkey. A week later, the businessman returned to the village. He told the villagers that his kids loved the monkey and he wanted to buy two more.
This time, another villager agreed to sell him his two monkeys but for a higher price. They negotiated a little and the businessman finally agreed to buy the two monkey for Rs2,500 each. He paid the villager Rs5,000, took the monkeys and returned to the city. The second villager told everyone about the price he had received.
The villagers felt envious of the fortune this villager had made, and wished that the businessman would return to buy some more monkeys. Exactly a week later, the businessman came back.
He told the villagers that his neighbours’ children loved the idea of having monkeys as pets. This time he needed at least three monkeys, but was reluctant to pay a higher price. The villagers by this time had figured out that the businessman liked monkeys and had money to spend. They increase the price to Rs3,000 for each monkey. The businessman reluctantly agreed to pay the higher price, took the three monkeys and went back to the city.
That evening, the only topic of discussion in the village was the seemingly increasing popularity of monkeys in the city and the businessman’s willingness to pay a higher price each time he visited. The younger members of the village argued that their pets were clearly sold at too low a price.
They wished that the elders had negotiated better as the businessman looked rich and could have paid more. The elders argued that by selling a monkey for Rs3,000 they had made more money in a day than they would have earned in a month through hard labour.
But they all agreed that the monkeys could fetch a higher price and they needed to make the most of this opportunity. Since there were only four monkeys left in the village, the villagers sent a guy to the nearest village to buy more monkeys.
The guy returned to the village one day before the businessman was expected to arrive and told the villagers that he could only buy two monkeys for a price of Rs2,000 each. The village elders got together that evening to discuss their strategy.
They now had six monkeys and decided that they should sell them at no less than Rs3,500 each. This seamed a fair price as this time they had paid Rs2,000 for the new monkeys and had also incurred the cost of travelling to the nearest village. However, they agreed that they should try and negotiate as high price as possible. As expected, the businessman returned to the village the next morning. But this time there was something different about his behaviour. Previously he had always been cautious about showing his interest in monkeys.
He had always driven a hard bargain, always eager to spend as little as possible. But this time was different. He declared straight away that he wanted to buy twelve monkeys and was willing to pay Rs4,000 for each.
The businessman’s sudden change of behaviour unnerved the villagers. They forgot that they had agreed to negotiate as high a price as possible, and agreed to sell the six monkeys at the offered price.
The businessman looked happy with the deal and told the villagers that there was a huge demand for monkeys in the city, and that he would be delighted to buy as many monkeys as he could get.
That evening, the villagers sat down to discuss their day of trading. Some felt that they should have negotiated a higher price. Others were content with the price they received. But everyone agreed that they needed to get more monkeys. The next day, a poor looking fellow arrived in the village with twelve monkeys. He told the villagers that he was on his way to the city, where he had heard there was a big demand for monkeys. The villagers invited him to spend some time with them. After making him comfortable and extending the usual hospitality, they asked him about his planned journey. He told them that he had heard that monkeys were fetching a handsome price in the city, and that he had decided to take all his monkeys to the city and earn a good profit.
The villagers consulted each other and decided that they should buy the monkeys from the poor man. They did their homework. They observed that the businessman first bought one monkey, then two, then three and then six. They estimated that he could easily buy twelve monkeys if not in his next visit, then in his visit the following week. They decided to offer the poor man Rs4,000 for each of his monkeys. But the poor man declined the offer. He told them that he had heard of a businessman who had paid as much as Rs4,000 for a monkey.
He felt that he could get at least twice as much by selling his monkeys in the city. The negotiations continued for much of the day and eventually the poor man agreed to sell his monkeys for Rs5,000 each.
That evening, the villagers sat to discuss their good fortune. They felt lucky that they were able to buy so many monkeys at such a good price. They felt certain that they would be able to sell their monkeys for at least Rs5,500 each and make a handsome profit in just one week.
That same evening, the businessman and his friend (the poor guy who had sold twelve monkeys to the villagers earlier in the day) celebrated their success in trading monkeys. They bought twelve monkeys at an average price of Rs3,333 each and sold them for Rs5,000.
The villagers waited for the businessman to return the next week and the weeks after that but he never showed up.
The moral of the story is that there are unethical businessmen looking to cheat people out of their money. These people exist in almost every walk of life. They could be stock operators who convince people to buy shares at a high price or property developers who encourage people to buy properties because it is a risk free way of making money. But there is also another lesson: know your monkey’s worth and do not be greedy.
The villagers lost money not because the businessman was able to cheat them but because they broke some basic rules of investing.
Knowing what your investment is worth is the first rule of investing. The villagers knew that they had paid Rs2,000 for a monkey just a few days earlier, which was the same price at which the first villager had agreed to sell his monkey.
This seemed like a fair price for a monkey. Buying monkeys at a higher price was just exposing the villagers to a risk of loss, irrespective of whether the businessman returned to buy the monkeys or not.
In real life, knowing the value of your investment is a challenging question. But it pays to ask some basic questions. How much income would the investment generate? How is this income likely to change over time? How much are similar investments worth? How have prices of these investments changed in the recent past? Answers to these questions could help in understanding the value on an investment.
The villagers bought twelve monkeys for Rs4,500 on the speculation that the businessman would buy them for Rs5,000. It is important that investment decisions are based on facts. A lot of decisions appear to be made on speculation. For example, I will buy gold, I think it will go up to $2,000/ounce; I have heard this share will double in price; I have heard a new developmental project will be announced in this area, we should buy property here. Decisions based purely on speculation rarely go right. Developing an understanding of why an investment would increase in value could significantly reduce the risk of loss.
One of the best ways to reduce the risk of loss from investing is to form an estimate of how much you could lose if things went wrong. For the villagers, their worst case scenario was that they would be unable to sell the monkeys. In which case, they would probably have had to keep them as pets.
If the worst case scenario is acceptable, then the investment risk is worth taking. But working out the worst case is often tricky. Theoretically speaking, a number of investments potentially present a risk of total loss.
For example, if you book an off-plan apartment, you expose yourself to the risk that the developer might go into bankruptcy. In such an event, the worst case scenario could be a substantial loss of initial investment. On a practical basis, it is not too difficult to get an estimate of what the worst case scenario is.
Developing on the earlier example, if the property developer has a long history of successfully completing similar projects and is not over-committed, it would suggest that the development is likely to be completed.
In short, whenever investment decisions go wrong, it is worth reflecting on your own actions before blaming other parties for the loss. Obtaining answers to some basic questions about the nature of investments could be the difference between a profitable investment and a loss making one. It is better to know your monkey’s worth than blaming the immoral businessman.