The 200000% return

Amar Pandit , CFA , CFP

I was speaking with a friend sometime back and he said ‘what if making money was as easy as plucking money from a tree. I wish money was so easy and it grew on trees like a money plant.’ I told him “Never wish such things because if it was so easy, then it would have no value.” The money that you have today would also have no value should money ever become as easy as plucking from a tree.

He didn’t get the meaning of what I said immediately, so I expanded my thoughts a bit with an example of the Venezuelan stock market index.

What would you say to a tantalizing 200000% return?

How many of you would love to get it? I don’t think I will hear a “NO” to this one.

According to Forbes, The Venezuelan stock market index delivered a 200000% return in 2019. It was precisely up 199,568.90%. Yes, you read that correctly. 200000% means 2000 times the original investment. The stock market of Venezuela, the country with the largest oil reserves in the world managed to achieve that feat.

Yet it was the worst performing stock market.

Would you believe me if I said so?

Not too many instantly.

I asked a few people with some from the financial services industry, whether these 2 statements are true.

  1. A stock market gives 200000% return.
  2. It is the worst stock market performance.

What do you think?

Many did not believe me but as I shared the data points, eventually all of them did.

The 2 statements are absolutely True and the Venezuelan Stock Market Index “The Caracas Stock Market Index” was indeed the worst performer.

This is because the stock market index was in their currency “Bolivar”. The Bolivar had lost almost all its value against the dollar. Thus, in dollar terms this performance of 200000% simply didn’t mean anything. The currency had practically become useless. So even if you got a return of 1 million %, it does not matter if your currency has become worthless.

On a lighter note, I shared a formula for quickly becoming a billionaire with my friend. We both became Billionaires instantly.

And I am sharing the secret only with you. Remember you read it here.

We recently bought this on Amazon and thus ended up becoming a billionaire. In fact, we could have also become trillionaires.

You can too.

The only catch is that this $50 billion is worth $9.99. So, while you are a billionaire in Zimbabwean dollars, the story is very different in US dollar terms.

I am sure none of you would be interested in this.

Jokes apart, the message is loud and clear.

When money loses its value, stock market returns don’t matter pretty much. In fact, the average return for the Venezuelan stock market index from 1994 to 2017 was a staggering 62.34% p.a. On the other hand, the world average in 2017 based on 88 countries was 14.94%. The difference is close to 48% p.a. Imagine a compounding advantage of almost 48% for 23 years. It’s huge. Despite this, the outperformance didn’t mean anything.

The lessons for all of us are as follows –

  1. Absolute returns on their own don’t mean a thing however lucrative or sizable they are. They have to be looked at in context of point 2 and 3.
  2. The strength and stability of your currency is important.
  3. Lifestyle Inflation (depending on our personal lifestyles) is the monster that destroys wealth while we obsess on volatility, taxes and costs. Lifestyle Inflation is thus the Enemy to be defeated.

I told my friend that the moral of this conversation is – If everyone made so much money so easily without effort, it truly would have no value and I bet you would say at that point of time “I wish it wasn’t so easy.