THE SHADOW BANK:
A shadow bank is a non-depository financial institution that operates under exemptions from normal banking regulations.
Investment banks, private equity and hedge funds are examples of a few types of shadow banks.
They create debt and equity capital and sell investments across the global financial system.
INVESTING VERSUS GAMBLING:
There is only one thing that differentiates investing from gambling…
In gambling, the probability of loss exceeds the probability of gain.
With investing, the expectation is that the probability of gain exceeds the probability of loss.
Probability is a number—a percentage. It’s something to be measured.
To meaningfully evaluate any investment, you have to know how the expected return percentage compares to the associated risk percentage, but almost no one does that.
Here's a simple example to drive the point home:
Think of a coin flip… if I told you that I’d give you $10 if you were to correctly guess which side comes up, what would be a fair bet? The answer—as you probably intuitively know—is $5.
Mathematically speaking, the chance of winning is 50%; so, if you divide $5 by 50%, you get $10, which is the fair return. If I paid out more than $10 on that $5 coin flip bet, that would be a good deal; if I paid out less than $10, it wouldn’t be.