Using knowledge Effectively

Over the past one year, I have learnt a lot at business school. As a Finance and Accounting major, obviously those aspects of the business. Besides that, I have also learnt a lot about Business Strategy, Marketing and Operations. However, that knowledge is useless, unless you know how to use it effectively. Here is an account of the one chance that I got to use this information for personal gain.

I needed to transfer cash from my home country. I have an education loan that takes care of living expenses and I replenish it periodically depending on my own needs. Close to more than a month back, I saw that my funds were dipping low and I needed to get some more money. I also saw that the exchange rate to the dollar was much higher than it was in recent memory.

The US dollar has been appreciating since the FED rates have been dropping in this country [the US]. This has also been accentuated in a way by the increase in interest rates by the central bank in my own country as it attempts to fight the rising levels of inflation in the country. Inflation there is currently higher than it has been in recent memory, a classic case of the workings of supply and demand. The demand for food and foodgrains has increased, and has not been met with corresponding supply in recent times. A drop in supply, combined with astute [and illegal] black marketeering by business(wo)men have ensured that inflation is significantly high.

Then there is the effect of oil prices. Oil has ensured that the local inflation rate in my country has gone higher. This also indirectly affects other prices as it shoots up transportation costs at all levels of the marketplace. Oil prices has also ensured that the demand for the US dollar is higher and that has appreciated the dollar even further, making it more expensive to buy.

When I thought about asking for money, I astutely [in my belief] thought that this was a bubble waiting to burst. Oil prices were at unsustainable levels. With the winter arriving, there was no way that the US could afford to go into a oil-guzzling-heater weather at such expensive levels. There had to be a decrease. Also, with the price of gasoline at such high levels, demand had predictably dropped as people moved to restricting its usage. Ford and GM, promoters of the guzzlers in the US reported huge drops in demand for their SUVs and vans as the US general public moved to cleaner, greener cars.

The OPEC also noticed a sudden drop in the demand for oil. This was accompanied by loud rhetoric to explore and exploit alternative sources of energy which would reduce the dependence on oil, bring prices down and be more environmentally friendly. Suddenly you had Barack H. Obama, John McCain and even Paris Hilton commenting on their green policies. You saw legendary investor T. Boone Pickens coming out with the PickensPlan with a strong focus on wind energy as the source of the future.

Having followed companies in the alternative energy industry space myself, I saw the importance and relevance of solar, wind and other alternative energy companies. The OPEC saw it too. They saw this as a potential drop in the demand of their mainstay product. This warranted even Hugo Chavez, the Venezualian premier who has been trying hook, nail and sinker to ensure higher prices of oil, to comment that oil prices were not sustainable at these levels.

As you must have guessed, I predicted with fair certainty that oil prices were almost certainly going to drop. Levels were not real and then had to get to a sense of normalcy. Midway through the time that elapsed, economists at major investment banks and financial gurus began to chant this mantra as well. I followed USO, an ETF on the American Stock Exchange [AMEX:USO] very closely and found it to be behaving as previously predicted.

I was of the belief that if oil dropped as was predicted [and corroborated by the gurus], this would reduce the demand for the US Dollar. This would also drop the inflation rates in my country [to some extent, this could be lagging or stuck in govt. bureaucracy]. The net effect would be a depreciation of the US dollar to my own local currency and that would buy me more dollars for the same amount of money.

I held out, not telling my parents the real reason. I also thought that it was unlikely that the dollar would appreciate any more than it currently had. It was unlikely to go any stronger. In a way, I did take a bet; a bet in a situation that I should not have taken one [ as a debt ridden b-school student, you dont want to take one]. Yet, as I saw it, it was better to do this than to leave myself to chance. In a normal situation, I would have taken the prevelant rates and transferred the money without giving it a second thought. Atleast this way, I was better informed that there was a higher likelihood of the prices going lower than going higher.

The bet paid off. I waited until I could no longer hold out and needed the money. After that, I asked for the money to be transferred. A net gain of 400 basis points. Not a lot some would say, but then again, it was something. You really cannot expect to make that much of a bet on such non-volatile instruments in such a short period of time anyway.

I am just happy that the knowledge at business school is helping me think like a real business leader who makes his/her decisions based on the prevelant conditions in the market.

For all those undecided, take the plunge. B-school will be the single best investment that you can make in yourselves [ short of getting married rich :-D ]