Ownership through paper (shares) has always been and will always remain the biggest illusion of ownership. Real ownership comes through sweat and hard work and never diminishes in value!!!
As I sit down to write this editorial, the selling pressure in the markets have been so intense today that the Sensex broke the 8,000-mark and slumped to a low of 7,697 – down a whopping 63.7% (13,510 points) from its all-time peak of 21,207, touched on January 10 this year. I remember having written the last time on the same subject for the 3rd February, 2008 issue, when the markets had fallen to around 15,000 in an edit titled, “If you can, invest to become an entrepreneur instead of investing in stock markets!!!” As the index falls to almost half of what it was then, there is nothing more important that I feel like sharing again with my readers. Readers of TSI know that over the last few months, I’ve constantly been focussing on the impending global crisis, the subprime crisis and the failure of the banking system in the USA. In that edit then, I remember having written about the huge losses that Morgan Stanley and Merrill Lynch had been facing and how the entire American system was on the brink of a disaster. Then again, I hope all our readers would agree that we were the first to write on the entire crisis; and on how to save capitalism, in our issue before last. And to keep our leadership in trying to impart the right knowledge to our readers – that can also immediately impact and benefit them – this time again I want to share my views on investing in stock markets with my readers.
Just in case you think that I myself may not be doing what I preach, let me tell you that in my entire life, neither have I, nor has my father, mother or wife, invested even one rupee in the share markets. Well, this despite having majored in finance during my business management studies and having topped in the Investment Analysis and Portfolio Management paper with an 80 plus score under a professor who was the strictest in town! Also, this despite having some very close friends who were stock market fanatics and doing very well in the financial sector themselves! And this has been so because after properly studying and analysing all possible portfolio investment models, the only conclusion I could come to as a very keen student of management (who has always believed that there is nothing more practical than a good theory) was that “all the theories that suggested you the most ultimate way to make money in stock markets were utter garbage.”
There is no way that one can draw a regression line and show that because over the last 20 years, people have made money in the stock markets like this, therefore they can do the same in the future too. The last time the Nobel Prize was given to two economists for their portfolio investment model, one saw the US government having had to bail out the venture of these very economists just one year down the road! That, indeed, is the one and only truth about share market investments.
So why should the share markets exist at all? And if so, who should invest in it and who will make money from there?
Well, the answers are complicated. I wonder often: do we need a share market at all in the first place? I have always had a personal objection to the paper ownership of others’ sweat and toil. That’s why the worker feels so alienated from what he does in a modern-day large corporation, while someone who contributes nothing to the organisation’s production process reaps the profits on the basis of capital power. But then, entrepreneurs need money to create production and in turn jobs and growth, don’t they? But entrepreneurship also means responsibility and accountability; and if entrepreneurship is responsible, then shouldn’t entrepreneurs be answerable about the money that they take from others?
And if they are to be responsible, why shouldn’t they take the money as debt from banks or owners of capital where the entrepreneurs know that they are obliged to give regular returns – unlike on equity? Well, I am sure at least Fidel Castro for one must’ve had similar thoughts – for when he took over the reigns of Cuba, he did convert the stock exchange building into a hospital... for masses need hospitals, education and employment first, before they are encouraged to gamble their money away on stocks! But then, let’s not get so extreme! The share market is one of the lifelines of the (inhuman) capitalist system, which unfortunately appeals most to the selfish human personality and psyche. And since I am all for democracy and freedom of choice, I would keep my loud thinking to myself – though that’s exactly the reason we haven’t yet gone public. As an organisation, we believe in being responsible money spenders. Thus, we will go to the market the day we know we will be able to do so much productive work with the money generated that we will be able to give the right returns to our investors.
So the question is, if share markets are to remain, who should invest? The answer is Warren Buffet!! Yes! If you are rich enough like him to be able to sit on idle cash for years and wait for this kind of an inevitable and unavoidable crisis of capitalism, then you should invest now when the prices are at the rock bottom! Because such people don’t worry about the markets going further down in the short run, but – as the prices fall – keep buying shares of companies with high intrinsic worth. Because when the markets grow over time later on, they make enormous profits.
Does that mean I am saying the common man shouldn’t invest? No. I am not saying that. But the common man shouldn’t invest if he thinks that this is the big shortcut to success. There is nothing that can be a more foolish thought. You can never become rich (individual stories don’t prove any point) in general just by speculating on someone else’s sweat. It’s almost like gambling and it’s a bad habit. It costs a lot of pain to your families as well. We all must know that we have got to live within our means and with what we earn. There is no magic that can give us supernormal profits in the long run if one doesn’t put in one’s sweat and hard work. If we invest in shares, it should be knowing fully well that that is speculation – so that one is not pinched when the market falls (and forced to take it with a pinch of salt) – and after having enough safe savings in the banks to absorb such shocks. It is indeed stupid to put all your money thinking you are a know-all of the stock market and can leave your entire family with the pain of being left with no savings, or with the burden of having to deal with a suicide or something as selfish as that.
If you insist on investing, invest in your own abilities, your own sweat, your own entrepreneurial venture if you can, instead of in stock markets. Researches across the world state that in general, returns in successful entrepreneurial ventures are always significantly more than investments in stock markets. Other than this, entrepreneurship has its own advantages – like generation of employment – which goes on to add to overall economic prosperity. Entrepreneurship involves the reverse of alienating, and it makes you realise that the real gold and real assets are not share certificates, but the people who work with you. And let me assure you, the value of your sweat never disappears. It’s only when you want to speculate on someone else’s sweat and make overnight riches, and when everyone joins in the same group-think, that the value system suddenly evaporates... and then it takes years for that sweat of the real workers and entrepreneurs to build it up again.
Finally, I should want to end with the same words with which I had ended my February 3, 2008, edit... If you still have to invest in stock markets, it would be good for you to become friends with the term ‘shock market’!!!
- 09 November 2008 |
- Dr. Arindam on Indian Economy