DOING WHAT YOU KNOW BEST

DOING WHAT YOU KNOW BEST

At least two to three times a year , the financial world provides an opportunity to the 2 billion literate experts of this world. This opportunity manifests itself in making quite a few armchair economists every time  and also throws up a lot of investment experts and advisors. This is required also, because there are serious shortage of jobs in this world; and what better job can be there than to comment upon the economies of the world , tell the televisions that the doom is near and how this crash is worst ever that the world has seen- ever in most cases meaning since last week .

I have always approached most of the things rather simplistically i.e. from First Principles. Here is how they went:

 What is a Stock/Share? It is part of a business that anyone can own legally, even if someone has limited funds.

What Stocks/Shares should I buy? Of a good reputable business which has near monopoly . Preferably a product that is used regularly and cyclically.

But I don’t understand balance sheets, all the financials which are to be considered while buying a share what should I do? Invest in Mutual Funds. Diversified and preferably large cap.

How long should one hold the shares of a good company? Forever! If the business is good and growing , why would you want to sell it and start looking for another good business. It is like closing your own running shop and starting another one instead.

This was as close my mind worked towards investment and all was going well… till something called derivatives came along.

These were very complicated financial concepts which made the people who were regularly buying and selling everyday (and hence called traders)- even more busy. Now they were not buying shares but promising to buy a whole batch of shares of a company by paying a fraction of what you and me were paying by “actually buying shares”. To cut a long story short at various times when the markets fell due to a lot of reasons that they do, a lot of people lost money, homes and even lives.

An even more complicated product wiped out the economy of United States and Europe in 2008 .

During all this time I was quite bewildered (not enough to not continue with my MF investing).I was wondering that what economically productive function was being performed by the FnOs or derivatives and individuals and companies who were dealing in it.

If something is not produced, it is not part of an economic activity. This production can be of something tangible like metal, petroleum, machinery, banking, Pharma OR non tangible like IT, healthcare OR services. Something must be produced to have a value attached to it. We all are part of that economic activity. If we do not work, not only will we not be able to earn for a living but also not add any value to the society and the economy. There is a classic theory of economics called Guns and butter, which you can google .

In short… we must do what we know..exert and assert our skills.

It is very important to read the above and understand before reading what I am about to mention below.

We earn by working and save it in the banks and further invest it in Mutual Funds, stocks, gold, real estate, bonds etc. The companies, the stocks of whom you own are carrying on their business and making a profit because of which your share price goes up. But what happens if that company whose shares you own, instead of using it’s profit to expand it’s business uses the money to invest in the Stock Market or buys MFs for itself? There is nothing wrong with it legally. They are confident that they will make more profit by investing than by carrying on their own business.

Let us further take this example. The government of a country has wealth in form of foreign exchange or surplus taxes in its budget (which rarely a government has). Now instead of using that wealth on development programs the government decides to take that money and invest in the stock market. Is that right, or is that correct? Is the government doing anything wrong? It maybe argued that by doing so the government is trying to bridge the deficit that it is always saddled with because the receipts from taxes are always less than what it has to spend for development. It maybe true ,however to me it looks like a python trying to eat itself tail onwards.

This was what China was trying to do. It was using it’s reserves to make profit from the market that was supposed to be coming up by it’s own developmental and growth policies…and who was supposed to be having a higher growth rate than China.

There is more to this in form of improper or incorrect data that used to be flowing out from China, which I always believed was “doctored” by the government. China is in fact in a unique position to show to the world what it intends to show and how much it has to show. I am personally witness to 2,3 incidents where the government or party workers kicked in to what was supposed to be a private drydock in order to create subterfuge and diversion from accidents that happened due to safety having taken a backseat.

Coming back to our talk… it is important for everyone to do what they are trained to do or supposed to do.

Government is supposed to create policies and a safe atmosphere for it’s citizens and businesses.

Businesses and industries are supposed to carry out their enterprise in earnest.

Citizens are supposed to abide by law like everyone else, work and earn their living and ensure that their dependents are looked after.

This is the ideal world…or utopia as we call it.

What actually happens is …

Government does business or creates confusion by interfering in businesses.

Businesses try to interfere with governance and twist laws to extract unfair amount from the citizens.

Banks mislead the clients and channelize the wealth they are supposed to protect into avenues that are profitable only to themselves.

The professionals who are supposed to heal, build bridges, protect the country and carry on their professions start dabbling with their money and lack of knowledge…

As a result all goes haywire… and we have the entropy and disorder that we have.