The meaning of investment has been corrupted for over a
century now. Investing was like sowing seeds in the garden in the anticipation
that one day a big plant will grow and give fruits. But, the continuous introduction
of complex financial tools combined with the changing mentality of investors
has redefined the notion of investment.
Investors are more focused on the short-term gains. They are
more interested in the information available in the market rather than scrutinizing
financial statements of the companies. Rumor sways the market more than the
actual information. Companies are made and burnt just based on the common
perception. And, this perception rarely has anything to do with the financial
or qualitative analysis of the company.
Stock market has been a place for betting. Majority of
people participating in the stock market are speculators and not investors. Add
to that, the availability of derivatives markets and complex financial tools,
stock market has been a heaven for gamblers. Hedging has been very prominent in
the recent times. Many analysts believe
that the scale of 2008 recession can very well be attributed to hedging. We had
the case of hedging by J.P. Morgan Chase to bring down share prices of strong companies.
Such unethical acts combined with irrational investors create huge signaling
effect in the market. At times, shares of even strong companies are brought
down. And at times, shares of even non-existent companies are purchased at huge
prices. Unethical nature of companies and the irrational behavior of investors
have made the stock market ever so vulnerable.
Even shrewd knowledge of finance can’t help. The very
assumption of almost all the financial theories that a market is composed of
rational investors is wrong in the real market. The behavior of market and the
participants is so diverse that no theory can sum it up. Many times, there are
no relations between a company’s performance and its share prices.
Another aspect of the market is that, contrary to the mass
belief, the market is not efficient. Even the advanced stock market of USA is
not efficient. How do you explain the market crashes of 2007-2008 and
2001-2002? And the Asian crisis of 1997. What sort of efficient market needs
such huge “corrections”? None.
So, if no one can understand the behavior of the market, how
wise is it to invest in the market? You can spend hours analyzing the financial
sheets, the corporate governance and the future growth prospects, but what if
that information doesn’t really impact the share prices? What are your chances
to succeed in the market when you are the only rational investors and all
others speculate? Some may argue that on the long run, the market does value
the shares correctly. But, what is the guarantee that you will live to see
that? It may take years for the market to value shares as per its intrinsic
value. It may never happen at all.
So, my advice is stay away from the stock market. Rather
invest in small companies as a seed investor. Grow with the company. Be
involved in the company. Nurture it, care for it, scrutinize the performance,
evaluate the growth, and analyze the prospects….Invest for long term. It’s
better to understand and participate in the growth of few companies rather than
speculate wildly on numerous companies in the irrational market.
