Wednesday, October 24, 2012

Stay away from the stock market

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.

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