Previous Chapter : LIES, LIES AND DAMN LIES-1
It is said, “If dreams are horses, beggars would ride them”.
This suits an ordinary investor who hopes to get rich through stock marketing. Equity markets are considered to be very risky by some people. On the other hand they are proclaimed as solutions for inflation and the last tool for creating sustained returns for investors. Both these views are half-truths or lies. The hard truth is that very few investors and traders make money from stock markets. Rather most of the investors and traders lose their money irrespective of whether they are long term or short term investors.
By investing in stocks an investor becomes part of a venture or business over which he has very little control. Every business has some promoters who have major stakes in the business where an ordinary investor is only a minority stakeholder who gets only hands out from the promoters.
Press releases and balance sheets are creations of the managements to mislead the common man. Think of what happened to Enron, Satyam Computers and Bernie Madoff‘s schemes. Financial papers, TV and other media create news that exaggerates the working of particular companies creating false impressions about their profits and losses. What Goldman Sachs did in 2007-2008 periods is a typical example. This company created portfolios that are likely to fail in future and sold them to investors after getting good rating from reputed rating agencies by misguiding them. They and a big hedge fund manager then betted ans even big institutions have no methods to find out what is good or bad. Poor investors are misled by these news items and buy their stocks. Promoters and major shareholders unload their shares on the unsuspected public after that and the poor public holds the useless shares without any means of escape. Ordinary investors have no means to research a company except to relay on company reports and research papers created by others. They never visit a company or under stand what the business is. The public never understood the dot-com business and everybody knows what happened in 2000’s.All investors will fall into such traps at some time or other. They may hold some good shares. However they will also have a bunch of rotten stuff that drag the return on the over all portfolio. The definition of a good stock is also an imaginary one. A blue chip company will not remain a blue chip company forever. If one looks at the companies that originally constituted Dow Jones Industrial average 130 years back, there may be a very few now in the present DOW. This is the case in all indices. This shows that long term investing may or may not be productive. It is a matter of luck that ordinary investors owns a good stock because ordinary investor books profits on good stock when he gets profits and holds bad stock for ever without exit. This is true of short of traders and investors. Most of them have no escape route, because a big portion of their portfolio consists of companies that have no quotations in any stock exchange. This happens because those companies they had invested might have gone bankrupt or disappeared due to bad performance. Those investors who had made their own research and experience might get out of companies that fail in time. But ordinary investors fail to do that because they never know what happened to their companies till stock prices crash.
Diversification is said to be a solution to this problem. If the investor is not lucky, his diversification can also land him in more trouble due to wrong choices. Stock markets are cyclical in nature and prices can crash due to problems that have no relations to a particular company or industry. Recent crash in stock markets in 2008 is a typical example. It is to be noted that DOW had fallen from 15000 points to 7500 points within a short period of time wiping out trillions of dollars of investor’s wealth. Those who invested during 2008 period are still waiting for an opportunity to recoup their losses. Investors like Buffet are rather exceptions and comparing an ordinary investor to such personalities is irrational.
Will be Continued (Lies, Lies and Damn Lies -3 )
CYRIAC J. KANDATHIL, Chief adviser, www.AssuredGain.com