By Sudhir Bisht
Before the readers reach out to pelt stones at my phantom, I would make four reasonable statements:
I am not a sadist who feels happy that the millions of dollars which people invested in the stock market have vanished into thin air. But I do strongly believe that the millions that we think that the markets have lost were never there in the first place! I always feel happy if what is an illogical phenomena comes to a logical end. To me the ever upward movement of stocks was illogical and bizarre and hence its abrupt end makes me happy.
I believe that money must be earned by the sweat of one’s brow
And any extra money that doesn’t come from (2) above should always come from a believable and sustainable source and must be in realistic magnitude.
And finally I would like you all to read this article without any bias. Just imagine that you have some money to invest and you are just looking at where to put it.
If that is OK with you folks then let’s proceed and examine my theory that the Global meltdown is really good for the mankind.
Let’s assume that you, a honest lower middle class man, have 2,000 USD to invest and you are advised to invest in a company “LLL” which has been giving dividend of 1$ per share for the past 3-4 years. The face value of each share is 5$ and hence the dividend per share is 20% on face value.
You are happy to invest in this company as you reckon that the country that you live in has an inflation rate of 8% and if you invest in LLL, you will be able to beat the inflation by 12 percentage points on dividend income alone. Bingo. Perfect logic and there you go to LLL with a view to buy 400 shares with your 2,000 $
But when you reach the office of LLL, you come to know that the company isn’t offering any share and that only way you can get these shares is by buying them from the stock market and the price of each share is 50$ . You take out your calculator and punch the numbers. For 50$ each, you will get only 40 shares and the dividend that you are likely to get is 40$ on an investment of 2,000 $. This means that you will get only 2% return on your investment every year, which is well below the rate of inflation of 8%.
At this point your stock consultant tells you that the company is making an earning per share of 3$ per share and out of this 1$ is usually given to the shareholders as dividend and the balance earning of 2$ is ploughed back into the operations. So though your dividend income would be only 1$ per share, your book income would be 3$ per share. He then tells you that you live in a developing economy and the prediction is that the Market index would double in the next 365 days. The economy is growing, the and the Foreign Financial institutions are making a beeline for picking up the best performing stocks and this will boost the market value of your stocks. He tells you that dividend income and even EPS are concepts that have become a passé. Market valuation is the only thing which is important. He even tells you that best companies in the world are not the ones with highest revenue or with maximum profits but the ones with highest market capitalization. And he assures you that after one year the stock of LLL would be valued NOT at 50$ per share but at 100$ per share.
The middle class man inside you wants you to stay away from the investment but the plethora of magazines that you have been reading and which have some smiling and some grave pictures of stock market gurus telling you that dividend is nothing but it is the Future price of share which counts and it is not what the company is today that matters; rather it is what the company can be in its chosen field tomorrow is all that matters; the management is good and the industry is expanding; that the company LLL is diversifying into so many developing markets and so on and so forth.
No one tells you that the market value of the stock is only in the books and unless you actually sell the shares and realize your money, it never would be truly yours. No one says that what doesn’t come to you as dividend may never come to you after all, should the markets change. But so tempting is the prospect of buying a share at 50 $ and selling it at 100 $ a years later that you forget all fundamentals. You forget that no business can easily double its profits in an year and if there was one such business, so many people would rush into that business that the competitive edge of the pioneer would be lost in no time.
There is a voice of logic that is telling you to stay away from the market but eventually the greed prevails over logic. You invest not only your 2,000 $, but you borrow from friends and banks and start investing in the most organized and structured gambling games called the stock exchange.
You started investing in stocks thinking that you are the protagonist of the script around which the company’s theme is being woven. So you invested when the stock was at 50$ and then you invested again and again until the price touched 100$. The only way the share could go was UP, you thought! You took loan against your parental house and mortgaged your family gold to take the loan.
To me this was pure greed. You wanted your money to go up three times and you waited the share price to hit to that level. Your greed was growing. You went to your banks and asked for loans for investment in stock market. The banker gave you the loan too. You invested in mutual funds and you thought that the “unearned income” would go up and up. But you forgot that this was a large scale gamble being played in the open with full support of the financial institutions. As long as the market value of your scripts was going up, you didn’t have to bother.
You forgot that easy money was akin to an evil allure which could consume you. And finally it did. The NASDAQ fell and Nikkei dropped, the FTSE dived and the Sensex crashed and you found that the LLL stocks that you bought for 100$ are now at 40$.
You started as a “cautious” investor who wanted to treat only the dividend income as your own. Then you became a “realist” who treated EPS as your income. Then you became a “gambler” who was just following the stock value without any regard to any arithmetic or any accounting practice.
You now take solace in the fact that even the Warren Buffets, the Mittals and the Ambanis of this world have also had their net worth halved in this global meltdown. It is true but this bravado may make you look even more stupid. The Buffets, the Mittals and the Ambanis didn’t sell their family gold to acquire their assets. Their halving of the net worth wouldn’t impact them as they never will have to bother about paying the milkman at the end of the month. Their children’s school fees have been paid for the next 6 generations to come. They will not have the bank clerk knocking at their doors for the payment of the monthly instalment.
But it is you who must dread the prospect of receiving abuses from the milkman who must be paid. You must surely pay the second term fee for your son who is attending to the senior secondary school. The bank clerk may not come though as he might have lost the job, in the meltdown.
I wish the governments never succeed with their interventions in this crisis. When the government talks of raising the fertilizer subsidies for the poor farmers in the third world countries, the Capitalists of the all the worlds unite and raise hue and cry against it. But the most capitalist of all the governments, the government of USA is readying to bail out this gambling industry again. The real axis of evil is not being allowed to die a natural death. If the evil rises again, it could kill the mankind.
May the markets never reach the heights again! Let hard work and real commerce get a real chance. Amen!
The author is a freelance writer. Reach him at [email protected]