Certain Uncertainty

IT WAS THE FATHER of value investing Benjamin Graham who once said that in the short run, the stock market is a voting machine, and in the long run, it is a weighing machine. But what it is not is a predictable machine, even though that is exactly how short-term investors perceive it. It is why all those who put money in stocks a few days before the election results expecting a quick buck shouldn’t blame anyone except themselves when the fall happened.

The safest investment usually is the government bond. The 10-year one is now giving around 7 per cent yield, and that is a guaranteed return. It will not fail unless India itself goes into bankruptcy. The question those who want even 1 per cent above 7 should be asking is why they deserve it since nothing in life is free. The more you get, say 15 per cent or 20 per cent, or in short-term punts, even 100 or 200 per cent annualised, the greater the risk of also losing the money invested. Extra returns bring on extra risk. That is why cooperative banks, with their history of folding up, pay much more than public sector banks for fixed deposits. Most people just don’t get this concept. Some investors make extraordinary returns and that is because they have an investment philosophy honed with past losses. Their extra risk is balanced out by experience and knowledge but even they never have a sure bet.

Those who expected to make a certain profit off election results were just unaware of the nature of the activity they were doing. When the markets tanked, it wasn’t the rare event they thought just couldn’t happen. It was only the risk that came with the potential reward doing the talking. In the case of such short-term financial misadventures, the risk, in fact, is even greater than the usual. Millions of others are also thinking the same way and by the time you put in your money, the market has already risen a lot and even if your bet had swung the right way, the profits would be small. Whereas if it went in the other direction, as just happened, then the losses would be propor­tionately greater. If you really want to make money off election results, the time to invest is months or a year earlier, before everyone is crowding the same party. Still, you might lose but the risk would be reduced and losses less.

So next time someone gives you a tip about a stock that will double in two months, ask what is the risk that you are taking on. The answer is your capital, the money that you worked hard to earn for your needs, and not to gamble away. Graham had another fundamental idea—that what most people do in the stock market is speculation and not investment, and that also gets borne out again and again in market crashes.

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