It is not that I do not wish to keep learning, keep acquiring knowledge and someday perhaps get wise, and it is not that I have anything personal against the Casino - apologies, the stock market - and after being told by no less than a friend that I deal with nothing but fact-free statements, there is every desire to acknowledge facts and become a number cruncher when I grow up; but despite all my efforts to know, I now know that some things are just not meant to be!
This fresh bout with the Casino was probably instigated by a post on social media by someone who was concerned that the Stock market was down despite that fact that the rupee had appreciated, the ten-year bond yields are down, cement numbers are high, auto sales are growing, and textile exports are up.
Well, one reason could be that it is a buyer's market! Except that if you ask a broker, it is always a buying market!
But seriously, it is sometimes mindboggling how even the best of analysts miss the obvious: the stock market is down because investors are concerned that, in case the American people choose wisely but not pragmatically, the matter of the wall may remain in limbo, with resultant repercussions for the global cement industry, and consequently Wall Street, thereby impacting inflation in Pakistan.
As regards dealing with facts, notwithstanding the fact that facts are boring and fickle, in the information age no man can digest and deal with all the available facts, and apparently in a debate if you don't deal with the facts the other party flouts, you are an ignoramus. The bigger problem is that with multiple facts floating around, one can never be sure about their authenticity and accuracy - most of the facts quoted are irrelevant or a load of crap. Finally, limited to the economy, the only facts I find relevant are the growing external debt, the continuing trade deficit, and the lack of industrialisation. And to repeat, before all that come the three brothers: land reform, judicial reforms, and police reforms.
Anyways, with a pure intent to correct my misconceptions about the stock market, I picked up a book which I had purchased a while ago but had never gotten around to reading. And let me tell you, it took a lot of time and effort to almost finish.
My favourite take away from the book: "Economics is a science of fashions - Keynes and 'pump-priming' at one time, Friedman and monetarism at another. The profession burns through new theories the way a teenager hops from one new date to another: it meets them, spends some time with them, examines them, finds what it thinks are flaws, and then drops them for a newer face." Benoit Madelbrot.
The author goes on to make short work of all investing theories, including the capital asset pricing model developed by several analysts in the 1960s, Harry Markowitz's modern portfolio theory, and the Black-Scholes equation for pricing options.
The fact that nobody can beat the market, and that you have to be bloody lucky to not lose your shirt in the market, was not really my field of interest. And while learning about fractals was interesting and knowledgeable, more up my alley were the ten heresies of finance: the markets are turbulent; markets are very, very risky - more risky than standard theories imagine; market timing matters; prices often leap; time is flexible; markets are inherently uncertain, and bubbles are inevitable; markets are deceptive; and in markets the idea of value has limited value.
If the above is not a definition of Casino Royale, I am not sure what is!
Rest in peace Sean Connery - the quintessential Bond.
The stock market is a zero sum game: if somebody makes money, someone must have lost money. The market is all about two persons betting whether the share will go up or down, and while economic theory will have you believe that these are two rational fully informed investors, the bigger likelihood is that they are either going by their gut or acting on a tip. And acting on a tip is crazier than going with your gut - why would someone with genuine information to make money go around broadcasting it.
And why can investors not be well informed? Well a key source of information about any company is its audited financial statements, and to understand them you need three accountants, an office boy, and a cook. The first accountant to review that they are correctly prepared and abide with the relevant accounting framework, the second to disagree with his finding, the third to agree that they both have a true and fair view, the cook to ensure a continuing supply of tea, and the office boy to get the smokes. And given that accounting standards have been made more complicated than rocket science - accountants, like the economists, want to appear smart, hence the mysterious accounting treatments - an investor will be lucky if he gets an answer which he can understand. But assuming the rare instance that he does, all that would only be history - no one, especially not accountants, can predict the future.
No amount of projections and scenarios can get it right, unless luck comes into play.
Dear readers, the quest is simple and if anyone has the answer to how the stock market is a barometer of the real economy, do email it.
After all, how can a market place which is inherently turbulent, deceptive, and risky, and which is made up of players who have the singular objective of making a quick buck on something that they are absolutely clueless about be a barometer!
(The writer is a chartered accountant based in Islamabad. Email: [email protected]. The views expressed in this article are personal. The views are not necessarily those of the newspaper)
Copyright Business Recorder, 2020
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