Wednesday, May 20, 2009

The stock market is an ass

For the last three days, I have been watching the Indian stock market with utter amazement. On Friday, the BSE Sensex closed at 12173 . On Tuesday, it closed at 14302. A full 17% increase in two days. You would have made a killing if you bought on Friday and sold on Tuesday.

Nothing has changed in India except that the Congress won an unexpectedly comfortable victory in the general elections. On “sentiment” , paper wealth of Rs 350,000 crores (US$ 75 bn) has been created in two days. This is pure nonsense.

Unfortunately, the stock market gets a disproportionate share of public interest. And where the media and public watch, politicians follow. So economic policy starts to be dictated by the mayhem in the stock market. The stock market is NOT the, or even the most important, barometer of the economy. Its just one of the many markets that exist.

In the long run, the stock market as close to a perfect market as humans have ever invented. But the operational word is “long term”. In the short term its an ass.

90% of trading in a stock market is speculation. Maybe even more. These are punters trying to make a quick buck every day. You know that utter madness has crept in when you see Madras maamis in 9 yards sarees staring at a screen and day trading.

Politicians and businessmen should ignore the stock market and concentrate on real performance. Forget having the ticker on all the time in your office. Watch your sales. Watch your profits. Or if you are in the government, watch growth, public debt, investments. Ignore the clamour when the stock market falls (notice that there is no clamour when it rises insanely).

It’s a free world. Let the punters lose their shirts, or their sarees. Real people – investors, businessmen, government – just watch it once a year. The other 364 days, focus on performance. You may be pleasantly surprised that, that on the 365th day, when you notice the index , it has hit the roof.