Why the Keynes theory “in the long run we are all dead” can also be applied for stocks?

Business

oi-Sunil

By Sunil Fernandes

Published: Saturday, June 23, 2012, 9:42 [IST]

It may almost be a heresy to tell a genuine investor to speculate in equities, but the pace with which we have companies getting embroiled in controversies (latest is cement cartelisation and Reliance Communications books of accounts), it is better to speculate then to invest.

As a trader (speculator sounds colloquial) you could end up losing say a maximum of 5% every day (in a very rare case more), or might gain by a similar per cent age. However, should you become an investor and invest for the long run, your company might get caught in policy changes, regulatory hurdles or impropriety, which is so rampant, you and your shares would be damned.

In fact, in some cases you may lose all of your capital. At least by speculating you are only losing part of it. Pertinently, the opportunities based on events and news are plenty to facilitate speculation or trading. Like last week there was an opportunity to speculate in banking stocks ahead of the credit policy, then there was the Greece election results and finally the Federal Reserve meeting, which provided an opportunity based on hazarding the right outcome of the event.

Buying and selling stocks on events and news has come in vogue, as Buffet's theory of holding a stock to buy for a lifetime is becoming irrelevant, as the desire to make quick money re-surfaces.

In an environment where scams, policy changes and judicial intervention are so dynamic, you may end up with a stock that has filed for bankruptcy, if you buy and hold for life.

An investor was giving his rationale for speculating then investing. He was recounting the scores of infrastructure companies, which are almost at one third of their values they were two years back.

If you had to speculate (buy and sell immediately) you would have ended with a loss of a 3-4% (maximum in a day) in these infrastructure stock. However, if you have held these stocks for the last two to three years, your loss could be as high as 70%. His logic is perhaps right, if you look at the hundreds of companies that have eroded investor wealth in the last few years. Some of these are in banking, telecom, gold loan companies, capital goods, metals, oil and gas, hospitality etc. Perhaps, the only sector that has given some returns is the FMCG and Pharma sector.

Clearly, the mantra these days seems to be to buy and sell equities for short term gains or losses. As Keynes rightly pointed out "in the Long run we are all dead" (in another context all together). And so are some stocks.

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