August 2, 2024

 

The Financial Markets as an institution of wealth building was so nebulous for me while growing up, that I never had the faintest idea that I would be a participant. Even when I learnt about it a bit, during the turn of the century- I had just started work and put some money in- only to lose it all. Over the last 20 years, the markets have evolved tremendously. The barriers to entry have gone down, they have been analysed to death by the finest eggheads, the choices and products on offer are mindboggling to the point that an entire industry has developed just to translate these to the consumers. The fact is that this simply akin to spending days at the races. If you back the right horse, you get value.

How does one get wealthy? In three ways and three ways alone. The first is if you create value yourself ( as in pursue a succesful entrepreneurship), the second is if you rent out your inherent value (as in  traditional employment or “prostitution” or renting out an asset that you own) or else you back someone who is creating value ( play the financial markets).

The backers however, have far outgrown the players- and while this has decidedly helped the players raise funds, but equally has created some really complicated dynamics. The value ascribed by the market is not simply dependent on the value generated- but also on what the large number of backers decide to do with their backing. In other words “traders” determine the value of the stock – and by traders I mean anyone who holds a position in the stock.

Going back to the egghead research, the only pointer I picked up is that for a normal person who has normal duties of life to negotiate, the idea is to invest in good stocks when they are at a good price and then forget about it. Over time, there are ups and downs but there is always an upward trend long term. I buy into this and I also think this will continue into the future, especially given the productivity increases that are attributable to technology- AI for example. The problem is a lot of the value associated with these future benefits is already priced in the stock today. So if you buy today and hope it will increase tomorrow, that may not happen. In fact the opposite will- as the promise somehow does not get fulfilled and stock crashes. This is less a problem for young people than it is for those like me who are around 10 years from formal retirement. This gain is something that is said but it isn’t really true. Sure, if you are young your runway to retirement is massive- 30 to 40 years. Within that time, whatever your position initially, it will have no doubt increased. But it is not like you have a lot of investable funds when you are young. Also, when you are oldish ( or youngish  like me), you may base your investing decisions based on the fact you need see sufficient upside within 10 years when you retire. The fact is, you should never depend on this for retirement income. That income has to be moderate, but guaranteed. Something that does not to curb any enthusiasms in your post-retirement age but does not necessary provide for whims automatically. That is to say, most of  it should be for essentials and very little should be discretionary. So you can eat well, but if you want to go on a cruise, well maybe that should be dependent on your stock returns. This means that in reality you are not bound by 10 years for returns- but you are in it forever. You may die at 70, and the portfolio is negative. But it passes to your kids who live another 50 years and during this time it turns positive- to their benefit.  The key insight is that as long as you have kids that you think of as an extension of yourself, you should not balk at investing in financial markets. There is never a bad time.

However, it is even better to go in when things are at the low end- and right now they are not. The greatest wealth is made when you go in during a correction. For the young people of today, one such correction is much needed. They are priced out of any assets that they can consider buying, they are beset with inflation and a generally gloomy earning potential via traditional employment routes. The obvious escape is to go in heavy when the market corrects. This could be as good as getting a steady job if not better. How to get in though? When will markets correct? The general view is that they might correct any time now- based on fundamentals. But as I mentioned that the traders have more influence than fundamentals. Not to mention the power that rests with US central banks- who can choose to prop anything up by printing money- and have done so for decades now. There is not much incentive also for the really rich to have the markets correct- because this lot is old, and are not going to necessarily live long enough to enjoy the next upside. It will take the untimely deaths of a lot of baby boomers for the markets to correct fast, alternatively there would have to be a black swan event that spells some sort of universal dystopia. Else it shall correct much later. But it will correct as there is no evidence to suggest that it wont. 

The young people today ( GenZ and soon to be Gen Alpha) need to get in on this impending correction whenever it occurs. If they have rich parents, the latter can get in on their behalf. But if not, they need to put all their spare money in- even borrow change from relatives if they can. Nothing can provide a better safety net for their generation. Because with all the change brought about by AI- the only real winners will be businesses. They will produce more and sell more with a lot less. If you back the big businesses, you cannot go wrong.