Monday, March 20, 2023

Revisiting Investments and Investing

There is no such thing as a risk-free investment.

Holding cash at home is not risk-free since inflation eats the money away.

Investing in a bank involves varying levels of risk:
- the most safe banks are the scheduled public banks. You expect the government to cover losses if the bank fails. Officially , the deposit insurance cover is only 5 lakhs, but in general the expectation is that the government won't allow the bank to go bust. Ditto for most major private  banks.

Safety does not imply solidity. The balance sheets of most banks are suspect.

The risk is that the real return, that is, return net of inflation, may still be negative, especially on a net of tax basis.

As to investing in banks other than the big ones, the less said about it the better. 

Investing in the stock market is highly risky for several reasons. It is a rigged game, where the muppets keep entering only to get slaughtered in hordes. 

Debt mutual funds carry risks as we saw in the case of Franklin Templeton. In search of a little extra yield, they could invest in illiquid  securities of not so strong companies. In case they invest only in 
supposedly safe long dated  government bonds, that carries interest rate risk, which , as the SVB collapse shows, can be deadly. 

Equity mutual funds carry the same risks as investing in direct equity, plus some more. As an individual investor you would never have invested in Anil Ambani's power project or in Nyka. The fund managers, however, are part of a cosy cabal, which believes in mutual scratching of backs, and what the hell, it is not their money anyway.

Every player in the financial markets has an incentive structure that is at variance with the wellbeing of the investor.

The financial markets are a giant suction machine that keep rotating our  money at great velocities, sucking out a little bit in each round, and to add to it, the machine breaks down once in a while.

Gold, as in physical gold, is always safe. It will protect you from inflation in the long run,  but is highly volatile in the short run. However, central banks are scared of gold, in the same way as religions are scared of sex, it is the only power strong enough to threaten their hegemony. So central banks will do everything in their power to curb gold, ban it, demonise it, and in general harass those who hold it. 

Money is supposed to be a "store of value". That is the biggest bullshit fed to us by economists. Economists, by the way, are a totally clueless bunch whose job depends on pretending to be erudite.

An economist consulting a tarot card reader, to raise interest rates, might end up in a better outcome, 

Ditto, an equity fund manager consulting a monkey with a dartboard , to help him choose stocks. 

Cryptos, commodities, options, futures, derivatives, currencies and the like are all  scam games to divest the investor of his money, except that the word investor is inappropriate, hopeful idiots is a better term. In a gambling den, only the house wins. Always.

So then, what to do? 

Money loses value hence one needs to invest in things other than money.

Which things? 

For that, let's go back to the basics of investment.

Anything that will not result in the investor losing his principal. That is the first rule: not to lose the principal.

Anything that is real: that is, is tangible, has a use for someone, and carries real value.

Anything for which the demand from the people will increase over time. Rising demand gets reflected in the price.

Anything that will not collapse overnight, like banks tend to do nowadays.

Anything that has been considered as investment for ages, and will continue to be considered as such.

Anything not subject to black swan events. Black swans seem to be getting  increasingly frequent nowadays. 

Any suggestions? 

Responses are welcome

1 comment:

Anonymous said...

Very well penned. It’s true, to exist is to subject oneself to risk. The ultimate solution is minimalism. To learn to be contented with little - with far less than what one has. If a person can reach this balance he or she would have truly minimised risk in all respects - financially, physically and mentally.