Can anyone plan this?

[Sanjeev Sabhlok <sabhlok@almaak.usc.edu>]

I see the name of Warren Buffet (btw, I see it because I am moderating
this list now again and we are still in need of  Puneet's replacement
since he has done his month (more than a month!).) used to illustrate
that markets are inefficient 
	and 	
HENCE	
	whatever whatever (should the govt. intervene? Is that the
	logic?)

Warren's style of investing is very very long term, with very very solid
companies. After huge research. Anyone can follow that style and gain
from the stock markets. The problem is that not everyone does it. How
many people have bought stocks with the intention of holding on for
20,30, or 40 years? Clearly if that is your intention, you will put in
months of research and not just go to the market and buy (or sell).
Warren is the best Professor of Finance ever, in a sense: he is the most
studious investor that ever was. Hence his success. 

Back to markets and what it means to be a market. Nothing like data to
illustrate things:

(data from Business Week, Nov. 16 1998)

Between 1989-1995, the Small Business Admnistration of USA reports that
29 lakh companies were formed in the USA and 26 lakh died. (A small
business is one that hires less than 500 people). At the same time,
three-fourth of the new employment in USA was generated by small
businesses. This is the quintessential market for those still enamoured
of our bureaucrats and planners.

That is the way the employment is created, and growth. In India we chose
to let government bureaucrats invest in companies on which they had no
stake at all (except as parasites), and they NEVER NEVER let a company
close down anyway. When about 85% of the investment decisions made in
the private sector are wrong, and the market competition forces them to
quit (creative destruction, a la Schumpeter), how in heavens name did
we imagine that our self-interested bureaucrats (and worse: our
politicians) could ever manage businesses? Have they been listening to
the market and closing down their bad ideas? NO. Have they listened to
the market and downsized? NO. Have they listened to the market and
followed the market price? NO. Instead they have dictated prices and in
monopolistic conditions, distorted the entire economy. Petrol is
overpriced (it is much much cheaper in USA) and coal is underpriced, for
example.

Lesson No.1. 

If you have not read at least 2 books on Warren Buffet's style of
investing, do not represent him. Markets are certainly not efficient in
the EMH sense. Finance theorists have been quibbling about this for
decades and still not agreed to anything. There are certain
consistencies in human behavior that traders exploit to make a living.
But many of them, indeed most of them fail. Short term trading is no
substitute for long term investment in well-researched companies. It
will be a foolish thing to jump into the stock market under the
impression that anyone can go in and make gains there. 

Lesson No. 2

Let the person who has the idea to start a business (i.e., the
entrepreneur) hold most of the risk. Do not let bureaucrats and
politicians who have no stake in any company sit and make a mess of our
nation. If you read about the level of demoralization in Russia today
you will realize that once non-market principles gain supremacy it is
well-nigh impossible to get out of that mode. Corruption and mafia-baazi
of the socialist times has not left Russia. Never will. 

SS





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