One thing I like about Manish Chauhan of Jagoinvestor is that he reacts to every mail that he receives. I do not. Well normally I do not. However once in a while I do. When I said that Financial Literacy is nobody’s baby, one Mr. Abhi wrote the following…Below that is my reply:
Very true subra. But I have a different point for which I would like to know your opinion – if everybody is literate, it becomes situation like no one is literate. Some people make money in MF/direct equity etc because some people loose that money. So, there has to be a different set of people with different level of literacy, only then the market would work. Suppose everyone knows company A shares are going up, no one will sell it. For a sale to happen, there has to be a guy thinking it will go up and one guy who thinks it will go down. Isn’t that the case?”
First let me correct the English. It is ‘lose’ money not loose. Having got that out of the way, let us look at the logic. “Suppose everyone knows a company A shares are going up, no one will sell it”
This assumes that :
a) there is something called Perfect Information in the world.
b) everybody has it
c) all those who have that information has the SAME ability to assimilate it
d) there is no change of opinion EVER.
e) all the investors are so rich that they do not need dividends, nor do they need any money FROM this particular asset. EVER.
f) When the company needs further capital it will come from the SAME set of people in the same proportion.
Since these a-f conditions can NEVER, EVER co-exist, there will be an EQUITY market. Perfect information and perfect equilibrium happen only in laboratories, and the subjects are rats.
I am sure you MEAN that for every body to make money is NOT POSSIBLE, and for every winner there has to be a loser. Completely untrue. When the underlying cash flows improve share prices go up. In 1980 I am not sure if the market cap of the BSE was more or less than the Market cap of Wipro today. Or that of Reliance.
So at whose cost did Mr. Premji or Mr. Ambani get rich? Did you lose (ha!) Rs. 100,000 crores that is with Mr. Premji today? NO. He earned it by improving the cash flows.
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