Financial literacy: Rejoinder
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:
“Abhi
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.
Simple.
Pravin
You are correct.though,to put abhi’s nagging doubt at rest,it must be pointed out that derivatives like options,futures etc are zero sum.ie every loser has an equivalent winner.no new wealth is created
subra
Again wrong Pravin. It is like saying a person who takes LIFE INSURANCE profits at the COST of the life insurance company. It is not right. It looks like that but see the amount of money that LIC has accumulated with the life premia. So where is the zero sum game?
A derivative contract is just like insurance. OOps it is too long n complex
Abhi
Thanks subra that you thought that my comment requires a whole new post instead of just an answer in the comments itself 🙂
My apologies for bad English – I guess one should not post comment when he has only 2 minutes of time, specially on a mobile device with auto-correct on!
Probably I gave wrong example so you misunderstood the comment. I don’t think that for every winner there has to be a loser, but yes for some cases it it true. But again I digress…
The points where I wanted your opinion were –
1. What we understand as definition of financial literacy today will change as soon as everybody knows it. We never care about things which everybody knows, we only care about things when only some people (not all) know it.
2. As you said in this post, ability to assimilate is equally (probably more) important. Since it is not same for all, gaps will always remain.
subra
Abhi, knowing does not mean ANYTHING. It is doing which will have an impact.
Everybody who passes class 7 or 8 knows COMPOUNDING, how many of us know how to use it?
Knowing (Saraswati), Having a guru who will take us on that path (Hanuman), and having God’s grace a.k.a Wisdom to do it (Parvati) – all 3 Gods are necessary.
Siva
Blogging about finance is becoming too complex, only people like this Author can do it with perfection.
Good work Subra! One of my friend always thinks MF/Equity is gambling. I’ll forward this post to him.
Jitu
Two comments that stand out for me:
a. Perfect information and perfect equilibrium happen only in laboratories, and the subjects are rats.
b. knowing does not mean ANYTHING. It is doing which will have an impact.
Vishal
Comeon Abhi.. how can you say that it would not help if everybody is financially literate !! Are you saying what is the point in learning the alphabet if everyone else is also learning the alphabet? Let’s take general education, is everyone in the world better off being educated, or it does not matter as long as everyone is uneducated? Don’t you think the world would be a better place for everyone if everyone is educated? Same is the case with financial literacy – all financially literate investors can do better for themselves, not at the cost of other investors, but at the cost of insurance companies, banks, etc. that try to fleece us by offering bad financial products. If all of us don’t buy bad products, all products will be good products.
Sreekanth Yelicherla
Abhi: I got your point!
ddshahs
‘Perfect information and perfect equilibrium happen only in’HEAVEN!!