Friday, July 26, 2002

No Hope in Concepts: The Reason I Stay Away from the Stock Market

I have to credit my metaphysics teacher Rev. Fr. Roque Ferriols, S.J., who instilled in me the habit of asking "Meron ba?" In English, the nearest translation I can think of is "Is it there?" Does it exist or is it just hot air? The habit is based on the principle that there exists a reality. And human beings that we are, we nestle in reality. That's where we live. But there are a lot of non-truths out there that deceive us in to believing what is not reality.

And these non-truths are not necessarily lies or accounting scams. Non-truths can be innocent things like concepts. Concepts are products of our minds. They come out of our minds based on our experience of reality but concepts are not reality. The function of concepts is to point us to reality. If we say moon, for example, we have a concept of the moon. But the word moon itself is not reality. The real moon is up in the sky. To be fascinated with the moon, is to be fascinated with reality. That looks okay. But to be fascinated with concepts -- such as earnings per share -- is to be fascinated with nothing. That is not okay.

The stock market is one place where everything is concepts -- and not just concepts but concepts of concepts of concepts. Take the concept of debt to equity ratio for example. It looks simple. Conventional wisdom tells us that a company with a high debt to equity ratio means it has more debts than capital. This means a large part of its costs will be interest payments. A company with low equity ratio is one with less debts than capital. Interest might not be eating up its profits that much. So which one has better prospect of making more profits?

Dig deeper and see where the labyrinth of concepts bring you. Debts: What does the company owe? Well -- loans from banks, advances from stockholders, bonds, commercial papers, promissory notes, purchases on credit, etc… still with me? What is capital? Money, property, goodwill? How do you value this money? Based on inflation? How do you value property? Based on market conditions? What is the market condition? Then, we realize a lot of things are not really clear. How does one classify, for example, between a debt and equity. Preferred shares -- is that equity or debt. Convertible bonds -- is it debt or equity. What about warrants or option contracts. Then we find out that a lot of the underlying items are based on opinions and opinions no matter where they are coming from are not truths. So we ask, is it really there? Meron ba?

Just look at the moon. No matter what the people say, you are sure it is there. Unlike the stock market, the moon is not susceptible to the whims of the crowd. In the stock market, if the crowd believes there is a value, everything goes up. If the crowd believes there is no value, everything goes down. Then, creative accountants and corporate honchos with appetites for large sums of money (and everyone in the stock market has that appetite) start playing around with the concepts and masquerade losses with profits until they are caught. Then, everything crumbles. People realize all they really had was concepts -- concepts of concepts of concepts.

I never thought of playing with the stock market crowd. There are many people way ahead me who drumbeat the perceptions of this crowd. No hope it putting one over them. No hope in concepts.

So, I stay away from the stock market. The truth is hard to find there -- with or without accounting scams.

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