I know that Value Research readers may not find this to be of much interest, but the world of equity speculators and the brokers who make money from them is in a tizzy. SEBI's new rules for equity trading have riled up investors and brokers alike as being likely to depress trading and make quick speculative trades less convenient.
Essentially, these rules would lower the velocity with which traders will be able to move money around from transaction to transaction. They would also force traders to have larger amounts of their own money in order to carry out a given activity. Since most traders seem to be permanently maxed out on the amount of money they can deploy, this would inevitably have the effect of lowering the amount of trading they can do. It's interesting to note that the intended effects of these rules are themselves being pointed out as their harmful side-effects by traders and brokers.
As things stand, SEBI has now postponed the implementation of these rules and diluted some of them. People are speculating that the postponement is a sign of some kind of a rethink within the regulator. Since such speculations are coming from those who are expert speculators anyway, anything is possible. However, the fact remains that there is a large sized contradiction here. During the last four months, there has been a massive boom in small investors trying their hands at equity investing. At some level, this is counter-intuitive. Those who have invested for some years or decades can hardly recall any time when the economic and business situation has been more uncertain.
On the one hand, as economic data for the last few months has started coming in from around the world, the scale of the slowdown has been shown to be huge. Of the ones where data is now available for the period since April, there is no country whose economy seems to be down by only a single digit percentage. And since the headlines always report an annualised figure (which may not be justifiable in this case) we are reading numbers like -39% for the US and -65% for Spain.
Since the equity markets are supposed to be following and reacting to such news, what is the explanation for the wild stampede of retail investors rushing into the markets? More than anything else, SEBI's new regulations are intended to suppress this new crowd of novice speculators. But why has this stampede started? To my mind, the right answer is that there is no single answer. There are a mix of reasons, not the least among them the now widespread impression that the impact of the Chinese virus will be brief and minimal in the long run.
I think this is now a system of circular logic, at least partly. The markets are not receding strongly because of the belief in a quick recovery and the belief in a quick recovery is there because the markets are not receding strongly. To my mind, there is nothing in the economic and the business data that justifies this, neither from this end nor from that end. This is a delusion.
Am I saying that equity investors should get out and run? If you are a new investor who is now getting attracted to hit and run trading then yes you should get out and run. However, for real investors, far from it. This is a great time to invest, even if it's a difficult time to make judgements about where to invest.
Of course, as I pointed out last week, one stage is a development of the other. Most investors have to pass through the first stage and learn the hard way. If you can learn by keeping the hard way from becoming too hard, then that's that much better. As for real investing, this is a good time to get serious. The coming economic and business slump will eventually mean that better businesses, which are ahead of their competitors, will come out much further ahead.
Identifying those businesses, and then taking advantage of the uncertain times, is what investing is all about. So let's you and I focus on what's there on this website and on Value Research Stock Advisor, and forget about what will happen in the short-term to those who are trading and punting.