Widely read:
For investors, 2022 was the best bad year that I remember in a long time. On the face of it, the markets should have crashed. If I list the actual events of the year, from a major European war that now seems never-ending, an oil price spike, yet another piece of COVID idiocy from the Chinese government and, above all, the long-feared end of the free-money regime of the US, then investors should have had a very bad time indeed. And yet, here we are, the year has ended and we're fine. Compared to how bad such a year could have been, it's been a good year.
There's a fuller treatment of 2022 in our cover story of 'Mutual Fund Insight' February 2023 issue, but there's one more sense in which I can call this the best bad year I remember. Those investments that should have done badly actually did badly. That sounds like a cruel thing to say but this is important. The function of any properly functioning, free-market investments system is not just to ensure that good investments succeed and bring good returns to their investors but also that bad investments fail and cause losses to their investors.
You read that right - the failure of bad investments is just as important as the success of good ones, perhaps even more important. As long as badly run and loss-making businesses stay afloat, they keep sucking up resources that good businesses could use. Here I mean resources in the broadest sense, which include investors' funds, employees, market share and the general bandwidth of attention. The sooner bad businesses fail and release all these, the better it is for those of us who have invested in the good ones.
Unconvinced? As proof, I'll just point out that the industry with the highest mortality rate of businesses over the last two-three decades is technology and yet that's also the industry that has had some of the biggest successes and has transformed our world. One of the contributory reasons is that dysfunctional businesses failed quickly and got out of the way. That is, up to a point.
Over the last few years, we have had a new wave of technology businesses that are doomed to failure and yet keep surviving because of the scale of misguided funding they were getting. In India, there has been a spate of IPOs from such 'digital businesses' since 2020. The IPOs all succeeded in gathering humongous amounts of money from investors who should have known better but now reality has reasserted itself. IPOs like Paytm, Zomato, Nykaa and others have done poorly for investors and hopefully, that has put an end to more such 'digital' IPOs that do nothing but enrich the promoters and VCs and impoverish investors. Businesses that have never made a profit and look like never being able to make any should never get any investments in the markets. This is the first good failure of 2022.
The second good failure of 2022 is, of course, crypto. For my regular readers, I hardly need to point out that crypto is the worst and the most dangerous racket pretending to be an asset class and an investment that the world has seen. There are many deep problems with crypto but the fact that it's to be tailor-made for crime and malfeasance is not even the worst of them. The worst is that a whole generation of investors - mostly young ones - started taking this nonsense seriously. The idea that an investment has to have an underlying connection with reality seemed like a stupid, old-fashioned thing to them. Someone could spin up some software, create digital 'tokens', and that these tokens could be treated as a currency and as money seemed like a good idea to so many people.
Well, now reality has reasserted itself, as it always does and that has been the greatest gain of 2022. It's been an interesting year and while it seemed to be going downhill a few months ago, I'm happy that it has ended well as well as ended badly, in the most appropriate way.
This editorial appeared in Mutual Fund Insight February 2023 issue. To read the cover story and other insightful analyses, columns and articles
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