Monday, August 22, 2011

Economics and Investing: A direct relationship

In my fifth year of teaching Finance I was approached by an honor student complaining that he did not deserved the 78% grade on his case analysis paper. He mentioned that all his grades for the past case analyses are way above 90%. I admired his bravery but I pitied his fear of receiving low grades. Looking on our society today, being rejected and being a failure is an anathema. Parents, peers and even schools pressured us to be successful in all what we do resulting to the feeling of humiliation when we experienced otherwise.

In investing, failure is part of the territory. Stock prices will surely go down, mutual fund NAVs will fall, real estate prices may depreciate and business may collapse. What we can do is to mitigate the failure by using our knowledge in economics.

We should remember as an investor that investment works in the essence of the most important word in economics: scarcity. I remember my economics professor Enrico Mina said that scarcity compel us to compete starting from the sperm cell racing to meet the egg cell. In investing it is the same , you compete with everybody else on buying the house located in the best location, selling first the stocks before the price goes down and even just getting a high score in the dreaded UPCAT exam.

Those who say that we can disregard competition are in the wrong side of the equation. We can not escape it and the products it produce: pain when failing and joy when succeeding. If I succeed in a competition it will teach me magnanimity and humility and if I fail my salvation is to persevere more to do all things well and to anticipate the reward that will surely come.Our being will not be complete if pain and joy are absent.

In my MBA days I had a debate with an Indonesian classmate who said that our country is becoming a failure. At the beginning, I was angry then I realized that there was a hint of truth on what he said. His basis of contention is that we do not produce what we consume and the scarcity we are experiencing were the product of lousy performance. Now I accepted that economics play a vital role in good investing.

Our country and our investment strategies are microcosm of who we are.

Our country will be economically prosperous if we start the culture of rewarding those who are most useful and those who provide valuable things to others.

Our investing strategies will be successful if our decisions are based on business performance and achievements.

Economics and investing are inseparable twins fueled by scarcity, surviving due to coordination and succeeding thru productive efforts. Disregarding one means stagnancy and strengthening the two means prosperity. We now know what to choose.

Arnel L. Cadeliña

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