Friday, January 15, 2010

The Stock Market is Nothing More Than A Casino

During my college days we were asked to write a critical essay on 'The Stock Market is Nothing More Than A Casino.'

It's astounding that this has become a reality across the Globe where investments are little valued on the dividend or net asset value models anymore and the underlying business itself is often totally disregarded since it's only share prices that are dealt with on a 'virtual' basis!

Instead, due to excessive leveraging, especially by banks and hedge funds, shares prices are manipulated (ramped up) by 'hot' money flows and then dumped to leave the smaller players and genuine investors with huge losses.

More than that, USA Congressional hearings day before yesterday in the USA have revealed that mega Investment Houses and Merchant Banks (in particular Goldman Sachs) who act as underwriters for huge share offers, placements and right issues, have been allowed to SHORT SELL investment they themselves recommend to their clients to BUY, thus standing on its head the principle that the buck stops with the Underwriters! This conflict of interest has huge ramifications in the financial world where it is now clear that all the risk is born by unsuspecting investors, and the fact that Govt Will bailout the big banks and financial houses has been factored in!!

Govts and Central Banks everywhere must set clear rules limiting Banks, Merchant Banks, Financial Houses and Hedge Funds from over-leveraging. My personal view is that Equity:Debt ratios should not exceed 2:1. This would allow for an element of speculation, but not an excessive one for investments in share markets. Speculation in futures and currencies should be totally banned, except for genuine producers, buyers and sellers who taking actual physical delivery of goods and services.

Such controls might reduce the huge volume of speculative trade that has unhealthily driven the USA and European economies, but that is infinitely preferable to the boom and bust economic cycles we are now struggling with that threatens to bankrupt the whole world every time it occurs!

If USA will not lead the way for a total revamp and reform of financial trading due to selfish interests, perhaps Asia and Malaysia can take the first steps!