3:16 pm - Monday January 21, 3078

The lessons one has to learn from markets these days

Bear Stearns, Merrill Lynch, Lehman Bros, AIG ? These were the big names one feared for in the markets and one cherished dreams to be associated with.

What indeed made them big and feared for?  Their aggressiveness in the first place, positioning in the market, ability to raise capital, leverage on such on capital, ability to create structured products with such features to seduce the markets, etc. were some of the features of them

As long as they could call the shots, they were merrily making money and nothing could stop them. They believed in their self proclaimed philosophy that money makes money and they were putting in all their money (their own and borrowed) in the markets as if there was no tomorrow to make extraordinary gains.

They were also not exercising any restraint even when the markets cautioned them at periodic intervals.  They did not pursue any prudent practices as one would expect even from a conventional banker. Well. Our investment bankers are expected to exhibit and exercise more prudence as they normally deal in huge money.

Bankers are supposed to have the skills to predict the markets accurately as they would have all the information at their command. They are also supposed to indulge in research and development studying the markets closely and picking up signals – warming or warning. They should get in to the market at the appropriate time and get out of the market at the right time. But of late, our investment bankers appeared to have lost sight of their basic skills.

These crops of investment bankers â?? despite their very long years of existence in the market even in much worse and adverse conditions â?? were basically greedier. They were not willing to believe in accepting the reality that every one has limitations. They behaved as if they are the greatest of all times and they could make money but money only all the time. They seemed to have overlooked the fundamental feature of the market in which they played â?? that ultimately it is a zero sum game.

So, greediness to a greater extent put them in misery

Next, normally one is expected to call the shots and withdraw from the market when ever it is advantageous to them. Even when the market cautioned them with number of signals at different points of time, they did not pick them up. They were arrogant and behaved as if they would be right ultimately. This made them to cling to their positions â?? rather losing positions. Not only clinging to their positions, but also pumped in much more money into such losing positions.

So, failure to learn the lessons throughout their journey brought them ignominy

One is expected to exercise caution in making use of oneâ??s own money and making the right kind of investment so as not to lose the very original investment itself. And when one borrows money from others and investing in them in business they are supposed to take up the role of a trustee, as such monies are lent to them with the fondest hope that they would be returned with sizeable returns.. But they treated this money as if it were their own. They also did not prescribe for themselves any limits for such leverage.

So, failure to live up to their role of a trustee put them in disaster

Finally, recognizing limitations and respecting law of nature are two important ingredients for achieving an everlasting glory for individuals and institutions alike. They should accept with all humility that they are not simply great and they are only a small part of the whole wheel. Unfortunately, they felt that they were right all the time. They felt that the markets would behave the way they expected but unfortunately the markets did not.

So, their arrogance and lack of humility led them to their present status

Ultimately one should recognize that after all, we are all human beings and there is a power above us monitoring us. If we recognize this and play within limits, there should be no worry. Only when we try to disprove this fundamental philosophy and exhibit arrogance, we are shown the door.

Utilizing this occasion, I would like to share one important lesson I have learnt during my trading days â?? If the markets behave the way the traders expect, the job of a trader would be made easy. Unfortunately, we know how difficult the job of a trader is. Making money in the markets and all the time is a very difficult proposition. Experienced traders recognize this and provide for this when they approach markets.

NB: I have tried to analyse the general reasons for the happenings in the market.  The points discussed here may not be applicable to individual names mentioned and may not be in  the list of reasons for their failure.  I feel this disclaimer is necessary to enable the readers to pursue further study and reasons for their failure.

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