Last week a friend and I met after nearly 30 years. Conversation veered to those days of frenetic stock trading. Many of us can’t forget 1990-91. Sensex crossing the 1,000 mark seemed like a major event. Harshad Mehta lorded over the markets and magazine covers. We laughed over our foolishness and the many goof ups then. To a new entrant, the markets seem magical and full of promise. Anyone can make money easily, one thinks, until one is hit by a crash.
There is no dearth of stories when it comes to the stock market. The vivid memory was of the new issue mania of 1992-94 when issue of shares was freed from government control. Until then every IPO had to be approved by the Comptroller of Capital Issues (CCI), who decided, among other things, the price of the issue. Since they applied a static formula, and had the mandate to enable small investors to access the markets, they underpriced public issues. Many retail investors rode that bandwagon in the 1980s to make money on stocks. Now that the control was gone, how did the “free” markets behave?
Sebi had been newly empowered after the scam and crash of 1992. It was trying its best to manage the flood of new issues, and issued guideline after guideline. Many of us had the active duty of keeping track of what changed and how. But the market players were smarter. They filed so many new issue offers that they overwhelmed the regulator. There were four categories of merchant bankers, and at one time, nearly a 1,000 names were registered. There were so many spurious issues hitting the market place with dubious promoters and hilarious business plans.
Academics who studied that equity is more expensive than debt, wondered how to account for the free money these businesses were raising and running away with.
Our discussion turned to the learning process. It is possible to comment on all these in hindsight, but we were so caught in the newness and speed of it all when it happened. Whether it were the stories of stocks running up on fancy fables, or new issues coming with the promise of the moon, it was tough to sift wheat from chaff. Stock analysis was a new science, and many of us were still figuring how to get the industry data and structure right, before pinning the business and its growth plans into that picture. We were struggling to keep pace.
How does one learn? Wait for years to gain perspective and go back and understand what happened then? That kind of indulgent learning is too slow and impractical. How does one learn when theories turn invalid overnight? How does one cope when new events unfurl quickly, with both opportunity and challenge? Is it possible to encapsulate the essential learning and make it an offering for an investor, analyst, adviser or relationship manager to master? That question led to forming my business proposition.
Learning is a complex process, and it is simplistic to assume that it can somehow be formalised and packaged for all time use. There is perhaps a conceptual core that can be taught. But much of the learning is acquired by the learner, from experience, observation, application and practice.
Professions like accounting, medicine and law, have managed to codify these two sources of knowledge and learning into theory and practice. Learners can sharpen their skills as they work with a core knowledge base. It is possible to view investing similarly, and to insist that the essentials are learned by everyone before they step out to practice, where learning continues.
Consider the profession of farming and agriculture. So much is learned by doing, observing, and internalising the linkages. Though formal education in agriculture, horticulture and all such branches of study are available, the knowledge a farmer acquires from doing, is precious. The same can be said of cooking and cuisines; or healing and indegenous medical practices; or stock trading. Diverse professions, but linked by the prevalence of knowledge acquired from actual practice. Intuitive learning that is tough to codify and formalise, but passed along to the learner. These learnings are cultural codes and norms. They are known so easily to those that belong to the clan, observe and imbibe, and are available to absorb knowledge and learning that seamlessly and informally happens as events occur.
Somehow we discount these learnings. Ask specialists about technical analysis of stock prices, they will likely scoff. They see it as the tool of the street —crude, rule-based and simplistic. Ask the medical practitioner about herbal remedies, they will seek authentication from independent research.
Ask the grandmom to explain how she turns out perfectly round and similar sized rotis by tearing off balls by hand from a correctly mixed mound of dough, she would be at a loss. Intuitive learning is like that—we can’t explain how we know what we do.
That opens it up to manipulation and fraud. Quacks and ill-informed practitioners mushroom to take advantage of the faith and belief in the informal learning systems, and exploit the gullible with half baked information. Much like the phone calls and tips from Indore, or the predictions offered by the neotechnical analysts. The entire system’s credibility comes under question, and we lose the precious benefits of informal learning.
To assume that all learning can be formally codified and then imbibed by learners, is to take a horribly static view of the world. A school can only offer mastery over language and math and introduce children to the wonders of the scientific approach. The responsibility for learning is then on the child as they step into the world. Investing knowledge is not different —one can lean on books for fundamental principles. One can acquire formal education on the process, products and policies. But the actual learning that enables decision making in a crisis, is one informally acquired through consistent engagement, curiosity and observation. Such learning is acquired without conscious effort to acquire a certificate. It is precious, intuitive, and immensely useful. We can’t oversimply it.
(The author is Chairperson, Centre for Investment Education and Learning)