The Confidence Effect in Money Matters
The sharp fall in stock prices of companies laden with some debt had its latest victims – We happened to get distress calls from several investor with little more than two years of investing history, complaining “Is stock market less safe a place than it used to be?”
Again, we searched for answers through teachings of some of the greatest all time investors and reverted to the distressed investor that probably, stock markets were never a safe place in the first place. Humans have the inherent tendency to shun uncertainty and vouch only for things they feel confident about. While this helps in getting a good night’s sleep, it is important to sit back and analyze the source of the confidence. The world is an uncertain place, be it the stock markets or the everyday life and a lot of times, our confidence is not based on thorough due diligence but only to give our self a false sense of safety. This is not to say that confidence is a bad thing, but false sense of confidence will lower your abilities to grapple with failure. On the contrary, identifying the risks will surely leave you better prepared to accept failures.
GreenEdge Wealth Services’ View
To illustrate the point, never has the quantum of personal loans and credit card outstanding in our banking system been so large. It just goes to show that our generation (in their 20s and 30s) is far more comfortable with debt than our parents were. A lot of it stems from the confidence – that the young generation is educated, well employed and possibly more optimistic. While the source of confidence is not entirely shaky, I think the earnings risks to this generation are not too different than the previous. If we are better educated, there are millions more competing for the same jobs. Salaries can’t be extrapolated to eternity as increasing number of companies follow the hire & fire policy and burgeoning globalization brings a lot of foreign problems to India. Debt remains as risky as ever.
Would quote Michael Lewis here “Leverage buys you a glimpse of prosperity you haven’t really earned. Jobs are contingent, but debt is forever”. This is not to scare you from taking debt, but to realize the risks that come along with it.