Bluff Your Way in Finance.docx
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Bluff Your Way in Finance.docx
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BluffYourWayinFinance
BluffYourWayinFinance
Contents
Introduction
TheStockExchange
TheMarket
Market-makers
Brokers
OtherAnimals
Investment
Securities
Options
JudgingaShare
Timing
Dealing
Takeovers
BidJargon
SomeMoreJargons
WorldStockMarkets
Tokyo
NewYork
Europe
Others
OtherMarkets
LIFFE
MoneyMarkets
Commodities
FinancialRegulation
TheBankofEngland
TheFinancialServicesAct
ThePanel
TheEuropeanUnion
LastRefuge
INTRODUCTION
Financeisajungleinwhichevenexperthuntersaremauledoreaten.Amateursstandlittlechanceunlesstheyarmthemselveswithafewweapons.ProdpeopleintheCitywiththerightphrasesandtheymaybelieveyouaretoowellarmedtobeconsumed.
Thenoviceneedstolearnjustenoughtorealizewhenthereiswoolinfrontofhiseyes,andtoaskquestionsthatwillkeeptheexpertsfeelingtheyarebeingwatched.Forinstance,ifyouaskadviceaboutwhichsharestobuyyouareliabletomeetcondescensionandthesuggestionthatunittrustsmaybethewisestmoveforthesmallinvestor.Atthispointadisingenuouslittlebluffcanwarnthemtobeabitmorecareful–somethinglikeaskingwhethertheP/Eistoolowforthesectorbuttheyieldbelowtheopportunitycost.Thatmaystopthempatronizingyou.
Ontheotherhandifyouaskwhethersuggestedinvestmentsprovideareturnwithanadequatenetpresentvalue,andwhatdiscountratehasbeenusedintheDCFcalculationsandwhy,youareliabletoleavemanyafinancialadviserfloundering.
Thisofcourseistheessenceofallbluff:
tohintthatyouknow,buttogettheexpertsufficientlyoffhishometerritorythathecannotbesurewhetheryouaretooknowledgeabletotanglewithortoosharptoberobbed.WithanexpertofRembrandtyousteertheconversationto,say,Velazquez(ifthatiswhatyouknowalittleabout)andhewillbecomeillateaseandwaryofflatlycontradictingyou.Withaneconomistyoudiscussshop-floorworkingpractices.WithCitypeopleyoudiscusseconomicswhileknowingjustenoughnottobecaughtbeforethesubjectischanged.
Youdo,however,havetotakecare;theworldoffinanceisitselffullofpeoplebluffingforaliving,sowatchoutwhentheseploysareusedonyou.Aneffectivecounter-playifyoususpectyouhavemetaprofessionalblufferistoinsistonhisspeakingplainEnglishandexplainingeverytermprecisely.Thisisnotunreasonableforiftheywantyourcashtheleasttheycandoistospeakalanguageyoucanunderstandandnothidebehindvaporousdouble-talk.
If,despitethat,theystillburyyouinjargon,bealert.Theymaybepeddlinganideasoobvious,orsofalse,itsfragilityneedstobewrappedinverbalflufftoprotectit.
Soarmyourselfwithagoodenoughcommandofthevocabularytoknowwhenothersarebluffingandtoprovideammunitionfortheperfectriposte.
Defensivebluffing,especiallyonthestockexchange,istoavoidadvertisingoneselfasasucker.Theaggressivebluffhoweveriscalledfraudandisfrownedonifdetectedandyouarewithinthejurisdiction.IntheCityyoucangetawaywithalotifyouareasmoothunostentatiousoperator.Peoplewilloftenloveyouevenafteryouhavepocketedtheircash.Nottobeoneofthemugsrequiresknowledgeaboutwhathappensandwhy,soawould-beinvestorneedstohaveafirmgraspofthebasicsifonlytoshowthatyouknowthisisnotaveryseriousplaceandthepeopleinitcleverhucksters.
THESTOCKEXCHANGE
Thefirstthingtorememberisthatyoushouldneverallowanyonetofoolyouintothinkingthereissomethingspecialormysteriousaboutthestockmarketoraboutshares.
Banknotesstartedasreceiptsfromrenaissancejewelersandfinanciersforgolddepositedintheirvaults.Thereceiptswerethereforeasgoodasgoldbutcouldbetradedandexchangedmuchmoreeasily.Thestockmarketisalogicalextensionofthis.
Peoplearereluctanttolocktheirinvestmentmoneyintoacompanyforever,sotheyrecoverthecashbysellingthereceipt.This“marketliquidity”makesinvestorseverreadytostumpup,whichinturnmakesiteasierforbusinessestoraisecapital.
Thatatleaseisthecasefortheexchange.Itseemsnottohavenoticedthatbyfarthegreatestportionofcapitalusedbycompaniescomeseitherfromretainedprofitsorfromloans.Andsomecompaniesgotsodisgustedbyconstantscrutinyandcriticismtheyboughtbackthesharestogetridofthequote.
Seekersaftercertaintyorevenpredictabilityarealarmedbythemarket.Aswasverysuccinctlystated:
“Anyonewhothinksthereissafetyinnumbershasn’tlookedatthestockmarketpage.”
Butthereisnothinglikeaquickandeasyprofitwithpracticallynorisk,totapuniversalgreed:
arashofshareoptionsforemployeesplusprivatizationswithsoaringsharepricescreated12-13millionshareholdersinthepasttenyears.Some20%oftheadultpopulationnowownsasharedirectly–quiteapartfromtheoneswhosepensionsandlifeassurancedependonthestockmarket.
Likeexistingshareholderswithalittlemorecashintheirpockets,someofthesenewcapitalistsarenowwonderingifitmightbeworthdabblingasecondtoeinthepiranhapool,butaredeterredbythearroganteffronteryofthejargon,andthehighcommissionschargedbybrokerstryingtorecoverfromthesmallsaverwhattheydarenotchargetheimportantinstitutionalclient.
Theimportantthingtohaveisconfidence,forinfactitisrelativelysimple,andtherearewaysofminimizingcosts.Thebasicprincipleis:
“Takeasmuchasyoucangetandpaynomorethanyoucanhelp.”
TheMarket
Therearetwothingstobearinmind.Firstly,thestockexchangeisnodifferentfromavegetablemarket(norarethebarrowboys).ItisjustamatteroflearningtheshareequivalentofthedifferencebetweenaCox’sOrangePippinandJerusalemartichoke–thoughitmaytakealongtimebeforeyouspotalemon.
Secondly,themarketneedsyoumorethanyouneedit.Youcanalwaysputyourcashintoabuildingsocietyorasockunderthemattressbutwithoutyourinvestmentmarket-makerswouldhavetoworkforaliving.
Therulesthereforeare:
keepagriponyourimpulsetospend,andbepositive.Stockbrokersarelikeusefulhounds;theyhavetobetrained.Sowillneedtheoccasionalfirmhandtoensurethattheyknowwhoisboss.
Thestockmarketemploysanumberofprofessionals.Whenthedealingwaspersonal,theStockExchangemotto“Dictummeumpactum”(mywordismybond)meantsomething.Notjustbecausemostofthemweregentlemeninthosedays,butbecausedealsworthlargesumsofmoneyweredoneonnomorethanabriefwordandajottedaidememoireintwonotebooks.Nowallisdoneviacomputerandsuchrelianceonenlightenedself-interestisunnecessary.
Market-makers
DrJohnsonwasscornfulofjobbers(themarket-makers’predecessors)as“anunnecessarycollectionoflowfellowswhospeculateintheFundsandareofnobenefittoanyonebutthemselves”.Hemighthavebeenlesscharitableabouttheirsuccessors.
Amarket-makerbuysandsellsonhisownaccountandforhisownprofit.Asaresultheactsasabuffertothesurgesofbuyingandsellingfrominvestors.Whenallthepressureistosell,hemarksdownpricesuntilthesellersaredeterredandotherssmellabargain.Alltheotherwayabout.
Themarket-makerhastwoprices,say,108-112,whichmeanshebuysat108pandsellsat112p.Pricesthatarequotedinthenewspapersrepresenttheaverageofthesetwo,the“middle-marketprice”,justaspublishedcurrencyexchangeratesarethemid-pointofbuyingandsellingprice.
Thedifference(between108pand112p),knownas“thespread”,paysforhisrisk,hisprofitandhisdailysandwiches.Tosaythemarket-makerhasabigspreadisacommentneitheronhisbellynorthefarmheusesastax-dodge,butacriticismofhismarketgreed.
Itisimportanttorememberthatmarket-makersarethesniff-the-breezetypeofinstinctivedealers.TheyhavelittleideawhatliesbehindnameslikeShellorBarclaysBankanddonotcare.Fromnewspapers,thegossip,andafeelforthewaysmarketsbehaveevenwhenbeingirrational,theysensetheatmosphereandjuggletheirpricesandtheirdealings.
Theyusedtogetveryrichindeedbutcompetition,nervousmarketsandbeingpartoflargeconglomerateshavedentedthebusiness.Marketproblemsofthiskindarethefavoritetopicofconversation.Itwillnotbeoutofplacetoenquirewhethertheremaybetoomanymarket-makers,ortosuggest,inacasualway,thattherehasnotbeenenoughgrowthinturnovertosustainthemall,addingthattherecentwarinessofinvestorscouldensurethedifficultycontinues.Youmightaskwhichmaybethenexttofallover.
Donotexpecttodealwiththemdirect.Market-makershaveproblemsenoughwithouthavingtocopewitheveryeagersmallinvestorringinguptonegotiateeachtransaction,sotheyconfinethemselvestotradingwithbrokers.IfyouaretheBritishRailpensionfundorthePrudentialtheymaydeigntotalktoyoubutifyouhaveunderamillionpoundsinyourpalm,forgetit.
Brokers
Brokersarethemiddlemenwhodothebuyingonyourbehalf.AsDisraelisaid“Itiswellknownwhatamiddlemanis:
heisamanwhobamboozlesonepartyandplunderstheother”.
WhataBrokerDoes
WhenyoutelephoneabrokerheorsheswivelsroundtothecomputerscreenwiththeTopicservice,onwhichtheSEAQpricespagescanbecalledup.Thereisnopointtryingtorememberwhatalltheacronymsstandfor–themarketmenhaven’tgotaclue,sowhyshouldyou.YouneedonlyaskwhetherSEAQisshowingalargevolumeandwhethermarket-makersareraisingtheirlimits.
IfitisapopularcompanylikeMarks&SpencerorICItheremaybeadozeno
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