by tonytran2015 (Melbourne, Australia).
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DISCLAIMERS: The opinions expressed in this blog ARE NOT ANY FINANCIAL ADVICE. This author takes absolutely NO RESPONSIBILITY for any action of the readers.
#bankrupt, #stock market, #crash, #lowering interest, #bank rescue,
1. The crashing of share price of any company is just a rude awakening.
The value on the stock market of any (stock market) listed company is just a speculation on how much is the “future value” of that company. The “future value” of the company is just the discounted value of all its earning plus the redistribution of company capitals at its dissolution. So there are a lot of “ifs” in the valuation of the “future value” of a company.
When the “future value” originates from the advocates of the company, it would be astronomically high as all “if’s” have been assumed to be already facts. On the other hand if the “future value” originate from the skeptical observers (the “bears” of the shares markets) it may be dismally low. The traded values of shares at a shares market obviously depends a lot on which side has a bigger propaganda machine.
On the day a company is floated, existing shareholders would want to make quick profits on listing days and they may employ the service of “promoters” and “underwriters” to get outsiders to buy their shares at much more than their real worth.
After all shares had been sold to outsiders, the promotion activities would stop and the skeptic would have their chance to criticize all the “if’s” and the make a more realistic projection of the future earning of the company. From that time, new share holders from the outside would slowly realize the truth:
“If a company is making fantastic profits, its existing owners would not want to sell it, only companies in bad shape are being desperately unloaded by their owners”
Then new shareholders only see the traded values of the company falling. Some get too upset and decide to sell out at all cost (called “sell at market prices”). Others are then so fearful, they compete among themselves to be the first to get out. So the shares price of the company falls down steeply (“shares price crashing”). 
2. The crashing of all share prices of any share market is just a market wide rude awakening.
The crashing of the shares price of one company on the market may make shareholders of other company worry. They too start worrying whether they had also been taken for a (rough?) ride. Some of them will try to get out of shares to be on the cautious side. This amplified selling action may cause the prices of all shares on a share market to crash.
3. People wrongly blames share market crashes for their financial losses.
The CRASH OF ANY SHARE-MARKETS DESTROYS NEITHER WEALTH, NOR EARNING GROWTH of companies traded on that market. The crash only means that people no longer blindly believe in the rosy pictures painted by the promoters of those companies. New buyers of company shares would only believe in highly probable earnings of the companies, not in their fantastic earning which may or may not eventuate in the future. Some new buyers also want to buy at big discount from panicky existing shareholders.
The periodic loss (earning deficit) of share-market listed companies caused by unreasonable assumptions, uncontrolled spending, loss of income sources, the extravagant payments to directors and managers have slowly and certainly devoured and eroded the growth and sustainability of those company. A share market crash is only a rude call to shareholders to return to reality.
A share market crash is just similar to the medical assessment of an illness in a patient, the detection has not caused the illness, the latter has been caused by other causes which may include his genetic condition, his environment, his living style, etc …
4. Tax money should not be spent rescuing imprudent investors.
a/- Sometimes, the government of the country may feel compelled to rescue those gullible, imprudent people who had put their hard earned money in the share markets. The government of a country often lowers the reserve-bank interest rate to prop up the values of shares.
Such rescue is unfair to other prudent tax payers as they had stayed clear of the unsustainable companies and had not enjoyed the good time provided in their boom time. Governments should better spend money making laws enforcing disclosure compliance by companies, banning the listing of “strangled companies” [4a, 4b] on share markets and educate share-holders on how to force compliance and transparency on companies .
The term “strangled companies” denotes those paying astronomical salaries to their directors, chief executive officers and promoters. When the directors and chief executive officers of the companies are paid astronomically high salaries and bonuses there will be no cash left for basic operations of the companies. The latter are destined to fail.
“Strangled companies” in the stock exchanges of leading countries operate in much the same way as the illegal groups of “kidnappers organized-beggar-operators” operating in third world countries (with weak laws enforcement): Kidnappers stole children from others and force them to beg in public areas. The children are kept always miserable. No matter how much passerby people give to the begging children, their handlers (kidnappers) will extract almost all the money leaving them with only just enough to sustain their miserable lives.
Lowering of the reserve-bank interest rate only makes people spend more on the present and spend less to prepare for there future. Only incapacitated people like old or disadvantaged people pour their excess capacity into strangled companies to prop up the share markets. Most people would borrow money at zero interest to enjoy life while they can still. Some small percentage of careful people may borrow (when approved by their lenders) to build their own income generating devices such as small business under their own control, spare housing capacity for possible future rental purpose and only fools borrow to invest in “strangled companies” on the share markets.
Lowering interest rates strangles pension recipients who earlier invested their money in pension funds.
b/- Sometimes, the government of the country may feel compelled to rescue big banks listed on the shares market.
However, rescuing an insolvent bank is still the propping up of a “strangled company” called a “bank”. That bank has had periodic loss (earning deficit, caused by unreasonable assumptions), uncontrolled spending, loss of income sources, extravagant payments to directors and managers. All those mistakes have slowly and certainly devoured and eroded the growth and sustainability of the bank. It should be let going bankrupt. [5,6]
c/- It is easily seen that a government may pass laws such as those regarding franking credits in Australia with the indirect aim of pumping up share markets .
5. Staying calm when share-markets crash.
You can remain calm when the share markets crash if you strictly follow the following rules:
a/- Be self-reliant both in your thinking and in your financial conduct.
b/- Operate only inside your familiar area of financial knowledge. Don’t engage into any financial because of buzzwords. Avoid all financial salesmen with buzzwords. Buzzwords are only only used to confuse new comers like you and are more likely parts of some new traps.
Examples of buzz words are “new economy”, “clicks per day”, “securitized loan”, “negative interest”, “security” (meaning its exact opposite: a loan without any ordinary sense of security), “quantitative easing”, etc…
c/- Don’t have blind spots on the sustainability of the operation of “strangled companies” around you (which include your banks and your pension funds).
d/- Don’t deal with, don’t rely on any financial adviser, promoter who had been bankrupt. Don’t buy into any “zombie companies” which had been bought by Private Equity, Private Investment Group and re-floated on the stock markets.
e/- Don’t leave your hard earned money in any kind of banks without the “guarantee by government of the nation”. Building societies, merchant banks, investment banks, hedge funds are mostly without such guarantee.
A responsible government should also educate customers of its “saving banks” that they would only get back a set percentage of their deposits in the event that their relevant “saving bank” goes bankrupt. This action would hurt the short term interests of “saving banks” but would make a knowledgeable base of depositors, who are also tax payers, which are resilient to economic disasters.
Building societies have a lot of real estates mortgaged to them, but they are not allowed to take those real estates unless the borrowers are in default in repayments.
f/- Deal only with companies that are risk proof against any bankruptcy any of their counter-parties.
g/- Do NOT leave your pension money in the share markets at time of volatility.
h/- Pay also attention on the sustainability of the economy of the nation. The nation may also go bankrupt and some nations had actually lose some of its territories or utilities (communication companies, power companies, water companies) to its creditors. Be prepared for that eventuality when you have your politicians spending national treasures to prop up share markets and rescue failed banks. If your nation go bankrupt after some shares markets crash, blame only yourself and your countrymen for not having been active enough politically and for not having thrown out those politicians.
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