Satyajit Das – ‘Illusion of Liquidity’:
John Maynard Keynes on Stock Markets and Liquidity [His insights from 1936 are as relevant today as they
were back in the depression era]:
“It might have been supposed that competition between
expert professionals, possessing judgment and knowledge beyond that of the
average private investor, would correct the vagaries of the ignorant individual
left to himself. It happens, however, that the energies and skill of the
professional investor and speculator are mainly occupied otherwise. For most of
these persons are, in fact, largely concerned, not with making superior
long-term forecasts of the probable yield of an investment over its whole life,
but with foreseeing changes in the conventional basis of valuation a short time
ahead of the general public. They are concerned, not with what an investment is
really worth to a man who buys it “for keeps”, but with what the market will
value it at, under the influence of mass psychology, three months or a year
hence. Moreover, this behaviour is not the outcome of a wrong-headed propensity.
It is an inevitable result of an investment market organised along the lines
described. For it is not sensible to pay 25 for an investment of which you
believe the prospective yield to justify a value of 30, if you also believe
that the market will value it at 20 three months hence.
Thus the professional investor is forced to concern
himself with the anticipation of impending changes, in the news or in the
atmosphere, of the kind by which experience shows that the mass psychology of
the market is most influenced. This is the inevitable result of investment
markets organised with a view to so-called “liquidity”. Of the maxims of
orthodox finance none, surely, is more anti-social than the fetish of
liquidity, the doctrine that it is a positive virtue on the part of investment
institutions to concentrate their resources upon the holding of “liquid”
securities. It forgets that there is no such thing as liquidity of investment
for the community as a whole. The social object of skilled investment should be
to defeat the dark forces of time and ignorance which envelop our future. The
actual, private object of the most skilled investment to-day is “to beat the
gun”, as the Americans so well express it, to outwit the crowd, and to pass the
bad, or depreciating, half-crown to the other fellow.”
