It’s not always about the money, stupid!

The term ” financialization” refers to the process of converting physical assets into financial assets, which makes it easier to measure their worth. For more than 100 years, we have been slowly financialising the world and have found innovative ways to value our activities.

That’s a long time to solidify an activity into a chronic behaviour. As investors, our minds are attuned to observing patterns in the real world and financialise those stories in the form of an investment idea. The entire global financial system is built on the theory that our knowledge of what’s happening in the world today will help us find value in tomorrow’s things.

At the moment, we are seeing something similar. All around us, a large part of the world is locked down and car horns are replaced by chirping birds. The economic machine of the world was not designed to stand still and we can see the impact of that on several industries.

The impact only becomes real when we measure it in the form of human success or suffering. Our brains do acknowledge that as human beings, we need to be empathetic towards other people’s misfortune and not celebrate our own good fortune too much.

However, like an occupational hazard, the mind of an investor needs to leap towards placing a value on that calamity or a good fortune. As Paul Bloom says in his book, Against Empathy, “Empathy is particularly insensitive to consequences that apply statistically rather than to specific individuals.”

The impact of the global pandemic is psychologically more severe when we know it has affected a real person than reading a bunch of numbers in a newspaper. When we are busy studying the statistical impact of this event, are we trivializing it by calculating positive financial outcomes in the future?

It is hard to make these accusations because every investor hopes to compound their wealth in the long term irrespective of what’s happening around us. There may be legitimate reasons to act decisively on our portfolio when things around us do not look so good.

The famous quote, ” Be greedy when others are fearful & be fearful when others are greedy” tells you to do exactly that. It’s perhaps also a way some of us process and accept unusual economic and global events.

People are attributing a lot of reasons to the rapid rise in stock prices across global markets, while looking around them it is clear that things aren’t normal. Reasons like revenge consumption, pentup demand, buildup for the pandemic, stocking up essentials, kids with new brokerage accounts, Covid beneficiaries, virus tailwinds, excess liquidity & so on fill up our minds to justify this global economic event.

We may be tempted to feel bad as human beings and investment professionals by trying to evaluate the world this way, as an economic triage of entire industries. If we do, we can remind ourselves that financialisation has also helped the world mobilise incredible monetary resources in a short period of time to make sure the world won’t collapse under the weight of the crisis.

It has made sure that finances can reach all connected corners of the world when they are needed. After the crisis gets over, it is the same grease that will lubricate the economic machine of the world.

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Invest-Wealth-Economic Times

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