Voltaire once said:- “Common sense is not so common“. He wouldn’t know that stock market is one place which fits the bill perfectly. Here irrationality rules the game who has fear and greed as its close allies.

I have never been able to understand why stock picking is so diametrically opposite to owning a business. In either of the scenario, you are the part owner of the business and hence should think alike.

Stock market is primarily driven by earnings of a company whereas a businessman, no doubt would be concerned about the earning, would be more concerned about the cash flows. And this conflict of convergence of the motivations result in interesting observations. One such observation is of “mark to market (MTM)” concept which is explained through an example below:-

These days Indian companies are showing huge losses owning to depreciation of Indian Rupee with respect to Dollars. This condition arised due to the fact that businesses had entered into currency futures and the rates have gone much out of line. Hence according to mark to market accounting principles, they would have to book losses on their balance sheet. Earlier when the rates were in their favor, naturally they would have reflected the profits as well.Now indian companies are urging concerned authorities to do away with “marked to market” principles as it would provide a dent to their earnings and hence to their share prices.

Now this whole scenario, if viewed through a businessman’s perspective, would puzzle him to death. In the first place when the companies booked profits, a natural question should have come up -

“Is the cash really coming in??” It is only the notional profits which were talked about and not the real hard cash.

Also now when trades have gone against them same question should have come up.

“Is the cash really going out??” 

Again it is the notional loss which is being talked about. To give an example, say future rates were 44:1 when the trade was entered and dollars were acquired for 42:1; still it would have resulted in a profit for 2 Rs per $. But now according to marked to market accounting principles when exchange rate is hovering around 51:1, companies would have to book losses of the order of 7 Rs. per $. This jugglery of accounting would have made no sense to any business man but makes all the sense to stock analysts.

No wonder Voltaire once said :- “Common sense is not so common!”

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