Hellish weeks and my tractor analogy

To say that the past few weeks have been hellish for investors is an understatement. Last week, the local bourse sank below the 6,500-level, dragged down by high inflation and fears of more economic tightening measures to stem the effects of a disrupted global supply chain brought by the war in Ukraine and the pandemic.

For those who have a stake in the cryptocurrency markets, many saw the value of their investments cut by over a half. For those with savings safely tucked in banks, little do they know that runaway inflation is chipping away at the real value of their money.

Some say that it’s a good problem if you see the value of your savings and investments slowly going up in smoke due to inflation and a bearish market. At least that means you are not living in a hand-to-mouth existence; that you still have excess money to play the role of either a passive or active investor.

I am among those, perhaps, “fortunate” people who are faced with such a “good” problem. As of this writing, I already lost at least 20% of the value of my stock market portfolio. But it’s just a paper loss, not until I decide to sell any of those devalued stocks at a loss.

A friend of mine who convinced me last February to get into the crypto game could be worried that he is losing face. He need not worry about how I regard him. When it came to the highly-risky cryptocurrency market, I only invested what I can afford to lose.

I’m more concerned about the stock market. Because the mood in the capital markets right now will affect everyone. Even with the incoming Marcos Jr. administration selecting a promising economic team, investor confidence is still weak.

A friend of mine once commented that there is little that the ordinary masses can gain or lose from the stock market. I understood what she was trying to say; the poor can’t eat your stock market portfolio. I am not an economist but Economics happened to be my favorite subject in college. So I had to weigh in on my friend’s ignorance.

I used my “tractor analogy” in explaining to her why I invest in the stock market. Let’s say I own a mechanical tractor (savings). Instead of letting the tractor rot in my garage, I lend it to a skilled and honest farmer (investment). The farmer had been using a carabao to till a large portion of land. A tractor would do wonders to make his land doubly productive.

In exchange for lending the farmer my tractor, I get a share of the harvest. If the farmer maintains his honest and hard-working ways, barring any major calamity, we both will prosper (increased productivity). Crop supply goes up, prices go down, and the rest of the community, too, will benefit.

There will come a time the farmer will be able to save enough money to buy his own tractor. He will return to me my tractor, and with my share from the harvest I could use to buy one more tractor. Because I now have two tractors, I could lend them to two trustworthy farmers (job creation).

Notice the words “skilled” “honest” “hard-working” and “trustworthy” in that analogy. Because those are the exact cogs that must be in place in order for this economic wheel to turn efficiently. If trust and stability (rule of law) are not built into the system, that tractor would just be sitting in my garage. I couldn’t risk having it stolen by corrupt people or destroyed by destabilizers, or put to waste by incompetent hands.