Tuesday, August 24, 2010

Pink Newspapers need to Learn Finance

A leading pink newspaper in India is talking of Mukesh v/s Anil Phase II, and how Anil Agarwal will get more wealthy than Mukesh Ambani based on his acquisition of Cairn Energy.

Let us understand the basics. Does the transaction of buying a share of Cairn Energy make you wealthier? With the investment, money only changes form - from your bank account to investment in Cairn. If financed by a loan, then both your assets (investment) and liabilities (loan) go up, keeping your net wealth (assets minus liabilities) constant.

Your wealth increases as and when the Cairn share appreciates in the market after your share purchase - or if Cairn pays you a dividend. Elementary, Watson.

This episode only highlights the inherent flaw in the various Lists of the Wealthy that publications churn out. They draw conclusions based on measuring the tip of the ice berg viz. listed shares. The long list of items left out - unlisted shares, non-corporate liabilities, bank balances, physical assets like gold, paintings and yachts ...

1 comment:

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