ON NOVEMBER 4, Dhaka stocks plunged for the straight fourth trading day since October 28 due to a selling pressure amid a volatile trend on the market in recent weeks. The general index of the DSE lost 50.86 points, or 1.89 per cent, to close at 2633.83, while its blue chips index, DSE20, shed 41.08 points, or 1.78 per cent, to finish at 2267.93. The DSE general index lost 134.67 points in the last four trading days. At around noon, a group of retail investors staged demonstration in front of the Dhaka Stock Exchange building. They chanted slogans against the Securities and Exchange Commission and the DSE, demanded steps to bring back normality to the market. Demonstration like this seems to have become a ‘natural phenomenon’ at the DSE whenever the prices decline.
In October Dow lost about 18 per cent. On October 15 alone, it lost 7.87 point. In the United States, although people invest their life savings in the stock market, I have not yet heard of anyone staging demonstration, even if they have lost all their money; it is simply because they are aware of the risk involved in investing in the stock market. When Freddie Mac and Fannie Mae investors lost their money, no one broke out in anger. When Bear Sterns shareholder lost their money, as the government forced it to merge with JP Morgan Chase, no one shouted any slogans.
In the summer of 2008, when I went to my ancestral home in Lakshmipur, I observed an interesting thing. A few college students, who had invested in stocks at the DSE, were discussing their future strategies. They had figured out some interesting trends in the market and invested their money accordingly. All of them had made some quick money through IPOs, which prompted them to invest in the secondary market. And the only knowledge they seemed to have about stock market was confined to ‘P/E ratio’!
When I was an undergraduate student of finance and banking at Rajshahi University, I also did not learn much about the stock market except ‘P/E ratio’. Most of our curriculum was designed so as to teach us about the time value of money, cost of capital, basic accounting, etc. The curriculum barely talked about stock market and valuation process. I also know of some of my finance professors who would invest in the stock market on the basis of simple market trends rather than any fundamental analysis!
The demonstration at the DSE on November 4 tends to reinforce two important axioms of finance – ‘there are no such thing as free lunch’ and ‘let the buyer beware’. The first means everything valuable comes at a cost. In the case of investing in the DSE, the valuable item is the higher return and the cost is the risk involved. We need to realise that higher return also involves higher risk. Before investing in stocks, investors should be fully aware of the risk of losing their life savings. If anyone does not want to take the risk of a fall in price, he or she would rather not invest in stocks.
The ‘demonstrators’ seemed to believe the inactivity of institutional buyers had created the price drop. Under the regulatory framework, institutional investors will do everything to make money, shouldn’t they? In fact, the motivation that drives us to do business and to take risk is profit. The Securities and Exchange Commission should only take action if something illegal is going on in the market. If free money is provided to those ‘investors’ now, everybody will run to the stock market without knowing its downside which will create a long-term threat to the market. Let the market work by itself.
The fundamentals of investing are to buy cheap and sell high though market timing is not always possible. However, most of us buy stocks only when we feel comfortable doing so and then proceed to sell when the headlines make us queasy. The best move is to buy undervalued stocks of fundamentally sound companies. In the short run, you might have some ups and downs in your portfolio, but in the long run you will get your money back with expected returns. Furthermore, one also has to take decision on his investment horizon and also about his minimum expected rate of return.
On October 16, 2008, in an article on the New York Times, ‘Buy American. I Am’, investment guru Warren Buffett wrote, ‘A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful … I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over … again I emphasise that I have no idea what the market will do in the short term.’
Though most of the investors even do not understand the basics of investing, they invest because they see others are making some quick money through IPOs. Most of the small investors in the DSE tried to guess short-term market movement and now they have to pay the price. The SEC should not ‘bail’ them out. Everything works much better when wrong decisions are punished and good decisions make you rich.
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