THE Dhaka Stock Exchange (DSE) Index declined about 14 per cent and DSE General Index dropped about 11 per cent in last one year. As a result, 'investors' in different places in Bangladesh got very angry. On the other side, when Freddie and Fannie investors lost their money, nobody broke out in anger. When Bear Stern or Lehman Brothers shareholders lost their money, no body "chanted" any slogan. Though Dow has lost 40 per cent since January 2008 nobody staged "demonstration" in front of the US Securities and Exchange Commission (SEC)! In the USA, though people invest all their life savings in the stock market, this writer hasn't heard anyone did stage demonstration even when they had lost all their money; it is simply because they are aware of the risk of investing in the stock market.
However, as Dhaka stocks plunged, 'investors' in the kerb market demonstrated in front of the DSE building, being unnerved by the continuous fall in share prices. They chanted slogans against the SEC and the DSE and demanded steps so that the market "gets back to normalcy". Whenever there is a price decline, demonstration like this is becoming a natural phenomenon at DSE. It looks like a demonstration has become a part of our national characteristics whenever something goes against their interest.
This scribe saw investors investing on the basis of some simple ratios, and trends. He even experienced that finance professors were using simplistic price/earning (P/E) ratio, or market trends to invest in the stock market! Those investors already made some quick money through initial public offerings (IPOs) and thought that investing in the stock market is an easy way to make money. That quick money from IPOs made those investors 'greedy' to invest in the secondary market now. An investor who thinks that stock market is a risk-free place to make some easy money, then they will react even in the face of a small decline in the market.
This time again, two important axioms of finance are reinforced by these demonstrations in the country. Those are: 'there are no such things as free lunch' and 'let the buyer be aware'. 'There is no such thing as free lunch,' means that everything valuable comes at a cost. In case of investing in stocks listed with the DSE, the valuable item is the higher returns; taking risk is the cost in this instance. We need to remember that higher return is also associated with higher risk. The axiom "let the buyer be aware" means that the buyers have the responsibility to understand what they were buying. Before investing in the stock, investors should be fully aware of the risk of losing their life savings. If anyone does not want to take risk of price fall, he should not look at stock market.
Those 'demonstrators' believed that inactivity of the institutional buyers created recent price drop! Under 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 Security Exchange Commission (SEC) shouldn't take any action as long as there is nothing illegal going on in the market. If you provide free money to those 'investors' now, everybody will run for stock market without knowing its downside which will create long-term threat to the market. Let the market work by itself.
The basis of investing is to buy cheap and sell high. However, most of us buy stocks only when we feel comfortable in doing so and then proceed to sell when the headlines make us queasy. Then 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 return. Thus, one might think it would have been impossible for an investor to lose money during a period marked by exceptional gain. But some investors did and stood as "demonstrators" in front of the DSE as the hapless ones bought shares only when they felt comfortable in doing so and then proceeded to sell when the headlines made them uneasy.
On October 16th, 2008, in his article in the New York Times, "Buy American. I Am.", Investment Guru Warren Buffett says, "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."
And, most of the small investors in the DSE tried to guess short-term market movements and now they have to pay price for their mistake. The SEC should not "bail" them out. If an authority has some principles and knows what it is doing, the market responds. Everything works much better when wrong decisions are punished and good decisions make you rich.
However, lack of faith in the regulatory body, i.e., SEC, is another major reason for the recent "demonstration". Many investors claimed that the SEC always showed itself as a protector of the manipulators or big institutions which surely have at least some validity. The SEC should work to change the micro-structure of the market rather than increase prices artificially. Increasing liquidity will certainly lead to 'manipulation' of prices upward. But isn't it encouraging investors to stage "demonstration" whenever there is a price decline too? So, the SEC needs to focus on changing micro-structure of the market in the long-run. For example, providing training to investors, ensuring reliable information flow, accountability, transparency in firms' reporting etc., will change market efficiency tremendously.
If market works freely and efficiently, overall confidence in the market system will increase and, thus, propensity to stage 'demonstration' will be defused automatically. Still the SEC or the government of Bangladesh failed to bring those culprits behind the 1996 stock-market manipulation to justice. And these kinds of failures give wrong signals in the market place and will induce manipulators from home and abroad. The SEC must take some fruitful long-term action to increase efficiency in the market. It is time for the demonstrators and also for the regulatory body to change.
However, "if I were you, I would have bought shares in this declining market rather than staging "demonstration". Again, "Be fearful when others are greedy, and be greedy when others are fearful". One hardly can predict the short-term movements of the stock market. But what is likely is that, in the long run, the market will move higher, perhaps substantially so. So, buy shares of fundamentally sound companies now, hold it and make money. Buy now. Pay less, sell high and start making money.
*This article was published on the daily Financial Express in Bangladesh on February 17th.
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