Capital market not for all and sundry

IT was in mid November when 'Mizan bhai', the popular tea seller of our area entered into the secondary (stock) market with all his savings; he hardly had any idea about this tricky place. As I along with my friends use to go to his tea stall quite often for Adda, we know him very well; we warned him about the stock market. At that time it seemed that "the unending bull run of the market will never stop and whoever invests here will come out with double or triple his/her initial investment in the shortest possible time", This kind of thinking was dragging lots of illiterate people towards the market like swarm of locusts which eventually became a slaughter house for them. Well, Mizan bhai didn't listen to us and invested in such a company the price/earning (P/E) ratio of which was more than 130 at that time. With the blessing of the so-called "four-day game" and "Miss nai, price barbei" (No misses, price hike for sure) news, he got more than 45 per cent return and with Warren Buffett-like confidence, he reinvested in the early December even on a worse company. That was the beginning of his misery and a few days ago, he came out of the market with only 20 per cent of his initial investment. This is the story of most of the people now who came to the market just a few months ago to double their money. Reasons behind the "Crash 2011: Lack of monitoring and proper action by the regulatory body, the Securities Exchange Commission (SEC), which then only held a news conference with the functionaries of Dhaka Stock Exchange (DSE) to warn investors to avoid its liability. The SEC was too reluctant to react properly to the bullish market. It mainly tried to control the market by reining in margin facility though, at that time, millions of fresh money was flowing into the market from several different sources. Most of the decisions taken by the SEC to control the market were crap, as if they were trying to help some "gambling syndicate" rather trying to protect the rights of the small investors. Technicians can install software, but they can't fix a problem in it. This is proved by the latest market crash, because most of the SEC members are like "capital market technicians," but not true experts. Government should have been much more careful before selecting SEC members, because to run a market like ours, we need experienced academics who are practitioners in the field of finance and economics. It is quite obvious that lack of supply of new stocks in the market caused the bubble which eventually caused disaster to millions of people. Our government could resolve the situation by bringing the shares of state-owned companies to the market in due time. Failure of the government is another reason behind the crash. The SEC also failed to attract many private companies to the market. This caused supply crisis in the market, especially during the last year. Some recent untimely comments of a few so-called classical economists, who hardly accept the importance of capital market in the economy and only cry for the development of real sectors, forgot that capital market is the most important channel to mobilise funds for the real sectors. These people cannot be the well wishers of the market as they claim to be, because now the market needs positive comments from everyone responsible. Mysteriously, these people remained quiet when the market was skyrocketing and didn't warn people about imminent crash. Bangladesh Bank shamelessly saved commercial banks at the cost of the capital market, because it is liable for the well-being of the banking sector, not of the capital market. But it cannot avoid its large responsibility for the crash, as it did not take effective timely actions and remained silent when commercial banks were crossing their exposure limits to the market. After the banks made some hefty profits in 2010 from the capital market at the cost of the millions of retail investors, it was only then the central bank called its wards back home. Moreover, some actions in the money market to control inflation accelerated the inevitable crash. During the crash, the merchant bankers who act as market makers did not discharge their responsibilities properly, though they talked about a liquidity crisis, but the government gave them some instructions which they didn't follow. If they had performed their work in right earnest, the market would not have faced such a crash. Capital market is not a place for all. It is a very risky and technical place and only those who have sound knowledge about it should invest here. But in Bangladesh most of the people who invest in the capital market are there because they have heard that making a huge profit is possible in the share market and that too within a very short time. Many people can't even say 'P/E' properly, they say 'P' instead and they have no idea about earning per share (EPS) and net asset value ( NAV), which measure the fundamentals of a company. And it is not unexpected that a market full of such kinds of people one will day crash, as people invest here not by fundamentals but by hearsay. Obviously, the greed on the part of general investors dragged them to the market; most of them did not even know the slightest about the market. When some experts and newspapers were crying that "the bubble in the market is about to burst which will have severe consequences," the retail investors paid no heed to it and kept investing which made the bubble even bigger. So the greed of those people who expected 100 per cent return within a very short time is in fact behind the crash. There are differences between speculators and gamblers. Speculators are seen in almost all the developed capital markets who with their expertise take the position of the stocks in the market and bear huge risk for them. On the other hand, gamblers are those who purchase a stock at a lower price and with the help of his syndicate spread the rumour that the price of the stock is going to increase. As most of the people lack in proper knowledge, they follow the rumour and go on a buying spree which pushes the price up to an unsustainable level. People do not understand when they buy shares that the gamblers sell to them. A large presence of such gamblers who act in the market with ill-motives is another reason which made it extremely overvalued and eventually to its crash. Absence of information intermediaries in our market is a reason which made the gamblers so powerful. So lack of information intermediaries is another reason behind the crash. Moreover, a large number of insider trading and manipulation by the sponsors of a number of listed companies made people dependent on the gamblers. Decision makers are brokers as well as investors in our market. This made the market more volatile and allowed some powerful people to escape the losses due to the crash, as they knew when to leave the market. Some brokers telecast enticing advertisements to attract people to their houses. A brokerage house advertised that "their house provides attractive facilities for jobless young people and housewives to earn money." When considerable expertise is required in this market to make investment, such ads. of brokerage houses made people confused and enticed them to invest in the wrong place. Now after the crash, these people became the worst sufferers. Remedy and some long-term proposals: More than three million people are currently involved in the country's capital market. After the crash, most of them have lost 70 to 80 per cent of their capital which brought them on to the street to demonstrate. Investors must understand that capital market is the riskiest place amongst all the sectors of investments. In most of the developed countries investors in this market who are much better informed and better educated also suffered from losses due to rise-and-fall in the market. Investors and government could consider the following facts for the well being of the market. Government can create a fund and give this fund to ICB and other merchant bankers for investment in the market. This will help the market to stabilise itself and regain investors' confidence. Later, the government can come out of the market with a profit in the near future when market will be stable. But this is a short-term solution. For making sure that this kind of incident will never take place in future government, formulation of some strict market friendly policies are needed. Capital market is not a quarry where one can come, dig and get the money out and become rich. It is a very sophisticated place where success depends on the very well-thought-of and soundly analysed investment decisions. After making the investment, the investors should wait for some time to get the result; but in our country most investors do not want to wait for long and they want the return immediately which is not possible. To see a better market in future, people should discard this type of attitude. People like students, retired persons etc., should not come to this market, as they are dependent on their savings. A decision with marginal error can eat up their investment. Only people with sufficient savings who are also well informed about the market and do not hesitate to take risks, should come here and make investment. It is not a place for risk-averse people. To influence investors to make long term investments, the government should introduce capital gains tax immediately in the next budget. Capital gains tax will help government to generate additional revenue and also drive traders away from the market which will eventually help stabilise the market in the long run. Investors should discard "four-day" gain attitude. This is not possible anywhere in the world. One is gaining because the others are losing. This type of trading drives the price to such a level that is far beyond the fundamentals of a company. People making investment at should least wait for a quarter to realise the gains, as the price of a stock goes up after the declaration of the quarterly news, if the company does well during that particular period. Investors should understand that fundamental analyses includes three steps -- economy analysis, industry analysis and company analysis. Often much importance is given to the company analysis. But investors should give emphasis to the economy and industry as well. Good understanding of the state of the economy and stage of the industry will help investors generate useful insight about future price movement of a particular company's stock. The paid-up capital of the merchant banks needs to be increased immediately. This will increase their exposure and help resolve the current liquidity crisis. Government should reorganise the SEC and increase its manpower to make it more effective. Brokers and merchant bankers should introduce more formal advisory services for the investors. As it is not possible under the current law, so the government must change this regulation and help establish information intermediaries in our country. There are a large number of qualified financial analysts available in our country; so, it will not be a difficult task. Finally, the central bank will need to cooperate with the SEC as capital and money markets are very closely related. And the central bank must observe the capital market closely before formulating any monetary policy. The writer is a student of BBA (Finance), University of Dhaka, and can be reached at e-mail: tanvir9870@yahoo.com