Let there be intelligent investors in stocks

Warren Buffett, the number one share investor in the world, considers Benjamin Graham`s book The Intelligent Investor as the beacon for investors. Behind his success as the top share investor lies the secret of this book. Benjamin Graham is treated as the father of security analysis. His entire research and analysis of securities are of the US market. So an investor outside the USA will not be in a position to derive as much benefit as from the book in as much as an insider can do. Still some of his comments and observations are universal in nature and will outlive time and place.
According to Graham, an investment operation is one which, upon thorough analysis, promises safety of the principal and a satisfactory return. Operations not meeting these requirements are speculative. It means that there is no scope for lackadaisical approach to investment. His views about the role and functions of an analyst are of prime importance. The security analysis deals with the past, the present and the future of any given security issue. He describes business and summarises its operating results and financial position. He sets forth its strong and weak points, its possibilities and risks. He estimates its future earning power under various assumptions or as best guess. He makes elaborate comparisons of various companies or of the same company at various  times. Finally, he expresses an opinion as to the safety of the issue. The Graham advice for investors can hardly be undermined:
(1) There should be adequate, though not excessive diversification. This might mean a minimum of ten different issues and a maximum of about 30,  
(2) Each company selected should be large, prominent and conservatively financed,
(3) Each company should have a long record of continuous dividend payment,
(4) The price paid for each should be reasonable in relation to its average earning for the last five years or longer, a price not to exceed 20 times such earning,
(5) Every investor should select a list of securities that will do better than the average  in future over a period of years. This is called growth stock which is defined as one which has done this in the past and is expected to do so in future.
Proper selection of securities after a thorough analysis needs a great deal of analytical literatures some of which are  elaborate and expensive. But unfortunately, we in Bangladesh are to be satisfied with the conventional annual reports published on the occasion of the Annual General Meetings (AGMs).
In the securities law, there are provisions for investment advisor and analyst. But the Bangladesh Securities and Exchange Commission (BSEC) is yet to issue license for operation of these kinds of share market players. If they start working, they will bring out various literatures involving research and analyses of the listed companies. The BSEC does not have a cohesive plan for development of the stock market. It works either sporadically or on case-by-case basis.
Bangladesh's share market is a haven for the initial public offering (IPO) market. Any issue with the minimum acquaintance has always been oversubscribed. Not much concerted efforts have been made for the expansion and development of the IPO market. Contribution  from IPO market is less than 2.0 per cent of the total investment  of the country.  It may be mentioned that the money raised from IPO market joins the national mainstream of the investment. The amount traded in the stock exchange is owned by individuals.
However, the secondary market works as a catalyst for the primary market. Some people have suggested that the appreciated capital and dividend income should be reinvested  keeping the principal amount intact. It is, no doubt, a noble suggestion. This will control  the overflow of capital in the stock market.  It is an acknowledged fact that the more flow of easy capital in the market, more will be speculation. But that requires existence of disciplined brokerage houses. There are many branches of brokerage houses which run business in the multi-level marketing (MLM) style.
These people allegedly approach the prospective investors promising fixed monthly profits, which is a very absurd proposition.  In this connection, it may be mentioned that very wide publicity should be made both from the BSEC and the stock exchange that none should invest in the stock market with borrowed money from the banks, any financial  institution or any individual as was done during last scams. Of course, loan from a merchant bank is a different issue because of the built-in mechanism in handling the loan.
Capital market cannot thrive on shares only. But in Bangladesh, mostly shares, a mutual fund and only three corporate bonds are traded. Treasury bonds are enlisted, but they are not traded on the stock exchange floor. It has helped in inflating the market capitalisation figures. On the other hand, mutual funds create pressures upon shares to  some extent as the funds are major investors in shares for building their portfolio.
In the developed  countries, bond markets are very  buoyant. Even from the early stage of the stock market, bonds have played a very important role. In the 19th century, the government or other public bonds helped in financing the infrastructure projects like roads and railways  in those countries which helped in transforming them as developed countries.  Our government may show courage in developing this culture. At one stage, we heard and also expected that the government would float bonds for financing the Padma Bridge project.
The present government, a continuation of the grand alliance, has paid attention to the stock market affairs. It can claim credit  for demutualisation of the stock exchange and bringing an end to pocket administration of stock exchange members. But unfortunately, during the last six years, it has not unloaded a single share from its control, not even from the state-owned banks which are now public limited companies in nomenclature only.  This is a mystery. Still we hope that the government will bring an end to this inhibition and unload the shares in phases and, obviously, through IPO.

rezaulparvaz@live.com