It is widely acknowledged that rationality is not really the biggest tool for our individual investors in the stock market. Our general investors are notoriously prone to gambling instead of investing and then they surprisingly go on blaming the 'big fishes' for manipulating the market. Many go on as far as blaming the government and even cursing their fate. Well, if you believe in some Aladdin's lamp which can double your money in a short time-frame, the first and in many cases, the only person you should always blame is yourself.
Now while there is hardly any debate on the broader characteristics of most individual investors, it gets quite interesting for our institutional investors. For the purpose of simplicity, let's focus mainly on banks.
We all know banks take deposits, provide loans and earn a spread in the process to make money. Because there is usually a mismatch of maturity between deposits and loans (higher duration of loans and shorter duration of deposits), it is important for banks to maintain enough liquidity so that customers can withdraw their deposits without any hassle. To address this mismatch of maturity and maintain liquidity, banks usually invest in capital market. Banks with low appetite for risk invest primarily on T-bills and T-bonds. But most banks also invest in stock market in search of higher return. Searching for higher return can be a double-edged sword as this only comes with the associated higher risk.
Most Bangladeshi banks have invested heavily in the stock market. During the 2010 bubble of the stock market, most banks invested heavily and made quite a killing from their proprietary funds. The bank's income skyrocketed and the heyday of whole banking sector dazzled like never before. But banks' own subsidiaries were also lending money as margin loans and many of the borrowers allegedly and illegally took loans from the banks to invest in stock market. This had extraordinarily increased the banks' systematic risk. So when the bubble burst, most banks were severely affected.
While it is true that it is extremely difficult to be immune during a stock market crash, there are quite a few things that banks could easily avoid. As a bank is mainly in the lending business, it should not have significantly invested the depositors' money in stock market after adjusting the maturity mismatch and liquidity requirement. Moreover, there was a classic risk management failure in its proprietary fund management. Many banks quite surprisingly invested in other banks. If a bank invests in other banks, no matter how many banks you invest in, there is going to be very little diversification benefit unless, of course, the revenue generator of a particular bank is largely different.
What is quite alarming is the fact that many of the problems still persist even five years after the crash. The Bangladesh Bank (BB) has directed the banks to lessen their exposure to stock market to 25 per cent of their capital on a solo basis and 50 per cent of their capital on a consolidated basis by July 21, 2016. But many of the banks are still investing so heavily that they have requested the BB to extend the deadline.
However, the most surprising fact that has struck this writer is the fact that although banks are investing hundreds of millions in stock market, almost all of them do not have dedicated research team for the proprietary fund management. Of course, a dedicated research team is not found even in some global institutions. But the global best practice is at least to go through the sell-side research reports before making investment decisions. Many of our institutions' investment approach is in stark contrast to the process followed by foreign institutions investing in Bangladesh's stock market. Most, if not all, of these foreign institutions have dedicated research teams of their own. Before investing, they always go through an appropriate and detailed due diligence. They would visit Bangladesh with their own analysts and portfolio managers and physically visit the companies they are interested in. They would talk to the top management of the company and ask tough questions to the company management to assess and reassess the potential of a particular company. Even after doing all this and despite the fact that most of these foreign institutions themselves have top-notch analysts, they also buy sell-side research reports from brokerage firms in Bangladesh to get an even more thorough understanding of the company.
As mentioned in the beginning, the individual investors in our market are not the most rational investors one would like them to be and it would probably still take decades for them to finally realise the value of company fundamentals. For the market to be increasingly efficient, the institutions need to play a major role. The institutions should never join the bandwagon of rumours and dark alley of gambling. They need to understand that right investments, especially for the long-term, can always bring sustainable and rewarding profits instead of one-off bets. They need to adopt the investment approach many of the foreign institutions follow and internalise the international best practices. If they can do that, they will serve not only themselves but also the market.
fuad.iba18@gmail.com
Company\\\'s fundamentals can insure investors against crash
Abdullah Al-Rezwan | Published: July 11, 2015 00:00:00 | Updated: November 30, 2024 06:01:00
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