Stock market chemistry

Turbulence, disaster or other kind of obstruction - either natural or manmade - are common features for an individual or for a corporate body in all kinds of businesses. Stock market is no exception to this. Moreover the stock exchange is usually oversensitive, and notorious for overreaction.

Occasional bearish trend notwithstanding, Bangladesh share market has been witnessing sound movement ever since the demutualisation of the stock exchanges. Before demutualisation, the affairs of the stock exchange were being managed by the board of the stock exchange almost like a private club. After the demutualisation, the management is in a position to comply with the rules of proper corporate governance.

Bangladesh Securities and Exchange Commission (BSEC) is now in a better position to properly oversee the activities of the stock exchange. It is true that the role of the regulatory authority is not to dictate but to remain watchful so that the rules of the games are followed. In that case the role is that of an umpire who can discharge his duties without any bias.

There is no doubt that BSEC has been functioning properly. Possibility of macabre disasters that occurred in 1996 and during 2009-10, is remote now as those scams were orchestrated by some of the numbers of the stock exchanges who are now not in a position to play such nefarious roles.

But this sort of bumping which being experienced by the market now will happen from time to time. Why will it happen? In the stock exchange there are two types of people - investor and speculator. According to Benjamin Graham, investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. The operations which do not meet these requirements are speculative. Warren Buffet is the top investor in shares and securities around the globe. He has been holding this apex position for decades. It is said that Buffet is always calculative, thoughtful, measured and patient. About the virtue of patience, Buffet says, if you are not willing to own a stock for ten years don't even think about owning it for ten minutes. Buffet has always laid emphasis on the fame and integrity of share trading. He once told his son, it takes twenty years to build a reputation, and five minutes to ruin it. If you think about, you will do things differently.

Buffet has advised to buy in a bear market. According to him, 'Be greedy when other is fearful and be fearful when others are greedy'. So far investment in shares and securities are concerned, Benjamin Graham's famous book titled "The intelligent investor" is considered by Warren Buffet as a holy book. For a conservative and careful investor whom he calls 'defensive investor', Benjamin gives four suggestions which are as follows.

i) There should be adequate, though not excessive, diversification, this might mean a minimum of ten issues and maximum twenty five.

ii) Large, prominent and conservatively financed companies should be selected.

iii) Companies, having a long record of continuous dividend payment should be picked.

iv) Price earnings ratio should not exceed twenty times.

Though Graham has highly discouraged speculation, the fact remains that speculation is very much dominant in any stock exchange around the globe. Strictly speaking, speculation syndrome is to be found in all kinds of business and profession. It is the speculations that cause bear hug, or bull run or any other situation like a disaster. The speculations need to be restrained, and it is the job of the regulatory authority or the stock exchange to curtail the activities of the speculators. Good governance, non interference and transparency are the practices to be followed by the competent authority. One of the important functions of the authority is to restrain the investors from unnecessary trading which Buffet considers as the devil.

As the political turmoil looms large, the share prices may further go down. But that does not mean that this should make BSEC or Ministry of Finance apprehensive. Such apprehensive attitude from the regulators will affect not only share market, but also total business and development activities of the country. It is the responsibility of the government in particular and the politicians in general to restore normalcy. In this connection it may be mentioned that the investors come to the share market of their own choices and nobody compels them. In the words of J. Galbraith, '… those people move to the gallows because of their seminal lunacy'. When a section of farmers incur loss because of the low prices of their products and sometimes they throw away their produce out of anger, the government does not come forward with a rescue package. Some of our economic pundits may come forward with a lot of proposals like rushing with bank money and extending easy loans to the affected investors. These so called financial 'gurus' do not want to accept the view that there is a limit to the rise of the prices of the shares and sky cannot be the limit. In this connection, we may again quote from Buffet who says 'avoid debt as far as possible'.

The writer is a financial analyst. [email protected]