:: Peoples Time Online ::
The Security and Exchange Commission (SEC) of Bangladesh has taken a highly laudable step in creating awareness about investments in the stock market of Bangladesh. It involved all major brokerage houses to offer seminars and workshops at various places across the country and has developed some literature with that goal in mind.
This is especially a very timely endeavour. However, having attended one of these sessions, and we came away quite disappointed. Let us explain.
First, let us look at the objective. We are afraid that the objectives are not clearly defined, and there are conflicting messages. This, to some extent, is resulting in inappropriate delivery at the seminars. If the idea is just to let people know that we have stock exchanges where we can buy and sell shares of companies, this may be sufficient.
However, the goal certainly is to make the participants more aware of the risks, the theory behind the operation of the stock market, and the significant and necessary terminology.
Please choose one or all of the following objectives you think we should pursue here
1. Build a core and stable group of investors who will participate in the stock market.
2. Increase the volume of transactions and trades in the stock exchanges.
3. Show the potential participants (please note that we said participants, not traders) there are reliable ways of making money in the stock exchanges.
We prefer that no 1 and 3 above are the articulated goals of this awareness creation drive. However, it seems to us that all regulators and participants are inordinately focused on number 2 goal above completely ignoring the other two, more meaningful ones.
The effort geared toward drawing greedy and uneducated participants into the stock market to swell the volume and value of transactions in the bourses is quite reckless. These people are unprepared for the volatility in the market and are quite likely to suffer significant losses (unless there is a general trend that is lifting all stocks). Due to a lack of understanding of how the market works, they tend to rely on technical analysis.
It also seems that the regulators and the stock exchanges are also encouraging the participants toward technical analysis. This, we feel, is highly inappropriate.
The following is a quote that is shown on the DSE news website every business day
“Honorable Investors. Good morning! Please make your investment decision based on company fundamentals, technical analysis, price level, and disclosed information. Avoid rumor-based speculations.”
There seems to be a lot more interest in technical analysis and not so much on fundamental analysis. The fee for the Technical Analysis Training program at DSE is Tk 10,000 while Fundamental Analysis program charges Tk 7,000 and Security Analysis program charges Tk 4,000.
We have a major problem with this scenario. First, even if the Bangladesh Stock Markets do not appear to be efficient in the weak form (Finance students and participants in the stock market should know what that is), it will be very difficult to outperform the market in the long-run.
Neither Fundamental Analysis nor Technical Analysis will help you generate a return better than the average of the market. If you have a long-term view, Fundamental Analysis, at least, will not hurt you. But technical analysis can derail you big time in the stock market. The people who had taken big hits were, in fact, directly or indirectly trend chasers.
The problem with Technical rules is that there are too many and not a single one of them has been proven to outperform the market average in the long run. There are about 300 stocks on the DSE, but there are hundreds of trading rules relying on technical analysis.
Technical analysis works extremely well after the fact. But we can assure you, as soon as you make that investment, that technical rule will not work anymore, and you will just conclude that you failed to recognize a particular signal.
You will not blame that technical rule because you believe in it, and you have been led to believe that all the successful investors use it. The reality is very far from that. The most renowned long-term investors do not rely on technical analysis at all.
It is fairly common that after you buy a stock because a technical chart told you to buy, the stock will fall, and the stock will start going up only after you give up and sell or you wanted to take in profit. It is also the reality that technical chart wins when everybody else is mostly winning, draws people in at the wrong time, and keeps people out much too long.
Bangladesh market has generated an annual average return of about 30 percent per year since 1999. This rate of return probably will come down as the market matures more, but a typical investor can expect to earn approximately the market average return by investing in a well-diversified collection of stocks.
The best way one should start dipping their feet into investing is through an open-end mutual fund, commonly known as a unit fund in our country. This is not getting promoted adequately. We have some closed-end mutual funds, and the fund managers themselves have destroyed our trust in them, and they have shown an inability to keep their promise and redeem funds at the end of the fund’s term.
The Ministry of Finance inappropriately interfered in allowing these funds to extend their term demolishing the understanding the investors placed in investing in these funds. In this country, without the ability to redeem investments in unit funds, we will never regain trust in asset managers managing mutual funds.
The speaker in the seminar we attended kept talking about when to buy and when to sell. In a well-functioning capital market, the capital market is meant to supply long-term capital to the businesses.
Well-managed companies should earn about 25-30 percent per year, and the long-term investors should also get that without hopping in and out of stocks. If a stock is good, the company is doing well, and the future of business looks good, why would you want to sell the stock?
There will be times when you should as a stock gets ahead of itself (it will sometimes due to manipulation, over-enthusiasm mostly resulting from technical analysis, and/or over-reaction to some news.) But the ideal thing is to stay with a stock which is steadily growing reflecting the growth and profitability in its business and you want to remain an owner of this stock as long as the business and profits are there.
Our basic message to SEC of Bangladesh and other regulators is: “Don’t try to teach when to buy and sell. Teach WHAT to buy so that you can benefit from your investment as long as possible and hold.”
Somehow, Fundamental analysis has been associated with “bookish knowledge and a lot of theory that does not work at all or work very well,” whereas technical analysis is street smart and “what you need to participate in the stock market.” When Technical analysis does not work anymore, it is quite common to blame the market, the manipulation, the syndicate, and inefficiency in the market. At that time, people generally wonder aloud, “why isn’t our market efficient?”
Well, had it been efficient, there would be no point trading on technical indicators and much of the fundamental analysis will be meaningless as under or overvalued stocks will be very difficult to come across. In an efficient market, every long-term investor gets the return commensurate with the risk (non-diversifiable) they are ready to bear.
Regardless of how much we vent against Technical Analysis, there will always be people, who will swear by technical analysis to time buying and selling a stock. These people run up the volume and trades. If you are interested in catering to these people, you will contribute to the overshooting and over-reaction in the market, contributing to unhealthy volatility.
In the seminar, we heard about risk, but not much about diversification. We were told that over-diversification is bad. We were told about averaging down. We did hear about stop-loss and personal financial plans. The theoretical aspects were not important in any discussions. There were mentions of ratio analysis, but how that is to be used was not discussed.
Our request: don’t try to draw anybody and everybody in the trading arena of the DSE and CSE. (or alternatively – don’t try to teach anybody and everybody how to time the market and find out over or undervalued stocks.) Keep those lessons for millions of citizens who have business degrees and better understanding (with a grain of salt) of the capital market. Encourage common folks to diversify their investment across multiple stocks and invest for the long term without bothering about the nitty-gritty of technical trading rules. People who do not quite understand how the market works and encourage them to invest in well-diversified open-end mutual funds.
Dr Sharif Nurul Ahkam is a Professor of Finance and Director of Graduate Studies, North South University.
Dr Md Arifur Rahman is an Associate Professor of Finance, and also the Chairman of the Department of Accounting and Finance, North South University.