Maswood Alam Khan
IN 1996, one of my acquaintances, an unemployed and unmarried 23-year-old man, could convince his retired father that it was the time for the family to make money in stocks and change their fate. The retired father was made to cash all his retirement benefits and hand over the whole amount to his son. The unemployed son invested all the funds in a number of prospective shares in the secondary market and in a matter of weeks found 85 per cent of all the money so invested evaporated into smoke. The retired father was so broken financially and so shattered emotionally that he officially abandoned his only son.
In recent days, shareholders in the capital markets in Bangladesh have lost between 20 and 30 per cent of their portfolios. Particularly last Sunday, the DSE witnessed a drastic fall, with the exchange losing around Tk 22,000 crore in market capitalisation. Small and new investors were reportedly the most affected ones by the plunge. Most of the big players, who could somehow smell the imminent fall, had earlier withdrawn their major shares after making some profit or before incurring any significant loss. However, the market situation improved somewhat the next day. But nobody knows when there will be another major fall in the prices of stocks listed on the exchange.
According to investment analysts, a majority of the investors incurred loss in the neighborhood of 20 per cent of their portfolios last Sunday alone.
The bubbling and bursting behaviour in the Dhaka Stock Market has evoked horrible memories of the crash in 1996 when many families found themselves completely bereft of their assets and many retirees found themselves robbed blind with their nest eggs drained in the volatile stock market. In 1996, the benchmark index of the DSE had soared from 1,000 to 3,627 in a matter of six months before the market crashed in November and December, marking the tragedy as the biggest share scam in the country’s history.
Panic played a big role last Sunday for small investors for bulk selling with banks selling off their shares for fulfilling Bangladesh Bank’s directive to increase their Statutory Liquid Ratio (SLR), a mechanism to contain inflation and fuel growth, and Cash Reserve Ratio (CRR), the minimum cash reserves each commercial bank must keep with the central bank in proportion to their customers’ deposits.
While demand of the banks for money would be strong with the increase in mandatory reserves with the central bank, those reserves should provide the necessary liquidity cushion. Banks’ sudden demand for money to realise their SLR and CRR needs, evidently prodded the inter-bank call money rate to hit recently a record high of 180 per cent.
Small investors in the capital market could have saved the erosion of their investment if they could hold back for a while their panicky urge to offload their shares. They had to understand that the latest fall in the share market is temporary primarily due to the banks’ sudden demand for money and once the SLR and CRR requirements were fulfilled, the market could have been stabilised.
In this context, the regulatory bodies do need to act in concert by taking measures for sustained investors’ confidence, both in the banks and in the stock market. The Securities and Exchange Commission (SEC) last Sunday rightly increased the margin loan ratio and changed some of their decisions in a bid to stop further fall of the capital market. The SEC raised the margin loan ratio to 1:1.50 from 1:1 and suspended the net asset value-based margin loan calculation system. The decision to shift trading of the shares of GrameenPhone and Marico Bangladesh from the spot market to the general market is also a timely step to restore investors’ confidence.
Abnormal rise in price during the last few years of some insignificant shares in the market allured the naïve investors to invest their hard earnings exclusively in stocks resulting in liquidity constraints in the banks. As a consequence, deposit growth in the market has for a long time been lagging the advance growth by a large margin. If this trend continues, the market may face further liquidity crises in the next few years with more disinvestments in government bonds and more withdrawal of deposits from the banks. Such transfers of money from banks and bonds to the capital market may jeopardise the banks’ ability to nurture further growth of advance and the imbalance may shoot the rate of call money permanently to a three-digit figures.
Common prudence dictates one to sell his investments and get out before things get any worse, if there are any strong signs of tanking. But a reverse action in such a scenario may also be rewarding. When the stock market goes down, one may keep his money in the market. This way, one can ride out the dip and eventually sell at a profit. In fact, stock market lows are a great time to invest even more. Many seasoned investors consider a decline in the market to be a “sale” like the “sell” we find in the malls during and after a festival. During the time of “sell”, one may take advantage of the opportunity to pick up some valuable investments that are only experiencing a temporary dip. Though it may sound unbelievable, the fact is investors who continued putting money into the stock market during the Great Depression actually fared quite well in the long run.
Unfortunately, one of the factors that prevents many people from becoming financially successful is their false beliefs about money. In fact, some financial myths negatively impact both their short- and long-term net worth. In Bangladesh, rumours and hearsays have been influencing the small investors to plunk down their money in stock market. And those who are educated and know the art of reading a company’s balance sheet are also misled by the nice prints on glossy papers of the balance sheets. Directors of most of the companies in Bangladesh know otherwise well the art of how to cheat the banks that financed their companies and how to siphon off funds from companies to build their personal fortunes.
Small investors who don’t know how to analyse the background of a company and its directors and evaluate their worth by investigative researches as to how the company behaved with their banks, how was the company’s corporate culture, how honest are the statements of accounts in their balance sheets usually depend on their gurus for their decision-making on buying and selling shares. Sadly, some big sharks in the capital market feed those so-called gurus with misleading information with a motive to beguiling the mass investors into plunging into the valleys of financial traps.
The most important issue for the regulator of the capital market is to safeguard the interest of the small investors like those young people who are unemployed and those vulnerable people who are retired and who think they could earn money for their living by playing in the stock market alone. They all know that it is unsafe to keep all eggs in one basket; but they forget this golden rule of diversifying investment portfolios when they follow the crowd in quest for easy and quick money. The government may find out a mechanism by which very young and very old investors are restrained by a set of strict laws from investing all their savings or retirement benefits all in the stock market alone.
One such rule could be a mandatory provision of investing in government bonds and savings schemes like Sanchay Patra (which must not be allowed to be cashed within at least five years) an amount equal to what one can invest in the stock market. A way, in addition, to attract savings in banks and government bonds is to introduce inflationary protection in savings with banks and bonds. There are banks in many developed countries which offer their clients very low interest rates on savings but they offer an insurance against inflation. Once a saver would realise that his or her savings would not be eaten away by inflation, thanks to inflation protection insurance, s/he would be less tempted to invest money in unproductive areas like buying gold or real estates.
These days, banks in Bangladesh, especially private banks are otherwise offering competitive interest rates for savings accounts. Investors should be content with even 7.0 per cent interest rate to save with a bank for a chunk of their investment portfolio. If inflation protection can be guaranteed by way of insurance or by a kind of government’s guarantee, small investors would be greatly motivated to set aside a good chunk of their investments and put that money even at an interest rate lower than 7.0 per cent in any of the banks which have good track records.
We all should bear in mind that cash in liquid form in a bank is much better than cash in papers changing hands in the stock market when we are too old or too young to play with risks. We should plan when we would be needing money for sending our son abroad for higher education, for defraying expenses in connection with our daughter’s marriage or for meeting our living expenses in our old age, etc. One cannot really gamble with his or her money that he or she would need during the retired life or for sending his or her son to a university. When, for example, one is nine years away from needing one’s money, 20 per cent of the money can be moved from the stocks into a liquid savings account. The next year, another 20 per cent may be moved out of the stock market and into a liquid account.
It 20 per cent of money is continuously moved out for a total of five years, then we will have 100 per cent of our money saved safe and sound in banks or government bonds, and away from the hands of the stock market. One needs to look forward to having one’s money there when he or she needs it. If the markets keep climbing, one might lose out on some extra money, but if it plummets one cannot predict how much he or she loses.
What is truly needed is education for investors to learn how to invest and when and how to avoid risks in investments.