STOCK MARKET - A TRICKY INVESTMENT OPTION

SHAMSUL GHANI (shams_ghani@hotmail.com)
Aug 11 - 17, 2008

How a benign looking sophisticated business center turn into a blood thirsty monster out to destroy every one and every thing that comes in its way can be seen at a place popularly known as stock market. The mayhem can be witnessed after every two or three years. The reasons could be different, but the end result is singular the financial destruction of the weak and the uninitiated. Who are these people who are mercilessly swept away by the roller coaster waves of tumbling stock prices every now and then? Surely there are some with a gambling streak- and no sympathy with them but the majority is of those who, either out of simplicity or through encouragement from business-seeking brokerage houses are enticed to take a seat in the casino. They know little about the business they are in. Leave alone the question of understanding the market mechanism; they know nothing about the company whose shares they have purchased on the opinionated advice of some broker. :

MARKET MECHANISM

Before a prospective new entrant decides to take a plunge, he is well advised to understand in brief the stock. market mechanism. The beastly market is ruled by bulls and bears, the two ferocious animals demonstrating their destructive powers in their own individual styles. The following table shows the KSE 100 Index's record rise and unprecedented fall history covering the last 19 month period.

DATE

KSE-100 INDEX

% INCREASE /(DECREASE)

MARKET CAPITALIZATION MILLION RS

% INCREASE / (DECREASE)

End December-06

10,040

-

2,771,114

-

End December-07

14,076

7.9

4,546,899

64.1

End January-08

14,017

(0.4)

   

End February-08

14,934

6.5

   

End March-08

14,994

0.4

   

15 April -08

15,538

3.6

4,752,722

4.5

28 May -08

12,255

(21.1)

   

End June-08

12,289

0.3

   

07 July-08

11,878

(3.3)

3,667,100

(22.8)

11 July-08

11,696

(1.5)

3,655,992

(0.3)

18 July-08

10,235

(12.5)

3,192,247

(12.7)

25 July-08

11,032

7.8

3,477,366

8.9

01 August-08

10,171

(7.8)

3,301,908

(5.0)

04 August-08

9,853

(3.1)

3,087,271

(6.5)

The three accent points - end of December-06, 15 April-08 and 04 August-08, - vividly depict the events of wealth generation through stock market followed by the swift evaporation. The market managed to generate Rs.1,981,608 million during a period of 15 months merely through share price hikes- any marginal amount representing additional listings etc, notwithstanding. During the said period of 15 months, the market remained "bullish". The additional wealth was largely generated by common investors who vied for the limited number of existing shares in a rising price scenario. The liquidity problem was taken care of by the stock market derivatives, COT, CFS, Futures etc.etc. Those investors who opted for leveraged purchases by making use of these derivatives exposed themselves to a much higher risk. Then, all of a sudden, the market was taken over by the "bearish" forces and Rs.1,665,451 million were lost during a very short period of less than four months. The losses were sustained by the weak and uninitiated common investors, mainly those who went for leveraged purchases. The process of generating wealth through price hikes followed by its siphoning-off to the coffers of high profile investors and hedge fund managers continues ad infinitum.

IN CASE YOU MUST INVEST IN STOCKS

It still remains to be decided which option is more dangerous- flirting with the sharks, dancing with the wolves or investing in stocks? The completed circular journey of SBP discount rate (from 13 per cent in December1999 to 13 per cent in August 2008), our economy experienced a number of both positive and negative turnarounds. With the fall of the benchmark rate, a major portion of investments in national saving schemes was diverted to property and stock markets. The herd mentality syndrome saw many losing their precious money in stock market trading

For those who wish to invest in stock market must remember that it is a highly sophiticated field requiring a cool and analytical approach. Survival of the fittest theory aptly applies to this field. The "fittest" must have skill, finesse, patience and above all sufficient amount of totally free money. In case you must invest in stocks, then try to stick to the following basics :

* Never treat stock market investment as a bread earning job.

* Never commit to the stock market money for which you are answerable to someone. Always enter the market in a planned manner and with a long term view.

* Before taking a start, spend some time in the stock exchange. Sit before the trading screen, befriend with the active common investors, listen to their stories of success and failure. Don't argue with them; draw your own inferences.

* You must be able, at least, to read a balance sheet and understand elementary economics. Keep an eye on the changing economic and political scenario.

* Take start by committing not more than 30 per cent of the available investment funds.

* Select two or three companies from country's potential sectors, may be oil and energy, cement, banking etc. Never go for the high profile shares. Select from reasonably priced shares of companies with a good pay-out record, low price to earning ratio and a book value close to the share's market price.

* Never opt for leveraged purchase, day to day trading and short selling. These are not your cups of tea. Also don't indulge in future trading until you are able to fully apprehend the arbitrage and hedging theories.

* Wait for the right time to enter the market. As they say, "buy stocks when there is blood on the street, even if it is your own blood." Never enter a fast rising or a crashing market.

* Never enter or leave the market too often. If the fundamentals of selected companies are not radically altered, don't get panicked if the prices fall. Try to average out very discreetly utilizing the 70 per cent back up funds.

* Never spend lavishly in case of any windfall profits. Rather, properly reinvest them to dilute your overall market risk.

* If the chips are down on all fronts, make an stop-loss swift exit.

A friend of Napoleon once recommended someone for one of the top slots in the army. The General of the Generals asked, "tell me if he is lucky too."

So, before making a decision, ask yourself this question, am I lucky too."

Never enter the stock market if the answer is 'no'.