Monday, June 15, 2009

KLCI's barometric influence

The cliche that a stock market index is a barometer of business or economic confidence still writs large. Or so, it would appear.

It's not just a localised phenomenon, of course.

The moods of many are still determined by Wall Street.

It's scary how irrational that is. But, there it is.

In recent months there has been recriminations and reviews of the Efficient Capital Market Hypothesis. The high priest of the ECMH is Eugene Fama whose co-blog I keep up with whenever I can.

The ECMH, which is a hypothesis, not even a theory, was the flimsy and slippery foundation upon which many sexy financial instruments were built on. These sexy financial instruments that were built one upon another using complicated language and calculations were, in the truest emperor with no clothes sense, caught when the financial and securities edifice started collapsing in the first quarter of 2008.

The ECMH supports the view that information must be symmetrical i.e. I know what you know and, therefore, all our investment decisions are rational.

But, everyone I know who dabbles in the stock market are completely insane, not just irrational! Is it not insanity if you make a decision to put money into a stock based on what you read in the Internet and the newspapers and a word from an acquaintance?

The worst of it is that beyond the street level, investment advisors are making decisions based on mathematical models without checking the assumptions. The assumptions. The root word is assume. Old-timers like to say that when you assume, you make-an-ass-of-you-and-me.

Have lessons been learnt? Have lessons been learnt even in the relatively calm backwaters of the Malaysian economy?

Judging from what the reminder issued by MIER as reported today, it appears that irrational investment decisions are still being made on the strength (or, weakness) or asymetric information i.e. information that I think I know but, which is only a fraction of what other people (market manipulators?) know much more of.

Yet, truth be told, the information is all out there. It's the analysis that lacks quality. And, most investors, even those highly paid investment analysts, are indolent, preferring to use the grapevine over careful analysis.

It's a scary thought.

2 comments:

Donplaypuks® said...

Many moons ago, my college lecturere asked me to write an essay on 'Is the Stock Market a Casino?'

I have no doubt that it is primarily so today!

This is mainly because of imperfect information, 3 or more days settlement dates allowing for speculation, margin trading with heavy gearing, huge hedge funds, insider trading and manipulation by directors and major shareholders.

Even in a beter educated society than before, few still understand PE ratios, Yields and other statistics used to evaluate stocks and shares and companies and businessses.

You are right. Most rely on rumour, word of mouth (from a fishermonger's wife) and snippets in the MSM and internet. Note how a stock's price will jump Monday based on a review of it in the Star on Sunday. Totally irrational and insane!!

The fault as usual lies in those whose job it is to monitor vigilantly and enforce the rules strictly - The Securities Commission, Stock Exchange, MoF and Bank Negara.

I mean is there anything more insane and incetuous than Bursa being listed on its own exchange, the KLSE?

How then can we expect neutrality and avoid conflict of interest situation from clouding the judgement of the enforcers?

Just one example. The price of Maybank has risen from about $3.80 to just below $6 in a few weeks this year, despite news that they will have to write off about $2 billion due to mark to market write-down on their disastrous and suspicious investment in an Indon Bank. What gives?

de minimis said...

Bro dpp

I beg to differ on apportioning blame to the regulators. The irrationality of Malaysian investors could be a reflection of the lack of quality education and, low reading culture in Malaysia. Hardly anyone reads. Everyone prefers to check with someone else instead of looking things up themselves.

The regulators actually try very hard. My complaint about the regulators is that they are themselves quite dumb in the sense that they just pick up the trendy developments overseas and plonk it into Malaysia with nary a thought about the state of play.

For example, the implementation of the Disclosure-based Regime for listings and prospectuses by the Securities Commission created 2 "unexpected" conditions:

a. IPO valuations were very high resulting in low subscription take-ups because the Malaysian investors were used to having 30% or higher premiums upon IPO listings!!!

b. Propectuses became voluminous because everything was disclosed, especially "risk factors" so that issuers and advisors had the asses covered leaving the illiterate investor to pore over thick prospectuses. These investors did the thing Malaysians do...just ask the friendly neighbourhood remisier and friend. If they say "buy" you buy!