When and why we shall invest in stocks
The world is in the grip of coronavirus fear and Bangladesh is not an exception. Our stock market is also a victim of the economic fallout of coronavirus pandemic. The whole world is now planning economic bailout to overcome the all out coronavirus crisis and future challenges. In Bangladesh also we need bailout plan to survive the stock market and save the investors. It is time now to plan when and how we shall invest in stocks as the investors should realise that it is now extremely bad season for the market.
If we go through the history of successful investors, we will see some difference between them and average us.
Warren Buffet, who reached into the top of wealth table through the stock investment ladder, is one of them.
But how? Buffet himself has said, when market crashes, when everybody sells shares because of frustration and panic, he catches some shares of fundamentally strong companies at a much cheaper price to hold over the long term.
That is the nature of capital market that if someone manages to buy good stocks in a right time and maintains a capacity to hold it over years, he or she gains a lot, usually more than the initial investments, as soon as the market regains normalcy.
My observation is it takes 2-4 years after the market bottoms out.
Let me share my own good and bad experiences in investment. In 1996, all the shares went wild to go higher and higher. I was holding some shares of the then Chittagong Cement Clinker Grinding Factory Limited at an average cost of Tk1,200.
I borrowed a lot of money from commercial banks including about Tk 3 crore from Southeast Bank to buy the shares, alongside shares of some other companies.
At the peak the cement company shares went as high as Tk14,000.
However, when the price was at 11,500, amid low supply, I manage to buy some more shares of the cement company from one of our Dhaka Stock Exchange members.
Our Late member, Shah Mohammad Sagir was branded like this, "whichever shares he buys must see a price gain." I bought those shares at that price following him, like many other shares.
I know the importance of optimization. An example of 1996, another member of DSE once asked me what he should do with his Apex Foods shares trading at Tk18,000-20,000. Should he hold or book profits when the share is going up too fast? I said, sell half of your shares so that if the market goes down you can enjoy the realized profit, and if it continues to go up the remaining half will be there to benefit you.
During the same season, I sold shares worth Tk 12 crore and bought some others worth Tk 10 crore. But, I did not sell a single share of my Chittagong Cement Clinker Grinding Factory shares.
I was neither ready to see any market crash, like many others. But it happened, no matter I liked it or not. The market began to fall in the first week of November in 1996. We were puzzled, optimistic as well that the market will be okay again.
But the optimism was too far from reality, the Chittagong Cement shares' price collapsed to Tk500 only - way below my average costing.
At the bottom of the market the margin loan provider banks were pressurizing me to sell stocks and pay their money back. The Tk23 crore investment portfolios dropped below TK 6 crore, while I owe Tk 6 core to bank in form of margin loans. Literally, there was nothing as my own if banks would take control of the investment accounts. I was determined not to lose the battle. I know my stocks were fundamentally sound and should stay ahead in recovery phase.
Managing to deposit some money I entered into a 2-year rescheduling arrangement with the lenders that averted a forced selling of my holdings. But the bank rate was too high then and compounding interest was a severe pressure on me.
Thanks to God, the company, Chittagong Cement Clinker Grinder, which later transformed into Heidelberg Cement Bangladesh Ltd, declared 50 percent bonus shares and 50 percent right shares in the very next season. My 12,000 shares became 24,000 shares. That lowered my cost price. Dividends and price appreciation helped me recover the unrealized losses in the cement company shares within 2-3 years.
OF the other shares in my account, which were of fundamentally sound and potential companies crossed my costing point by that time and the weaker company shares were going further down. I began to sell the profitable shares and paying back the loans. I became debt-free, some shares still remained in my account and some capital gains gave me some cash also. I have learnt that good company shares can be in investment accounts in all seasons over years. These will not end it up with losses, today or tomorrow.
I can name today's NCC Bank as a reward of buying and holding good shares. It was mainly an investment bank in 90s. In 1994, 1995, 1996 they had bought lots of good shares, price of which also came down during crash. Neither in bull market nor in bear market, they did not sell the shares. However, after recovery in three-four years of the crash the bank began to realise profits and the hefty proceeds helped them to build a full-fledged commercial bank -NCC Bank Ltd.
Novel coronavirus has appeared as a global crisis that is threatening of an economic recession, for some countries like ours it is at least a slowdown. Like all others, investors in stock market are also calculating the economic impact of the pandemic and trying to get an idea of post-crisis scenario. I firmly believe that the Bangladesh economy will be one of the tops which will recover fast.
Million-dollar questions are which should be the stocks to pick from the extremely depressed market? What should be the investment tenure? I am not sharing my thoughts for who follow the crowd or who are day traders. It is a discussion for them who analyse a company's business fundamentals and stock performance for at least last five years and ready to think 6 months as short-term period for investments. Before getting panicked, we need to check which industries and listed companies are taking shocks of the pandemic and which are not, which are being affected too hard, which are mildly.
Like, textile and apparel exporters are suffering order cancellation, what about the listed ones?
Besides, how the import dependent companies are being affected that is also a subject to analysis. Again, a company who stopped production due to lack of imported raw materials and the others who stopped production because of lack of orders has a difference of course. We will find some listed companies from different sectors which are not that hit from corona pandemic despite share price of those also have suffered during panicked selloff. I feel pharmaceuticals, electricity and gas transmission sectors to be in the list.
People are using more electricity as the temperature is rising here; people are not buying less drugs in the crisis. During recession or slowdown, when private sector seems weak, government usually begins large projects to boost the economy and employment. That helps steel, cement and other construction related industries to boost sale. So, I want to say, in any case scenario there is a long-term opportunity for an investor.
Government has given all the banks an opportunity to build a Tk200 crore fund to invest into the stock market in such a time when it is too cheap. As the investment opportunity is for five years, I feel there is a huge scope for the banks' investment research teams to find many profitable shares in the market and opt in to take the benefit. That will help themselves with good profits and the market with stability.
Many investors, including me, have already put their money to pick cheap stocks, but the price fall has pushed them into losing territory right now. If we have some saved money, and the stock is fundamentally sound and looks cheaper now why not we buy some more to bring the average cost down? I find some financial stocks as too cheap now. These usually are capable to return our money through dividends over years and the policy makers made dividends a more common outcome for coming days.
Share repurchase by listed companies is yet to be a reality here as we did not get the necessary law. But entrepreneurs of many listed companies can buy some shares of their own companies from market which is at the bottom now. At least for the sponsors and directors who once sold shares at higher price can buy now that will offer capital gains for them and stability in the market.
It is our collective responsibility to restore investors' confidence.
My request to Finance Minister to take steps to formulate the much-awaited buy back rules, arranging low cost loans for the listed companies who are being victims of the ongoing coronavirus crisis, and taking large public sector projects to offset the slowdown in the private sector driven economy.
I would also request to reduce corporate tax for listed companies so that they can pay good dividends. The unpleasant reality is listed companies contribute way more than their non listed peers because listed companies have to operate more transparently.
On the verge of a global economic recession, I would request our securities regulator to be strict to enforce mandatory rules and practices. The Bangladesh Securities and Exchange Commission (BSEC) must be rude to the sponsors and directors of listed companies who are yet to hold 2 percent shares of own company individually and 30 percent shares collectively. Approval for initial public offerings must be after a stricter cross checking, so as the preparation of statements and disclosures. Any non-compliance in disclosures, statement preparation, auditing, and of course secondary market trading should be strictly addressed and punished. For economic development a strong capital market has no alternative in the long run. We should bring all the large family businesses to the stock market discouraging bank financing.
The writer is a former President of Dhaka Stock Exchange (DSE) and he is the current Director of DSE.