John Mayard Keynes, the famous economist of early 20th century, was also a great stock investor. But the world as a whole and the students of economics in particular know him more as an economist who was not surpassed in fame by any other economist of his time and even till now. Keynes did not always win in stock market investment, but he won much more than he lost. That is why, in his time he was one of the richest professionals around.
In fact, Keynes's deep insight into the movement of economic variables like the interest rate came from his experience in stock market investment. One important piece of economics, known as liquidity preference, describes the relationship between interest rate and the price of bond, which is taught in the class rooms of the universities throughout the world. Keynes became more known to students for the liquidity preference theory than they knew him for anything else. Liquidity preference is nothing but about a decision whether an investor should buy a bond in a particular time at a particular price or hold the cash money. Unfortunately, very few investors can relate this theory to real investment decision. The average stock market investors simply can not relate anything between interest rate and the price of the stocks they are buying.
Keynes's liquidity preference theory tells us that it is profitable to keep the money in liquid form. It is not necessarily a good decision to keep all the money invested all the time. But the investing public prefers to keep all their money invested. To them keeping money idle is a loss. Here they make a mistake. Not only they do not want to keep their money idle, but also they borrow money and invest without giving much thought to the cost of borrowed money.
Many investors do not know how to read and analyse the financial reports that pour in daily about the corporate world and also about the economy at large. They do not have the capacity and patience to carry out a small research they need for arriving at good investment decisions by using those financial reports. They see the market blindly and follow the market blindly. Most of the time they are guided by what their peer groups do or tell them to do.
This type of investing public can be easily swayed by rumours and also can be cheated easily by clever players of the market. In fact, the clever players cheated ordinary investors in the Bangladesh stock market time and again. Every time they employed different techniques and the investors were caught off-guard. In such situations, the investors are left to muse on the hope that the market will go up. But that never happens. When the clever market players think that the market has reached a level where they wanted to take it, they pull the rags from beneath the feet of the investing public and the latter start falling through the holes. In the run up to the fall, many investors lose everything. Some are able to save a little, and others barely the capital they brought to the market.
If the result of the stock market investment is a zero-sum game, then the lost-money of ordinary investors goes to the pockets of those who made the things happen. What had happened in the Bangladesh stock market in 1996 and 2010? The perpetrators and the techniques were different but the results were the same, pauperising millions of people, and getting money flowed to the pockets of the few who had overwhelming influence over the ready-to-collaborate regulator. Never a stock market should invite the ordinary people to come to it if it wants to avoid scams. In Bangladesh, both in 1996 and 2010, mostly ordinary people were brought to the market giving them the idea that they would be gainers. But what happened afterwards? They were slaughtered in broad day light on the streets of Dhaka. On both the occasions the regulator, Bangladesh Securities & Exchange Commission, was there but the regulator was found to be either in league with the perpetrators or in some cases, inactive. The investors were never compensated for the loss they incurred in the man-made stock market scams of 1996 and 2010. For a while, everyone talked of everything but after a while nothing emerged to address the crisis. There were quarters at work to find out the causes of the scams but the discovered-causes could not have compensated the investing public. The policy makers only assured: in future no new scam would happen, but we knew, the scam will come back again. What we did not know is when that would happen. All the symptoms of impending disaster were there both in 1996 and 2010 but the fact was that nobody came forward to prevent it from happening.
The writer is a professor of Economics, University of Dhaka.
