Rudimentary, “Yahapalana” culture has no doubt brought about a shift in the general thinking of the society. Debatable and the divide visible as it stands, some call the process as witch hunting and the proponents justify yahapalana to be long overdue in all sectors for they have had it all from “Dharmishta samajayak karaa… suba [...]

The Sunday Times Sri Lanka

Regaining Capital Market Mojo: Part 1 – Creating awareness

Zen approach to investing; Most successful Wall Street traders meditate

Rudimentary, “Yahapalana” culture has no doubt brought about a shift in the general thinking of the society. Debatable and the divide visible as it stands, some call the process as witch hunting and the proponents justify yahapalana to be long overdue in all sectors for they have had it all from “Dharmishta samajayak karaa… suba anagathyak”!: Latest being “yahapalanayak”.
Will we ever run out of political tag lines?

In the run up to the “Dharmishta samajaya”, the nuts and the bolts (values) of a value based society were dropped. “Suba anagthayak” fast-tracked the creation of a materialistic society: society with an insatiable hunger for infinite material possession. Integrity took wings.

Unlike other service sectors, capital markets sustainability is hinged upon integrity. Due to demonstrated lack of systemic integrity there were instances when forthright policy makers vacated the post. Now the market sees a ray of hope; the right person being appointed to do a job of work at the Securities and Exchange Commission (SEC). Proper leadership is imperative for integrity to thrive. As the new leadership is determined to steer the market in the right direction and make it an even keel market where all gets a fair share, the question the policy makers must ask is as to why the market went on the wrong direction in the first place. The answer no doubt is lack of awareness. As I see it, awareness creation/education fell short of the expectations. Then, the ideal starting point to revamp the market is to have a structured awareness-creation programme.

The inevitable consequence of a lack of proper awareness as applicable to capital market activity was caused by the ‘idolatry’ of materialism. The new policy makers’ endeavour to bring some sanity and order to the capital markets process must focus on three key areas: Awareness, Integrity and Innovation.

One needs proper awareness to analyse and interpret be it crisis management or investment management. As it relates to investments, lack of proper awareness, leads one to have unrealistic expectations.

Investment decisions are influenced by “greed” (lack of awareness). Greed of a few, denies the opportunity to many. Investment strategies and expectations are not congruent with investment fundamentals. In response to investor greed and market needs, questionable advisors and brokerage shops mushroom “creaming” the gullible investor (lack of awareness of long term implications).

Wrong investments are made that leads to frustration and end up struggling to make good of a wrong decision. So long as one remains in this realm, no escape is available. In the absence of proper awareness, the market is driven by investor sentiments.

Expanded awareness:
With proper understanding of investing in the market and money, both the investor and the advisor work towards creating mutually beneficial synergies. The advisor educates the investor and guides them towards having reasonable expectations, and to work within the confines of investment fundamentals recognising investor profile and assist in overcoming financial inertia, meeting investor goal: realistic investor goals.

With a savvy investor /advisor community the market is driven on fundamentals.

Optimum awareness:
Reflects a market made of a mature and savvy investor/advisor community. They both have better clarity and investment decisions and take a more rational and philosophical approach. The investor is cognizant of an equilibrium point of money and constraint of money.
A Zen approach to investing is followed. Zen advocates a “keep it simple” approach. Investment goals reconcile with nature: law of least effort. So should our investment plans. By focus and concentration we create the right energies and that is optimum awareness. Most of the successful wall-street traders meditate. Succinctly, it’s all about creating positive energies and attracting right vibes.

A diversified portfolio over the long term with patience, discipline and positive focus will reach one’s goal.
The capital market system is a corrupt system globally. No matter what policies and controls are in place, so long as human greed exists, so would capital market corruption and manipulation. Introduction of draconian rules are no solution to the woes of the market. The more stringent the rules, the more creative will be the scam artist who will circumvent the legal structure. The legal framework must be bolstered by a dynamic awareness creation programme.

Creating awareness and educating both the investor and the advisor is critical to successfully counter manipulations.
Brokerage houses must have an education arm to educate their investor base. Merely taking over the investor money and sending out monthly performance reports and investor statements are of zero value as they will have no understanding of what these statements reflect. A case in point is how the Central Bank was concealing EPF losses and wrong investment decisions.

Education will help increase market participation rate. There is no purpose in running to Wall Street asking investors to come to Sri Lanka when our local participation rate is low. I have been less complimentary of periodic road shows overseas. They serve no justifiable economic purpose. Instead of costly foreign roadshows we must develop a strong home base. Once we have developed our local investor community then we should look outside. In this connection, the Colombo Stock Exchange and the regulator must give serious thought and explore the feasibility of creating an Investor Education Fund. A percentage of the trading commissions levied by the licensed brokers must be channelled towards funding this proposed fund.

Capital market literacy is critically important for the market to move forward.
Every agency that provides investment management or financial services must have a compliance department. The manifold functions of the compliance department, approval of new accounts, assess suitability; approval of trade, the core function must be to comply with KYC/KYP statutory mandate. KYC (Know Your Client) and KYP (Know Your Product).

In the process of monitoring KYC/KYP there will be a rapport that gets developed between the investor and the advisor and that is very important. The capital market though functioning on a framework of rules and policy guidelines at a micro level must be run on trust.

The financial advisor must obtain all the details of the investor to assess the investor profile and be compliant with KYC requirements. This will help the advisor to identify investor expectation and understanding of investment risk/return profile. At the stage of making recommendation of products the advisor must do product suitability and comply with KYP requirements and only promote an investment that will match the investor profile.

The regulator must conduct annual audits and validate if the advisor/broker makes a full and a complete disclosure of the investment that was sold or if it was sold on an unsolicited basis and no proper disclosure was made. Full disclosure involves broker commission, if the purchase/sale is speculative, the trading ranges if the advisor did a full technical and a fundamental analysis and research attached to the client file.

“Yahapalana tentacles” must reach all the cracks and craves of the market without exception if the capital market is to regain its mojo.
To be continued next week; Part 2 – Integrity
(The writer is a Sri Lankan-born investment advisor and expert in oil markets
based in Canada)

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