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Stock markets, sharks, suckers and victims [Islands Business, May 2006] and [The Fiji Times, April 16 2006]

28/03/2012

So you want to get rich from theFijistock market?

Newspaper supplements from the Capital Markets Development Authority (CMDA) suggest you can.

Of course, the CMDA and stock-brokers warn you- the higher the returns, the higher the risks.

But the incomes of  both the CMDA and stock-brokers depend on the stock market becoming larger, and ordinary folks investing more in shares.

Unfortunately, there are two risks that the CMDA and stock-brokers cannot emphasise too much to the public- because they would be undermining their own profitability.

The first neglected risk: are there “sharks” out there who stand to profit by roping in the more ignorant “suckers” amongst the investing public?  This is a general problem for all stock markets.

And the second long-term risk which is the subject of this article:  is there a danger that the investing public may become “victims” of futureFijigovernment policy changes, driven by the WTO?  This second risk is particularly important for theFijistock exchange.

Stock markets are useful

   Stock markets have an important role in all developed capitalist economies, bringing together those who want to invest their savings with those who want to borrow.

Stocks or shares are pieces of paper giving the owner part ownership in some enterprise, and they entitle you to dividends and potential capital gain (or loss) if you sell.

The investing public usually have a choice between high risk/high return shares and low risk/low return shares, and all kinds of combinations in between.

But stock prices can vary for all kinds of reasons.

Bulls and bears, booms and busts

   Usually, stock prices go up and down depending on the performance of the companies they represent.

And stock markets as a whole can also have their ups and downs, reflected by Stock Market price indexes- like the Dow Jones or Nasdaq.

When stock prices are rising, there is a boom, ordinary people pour in their savings, and owners’ wealth rises.  Huge capital gains can be made by selling at the right time.

But when prices are falling, there may be a recession (or “depression”) savings and fortunes can be lost if the prices fall too far.

And stock prices may move not just because of the economic performance of companies, but due to events such as the war inIraqor the result of theUSelection.

Or sometimes, sharks can “arrange” for prices to move in a particular direction.

Sharks, suckers and the Enron disaster

   The shark may be a manager who has substantial shares in a company which may not be doing well at all.

But the shark (helped by friendly auditors, stock-brokers,  or business journalists) succeeds in artificially creating a “bubble of confidence” around their company.

The public buy the shares, the share price rises even more, and at some point, the “shark” off-loads the stocks at the higher prices, and makes a killing.

But when the truth about the company comes out, the “bubble” bursts, the public “suckers” (who are usually the last to know) find themselves holding pieces of paper whose value has plummeted.  When they eventually sell, they make a huge loss.

Sometimes, the share price crash can be so massive, that the Stock Market is forced to suspend trading in that stock.  Investigations begin and the sharks may be charged for fraud.

Such trials are currently going on in US over the Enron disaster, in which ordinary shareholders and ordinary employees in the company lost billions of dollars.  The checks and balances did not work.

Even the supposedly “independent” auditors (Arthur Anderson) did not expose the truth, because they were also sharing in the huge profits. When the truth began to come out, the auditors were caught shredding documents which could be used as evidence against them.

To get the fascinating stories of how a few corporate sharks sucked in the ignorant public, just Google the Internet using the word “Enron”.

But this article is not about potential “sharks” and “suckers” in theFijistock market (there is a nice article there, of course).

This article is a warning about stock holders becoming “victims” of government policy changes.

Successful Fiji stocks?

 

   Some shares in theFijistock exchange are extremely profitable.

 

Some may gain in value as theFijieconomy grows, and the holders of the stocks stand to make major capital gains in the future.

 

But some of the companies are currently very profitable only because they are monopolies protected by Government.

 

Look at the protection of companies producing beer, flour, cement, television and, what has a source of conflict for several years, monopoly telecommunications services.

 

Consumers are forced to buy their goods and services, at a higher prices, while competitors are kept out.

 

Their profits are naturally large, and their share prices kept high.

 

And naturally, members of the public are encouraged to buy their stocks in the hope of continued good return.

 

But the WTO is here

 

   Fiji is a signatory of the World Trade Organisation (WTO). Fijisigned because  it cannot stay isolated from the rest of the world who have signed.

 

The WTO’s driving mission is to reduce import tariffs and other trade barriers, and enforce competition in all goods and services throughout the world.

 

These changes are coming toFiji, sooner or later.  It is not a question of  “IF” but “WHEN”.

 

And if a future Government is forced to reduce the protection it currently gives some companies, their profits are likely to fall, and their share prices are also likely to fall.

 

If the owners of the stocks sell at a price lower than what they bought at, they will lose a part of their savings.

 

Through no fault of their own, they will have become “victims” of Government policy changes, brought about for the good of the wholeFijieconomy.

 

Between the Devil and the Deep Blue Sea

 

   The owners of some of these protected companies are extremely powerful in theFijieconomy- like FNPF or Fijian Holdings Limited.

 

And they are caught in a bind.  They try to protect their current dividend incomes, by pressuring government not to remove protection from these companies.  But this is at a huge cost to the wholeFiji economy and theFijipublic.

 

Without doubt, the long term future of  FNPF and FHL rests on the economy growing faster.  Yet this requires the removal of protectionism and the introduction of competition which may harm their short-term interests.

 

But whatever the protected companies achieve in the short term, the long term reality is that the WTO will force the end of protectionism. And some share prices will fall.

 

By then, some stock-holders may have earned enough dividends not to worry about the future capital loss.

 

But some stock-holders won’t have time to enjoy the dividends before falling share prices hit them, and they become “victims” of Government policy changes.

 

Will Government bring in competition in telecommunications when they originally sold the ATH shares at too high a price with a promise of continued protection of monopoly?

 

Can the CMDA and stockbrokers, who make their living out of a growing stock market, warn theFijipublic about the dangers of investing in the stocks of protected companies?

 

It would seem that our stock market investors are also condemned to remain between the Devil and theDeepBlueSea, for some time to come.

 

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