Financial Times

Investing wisely in the stock market
The correction that checked the bull run on the Colombo Stock Exchange appeared to have bottomed out towards the end of last week. After seven consecutive days of falls share prices rebounded on the back of fresh buying, largely driven by foreign investors who were later joined by locals. The correction had been anticipated and served to drive home the reality that no market can keep going up forever, how ever much stockbrokers and investors might want it to. Market corrections have the salutary effect of reminding investors that all markets go up and down. Anything that goes up must necessarily come down. They serve to check any "irrational exuberance" displayed by those investing in the market.

In fact the latest bull run surprised even the most bullish analysts - nobody had predicted that the Colombo bourse, tiny by world standards, would rise so fast, so soon. Some stockbrokers had forecast that the market would reach its current levels only towards the end of the year.

This shows that apart from the usual reasons given for the bull run, sentiment or hope was a key factor in the latest bull market. The usual reasons given by brokers and analysts for the bull market were the massive dollop of foreign aid ($4.5 billion over four years) pledged at Tokyo, seen as a signal of confidence in the country, its economy and the government, the belief among investors that the war will not resume, the strong economic recovery supplemented by better-than-expected corporate results quarter-on-quarter, and the anticipation that companies will do even better in the months ahead if the truce holds and the economy continues to improve.

In that sense most analysts believe the market is still undervalued, although the more cautious among them were saying the market was "fairly valued" just before the correction - a polite way of saying that share prices were a little too high.
The bull run has highlighted the risks of investing in stocks. Those most likely to suffer in a market are usually small investors - they are usually the most poorly informed and have the least amount of cash to play with. Some, driven by the herd instinct, tend to put in money without too much thought or sell at the wrong moment. Timing is all-important when it comes to making money on the market swings.

Furthermore, in the rush for shares in a bull market, overburdened stockbrokers might have little time, or inclination, to advise small investors in a comprehensive manner. It is up to the investors to know the performance of the companies whose shares they are buying. They must also understand that usually the higher the potential gain, the higher the risk.

The revival of the stock market also means it is time for the stock brokering industry to take a fresh look at itself. Brokering houses usually lay off or lose staff in a long bear market, like the one the Colombo bourse went through. This means they might have to expand staff and strengthen their research outfits, especially in a bull market when they have more work.

Ethical standards must also be looked into. The scandal at the Securities and Exchange Commission, when some big names in the corporate world were accused of and investigated for the offence of insider dealing and the unsavoury attempt to sweep the whole affair under the carpet did much to damage the credibility of the market watchdog and erode confidence in the market itself. Investors, especially those thousands of potential ones, need to have confidence that there are adequate safeguards to protect their investments and that those responsible for regulating the markets are above board and will treat everyone in a fair manner.

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