The weak points of the stock exchange

For www.dailybusiness.ro

23 july 2009

”The brand is made by people and it is difficult to have a brand that is better than people” is the pertinent remark of Mr Nicolae Naumoff, a person who commented on my previous editorial. Mr Naumoff also notes that: ”Before we promote something, we should have something to sell, taking into account an honest report between the money we take and what we offer.” I can only subscribe to the two quotes and translate this judgment on the stock exchange.

According to some sources, around 1 per cent of Romania’s population is involved in transactions and investments on the stock exchange. In other neighbouring countries, the involvement of the population in stock exchange transactions amounts to almost 20 per cent. In this case, the percentage is the most important and not the absolute figure because it indicates the degree of knowledge and confidence in stock market investments, the positive perception of it and why not, the degree of perceived security and the level of notoriety that the stock market business has. We can also note BVB’s communication efforts from previous years which had unknown results. But the 1 per cent percentage shows that the results were not noticeable despite the services and the products that were launched on the market.
Which are the causes? Let’s examine a little bit what happened and what is happening on BVB in accordance with the structure of the population in Romania. BVB has been the generator of large speculative profits, for years (which have also been covered by the media for a long time), given that the list of traded companies is ”a bit” short, and the new listings in recent years have been short. Which probably shows us, more or less, the state and structure of the economy and the interest of companies to be listed, thus attracting money, which is cheaper than making a loan. On the other hand, the structure of the population in Romania is mainly in favour of the rural areas where the interest in the stock market, a sophisticated business, is absolutely zero. If we also take into account the first generation ”of villagers” who live in the city, the percentage of those who are possibly informed and interested decreases even more. We can further take pensioners, children, pupils and students out of the equation and reach an extremely small target group of potential investors. We can reduce this number even more by decreasing the investment funds that have run a large part of the stock market’s money and we will reach a tiny segment of individual investors among the approximately 22 million people that Romania has.

Therefore, the investment culture, desire and power to invest in BVB is greatly reduced. Maybe it wouldn’t be such a big deal, in the end, it’s a matter of education that BVB should take on, but the essential perceptions in the market are, or were like: ”the stock exchange is something sophisticated, it’s not for me”, ”I don’t have that much money to make big profits”, ”the stock market is for big speculators, some of whom also have inside information”, ”it’s better to buy a plot of land or an apartment because it’s safer”, ”I don’t know anything about it, I don’t trust them, I won’t get involved” and so on. So ”the brand is made by people and it’s hard to have a brand that is better than people.” The quote, in the case of BVB, refers mainly to potential investors and potential companies that are able and may want to be listed and less to those who work within the institution. If we do some calculations, it may be better to attract money from 20 per cent of the population, even if the amount per capita is lower, rather than from the one per cent who are, in their vast majority, big speculators, accustomed for so many years to high and fast profits. Behaviorally speaking, smaller investors are more stable than institutional ones that go for maximization in a small period of time. Smaller investors think long term, their behaviour being somewhat close to that of saving money with interest on bank deposits.

Going back to the people, the ”insiders” should reset and change BVB’s view of the capital market and the target groups it addresses. The logic of the facts says that BVB is currently at a turning point in the business strategy, and those ”inside people” should attract money from the population and to aggressively list as many companies as possible. They can be reached by generating trust, stability and notoriety and successful case studies. BVB’s business and brand was and still is exclusive, intended only for high-level insiders and speculators, and at the moment it is drifting due to lack of initiative and strategy. My impression is that they go on conservation and wait, doing nothing in fact. My opinion is that BVB could be one of the generators of the economic recovery if it proves an initiative of change, optimism and real inclination towards the two target groups: investors and companies interested in listing.