The only way to 'fix' the stock market is change it

Who can blame foreign investors from stampeding to sell out "like mad" last Monday, the opening of the week's trading? Stock markets and bourses everywhere suffer periods of boom or bust ("bullish" or "bearish" are the approved terms), and unfortunately our scandal-plagued Philippine Stock Exchange is in a tailspin.

No observer can avoid gazing with a jaundiced eye at the spectacle of Wilson Sy, long the man-behind-the-scenes in the PSE, a former president and CEO of the chamber, on the griddle in the Senate. Whatever elaborate attempts are being made by the PSE investigators to "clear" him and his powerful Wealth Securities firm, the finger of suspicion remains pointed at him. After all, Sy and his group, who dominate the list of PSE Governors (yep, they call themselves "governors", not mere "directors") have long been cornering much of the business in that organization in trading as in the various IPOs, or Initial Public Offerings, over the years.

This writer used to be a Business Editor years ago, and cannot claim the most up-to-date expertise these days in that field. However, there's always been one constant in business and trading that has remained undiminished as the condicio sine qua non of staying ahead in the game, and that's "confidence." If investors are confident in what you're selling, they stick with you. As soon as they suspect manipulation, chicanery, tomfoolery or flimflammery, they flee with their money.

In a way, those who speculate in any stock market are just like gamblers. As Nancy A. Nichols correctly pointed out in the Harvard Business Review (April 1993), "Markets are more complex than theories would suggest. They are made up of human investors who behave, well, like humans."

Can the PSE recover from its disastrous slide? Perhaps the only way the Philippines can attract skittish investors who've flown the coop to someday return is to establish a new Stock Market altogether. The bubble may already have burst in the present one. This may sound like a doomsday opinion. But the way things have gone, only a miracle can save the PSE. From what we've seen, God is somewhat miserly about granting "miracles" to those engaged in business and trade.

Remember the adage: God helps those who help themselves.

One of the most useful new books which have appeared in the past few months is Money, Greed, and Risk by Charles R. Morris, the managing partner of a consulting firm specializing in the financial-services and investment-banking industries as well as a former group executive at the Chase Manhattan Bank.

Morris had previously authored such highly-regarded books as Computer Wars (on the fall of IBM), The Coming Global Boom, and American Catholic (the rise of the American Catholic Church) and is a frequent contributor to The New York Times, Wall Street Journal, Atlantic Monthly, New Republic, and Harvard Business Review.

Morris subtitled his volume, Why Financial Crises and Crashes Happen, a very apt thought in this week of discomfort. (This is a Random House publication, Times Books, New York 1999).

On page 138, this expert makes a bold statement: "The average investor probably is a fool." He pointed out that a recent study of 100,000 trades shows that individuals consistently make the worst of all possible choices, "typically buying stocks that are about to fall -- probably because they've been hot -- and selling stocks that are about to rise, which should create plenty of opportunities for the pros. But that logic breaks down when professionals account for almost all trading -- the idea that YOU can find stocks everyone has missed gets implausible."

Morris underscores that "the growing dominance of institutional portfolios, that is, calls into question the basic premises of fundamental investing." He notes that "a growing body of data since the 1960s suggests that professionals make a lot of dumb decisions too. . ."

He explains this phenomenon by declaring that "intuitively, when professionals do all the trading, some professional is buying whatever another professional is selling, and they can't both be right." After all, he stresses, "generalized advice about sniffing out bargains simply isn't much help when you've got $6 trillion to place."

These remarks from somebody who's been in the field for decades ought to console guys I know who're feeling foolish about their midsadventures in BW Resources stock -- they bought when the stock was falling, and sold when the stock was still rising (and therefore feel themselves quite stupid). Not so, Morris indicates -- you win a few, you lose a few.

He dismisses the idea propounded by fundamentalists that "investment" is a process of company-by-company analysis (of balance sheets, income statements, competitive technologies, and the like) "to find the opportunities the dumbos have missed." He recalls that the fundamentalists like to invoke the analogy of a poker game, "Professional poker players say that in a typical five-handed pickup game, there is usually one other competent player at the table. The pros spot each other within a hand or two, systematically bet against the duffers, and walk off with all the winnings."

That's not the way it goes in the stock market.

The legendary George Soros (who's lost billions of dollars, yen, and rubles, as well as making billions more) comes to the support of the Morris Doctrine without comparing notes with him. In his book, Soros on Soros (Wiley, 1996), the wizard of Wall Street and The Man Who Broke the Pound asserted: "The prevailing wisdom is that markets are always right. I take the opposite position. I assume that markets are always wrong."

The trouble with our PSE is that many of the foreign investors who played in it belong to the cautious type. They were often Pension Fund managers. The task of a pension fund manager (as Morris reminds us) is not to "beat the market" but to fund a stream of well-defined future liabilities at the lowest cost. They strive to construct a portfolio of treasuries with cash flows that precisely match the expected pension outflows.

Let me say it again: Money is the most cowardly commodity in the world. No wonder it's fleeing our Philippine Stock Exchange -- because there are too many uncertainties and scandals.

Worst of all, it doesn't look like our government is facing up to the unstable situation. The President doesn't seem worried. The Cabinet members don't appear worried. The whisper has gone around abroad: Are Filipinos living in a fool's paradise? The somber truth is that we are not. It's only those at the top who can't seem to get their act together.

The President, for starters, should return to his Command Post in Malacañang and settle down to the difficult business of kicking ass and "offending" his intimates and cronies. He can't go to Mindanao with rifle in hand to end the insurgency like some field general, or make the people in Mindanao feel safer owing to his presence. A President, even when he walks "among the people" (as he believes), is always insulated from the grim realities of life.

Erap, with his "movie star" complex, surely feels consoled when he goes into the field and is applauded by a surrounding throng of fans (even sycophants). But feeling good is not what a Presidency is all about. This would be selfish self-indulgence. Doing good, no matter how painful actions and decisions may be, is what a leader must strive manfully to accomplish.

The President's sortie to our southern islands may send the message that he's not forgotten them Down South, but such a message is only skin-deep. Doing something constructive for Mindanao (not just hugging Nur Misuari and shaking hands all around) is what has long-lasting and significant impact for everybody, whether Christian or Muslim.

Unfortunately, that tale about a three-star general who is very well-regarded, Lt. Gen. Edgardo Espinosa, being deprived of his post as Southcom Commander because he offended somebody close to the President -- whether true or false -- has had a more debilitating and discouraging effect than an all-out Moro Islamic Liberation Front (MILF) offensive.

It may not be true that Espinosa, although he's said it, was relieved because a presidential pal, Lee Ping Wee of Zamboanga City, got angry when Espinosa withdrew the three or four Marine guards formerly assigned to that businessman. To begin with, why should our Philippine Marines be acting as bodyguards to a private person in the "export-import" business? By the way, what does Mr. Lee "import"?

The buzz in Zamboanga City is that Lee wants to run for Congress, and therefore is at loggerheads with Zamboanga's Mayor, the formidable ex-Congresswoman Ma. Clara "Caling" Lobregat, whose son, Rep. Celso Lobregat, is the incumbent congressman. An added rumor, though, is that the Zamboanga district may be split into two to accommodate Lee. By golly, haven't we got problems enough in strife-torn Mindanao without political infighting erupting to ignite more tension?

No matter how many denials may be issued, poor General Espinosa, a Marine, looks like he got caught in between. What a way to fight for peace and order!

The President is admittedly a macho guy, and quite capable of dealing with his enemies. However, what's crucial -- and becoming increasingly an embarrassment -- is how he deals with his friends.