Lies, sheer lies and newspaper articles

Dubai: Punch in UAE + stock market volatility and Saturday's leading MSN headlines are dominated by "ignorance and greed heighten volatility" and: "Investors lose Dh19 billion" of wealth.

A serious calamity in the offing, or the nation's leading English speaking newspapers struggling with the concept of reporting stock markets?

In the defence of local journalists the tendency to report extremes as crashes and booms or as disasters and euphoria is a worldwide phenomenon; "another day at the office" is hardly going to sell newspapers.

However, volatile swings at the extreme end of a price movement is precisely normal for an emerging market, or, for those that think the UAE/Dubai is not an emerging market; then price movements of this type are rather normal following a sustained period of price movements in one direction for a market of this size and a market of this number of stocks.

The real headline should be: "As we thought, the market was a little bit over-priced", as that is what the very same papers had been telling me via interviews with the likes of Shuaa Capital.

It is a similar message to one I picked up a few months ago from listening to a speech from Shaikha Lubna Al Qasimi along the lines of "expect volatility". Well, we got it.

So two points for this week: point one, is it or isn't it normal to experience these 4 per cent intra-day swings? If so, is it important, and to whom is it important? A background thought here: my Green Community villa, when I moved in, was worth about Dh1.3 million; now it's worth double that, according to the newspapers.

Yet as I stroll down the stairs the number of bedrooms remains the same, if the grass is greener it's because of The Mrs and her hose pipe, not because of the doubling of value. The price value becomes significant only at the time I exit or sell. In the meantime, the real value of my asset is intrinsic: I can live in it.

The two most important data in any investment are: the price you buy at and the price at which you sell. Investment managers may also add "and how it's managed in between" as a third consideration.

Point one: is it normal to find such high intra-day swings? One commentator said, "Such high intra-day volatility in share prices in two consecutive days is the result of gross ignorance and greed."

Really? He continues saying that the majority of "small investors are clueless as to how the formula of MACD (convergence, divergence), exponential averages work", I have absolutely no doubt that he is right on this point.

Indeed, I think a limited universe of stockbrokers, fund managers and, definitely, financial advisers would know. He is very probably a great analyst in his own right. What I dispute is the "greed and ignorance" driver, leaning towards a more general view that the principal driver is the nature of the market and the recent price history compared to market fundamentals.

I would take this view because I understand it, plus I believe the issues are very simple and can be over-complicated by technicians. For evidence: look at the Rebeco Emerging Market Equity site, it states: "investing in emerging markets with high potential involves accepting higher volatility in your investment".

These words are NOT unique to Rebeco; they are standard fare for fund managers making investments into emerging or new markets and having to report back to Compliance Departments and regulators in a world where what they say "can be taken down and used in evidence". In short, the Dubai and Abu Dhabi stock markets are small markets and as such volatility would only be abnormal where it was absent.

Put another way, the driver of volatility is the nature of the market. The number of stocks and the nature of the mix of the stocks. The fact is that there is not that many to choose from.

Fat man on the abra syndrome: if there are five smallish people on an abra and a huge 200 kg giant steps on the abra, the abra will tilt whichever way the big man wants to go. The same happens in the Dubai market, until there are enough smallish people and/or enough bigger players to stabalise the abra then the boat will continue to tilt when the big man moves.

When the big men of the UAE markets get to price extremes they are bound to move one way or another causing the whole abra to move. One reason why there is great local interest in increasing the internationalism of the local scene: make the market bigger.

All this means that, if the buy and sell points are critical points, the extreme high based on what has happened to prices since I entered a market would be a logical point to exit, n'est pas?

Assuming my exit is not illegal than surely my exit is logical and therefore hardly "greedy", part of my original strategy being completed I should take the view that it is time to find another asset that has the right "buy price".

My real complaint is with myself for not having had enough belief and money in UAE stocks when they were 50 to 100 per cent cheaper than they are now.

Point two: are the swings important, and if so to whom? For those investors taking the short term view getting out at points higher than their entry is all important. This is the issue that regulators need to address.

Do the "short termers" know the speculative nature of the short term play?

Why would anyone, not wishing to experience short term volatility, want to invest in areas with the certainty of rapid price movement (one way or another)? This is the regulatory challenge: making sure that the short term product is only sold to those that know what they are doing.

Yet there are those that know what they are doing. The short term traders who assess risk on a micro level and who differ from academics in defining risk and volatility (where volatility is the price range of an asset over a period, divided by the average price for the period). In practice, short term traders often make a distinction between the concept of Volatility, and the concept of Risk.

Academics define them to be equivalent, yet in practice, there is good reason to distinguish between the levels of volatility or risk experienced across different time frames.

During 23 years, the Average Quarterly Volatility of (for example) of PFE stock price has been 21 per cent while the Average Daily Volatility has been two per cent. With high intra-day volatilities the market might well attract a certain breed of investor taking a medium risk approach from daily trading with reasonably sized swings.

Price swings are less important for the "longer termers" and those investing savings on a regular basis who will benefit on an averaging basis as the market inflates and as the economy grows.

For them it is a question of blocking out the market chatter, you don't exit an aeroplane because of turbulence, nor should you exit a long term strategy because of short term pricing.

The author is Managing Director of Mondial (Dubai) LLC.