You can win at the Dhaka stock market if you can conquer panic, suggests a recent study by a local asset management firm.
Western researchers proved long ago that panic selling intensifies after a significant drop in stock prices and the market participants part ways through their responses in such situations.
UCB Asset Management Ltd's research in their report "Bangladesh Insights: A Visual Guide to Market & Economy, January 2022" showed from the beginning of 2007 to the end of 2021, the Dhaka Stock Exchange's (DSE) major index generated a compound annual average return of 9.6% excluding dividends.
The long-term annual average return is lucrative indeed if compared to that of 2.9% from the Frontier Market Indices Average and 4.3% of Emerging Market Indices Average compiled by MSCI.
Then, why do too many people talk about their net losses in the stock market even after their long attachment with the bourses of Dhaka and Chattogram, raises a question mark.
Their behaviour in the market might have been one of the answers.
The UCB Asset Management research reveals, of the 60 quarters in their study, including both the bullish and bearish periods, the DSE generated negative returns in 28 quarters.
Their biggest catch has been, the market barely closed the three-month cycles at the extreme bottom where individual investors suffer from maximum panic and a large number of them, especially those who chase market trends for immediate gains, tend to exit their positions to get rid of the pains in the market then and there.
"During periods of panic, one of the worst investment decisions you can take is to sell," said UCB Analyst Sifat Binte Zaman, a co-author of the report.
"As can be seen from our analysis, the market hardly ever ended any quarter at its lowest point," she said.
"Waiting for a price recovery could yield a less unfortunate result if you don't panic sell in the first place," she added.
In 26 of the 28 negative-return quarters over the 2007-2021 period, the DSE indices closed higher than the quarterly bottom in each of the negative-return quarters.
"Also, the highest quarterly declines were succeeded by quick recovery and that made the DSE a difficult platform for market timers," said analyst Taskeen Ahmad, the other co-author of the report.
Market timing is the investment approach that drives an investor to focus on the very next moves of price and that mostly results in buying overvalued securities and selling undervalued ones.
Buying and holding onto undervalued, high potential securities with patience is the simplest approach one can follow at the stock market for a fortune, which the world's most successful investor Warren Buffet proved, said the analysts.
Experts have long been criticising the Bangladesh stock market for its linear ways of price movement that happens due to the dominance of short-term investors.