Imagine having an educated pool of investors attending sharer holder meetings and actively participating in the companies that they own. This can only lead to analysts publishing research reports that contain data points that satisfy the markets desire to calculate fair market value (FMV). Our topic for this week will be about both the education level of the local investor in the Kingdom, and the quality of the research from the various brokerage firms. The fact of the matter is that most online traders can not define or calculate any of the ratios that are commonly used in the fundamental valuation of the financial markets. This goes against the law in the Kingdom as per the Capital Markets Authority (CMA), which clearly and concisely states that the determination of suitability of investors is the responsibility of the brokerage houses.
This aforementioned law is the critical point that opens the gates to the masses of potential investors. The fact of the matter is that investing in the KSA should not be considered a right, because it is a privilege that is oriented toward those educated individuals who are suitable for these investments. The masses of would be investors need to be converted into a pool of qualified investors. We at The KIN Consortium recommend a general audit of every online trading account. We would recommend that each investor take the CME exam or some equivalent test, prior to opening an online account. Once the investors hold a license, then they can trade in the markets under their own responsibility. The license shall serve as a standard of excellence that will include valuation models for fundamental analysis, charts for technical analysis, along with fundamental economics and the rules and laws of CMA. By raising the level of suitability of the investor base, we would have created a market that demands accurate research reports with accurate metrics for measuring the fundamental valuations of companies.
The responsibility of education falls on the Saudi Arabian Monetary Agency (SAMA), Institute of Banking and Finance (IOBF), & the CMA. The brokerages houses and their CME brokers carry both the fiduciary responsibility and the responsibility of enforcement of the know your customer rule. The weakness of the aforementioned brokers and agencies in terms of meeting the educational demand of the investment community has created a number of independent training facilities that all claim to be accredited by the CMA. We also recommend the audit of each training facility to ensure that the data that they are teaching is consistent with the accredited syllabus and training manuals.
The pool of investors are all striving to find some type of rhyme or reason for the manic volatility of the Tadawul. The ideal solution is to have the research departments at the local banks set up their own respective educational platforms teaching the CMA curricula. The content should not only consist of the basic valuation formulas for calculating fair market values for stock prices, but should also include live research reports with analyst commentary. The brokerage houses will offer these workshops and seminars to allow the investment community to understand how the formulas are applied in the real time markets. The CME brokers will close the deal by tailoring the clients investment portfolio to the needs and risk tolerance of the client. These are the solutions that are currently being used at a number of international brokerage firms around the world, and we believe that they should apply to the investment community in the Kingdom as well.
- Khalid I. Natto, [email protected], chairman & CEO of The KIN Consortium.