Market Efficiency and Investment - Essay Example

Interest in the investment of commercial property investment has grown over the of past few years. In a report established by Malinson in 1994, it was recommended that RICS should be the leader in the development of property. Modern Investment management techniques have driven management of property portfolios. These techniques are well established in the management of equity portfolios. An important aspect of these techniques is management of stock selection which aims at finding out mispriced assets to add more value to the portfolios. This approach looks for estimation of the investment worth or the intrinsic value of assets. Marketing is an oft conceived word used in our daily life. It is a normal word which may often be found as a part of our day to day conversations, and has more to do with the approach then the execution of a business idea.  It was first explained by the American Market Association as an “activity”.  Later the definition was elaborated and modified to involve the various institutions and processes employed for making, communicating and delivering products which are of value to the stakeholders-customers, clients, partners and the society at large. The term was derived from the original meaning which taken literally meant simply going to the market to shop or to sell goods and services there. Introduction and definitions: Before we proceed further, clear and crisp definitions of the terms that would be used in the text are needed. This is important to develop a clear and concise understanding of what will follow. Market Price is the total lump sum money that is actually paid for a particular asset. Valuation is a prediction of the expected selling price of the asset. It’s the open market value. The worth of an asset is it’s investment values. The worth of an asset can be further categorized into 2 broad genres. These are the individual worth and the market worth of the asset. Individual worth is the highest price bid by an individual purchaser who takes into perspective all information that is available to him in a very effective manner. Market worth on the other hand is the price at which investment would be exchanged and traded on the market. It is the place where buyers and sellers use all available information in a very efficient manner. According to some noted scholars, an individual’s worth need not be equal to the market’s worth. It is not necessary that it is equal to the market price or the valuation. The point in perspective being that an individual’s worth is dependent on certain specific inputs where as market worth on the other hand is dependent on market views and consensus cum collaboration on inputs. Thus, while the afforemention definitions maye be useful and lucrative enough for the discussion of important issues in this paper it is essential to note that both investment worth and market worth are synonymous with each other. Any future recommendations and advice on market worth against market price should be able to find market mispricing. Market efficiency: Market efficiency is a very important concept and is central to investment analysis which aims at identifying mispriced assets. If there is equal and similar information available to every investor in on the block, then they will analyse information in a very efficient way. The estimates of worth by all investors will be the same in this case. However, in reality this is not the case and this is not how it happens. The assessment of worth by every individual varies remarkably and they are these differences that help transactions occur. A notable researcher, Fama did some research in this regard and came up with three primary levels of market efficiency. These include the following: 1) The weak form : In this level, prices reflect everything that could be made out from past prices. 2) Semi-strong form: In this case, prices reflect all the public information that is available. 3) Strong form: Here prices are ubiquitous and reflect all information. There is enough evidence to substantiate the claim that UK commercial property market is rather more sound at the weak form level. Barkham and Geltner have also voiced their support for the weak form efficiency for the UK commercial property market. Given this level of efficiency, prices don’t give away all information that is publicly available and leaves scope for investors to undertake research. They dig deeper into research to identify any more mispriced investments while ensuring that the cost of the research does not surpass that of the value added of the mispriced assets. Some recently undertaken research identified anomalies and mistakes in the pricing of the assets in the stock market. According to an argument by Fama in one of his books, market efficiency makes one extreme hypothesis. According to him, it is bound to false. What makes the task rather more interesting is to measure the limit upto which behavior of returns deviates from the predictions made. His pronouncement on market efficiency of the stock market only substantiates the idea that property market does indeed offers opportunities for investors to find out any pricing inefficiencies. Investors associated with the property market need to make two property estimates, the investment worth and the expected selling price. Both these clauses are highly unpredictable. To help one in decision making, the estimate of investment worth is compared and contrasted with the expected sale price. The two may diverge from the actual price. Or the asking price which is mostly greater than the actual sales price. The underlying rationale behind the acquisition of underpriced assets is that the profits will flow as soon as the market correction has taken place. This means, this is when the forecasts have come in line with the investor’s who make use of the available information. In the stock market, the correction is adeft and is more inclined towards the investment or intrinsic value of the security. However there is very little information available about the correction mechanism in the property market. Investors in most cases are expected to find their own mistakes and correct it otherwise it will continue being inefficient at all times and days which don’t really have to be the case. Market correction needs to be more inclined towards market worth than the individual’s worth. An example of the An Soukh Stock Market Crisis: The Souk Al-Manakh stock market crash took place in 1982. The Souk Al-Manakh was the unofficial stock Market. Al-Manakh means camel and the market’s foundation had been laid down through a camel trading venue. It was displaced in an air-conditioned parking garage that had formerly been a camel trading venue and specialized in highly speculative and unregulated non-Kuwaiti companies. Market capitalization was soaring high and going on at unimaginably high levels. It was the third highest in the world at that point in time and this meant it was barely behind US and Japan. Infact it was well ahead of UK and France at that critical juncture. (Gufta; 1998;n.p) The swift revenues of the 1970s had been a boon for many private individuals. It left them with hefty substantial funds at their disposal. These funds triggered speculation and skeptics in the stock market in the mid seventies. The government reacted promptly and tried to bail out the affected investors. They also introduced stricter regulations in the process. The response ignited a bigger and more disastrous stock market crash of the eighties. It brought the least risk-averse speculators into the technically illegal alternate market, the Souk Al Manakh. Slowly and gradually Souk Al-Manakh leveled paralleled with the official stock market. This market was largely dominated by the several older wealthy families who indulged in far and wide trading among themselves. The Souk Al-Manakh ended up becoming a market solely aimed for new investors in the end alongside some older ones. Thus the word of Souk-al-Mankh and its possible role as a money machine spread like a world fire all over the Middle East. Many wealthy Palestinians, Egyptians and Pakistanis went up to purchase stock. They impersonated as Kuwaiti nominees only as only Kuwaitis can trade illegally. Non-Kuwaitis just as badly wanted to invest irrespective of their lack of legal standing. .One stock, The Gulf Company for Industrial Development, even advanced fifteen fold. This dynamic combo of extreme stock gains and astronomical amounts of leverage made many speculators millionaires and billionaires every night. Scam companies started cropping up over night and no customers no products could be caught. Every one escaped the regulation of Kuwaiti authorities. One IPO example was the emergence of a former failed $100 million real estate venture. It was converted to a hospital called “Gulf Medical” and brought the public by the individuals looking to recoup their initial investment. The investment was a remarkable success and hired some forty Egyptian school teachers to process the stacks of paper work. Share dealings comprised of post dated checks mostly. This caused a huge unregulated expansion of credit. The final crash came in August 1982. This was when a dealer presented a post dated check from a young passport Office. The employee’s name was Jesse al-Matawan and the unexpected happened; the check bounced. There were so many cards that collapsed in the process. In September 1982, the Kuwaiti Ministry of Finance demanded that all dubious checks be turned in for clearance. Souk Al-Manakh was ordered to be shut down. When investigation was carried out, the value of worthless outstanding checks turned out to be equivalent of 94 billion US dollars from some 6000 investors. Kuwait’s economy was severely affected because of this and the financial sector badly shaken. (Kuwait Crisis) The crash marked the beginning of recession through society as individual families started getting disrupted by the investment risks of particular members made on family credit. The debts from the crash affected all banks. There was just one Kuwaiti bank that was left insolvent and it was more so because of the support it derived from the Central Bank. It was only their National Bank that could survive and live through the crisis. National Bank of Kuwait is the largest commercial bank. Eventually the government intervened and a complicated set of policies were devised embodies in the Credit Facilities Resettlement Program. The implementation of the program was yet incomplete in 1990 when Iraq’s invasion changed the entire financial scenario. The Souk’s decline was albeit instantaneous and impromptu. Many claim that it cannot even be considered a crash as there were simply technically no bids involved. The final result of the world’s greatest speculative was a major loss for every Kuwaiti National, every man, woman and child. Eventually the Kuwaiti Government was compelled to close the stock and build a new stock exchange all over again. Ethically speaking the boon was a major blow to the confidence of the investors in the Kuwaiti stocks. The fact that even foreigners could impose as Kuwaitis and seek entry into the stock market and trace millions and billions in their kitty through illegal means is a lesson hard learnt. Had the authorities taken and kept track of the proceedings from day one, the economy wood has not crippled this badly and the sufferings by the families would not have been this dire. Estimation of Investment worth: The estimate of a worth can be calculated using various kinds of investors, each of which will have a different kind of investment objective. For instance, a pension fund may be more related with the particular assets contribution to the overall portfolio performance where as property company would be more inclined towards the re-development incentives offered by the same asset. Ergo, it is comprehendable that these different approaches will only apply to the appraisal of the same asset to varying kinds of investors. Another instance would be the various cash flow projections that may vary for different holding periods. Thus estimations are a very important aspect of marketing efficiency and it is necessary that proper estimates are applied. Works Cited Gufta. http://www.gulfta.com/forum/archive/index.php?t-4209.html (accessed May 18th, 2009). Kuwait Crisis. www.wikipedia.org/Al-Souk (accessed May 18, 2009). Read More