If the stock exchange is a road, then the investor may be likened to one who hires a car, complete with chauffeur, to tour the country. The car-hire company is the broker. The fellow assumes the company has rented him a high quality car and driver. The traffic cop is the Securities Authority. The car, with our traveller inside, and on which the traffic cop is supposed to keep an eye, is the company and its shares. The chauffeur is the company’s management.
The traveller-investor gets into the car, which seems to be all right, confident that the driver will take him in the right direction and that the traffic cop will uphold the rules of the road.
In weeks to come, we will talk about the car, the driver and the policeman. Today, we will deal with the passenger, namely the Israeli investor.
The reason for starting with the Israeli investor is that we want to show that all the ills of our capital market are nothing to do with him. We moreover expressly determine that the Israeli investor is not to blame for anything. One less worry to start with.
Contrary to prevailing opinion on and around Ahad Ha’am Street, the average Israeli investor in no wise differs from the American, German, Japanese or British investor. The Israeli investor is one who, like any other, has some money he is prepared to invest at one degree of risk or another, in the hope of making a profit.
Investors come in various shapes and sizes, ranging from the individual to the professional money manager to the institutional investor. We shall focus first on the individual, with whom it all begins. Please keep track of the money and you’ll see. We may have forgotten the fact, but all those vast sums of money, the billions and the trillions floating around in New York, or all the flow of funds on the Israeli capital market, starts from the individual. That fellow who accumulates a surplus of income over expenditure, and is seeking the best way to put the difference to work.
The Israeli investor’s first problem is how he is treated.
Israel is one of the few, perhaps the only country in the developed western world, in which sellers still decide what is best for purchasers. While gradually on the decline, this attitude is still woefully prevalent here compared to any place else. There were fairly objective circumstances that initially caused it to be adopted by various governments and it subsequently evolved into a generally accepted behavioural norm.
Our governments have always led the Israeli consumer by the nose. Initially due to a dearth of resources (the austerity era) and later by force of habit. For some reason, we forgot that the money the State uses to lay roads or pay old age pensions, comes from the individual.
"Government of the people, by the people, for the people", say the Americans. But in Israel, we march to a different tune: "My father chastised you with whips, but I shall chastise you with scorpions". That is where is all begins: with an attitude.
The first sine qua non for a stock exchange to operate as it should is this: the investor must feel he is really getting something in return for his money. He must have the sense that the people who are taking his money understand that he is due at least some gratitude in exchange.
If the investor feels the stock exchange is doing him a favour by taking his money, he will prefer to play the casino or invest in charity.
It not infrequently happens on the TASE, that the article he gets is not what the investor wanted. This not only unsatisfactory, it is distinctly aggravating. For the TASE to function as it should, it must give the investor service. Otherwise, the money meant for investment goes to another stock exchange, or simply is not invested.
So until it starts taking the investor seriously, let the TASE not expect the investor to take it seriously.
During the ‘eighties, we met a major Israeli contractor, who was then a big TASE player. Unlike many another client, he took the stock exchange seriously, an aberration whose causes we shall not outline. It took the man about ten years and a new life in another country, to recover from that wrongheaded attitude. Today he has a New York portfolio manager manage his investments.
We met him on a plane trip at a time when the Karam was flat on its face. "Why don’t you buy a little?", we suggested, "You and I both know things will recover". "Yes, things will recover", said the man, "but leave me out of it. Nothing has changed in Israel. The banks will come out to play again, the government will once more not know who is ultimately to blame. The money meant for the Karam is safer in a casino. True, the casino rips you off, but at least you enjoy it. That’s why you came there in the first place".
An American reaching the age of discretion when he may invest in a stock exchange, first looks around, studies his choices, and then, depending on what level of risk suits him, goes into action. In all our years of encountering whole droves of private and institutional investors in the United States, we have met very few who would buy into a share based on an unexplained tip.
If a company you recommend for investment has an historical record of growth and dividend distribution, that is one possibility. If the company is a new one, your customer wants a reasoned explanation as to why it is being recommended, forecasts concerning it and so forth…
Added to all of which, when an Israeli investor decides to proceed on the basis of historical performance or future promises, what basis, in fact, has he got? An historically based decision is usually reached by virtue of management’s credibility. The Israeli scene is not exactly loaded with management teams exuding an aura of credibility.
We have American-Israeli Paper Mills, we have Teva, and these have been joined, in recent years, by other managerial teams that treat the investor with respect. Once having taken his money, most Israeli managerial teams treat the investor as a nuisance to be brushed off impatiently.
As for future promises that new and old companies wave before the Israeli investor, these are a far worse proposition from his point of view. Take all Israeli and foreign issues marketed since 1990, and compare the rosy forecasts to the stark realities. Is this what happens in New York?
The difference is that the US investor believes (where Israel is concerned, perhaps naively), that once management has learned its lesson, and after the share has been slaughtered, greater credibility will attach to declarations. Look what is happening with shares such as Comverse, Technomatix, Laser Industries and others. American investors have returned to them. In Israel, investors are scared to return, since they regard the business as a trap and are confident, based on past experience, that no one has learned any lesson. One of the main reasons for this approach is the negligible quantity of shares for trading, the floating quantity, in the hands of the public. How many Israeli public companies are there in which interested parties hold less than 70%? 50%?
Compare that with the Standard & Poor’s 500 list. How many of the founders of those companies hold more than 50%? More than 10%?
When an investor, particularly a large private or institutional investor, purchases shares in a company in which the owners hold 70%, what is his status? His status is nil. Rightly or wrongly, the prevailing view in Israel is that the owners do as they please and the investor has no say. Not so in the United States.
The fact that the quantity of shares for trading is so small makes our stock exchange look less than serious. This state of affairs, of interested parties and management teams that do as they please, is not only characteristic of the TASE, but is one reason why foreign investors, especially institutional ones, steer clear of Tel-Aviv.
Our claim that the Israeli investor is like all other investors, can best be traced to the boom of 1992. Take, for example, the Isramco craze on the one hand and the Adacom craze on the other. Two different instances, but both typical and instructive.
It is not fair to blame the investors who rode bareback into the shares of those two companies. In the case of both Isramco and Adacom, Israeli investors were nourished by managerial announcements and consultants’ declarations.
You tell us, what chance of due diligence did the Israeli investing public have? You tell us, what did Messrs. Gura, Elmaleh, Toledano have to say? Please show us a few portfolio mangers and bank advisers who did not "know" that oil had been found offshore of Bat-Yam, and who did not regard Gura as the Israeli Bill Gates.
So why is the Israeli investor different from any other investor?
But show us another stock exchange from which these fellows would have emerged they way they emerged from the Tel-Aviv stock exchange. And after all this, people expect the Israeli investor, who cut his teeth on the bank shares affair, to take what happens on Ahad Ha’am seriously.
Next week, we shall discuss the other characters. But be sure we have not a single complaint against the Israel investor. We have nothing but respect for him if, after the bank shares affair, he took no steps against the banks or the government, and if, after Isramco and Adacom, he did nothing against his advisors.
Look how the Albanian investors are behaving, and show us please the difference between the Pyramid in Tirana and the 1983 bank shares.
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