Taking Stock / Tall Tales About the TASE

Over time, Tel Aviv's stock market generates the highest returns for investors.

That is the No. 1 myth of Israel's capital market. That professed axiom is the basic marketing ploy of the entire securities industry, and also serves as its main legitimization.

Thing is, it isn't necessarily true. First of all, how long is "over time"? There were plenty of times when the TASE generated very low returns for the risk over periods of three, four and even over ten years.

People who make their living on the market naturally tend to choose convenient periods for comparison proving handsome returns over time. But when you check matters thoroughly, you find that gauge is irrelevant.

Secondly, looking at the performance of the Maof-25 index or TA-100 index over (whatever) time is misleading. Most managed portfolios, whether managed by mutual funds or provident funds or portfolio managers, fell far short in performance of the indices.

One reason is that when a major company listed on the Maof-25 does badly and its stock lags, it quickly drops from the index and gets replaced by a better-performing stock. Another reason is that the return of the index does not factor in management fees and buying and selling commissions.

But most importantly, the impressive returns the indices show "over time" miss the main point. Which is that most of the money comes into the stock market at the peak, and flees in the trough.

Check investors' returns when stock-based mutuals are soaking up deposits (and major shareholders are selling to them). Again you find that most of the people came in toward the peak and left close to the bottom, when the major shareholders resumed buying.

Shareholders milking their companies are to blame for most of the market's ills.

By now that isn't a myth, it's an ethos. Whether through outrageous salaries or bonuses or shareholders deals, the owners are perceived to be the root of much, if not all, evil.

Yet the real power on the market is in the hands of the institutional investors - the mutual funds, the provident funds, the insurance companies and the brokers, all those institutions managing hundreds of billions of shekels of the public's money.

If they wanted to, the institutionals could force the companies, their managers and their shareholders to adopt new management norms, and completely different scales of remuneration. They're the ones with the money and they have enough legal and economic clout to wield real power.

If the institutionals were to decide to dump all holdings in greedily managed companies, the companies would change their ways.

But the institutionals, the ones managing our money, usually refrain from brandishing their tremendous might. At the end of the day they prioritize good relations with the big companies rather more highly than their customers.

Few are willing to collide with the big companies and their managements. So the fundamental problem on the capital market isn't the shareholders, it's the institutional investors looking at the short term, which are unwilling to force through changes in norms.

The capital market of 2004 is dramatically different from that of 2003.

As stocks climbed for the skies in 2003 and sustained momentum this year, we keep hearing that. Analysts, sophistication, complexity, new institutions entering the marketplace, new advanced instruments, the Consultancy law, you name it.

But the truth is that during a boom, the capital market always looks good. Exactly the same thing was said in 1993, moments before the crash. Then they were comparing it with 1983, when the bank stocks collapsed. And come the crash, all the market's glaring faults come to the forefront, begging for reform, until the next boom.

Nothing on the market has changed in the last decade.

That's the opposite of myth no. 3, and it's just as silly. That's what we'll hear when the boom ebbs and is replaced by gloom.

But the capital market has undergone a lot of changes in the last 10 years, and one of the most important gets little mention.

The tax reform, which brought the bite on local investments nearer to those on capital gains made abroad, is the most dramatic change of the lot. When the government does finally equalize tax on Israeli and overseas gains, it will have a fundamental structural impact on the local marketplace.

When investors can compare Israeli stock market opportunities with foreign ones, both companies and institutionals will be measured by international standards, like it or not. And that will affect the behavior of both.

It is symbolic, and disappointing, that the managers of the Tel Aviv Stock Exchange do everything in their power to defer that day, when taxes will be equalized. They, who preach regulatory and structural reform, drag their feet when it comes to implementing the most important reform of all for the Israeli capital market, a reform that would make it part of the international marketplace by abolishing its protective shield of lower tax.