The quality of securities on the local market has recently come under considerable scrutiny and, perhaps, with good reason. Commentators felt that certain securities did not deserve to be listed due to the poor financial health of the issuer.

In order to find a practical, fair and market-orientated solution, the problem has to be placed in its proper context. This would avoid rash reactions and temper expectations.

First, we have to keep in mind that, unfortunately, throughout history and across the world, markets and investors have always been susceptible to certain shortcomings. Markets tend to be greedy, euphoric, dominated by images, sentimental, gripped by fear. They sometimes over-react and become overly optimistic or brutally pessimistic.

At other times, investors under-react and remain placid when they should be buying or selling. The market often assumes that a price going up will continue going up forever, and that one going down will go down forever.

There is often the diabolic hope that a falling price will turn around in order to wipe out one's losses, as if in pity. There is also the fear of losing money by staying out of a market.

All these shortcomings are endemic in any market and mean that many prices are pushed either too high or too low. Sometimes, people feel they cannot get enough shares, bonds, property, and there is scarcity. At other times, selling seems to take ages, even with prices slashed to the bone.

Perhaps we feel such swings even more because of our small size, and the fact that most of our institutions are of the same type and, therefore, have the same orientation.

So, that's the market, anywhere, from tulip-mania to tech-mania. I started in investments when I was around 18 and the first mania I came across was the mine-mania. All the literature and advertising pointed one way: invest in mines. Not many people in Malta did because then you could invest only Lm500 abroad.

Nobody is suggesting this as a solution today, when anyone can invest Lm50,000 a year, and has the right to do with one's money as one pleases. The answer is therefore not prohibition, but education. The objective of a free society is not being prohibited from investing in a mine if you want to, but rather being educated enough in order not to sink your money in a black hole.

To a certain extent, education is a panacea, and that makes suggesting education as a solution rather facile. True, there are lots of training and education going on. The Stock Exchange, the MFSC, practitioners, the media, all contribute, but it all takes time (generations) for lessons to sink in, and they somehow never sink down enough. Look at our driving. In addition, therefore, one has to analyse the various practical options available now, since we cannot wait generations.

I can never help myself being amazed by the following typical behaviour. A normal person wanting to buy a new car spends perhaps six months comparing different models and asking all sorts of real or perceived experts about what to buy. He compares the looks, fuel efficiency, parts availability, reliability, reputation of the dealer, after sales services, and, above all, prices. He then spends his Lm7,000.

But when that same person goes to invest in a share or a bond, out of his house he goes, into the first outlet, and puts in his Lm7,000 in a jiffy. That is wrong!

Someone has to do the work, the analysis, and the thinking. If an investor wants to do it himself, and has the time and ability, then there are lots of opportunities to learn. At no other period in history was there the information flow we see today.

So, anyone who wants to start learning to analyse, and start analysing, has wind blowing in his or her sails.

Every stockbroker and adviser has those investors who are a joy: they listen to what is being said, they examine how things are being said, they think what they need, they read what is provided to them (often free of charge), they think about what might go wrong and where the opportunities are. They discuss different investments and then decide. They are the best clients to have because they have a feel, they have an understanding, of what the risk and rewards associated with a particular investment are.

If an investor does not want to do the work, then he or she must seek an adviser, a stockbroker or other professional.

Are all advisers equally good? Obviously not. Are all advisers equally painstaking in advising? Obviously not. Does their being regulated bring with it a guarantee of infallibility? Obviously not.

What applies to professionals in the financial field applies equally to other professionals. There are no ultimate guarantees and crystal balls.

Two points. First, by going to your adviser, and by seeking his or her advice to you personally, depending on your needs, attitudes and circumstances, you will soon know whether that person is for you or not, whether he is advising properly.

Second, comments which lump stockbrokers or other advisers together, as being either all good or all bad, as "not advising clients", are as shallow as when one talks in general terms about any other group of persons. We all know of great doctors and great lawyers, and others who should be avoided.

There are also a number of matters which are obvious to professionals but are not obvious at all to the proverbial man in the street. For example, the Stock Exchange has always made clear, and so have most advisers I know, that a listing on the Alternative Companies List is likely to carry more risk than a listing on the Official List.

Even the listing procedures differ markedly. And yet, this distinction is not working itself into the market. The distinction is there for all to see: in the offering documents, in the way securities are quoted, on all the advertisements.

Yet only rarely do investors ask what sort of listing a particular security has and we have to explain it on each occasion. To a large extent, it is the same with certain second tier markets in other countries. Perhaps the market is myopic in this regard and cannot make the fine distinctions which are so critical or maybe it is just a matter of time.

Another important thing to keep in mind is that a prospective investor has to look at both the financial health of a company issuing bonds and its business prospects. The first is a matter of good and proper accounting, reporting and analysis of the past and present. The second involves a study of the business, the industry, and all related matters to try and arrive at an informed opinion of the likely future performance of an investment.

While one can be pretty accurate about financial health, nobody holds the key to predicting business prospects. One seeks to study as much as possible in order to refine one's judgment but Midas is yet to be born.

A company which today is in robust financial health can be ruined by bad management or bad luck in a matter of months. A company in ruins can be phoenixed into a high-flier. We have all seen such cases.

There has recently been lots of discussion on financial journalism. I have followed the debate and participated in it on various occasions, including the excellent week-long seminar by the Tumas Fenech Journalism Foundation.

Some tentative conclusions follow. There is definitely a need for more financial journalists in Malta. We all need different opinions coming from different points of view: an adviser is primarily concerned with his clients' welfare and the market, the financial journalist with seeking and communicating "truth".

Financial journalism, however, would not on its own solve all our problems as some seem to suggest. Financial journalists may prove themselves to be quite impartial, but there is no such thing anywhere as absolute, total objectivity.

The greater the general public's support for financial journalists, the more independent they will become. Financial journalists have to go public with their conclusions and they are therefore susceptible to certain pressures to which a professional adviser, talking confidentially to his client, is not.

Finance is a public matter and we should all contribute, depending on our points of view, so long as readers know who we are. Insidious attempts to limit financial communication would lead to more abuse, not less.

Another solution proposed is credit rating. Again, credit ratings help and are a very important input into any investment decision. But credit ratings are not, and are not meant by their providers to be, the be-all and end-all of investing.

One criticism of the local market is that we are seeing more bonds than equities. I do not think this is a valid criticism. What an issuer offers the public depends on what is in the issuer's interests to offer and what the market wants. At the moment, it is bonds. So let it be.

That was much the situation in the United States when credit ratings started. Railways needed huge financing to build up the transportation required to develop a great land to greatness. Railway companies issued shares and bonds in massive amounts.

John Moody (1868-1958) started out compiling statistics on all sorts of companies and selling them in book form. After the stock market crash, which forced him to sell his business, he again set up a firm in 1909 analysing railroads and their securities and offering concise conclusions about investment quality using letter rating symbols, much like the credit-reporting firms have been using since the late 1800s.

Moody's firm developed into Moody's Investor Services and there are others such as Standard & Poor's Corporation, and Fitch Investors Service.

Rating involves both quantitative and judgmental inputs. Moody's have an excellent website and in it, among other things, they list the factors they look at and describe their approach.

They emphasise both the qualitative and quantitative aspects (ratings "are the products of a comprehensive analysis of each individual issue and issuer by experienced, well-informed, impartial credit analysts."), take a long-term view ("as a rule of thumb, we are looking through the next economic cycle or longer"), they strive for global consistency, they assess the level and predictability of cash flows (they ask: What is the level of risk associated with receiving full and timely payment of principal and interest on this specific debt obligation and how does that risk compare with that of all other debt obligations?), they examine a variety of economic scenarios, analyse accounting practices and assess sector-specific risk.

Moody's does not give one type of rating to all securities but lists 10 different types of ratings, including ratings for bonds, banks, insurance companies, and managed funds.

A rating is the first thing an investor and his adviser normally ask for because it provides the opinion of a professional credit analyst who has looked into a company, institution or country in depth.

Are raters and ratings infallible? Have rating companies been free of criticism? The answer is a definite no.

Ratings, I would say, are essential but, in advising clients, one has to put the investment and its rating in the light of the clients' circumstances, assess the client's attitude towards risk and growth, and put the investment in a wide, often very subjective, economic scenario. Investment advice goes beyond ratings in much the same way as painting goes beyond the transparency and permanence of pigments.

What does all this lead us to? There are no magic formulae in investment. Risk is there to stay, along with market vicissitudes. Advisers and regulators cannot eliminate these inherent characteristics. Analysis, rating, financial journalism are all essential, as is good advice, delivered personally and with integrity.

Market participants - all of them - have to keep in mind that we reap what we sow. One also has to keep financial health and business prospects in mind - it's more likely that a healthy bird will fly than that a weak one gets caught in a lucky gust of wind. An investor needs to beware and analyse, seek good advice, and take investing seriously, dedicating time.

Email: pvazzopardi@usa.net