Development of Capital Flow Analysis: The Author: John Oswin Schroy
The development of a new capital market forces one to see institutions in evolution, serving investors and issuers by creating new instruments and services.
In a small market, the only picture is 'the big picture'.
In the beginning, an emerging market is small and the only picture one can have is 'the big picture'.
A broad overview of market sectors and instruments is the basis for Capital Flow Analysis.
I witnessed at close hand two emerging capital markets: Brazil in the 1960s and 1970s, and Indonesia in the 1990s.
Fifty Years of Change in Five
In both the incipient Brazilian and Indonesian markets, at a certain point, institutions evolved quickly, compressing fifty years of change into five.
Investors and issuers also evolved at a fast pace. In Brazil, during the early 1960s, the popular basis for equity valuation mutated from par value to book value to price-earnings ratios in less than five years.
Expectations of institutional change are fundamental to Capital Flow Analysis.
In developed, older markets, like the U.S., institutional change is slower and may be unperceived.
In applying Capital Flow Analysis to the U.S. market, my inclination to look for institutional change, from experience in emerging markets, led me to see the bubble of the 1990s as a result of social evolution over generations.
The Role of Culture and History
Although both Brazil and Indonesia created capital markets with the usual appurtenances — stock exchanges, clearinghouses, stockbrokers, investment bankers, and securities regulators — there were differences in culture and history that influenced market behavior.
- Brazil as the world's largest Catholic nation and Indonesia as the largest Muslim country, created classes of investors and issuers with different perceptions and values.
- Brazil, colonized by the Portuguese, and Indonesia, by the Dutch, had distinct legal systems that uniquely shaped their markets.
- Brazil's stock market began to expand in the 1950s in a closed economy, without foreign investors, while Indonesia, in the 1980s, invited portfolio money in huge quantities from the first day. Different starting points and premises had different outcomes.
Culture and history often explains 'irrational' market behavior.
Working in markets with contrasting historical and cultural settings, I saw that players could act in ways contrary to what economists assume to be rational behavior.
The Irrationality Axiom and the use of cultural and historical explanations for market actions are rooted in observations in emerging markets.
The 'Themes' learning module, on this site, applies cultural and historical explanations to the U.S. capital market.
A Chance To Wear Different Hats
The rapid evolution of new institutions and products in an emerging market, a shortage of executives, and fast growing economies, opens the door to a number of careers in one lifetime.
In emerging markets, one can cram many careers into one lifetime.
An opportunity to wear various hats allowed me to see the market through the eyes of different players: bankers, brokers, fund managers, security analysts, and market regulators.
At different times, I have had a chance to be an entrepreneur, professional manager, and government advisor.
From this I learned how motivation of different issuers and investors influences financial markets.
This is the source of the Motivation Axiom in Capital Flow Analysis.
Some of the hats that I wore, that helped to form these perceptions, were:
Commercial Banker
My basic training in finance started on Wall Street in 1956 with the First National City Bank of New York, under James Stillman Rockefeller, where I learned bank operations, auditing, and credit analysis.
By the 1970s, I was a director of Chase Manhattan's Banco Hipotecário Lar Brasileiro, responsible for planning and financial controls for a 38-branch network with 3,000 employees and ninety product lines.
Security Analyst and Financial Publisher
In 1959, I founded Serviço Nacional de Investimentos, which for a decade was Latin America's largest publisher of stock market statistics, known for the Mèdia S-N, the leading Brazilian stock index during the 1960s.
This company was awarded the ABAMEC Prize in 1975 for pioneering contributions to the development of the Brazilian market. I managed this firm in partnership with J. Henry Schroeder Wagg & Co., of London.
Securities Broker-Dealer
In 1967, I founded and organized S-N Investimentos which became the largest securities broker-dealer in the Brazilian market, a position maintained until the 1990s, long after I had sold my interest. This company was associated with Banco Crefisul de Investimentos, of Porto Alegre, Brazil.
Fund Manager
During the years 1962 to 1978, I organized and managed investment funds for Chase Manhattan Bank and Banco Crefisul de Investimentos. In 1968, I set up and marketed Conta Garantia, the first money market fund.
In 1975, I organized and was a director of The Brazil Fund, a pioneer emerging market fund traded on the European market, in conjunction with Foreign & Colonial Investment Trust, Vickers, da Costa, Murray Johnstone, and Touche Remnant, of London and Glasgow.
Investment Banker and Financial Consultant
During the 1970s, I was a director of Banco Crefisul de Investimentos, CEO of Banco de Investimentos Lar Brasileiro (Chase Manhattan), and partner of Paulding Associates. In the latter firm, I advised on corporate finance to executives of international groups, such as General Motors, Xerox, International Harvester, Merck, Bayer, Rhone-Poulenc, St. Regis Paper, Otis Elevator, Pfizer, and Johnson & Johnson.
I worked on financial restructuring, going-concern valuations, mergers, acquisitions, and takeovers.
Advisor to Stock Exchanges, Clearinghouses, and Custodians
I was consultant to the Rio de Janeiro Stock Exchange, in 1967, and the Jakarta Stock Exchange during the 1990s on modernization, organization, and systems. As advisor to the government of Indonesia, I traveled to interview exchange executives, regulators, and central custodians in London, Frankfurt, Bangkok, Tokyo, Seoul, Hong Kong, Taipei, Vancouver, Sydney, Wellington, Kuala Lumpur, and Singapore.
I worked with Chase Manhattan Bank, Price Waterhouse, Arthur Andersen, the World Bank, and the Indonesian Central Depository on clearings, book entry settlement, and custodial issues.
Securities Market Regulation and Law
During the 1990s, I advised the Indonesian government on securities market development, drafting capital market laws and regulations, modernizing the stock exchange, and helping to establish the central securities depository. I received an award of appreciation from officials of the Ministry of Finance for participation in developing the Indonesian Capital Market.
Academic Background
I attended Cornell University, where I studied engineering, science, and mathematics, graduating in 1954 with a major in economics.
