Qualitative Research in Financial Markets

Trading strategies of individual investors in times of financial crisis: An example from

the Central European emerging stock market of Poland
Lukasz Prorokowski
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To cite this document:
Lukasz Prorokowski, (2011),"Trading strategies of individual investors in times of financial crisisAn example
from the Central European emerging stock market of Poland", Qualitative Research in Financial Markets,
Vol. 3 Iss 1 pp. 34 - 50
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QRFM
3,1 Trading strategies
of individual investors
in times of financial crisis
34
An example from the Central European
emerging stock market of Poland
Lukasz Prorokowski
University of Aberdeen, Aberdeen, UK
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Abstract
Purpose The purpose of this paper is to investigate equity appraisal techniques employed by
non-professional investors from the Central European emerging stock market (CEESM) of Poland. The
paper examines investment decision-making processes in the context of the current financial crisis in a
pioneering attempt to shed some light on crisis-induced changes in investment strategies. In addition,
the study tests the usefulness and predictive abilities of analytical tools employed by non-professional
investors when faced with unstable stock-market conditions.
Design/methodology/approach Questionnaires and experiments conducted with a large group
of Polish investors trading equities in their home market in order to gain information on the most
commonly used investment strategies. Their views are contrasted with similarly obtained opinions
expressed by UK non-professional investors to highlight differences in approaches to investments.
Finally, a series of semi-structured interviews was conducted to discuss how the current financial
crisis has affected investment strategies among Polish and UK investors.
Findings Technical analysis (TA) is the preferred tool utilized by non-professional investors in
Poland. However, the current financial crisis caused the majority of Polish practitioners to adopt
fundamental analysis which, in this case, is undertaken to support initial conclusions derived from
TA. At this point, investees financial statements coupled with analyses of the main macroeconomic
indicators for CEESMs became the main source of decision-influencing information.
Practical implications The paper addresses an area which is gaining in importance and is of
interest to both practitioners and service providers for non-professional investors. Further investigation
is recommended of nascent challenges to investing in CEESMs with practical implications for policy
makers and investors.
Originality/value The current paper refers to the global financial crisis which occurred in the
years 2008-2010. To date, there are no previous studies devoted to an investigation of how investors
trading strategies were influenced by the international financial crisis. Moreover, there are relatively
few studies which target practitioners from CEESMs. The paper focuses on the non-professionals, as
this group of investors seems to be relatively under-researched. Therefore, a number of important
implications can be drawn from the current paper with regard to investment strategies tailored to
overcome a financial crisis.
Keywords Poland, United Kingdom, Stock markets, Investors, Equity capital, Investment appraisal
Paper type Research paper

Qualitative Research in Financial

Markets 1. Introduction and brief literature review
Vol. 3 No. 1, 2011
pp. 34-50 Nowadays, non-professional investors can avail themselves of numerous approaches to
q Emerald Group Publishing Limited analyzing investments. Among the two most widely discussed equity investment strategies
1755-4179
DOI 10.1108/17554171111124603 are fundamental analysis (FA) and technical analysis (TA). The latter approach, however,
 has been strongly criticized in previous literature which indicates that prices of equities Trading
change in a random fashion. Therefore, reliance on historical data and sketching of trends strategies in
through TA might not prove profitable for investors (Fama, 1970). Nevertheless, an initial
investigation indicated that the majority of non-professional investors in Central European times of crisis
emerging stock markets (CEESMs) utilize TA when trading with equities. This result is
consistent with the findings of Roscoe and Howorth (2009) and Knipe (2002), who argue that
simple TA rules employed by non-professional investors are useful for forecasting price 35
movements in developing markets. Knipe (2002) defined CEESMs in accordance with the
Morgan Stanley Capital International Index. According to Knipe (2002), CEESM included:
Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania,
Slovak Republic and Slovenia. A similar definition of CEESM is adopted in the current
paper which investigates the preferences of Polish and UK non-professional investors
regarding their approaches to equity investments during the current financial crisis.
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In discussing aspects of FA, the study draws on Graham and Dodd (2004) and
Poterba et al. (1988) who defined FA as an investment appraisal tool that investigates
financial statements, the financial-economic environment of the investee company and
its competitors and markets. According to Poterba et al. (1988), the main goal of FA is to
make financial forecasts and target mispriced securities before market participants
recognize any discrepancies in security prices. On the other hand, Knipe (2002) defined
TA as an investigation of securities based on studying the price and volume history of a
particular stock. Unlike FA, TA does not utilize information about the financial standing
of the investee companies or its economic environment.
Apart from discussing theoretical aspects of different equity investment approaches,
the current paper seeks to identify the trading strategies which may be of most interest to
both domestic and international investors. Since these strategies have been set against
the background of the current financial crisis, the study draws on the theory that financial
crises are indeed alike. Henceforth, findings from the current paper could be attributed to
the future events associated with global financial crises. Strong evidence supporting the
thesis that the findings reached in this study could fit multiple shocks affecting stock
markets was delivered by Dungey et al. (2010). In this context, the authors analyzed
global financial crises from 1998 to 2010 using stock returns on emerging and advanced
markets. Based on the empirical findings, the researchers argued that financial crises
were alike. However, identification and analyses of commonalities of financial crises and
factors that propagate them created only one theoretical dimension. The current study
adds new insights regarding this issue by investigating equity investment appraisal
techniques adopted by non-professional investors during the times of the global financial
crisis. In particular, the paper examines the responses of non-professional investors to the
economic downturn and unstable market conditions.
As far as analyses of equity investments during financial crises are concerned, little
has been done to investigate equity investment appraisal techniques used by
non-professional investors during these crises. The large body of academic literature
focuses on the causes of financial crises affecting emerging stock markets. Kaminsky
and Reinhart (2003) indicated that financial crises affecting stock markets were caused
by information asymmetries and network effects, while Pavlova and Rigobon (2007)
found that financial crises were alike and caused by institutional imbalances, and Allen
and Babus (2008) focused on speculative attacks that trigger financial crises.
Nonetheless, the above mentioned studies indicated that it was feasible to specify
 QRFM a theory whereby equity investment appraisal techniques would be affected in a similar
3,1 fashion regardless of the nature of the factors propagating financial crises. Therefore,
findings from the current study may provide some clue about the influence of the current
crisis on the decision-making processes and trading strategies employed by
non-professional investors.
The current paper also addresses the problem of the absence of academic literature
36 devoted to analyzing equity investment processes in CEESMs, an issue highlighted by
Schroder (2000), Claessens et al. (2003) and Middleton et al. (2006). The authors decided to
seek the views of institutional investors involved in trading equities in the region in
order to assess the profitability of equity investments in CEESMs. Middleton et al. (2006)
interviewed a cross-section of investment professionals who possessed extensive
experience of trading equities in Central Europe. Their study produced a range of
interesting findings concerning investment decision-making processes, barriers to
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equity investments and motivations for investing in stock markets such as Poland.
Schroder (2000) and Middleton et al. (2006) both note that institutional investors
became interested in equity investments in CEESMs in the early 1990s. The authors
suggested that the interviewed practitioners used empirical measures of companys
performance (i.e. FA) while evaluating equity investments. However, Middleton et al.
(2006) highlighted the absence of reliable data and poor quality of financial statements
that made FA inefficient as an equity investment appraisal tool with reference to Central
European emerging markets. Against this backdrop, the current paper investigates the
profitability of FA adopted by non-professional investors associated with CEESMs. The
present study employs a similar methodological framework, and hence embarks on
interviews with a cross-section of both UK and Polish investors who possess a great deal
of experience in trading with Polish equities.
The research conducted by Middleton et al. (2006) and Schroder (2000) needs
updating because the authors focused on a period encompassing the early 1990s, since
when much has changed in the region. For example, the Warsaw Stock Exchange was
based in former communist party headquarters (KC PZPR) when, in 1991, the first
session took place. Back then only five companies were listed on the Polish stock market:
Tonsil, Prochnik, Krosno, Kable and Exbud. Nowadays, there over 400 are listed. Also,
in the early 1990s, no computers were used, and purchase orders were written down on
blue pieces of paper, with red pieces of paper reserved for sell orders. With no software,
the trading sessions were held on a weekly basis and stock prices calculated upon fixing.
In the 1990s, the stockbrokers were mainly young enthusiasts of capital markets
rather than professionals. In the first years of the functioning of the Warsaw Stock
Exchange, international investors were almost non-existent and brokerage houses
clients were mainly non-professional domestic investors; this contrasts with the claim in
Middleton et al. (2006) that foreign equity investment funds became interested in
CEESMs during the early 1990s. Nonetheless, previous studies have indicated that
equity investments on the Warsaw Stock Exchange became problematic due to a small
number of quoted companies which resulted in hiking up of equity prices (Schroder,
2000). As a result of such actions, the first speculative bubble burst in 1994. The Warsaw
Stock Exchange Main Index fell by 70 percent in its value that year. Investors and
researchers used to compare this crisis to the tragic events on wall street in 1929
(Claessens et al., 2003). Additionally, Koke and Schroder (2003) argued that back in 1994,
 the Warsaw bourse was of a microscopic size, if measured by the total capital of listed Trading
companies to Polish GDP. strategies in
Former studies described the adjustment of investment appraisal techniques to
institutional barriers and risks predominating emerging stock markets. Hereto, times of crisis
Middleton et al. (2006, 2007) reported that equity investors complained about the issues
of corruption and poor corporate governance in Central Europe which caused them to
shift away from traditional aspects of FA to focus on management competencies and 37
measuring governance structures. However, Schroder (2000) pointed out that illiquidity
and the size of investee companies also affected investment approaches in Central
Europe. Similar conclusions were reached by Wong (1995) and Cheung and Coutts (2000)
with reference to the Asian emerging stock markets. It took several years of reforms and
implementing improvements before the Polish capital market matured to become a
regional leader. This is impressive because none of the post-communist markets evolved
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at such a rapid pace and with such a well-organized stock market, one that was offering a
large variety of investment products. None of the neighboring stock exchanges in
Central Europe reached the same level of liquidity and transparency. In this context, the
above mentioned studies laid foundations for the current research which investigates
changes in equity investment appraisal techniques caused by the investment barriers
which emerged against the background of the current financial crisis.
From inspection of the above discussion, it becomes obvious that new research on
CEESMs is needed to refresh the knowledge of the functioning of these markets. To this
end, the current paper attempts to shed some new light on the issues raised in previous
studies. Therefore, the study focuses on problems concerning FA and TA flagged by
non-professional investors and attempts to find out what exactly has improved in terms
of market transparency, data accessibility and quality of financial statements in the
stock market of Poland. Previous qualitative studies (Middleton et al., 2006, 2007)
targeted UK institutional investors associated with CEESMs, but interviewing domestic
(Polish) non-professional investors remains novel.
Summing up, the academic literature has suggested several theoretical avenues that
are employed in the current study. One of the particular theories analyzed in the study
refers to the notion that equity investments in emerging stock markets such as Poland
aim for overall portfolio risk reduction and return enhancement (Divecha et al., 1992;
Middleton et al., 2007). Against this backdrop, the current study attempts to link the use
of TA and FA to the desires for higher returns and lower investment risks expressed by
non-professional investors in Poland and the UK. Therefore, the findings provided in the
paper could turn out to be useful for practitioners wishing to discover which equity
appraisal techniques should be employed to achieve either risk-reduction benefits or
higher returns in times of the current financial crisis. The structure of this study allows
for comparison between investment approaches of the UK and Polish investors but, in
addition to this, setting the study against the background of the current financial crisis
delivers unique findings regarding how investment approaches are influenced by the
adverse effects of a global financial crisis. A specific attempt is made to examine the
behaviour of a large number of UK and Polish investors in order to find out whether their
use of TA and FA (or other equity investment appraisal approaches) varied during
financial crises.
The remainder of this paper is organized as follows. The next section outlines the
methodology and research methods employed in the study. The qualitatively obtained
 QRFM findings are then discussed. The principal conclusions of this study are then
3,1 summarized with areas for future studies suggested.

2. Methodology
The study uses interviews and questionnaires coupled with an experiment adding
findings and explanations that broaden the existent knowledge base in the area. The
38 qualitative research framework employed in this study enables new theories to be
formulated and important conclusions to be drawn. The questionnaires utilized in an initial
stage of this study enabled the researcher to approach a large number of non-professional
investors in a timely manner. Care was taken to ensure that all definitions employed in the
research were clearly explained and outlined; this thereby allowed interview concepts to be
specified and non-professional investors to be identified for an interview.
The study uses responses to a questionnaire sent to non-professional investors in
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Poland and the UK. As a first step, practitioners associated with various investor clubs
were invited to take part in completing the questionnaires; the questionnaires focused on
preferences for investment approaches among UK and Polish investors. Investors who
were actively involved in trading with Polish equities were then considered further.
Employing one market and two groups of investors (the UK and Polish) injects a dose of
realism into the study and enables reliable comparisons to be drawn between
approaches to investment in equities traded on the Polish market during the current
financial crisis. No attempt is made to contrast investment decision-making processes
among non-professional investors with reference to the UK and Polish markets. First,
these markets differ significantly, with trading organized in differing ways. In addition,
the two markets were affected by the global financial crisis to varying degrees (Warsaw
Stock Exchange, 2010; Dungey et al., 2010). Finally, the UK market is classified as an
advanced market whereas the Polish has been promoted to the group of advanced
emerging market in October 2008 (Warsaw Stock Exchange, 2010). Henceforth, to avoid
discrepancies in analyzed information and bias in results caused by market status, the
study focuses on investors associated with one market Poland.
Having selected only those practitioners who undertook equity investments in the
Polish market during the current financial crisis, the selection process eliminated those
individuals whose Polish investments did not exceed 1 percent of the total value of their
equity portfolios. Since the study is designed to investigate approaches to investing in
Poland by both the UK and Polish investors, a bias toward internationally diversified
portfolios, in which Polish investments are insignificant and did not incur equity
appraisal approaches, was eliminated.
Since the study encompassed multiple respondents in its initial stage, the results from
the questionnaires had to be verified. To address this point, the study used a form of
experiment. The experiment represents a case study that delivers information which can
be utilized to discover various equity investment approaches. The experiment gives
respondents a choice of specific approaches to equity appraisal and tests the practical use
of the investment approaches outlined by the investors in their questionnaire responses.
Moreover, the experiment allows for eliminating those questionnaires which were filled in
an ad hoc manner. Since the questionnaires embraced a large number of respondents, there
is a risk that some non-professional investors might have provided unreliable information
by not treating the study seriously. If the results from the questionnaires indicated large
discrepancies with the investment approaches highlighted in the case study, an attempt
 to contact a respondent was made to clarify the differences. Questionnaire respondents Trading
had an option to provide their contact details in the form of an e-mail. In most cases, the strategies in
individuals contacted confessed that they had not given the questionnaires and the
experiment a great deal of attention and either amended their responses or decided to times of crisis
withdraw from the study. As a result of the various steps outlined above, the results
provided by 117 non-professional investors in Poland and 28 non-professional investors in
the UK formed the sample for analysis. The basic characteristics of these respondents are 39
presented in Table I. The table reveals that the respondents possessed a great deal of
experience about investing in a CEESM of Poland. The value of investments during the
current financial crisis was also significant. Most non-professional investors were aged
between 20 and 35 years.
Next, the questionnaire participants were invited to discuss their approaches to equity
investments during the global financial crisis. At this point, 11 UK investors and 41
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Polish investors agreed to attend semi-structured interviews allowing them to discuss

the challenges and barriers to adopting particular equity appraisal approaches in Poland,
and how the current financial crisis affected their investment decision-making processes.

Percentage

Age distribution
20-25 19
26-30 22
31-35 20
36-40 14
41-45 12
46-50 8
51-55 3
56 2
Gender distribution
Female investor 42
Male investor 58
Country of origin
UK 24
Poland 76
Trading experience (years)
0-5 19
6-10 51
11-15 20
16 10
Value of investments on Polish market (January 2008-January 2010) (k GBP)
0-1 4
1-5 17
5-10 21
10-15 22
15-20 16
20-25 11
25-30 6
30 3 Table I.
Respondents
Note: This table provides background information regarding the participants in the study background
 QRFM However, due to time constraints only ten UK non-professional investors and 15 Polish
non-professional investors were ultimately interviewed. The details of the interviewees
3,1 are presented in Table II. A visual inspection of Table II reveals that both groups of UK
and Polish non-professional investors have similar experience in equity investments.
The semi-structured interviews took place in the UK and Poland in January-March
and June 2010 and therefore might refer to different investment periods. The interviews
40 lasted approximately 40-60 minutes; transcripts of the recorded conversations were
made within 24 hours. The interviewees were guaranteed anonymity. The structure of
the interviews allowed for the provision of extra guidance if required into the matters
being investigated[1], as well as for timely follow-up questions to be asked. If, on
reflection, any issues were thought to require further clarification or explanation,
the interviewees were contacted by e-mail.
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3. Findings
Investors preferences for selected equity investment appraisal techniques are contained
in Table III. The results as shown in the table allowed four major approaches to equity
investments to be distinguished among non-professional investors. Apart from

Investment Value of
Interviewee Age experience Country investments Educational
code (years) Sex (years) of origin (k GBP) background

PL001 56 M 16 Poland 10-15 Economics

PL002 41 M 11 Poland 10-15 Investments
PL003 27 M 3 Poland 5-10 Management
PL004 28 M 6 Poland 5-10 Politics
PL005 26 F 5 Poland 10-15 Finance
PL006 31 M 7 Poland 5-10 Investments
PL007 35 M 7 Poland 10-15 Accountancy
PL008 45 M 8 Poland 15-20 Finance
PL009 33 F 9 Poland 1-5 Finance
PL010 44 F 11 Poland 10-15 Finance
PL011 40 F 7 Poland 20-25 Investments
PL012 55 M 14 Poland 25-30 Economics
PL013 61 M 15 Poland 15-20 Finance
PL014 23 F 4 Poland 1-5 Management
PL015 38 F 9 Poland 20-25 Finance
Average 39 60 % M 9 Poland 10-15 Finance
UK016 31 M 5 UK 10-15 Investments
UK017 33 M 7 UK 15-20 Accountancy
UK018 45 M 11 UK 25-30 Management
UK019 56 M 15 UK 20-25 Finance
UK020 29 M 6 UK 10-15 Economics
UK021 27 F 5 UK 10-15 Finance
UK022 40 M 18 UK 20-25 Finance
UK023 55 F 10 UK 25-30 Finance
UK024 39 F 4 UK 10-15 Management
UK025 28 M 7 UK 10-15 Property
Average 38 70 % M 9 UK 15-20 Finance
Table II.
Interviewees details Note: The table provides further details about the participants
 Trading
Percent of non-professional investors preferring particular equity
investment appraisal tools strategies in
TA FA AV X times of crisis
Polish investors 48 29 19 4
UK investors 36 54 7 3
Notes: TA, non-professional investors prefer to use TA as primary equity investment appraisal tool; 41
FA, non-professional investors prefer to use FA as primary equity investment appraisal tool; AV, non-
professional investors rely on the advice of third parties or follow investment decisions of high-profile
investors; X, non-professional investors rely on their own intuition; the choices of equity evaluation
approaches are ranked in accordance to their importance for non-professional investors; the term first Table III.
choice means that this strategy would be prioritized over the others in equity appraisal approaches; First-choice equity
the percentage numbers of non-professional investors correspond to each approach; for example, investment approach
48 percent of the interviewed practitioners from Poland indicated that TA was their first-choice of non-professional
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approach to investment appraisal investors

TA and FA, the non-professional investors associated with the Polish stock market
employ two additional styles of equity appraisal; specifically, they rely on the advice of
other investors (AV) or their own intuition (X). It turned out that while most of the
non-professional practitioners use a mix of different investment approaches, they
always prioritize one decision-making process. As far as the UK non-professional
investors are concerned, they mostly (in 54 percent of cases) employ FA to evaluate
equity investments in Poland; this preference for FA over TA was not affected by the
global financial crisis. In contrast to these findings, their counterparts in Poland
preferred TA (the first choice of 48 percent), but the crisis encouraged the majority of
the nations non-professional investors to utilize FA in their equity appraisal approaches.
The findings also indicate that non-professional investors from Poland are more likely
to rely on advice from their colleagues than are the UK-based participants in the study, but
do not employ any analysis while targeting prospective investments. This phenomenon
has recently increased due to market uncertainty. To this end, non-professional investors
follow the investment choices made by high-profile investors; 15 percent of the
interviewed practitioners from Poland followed the investment strategies of known and
respected investors. For the purpose of clarity, this approach was classified as following
other investors advice (AV).
The interviewed practitioners argued that the usefulness of TA with reference to the
Polish stock market was evidenced by the existence of easily identifiable stock price
trends. Against this backdrop, both UK and Polish non-professional investors analyzed
trading volumes and trends in stock prices. The elements of TA on which
non-professional investors relied during the current financial crisis are summarized in
Table IV. A visual inspection of this table reveals that Polish non-professional investors
are more inclined to utilize modified graphs than their counterparts from the UK. On the
other hand UK investors, unlike Polish practitioners who focused on TA as their equity
appraisal approach, tend to look at market statistics. The majority of investors from both
groups analyzed trading volumes and trends in equity prices.
However, in the wake of increased stock price volatility and investor uncertainty
caused by the current financial crisis, the practitioners admitted to using additional
equity appraisal techniques in their decision-making processes. Against this backdrop,
 QRFM
TA Considered (%) Not considered (%)
3,1
Percentage of Polish investors utilizing elements of TA
Modified graphs 78 22
Market statistics 45 55
Trading volume 96 4
42 Trends 91 9
Percentage of UK investors utilizing elements of TA
Modified graphs 65 35
Market statistics 75 25
Trading volume 97 3
Trends 76 24
Table IV. Notes: This table presents common elements of TA and corresponding numbers of non-professional
Investors using TA investors utilizing them; the definitions provided in this table were carefully explained to interviewed
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elements considered practitioners to avoid misunderstanding and biased, ambiguous answers

the interviewees domiciled in Poland and the UK highlighted the crisis-induced

importance and usefulness of FA. The breakdown of the elements considered via FA is
presented in Table V. Inspection of Table V reveals that UK investors are more likely
to analyze financial and cash-flow statements than are Polish non-professional
investors. On the other hand, non-professional investors in Poland are more likely to
avail themselves of public announcements than their counterparts from the UK.
However, the majority of investors in both groups analyze balance sheets and various
ratios (e.g. P/E B/V) but are not inclined to evaluate equity investments based on
executive summaries and quantitative models.
It emerged during the interviews that a majority of non-professional investors
investigated investee companies financial statements more thoroughly in times of
increased market instability. Prior to investing in an investee company, non-professional
investors, utilizing FA as a supplement to TA, considered projections of net profits by
targeted firms. However, the majority of Polish companies had lowered their forecasts
in June 2009, predicting lowered levels of future profits compared to 2008; this points

Percentage of Polish investors Percentage of UK investors

FA Considered Not considered Considered Not considered

Audit report 37 63 41 59
Financial statement 78 22 95 5
Balance sheet 93 7 94 6
Cash flow statement 67 33 83 17
Executive summary 17 83 11 89
Public announcements 87 13 56 44
Ratios 92 8 95 5
Quantitative models 33 67 31 69
Notes: The table summarizes the percentage number of non-professional investors who responded to
Table V. the questionnaires indicating whether they consider particular element of the FA in their investment
Investors using FA strategy; the definitions of FA elements provided in this table were carefully explained to interviewed
elements considered practitioners to avoid misunderstanding and biased, ambiguous answers
 to the existence of financial pressure and economic burden exerted by the crisis. Trading
Nonetheless, the non-professional investors from Poland and the UK reported finding strategies in
net profit projections generated by investees useful during the current financial crisis.
For example, interviewee PL006[2] noted that: times of crisis
If we compare the quarterly financial statements, it turns out that net profit projections
generated in third quarter of 2009, in comparison to the first three months, are ten times better
among the companies assigned to the WIG20 index (Index encompassing 20 most liquid and 43
largest blue-chip companies listed on Polish stock market). Moreover, analyzing these reports
provide invaluable insights into the crisis-recovery symptoms and anticipate prospective gains
from equity investments. On the other hand, analyzing the net profit projections in particular,
informs international investors about any vulnerabilities or poor financial standing.
At this point, net profit projections were treated by non-professional investors as an early
warning signal, causing non-professional investors to re-evaluate their investment
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decisions concerning companies that might experience serious financial changes in future.
Analyses of the published projections of targeted companies became a routine for
the non-professional investors during the current financial crisis. According to the
participants, it ensured that they made the right decisions, and therefore played a vital
role in the investment process. Moreover, having the information concerning predicted
net profits and knowing the number of securities issued by a certain company, allowed
non-professional investors to measure how expensive the equities were.
The interviewees highlighted additional benefits from analyzing the financial
statements of traded companies in Poland. It turned out that the reports deliver
important information regarding how a certain investee company might respond to a
financial crisis. In this context, interviewee PL001 focused on growth, noting that:
In several instances, net profits have been achieved thanks to substantial cuts in costs. This
means that an investee managed to survive the first wave of the current financial crisis but
did not necessarily explain that there is any growth potential. Without this potential,
next quarter might be quite difficult for a traded company.
While PL017 suggested that close analysis of the financial statements was vital:
Analyzing the structure of costs in balance sheets is particularly important for investors
active on the Polish stock market. If it turns out that the costs of raw materials have declined,
an investee company will reduce production, and hence achieving lower profits.
With regard to providing detailed descriptions of their investment processes, the
non-professional investors were asked several technical questions concerning
operational aspects of investing in the Polish stock market, mixed with general
enquires about their analyses. Both the UK and Polish practitioners developed similar
structures and procedures for investing on Polands stock exchange, but according to the
interviewees, the current crisis exerted pressure on their investment processes,
contributing to the increased monitoring of the targeted equities and markets prior to
and after an investment decision. Moreover, the crisis forced the UK investors to adopt
new approaches toward targeting investments in Poland. To this end, one of the main
impacts of the unstable market conditions related to the abandonment of the price to
earnings ratio (P/E) in FA. This indicator was calculated from data relating to previous
quarters and hence was regarded by the UK investors as unsuitable given the increased
market volatility; interviewee UK017[3] noted that:
 QRFM The implementation of the P/E ratio raised reservations. If calculated in June 2009, this
indicator reflected the horrible situation at the end of 2008 and February perturbations
3,1 affecting the attractiveness of the targeted company. Therefore, relying on price to earnings
ratio did not make any sense until the market conditions became more stable.
Discussing various aspects of FA, the UK investors admitted backing their decisions
with macroeconomic indicators for CEESMs and Poland. However, the non-professional
44 investors pointed out several issues relating to discrepancies in the forecasts of the main
economic determinants. In this context, the UK-based investors complained about
superficial analyses, indeterminable recommendations and misleading forecasts
produced by investment banks in their assessments of market conditions in Poland.
In the face of the multiplicity of various predictions for the same economic indicators,
the interviewees preferred to rely only on forecasts published by domestic authorities or
institutions such as the International Monetary Fund; for example, interviewee
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UK021[4] noted that:

The approach to investments, in times of the current financial crisis, must be based on the
accurate appraisal of the macro-economic framework binding the financial markets.
However, given the variety of predictions for the same investment determinants,
international investors might be urged to abandon some of the lucrative investment due to
the unfavorable opinions of market conditions expressed by financial institutions. Therefore,
it became obvious that the case of faulty predictions must be resolved.
According to the practitioners from Poland and the UK, Polands economy was not
unduly influenced by the financial crisis of 2008-2009 and this was reflected in the
emergence of equity investment opportunities, despite the negative predictions published
by rating agencies and investment banks. The interviewees complained that investment
banks could not reach an agreement on Polands economic situation with reference to the
performance of its stock exchange; for instance, UK022 argued that:
The BNP Paribas report [. . .] concluded that Polands exports shrank by 18.9% in the first
three months of 2009 and Poland fell into recession in March 2009. In contrast to this report,
other financial institutions declared that Poland never experienced recession during the
current financial crisis.
Throughout the current financial crisis, the non-professional investors admitted
experiencing additional problems associated with the accurate appraisal of equity
investments in Poland. In this regard, they took additional precautions and checked their
investment approaches with the forecasts of financial analysts and stockbroker
advisors; moreover, they began to evaluate equity investments based on the choices of
high-profile investors. However, the current financial crisis resulted in a large number of
practitioners carelessly analyzing the Polish market and making invented projections
(Warsaw Stock Exchange, 2010). Therefore, the approach to equity appraisal based on
intuition and advice from other investors put non-professional investors at risk
when they followed inappropriate choices and misleading advice. Nevertheless,
non-professional investors in Poland were willing to accept this risk.
In terms of sources of advice, interviewee PL006 suggested that:
There are several magical surnames of well-known practitioners non-professional investors
in Central Europe used to follow. Whenever a high-profile investor of that magical name
launched an investment, throng of other non-professional practitioners followed his steps.
 While PL004[5] claimed that: Trading
For anyone unfamiliar with the Central European region [. . .] the tangle of mutually exclusive strategies in
expertise and opinions can lead to confusion and mistakes. In Poland, however, the problem of times of crisis
unreliable information provided by the analysts was solved due to the revival of the Education
and Information Order Council filtering harmful information announced by incompetent
analysts or speculators. This may explain the willingness of Polish non-professional investors
to rely solely on external advice or expert knowledge of other market participants. 45
When describing how investment approaches were adjusted to the current financial
crisis in the Polish market and following the investment decisions of high-profile
investors the interviewed practitioners also touched on aspects of insider trading; for
example, PL011 argued that: with reference to Polands stock exchange, insider-traders
reduced their investments to PLN 35 mln in 2009; while PL015 suggested that:
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[. . .] the individuals from boards of directors and those having access to strictly confidential
information reduced their trading activity on Polish market during the current financial crisis
and invested five times less than in preceding years.
This pattern caused concern among the interviewees, particularly those from Poland
who followed the methodology of insider traders. According to the interviewees, this
significant decline in trading activity among investors who had access to privileged
information and tip-offs meant that the situation in Poland remained uncertain. This
concern was not confined to the Polish-based investors; for example, interviewee
UK025 noted that the insiders:
[. . .] hesitation and passive attitude delivered warning signals that should be taken into
consideration by other investors. If the insiders did not invest in their own targeted
companies or traded companies that they invigilated, this would mean that equities of these
companies were overpriced.
Having discussed aspects of FA and those who follow the advice of other investors, the
interviewees touched on the usefulness and predictive abilities of TA, pointing out
specific traits associated with equity prices co-movements. The cyclical fluctuations in
stock exchange indices of Central and Eastern Europe were taken into consideration for
a long time by Polish-based investors; according to these practitioners, the Polish stock
market witnessed a decrease in investor activities during summer holidays and
Christmas time. Relatedly, TA allowed for the implementation of financial strategies
against periodic bear markets and liquidity disruptions, especially in times of increased
market uncertainty. However, these assumptions were refuted by the UK-based
investors who indicated that, despite lower equity turnover volumes, in December 2009
all Central European stock exchanges experienced significant growth in the prices
of traded equities. However, these investors based their decision-making processes on
figures corresponding to trading volumes of equities in Poland.
Interviewee UK018 expressed a view that was common to interviewees from both
countries:
Since UK investors evaluate the structure of trading and turnover volumes for equities prior
deciding on investment operations in Poland, the stock exchanges that resembled the
balanced turnover structures similar to those in advanced financial markets or UK would
attract UK non-professional investors and enable them to successfully use certain elements of
TA, e.g. Analyzing Trading Volumes or Trends.
 QRFM Against this backdrop, the interviewed practitioners were convinced that Polands stock
3,1 market is structured in a way that enables investing in large, liquid companies
representing all sectors. More generally, the interviewees argued that TA enabled them to
hedge their positions against their countrys economic performance; such diversification
remained impossible in other CEESMs such as the Czech Republic and Hungary where
trading with equities was concentrated around a small group of investee companies.
46 A further investigation of apparent inconsistencies in the preferred investment
approach of Polish- and UK-based non-professional investors revealed different motives
underlying their first-choice of an equity investment appraisal technique. Apart from the
above discussed crisis-induced factors influencing investment decisions processes, an
important role was played by the general motives highlighted by Divecha et al. (1992)
and Middleton et al. (2007) in a selection of equity appraisal approaches. Here,
non-professional investors from the UK were more inclined to use FA as this approach
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suited their overall motives for investing that focused on risk reduction in equity
portfolios. On the other hand, Polish non-professional investors decisions were
motivated by return enhancement and, thus, the interviewees highlighted the usefulness
of TA. According to both Polish and UK non-professional investors, TA was a suitable
basis for a return enhancement strategy during the current financial crisis. However, the
latter group of investors was interested in a risk reduction investment strategy and
hence found FA more suitable for this type of approach. Opinions expressed by the
interviewees about the usefulness of FA and TA for risk reduction and return
enhancement purposes are summarized in Table VI.
Despite the financial volatility which began to appear in Polish stock market in 2008,
the interviewees agreed that the Polish bourse became a financial hub for the Central
European region and was a dynamically growing market facilitated by its developed
market infrastructure. The investors expressed positive opinions concerning
investments on Polands stock exchange. Whilst the interviewees pointed out that the
CEESMs were remnants from the era of socialist dictatorships (and hence were
associated with corruption, poor corporate governance and other concerns mentioned by
Schroder (2000) and Claessens et al. (2003)), they found Poland free of these risks. Neither
the transparency of the companies listed on the Polish stock market, nor the quality of
financial reporting and issues with corporate governance raised concerns among foreign
investors. Interviewee UK023 expressed this confidence in the following terms:

Polish investors UK investors

Equity appraisal techniques found useful for risk reduction (percentage of respondents)
FA 57 74
TA 29 18
AV 11 6
X 3 2
Equity appraisal techniques found useful for return enhancement (percentage of respondents)
FA 32 36
TA 54 51
Table VI. AV 12 8
Purposes of using FA and X 2 5
TA by non-professional
investors Note: This table summarizes the views of interviewees regarding the purposes of using FA and TA
 Fortunately, equity investments in such countries as Poland are not affected by these types Trading
of risk to the extent that investing becomes a challenge. The brokerage houses operating
on the Polands stock exchange administer reliable information from the stock market strategies in
to non-professional investors supporting them with the increased monitoring of the times of crisis
economic events in Poland during the financial crisis. Moreover, the brokerage houses lay
emphasis on educating non-professional investors about the functioning of the stock
exchange[6].
47
In summary, the findings from this qualitative research suggest that the CEESM
of Poland can be viewed as being defined by constant change. As interviewee UK017
put it:
One should note that emerging markets such as Poland are characterized by the term
developing and hence are constantly changing. In October 2008, for instance, Polands stock
exchange was promoted to Advanced Emerging Stock Markets status. This exerted pressure
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on investment approaches which changed accordingly.

This paper has addressed the nascent investment approaches of non-professional
investors in the Polish market. Since academic literature has created several areas for
future research in the field of investment approaches in the emergent exchanges of
Central Europe and the role of non-professional investors a fresh look at the
CEESMs with evidence from Poland was needed, particularly given the rapid changes
which have reshaped those markets.

4. Conclusion
The current financial crisis has influenced the equity investment approaches of
non-professional investors in many areas. However, and for perhaps the first time in the
history of the stock markets in Central Europe, during the current financial crisis
non-professional investors associated with the Polish stock market displayed a better
sense of market situation and equity valuation than many market professionals. At the
beginning of 2010, Polish media revealed that non-professional investors outperformed
institutional investors with reference to equity investments. Against this backdrop, the
question of what investment approaches were employed by these investors and how
they were applied to their equity investments during the current financial crisis
became pertinent. Moreover, this phenomenon sparked off a discussion about whether it
is profitable to follow investment decision-making processes adopted by
non-professional investors. To this end, the current paper has attempted to address
these questions and shed some light on the equity investment approaches that proved
successful for non-professional investors. The findings, therefore, become of practical
importance for practitioners investing in Polish stock market, thus bridging the gap
between theory and practice.
The paper has outlined the results from qualitative research (questionnaires,
interviews and an experiment) conducted on a large sample of non-professional
investors from the CEESM of Poland, and contrasting them with similar findings
derived from UK non-professional investors. The paper has reported that CEESM
non-professional practitioners, unlike their counterparts from advanced stock markets,
relied mainly on TA as a primary tool for equity appraisal. However, during the
current crisis, non-professional investors became inclined to utilize FA in order to
capture nascent tail risks associated with investing during unstable financial market
 QRFM conditions. In this context, the non-professional investors tended to look at investees
3,1 financial statements, balance sheets and cash-flow statements, as well as becoming
more receptive to external information and advice from other investors regarded as
renowned experts in the investing domain. The findings concerning the use of FA as a
primary equity appraisal technique support the theory developed in the academic
literature in which the current paper is rooted whereby FA allows for significant
48 risk reduction.
The findings also highlight similarities in the equity valuation techniques employed
by both Polish and UK non-professional investors. The domestic and foreign
practitioners both developed strategies for investing in Poland that closely resemble the
FA approach. Most of the interviewees also pointed out the existence of trends and
specific traits in Polish market behaviour that enabled them to successfully implement
TA (which proved to be profitable due to the slow dissemination of information into the
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public domain). The findings therefore add significant insights into the academic
debate regarding the challenges and barriers associated with investing in CEESMs.
These findings also suggest that, during the current financial crisis, non-professional
investors decided to back their decisions with FA, thus allowing for better estimation of
tail and systemic risks associated with capital markets. FA was also associated with
motives of risk reduction, primarily amongst the UK investors; more generally, the
current paper reports increased investment-risk awareness among non-professional
investors associated with Polish stock market.
The current paper has discussed several investment approaches in the specific
context of the global financial crisis. However, the qualitatively achieved findings
potentially overlook macro-level uncertainty among non-professional investors that
might affect their decisions to rely on their intuition. Nevertheless, the percentage of
non-professional investors who intuitively invested in Polish equities remained
insignificant for the first and secondary preferences. Therefore, the study focused on the
increased importance and usefulness of the FA and, hence, contributed to the existing
academic literature devoted to analyzing aspects of various trading strategies. It
remains the case, though, that a study investigating the notion of risks and macro-level
uncertainty associated with equity investments in CEESM would be a useful
complement to the evidence presented here.
The study has contributed to the knowledge about the functioning of the CEESM of
Poland and the investment approaches of non-professional investors associated with
this market during the current financial crisis. Despite limitations relating to time
constraints and information availability, the findings managed to deliver important
results and create implications for further studies in this area. In this vein, the
study recommends further investigation of investors views on the Polish stock markets
resistance to the global financial crisis. Additionally, while aspects of investors trust in
emerging markets such as Poland are highlighted in this paper these issues require
a more detailed analysis. Therefore, research investigating investors confidence and
trust in the Polish stock market during the current financial crisis might be useful.
Moreover, the current paper advises research about investors notions of such terms
as opportunity or risk, set in the context of the crisis. Further analysis of the
consequences of equity investment approaches adjusted for the impacts of the crisis
would be an important addition to the findings gathered in the present study as these
aspects have only been partially elucidated here.
 Notes Trading
1. All definitions used in the study were carefully explained to the interviewees. strategies in
2. Similar opinions were expressed by PL003 and UK022. times of crisis
3. Similar opinions were expressed by interviewees UK020, UK025, PL015.
4. Similar opinions were expressed by UK018, UK025, and PL007.
5. Similar opinions were expressed by PL005, PL006, PL011, PL013, UK023. 49
6. Similar opinions were expressed by interviewees UK019; UK018; PL010; PL008; PL002.

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Corresponding author
Lukasz Prorokowski can be contacted at: r05lp9@abdn.ac.uk
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