Value and character

I teach a course in Singapore Management University.

Apart from the syllabus of the course, I like the students to learn some values and tips that will be useful for them to cope with the challenges of life.

I will share some of the values that guide my character. I hope that these values will be useful as a guide to the students.

http://www.tankinlian.com/articles/values.html 

How to identity a bubble

Someone asked, "How to identify a bubble?"

The answer: "Nobody knows". Alan Greenspan, the former chairman of the US Federal Reserve Board said that one knows a bubble after it has burst. This is not helpful. It turned out to be disastrous, as the bursting of the US housing bubble has led to the global financial crisis.

Is there a rule of thumb to identify a bubble? Nobody has dared to stick out his thumb. But I shall try.

You get a bubble when the current price is 50% or 100% higher than the average price for the past 5 years. Maybe, we should look at the actual statistics and see if 50% or 100% is a better indicator.

For example, the average oil price during the past 5 years prior to 2008 must be around US$40. When it exceeded US$80, it was a bubble. After it burst, it returned to US$40.

When the high end property prices in Singapore doubled in value in 2008 compared to the past years, it was a bubble. It burst soon after.

A new way to do business - by conference call

I have to discuss a business proposal with a Telco. Their marketing managers were busy and could not find a convenient time for a meeting. We decided to have a conference call. It went smoothly. There was no need for a face to face meeting. This is a new way to do business. It is more efficient.

Thought for the day - Injustice

If you are neutral in situations of injustice, you have chosen the side of the oppressor. If an elephant has its foot on the tail of a mouse and you say that you are neutral, the mouse will not appreciate your neutrality:[ Bishop Desmond Tutu]

Contributed by Ho Cheow Seng

Invest in assets at deflated prices

In normal times, investment in shares give a dividend yield of around 3%. In a crisis, when the share price dropped by 50%, the dividend yield increase to 6%. It is likely that the company will suffer lower profits, so the dividend will be reduced. After reduction, the yield is likely to be still quite attractive.

If business conditions are bad, the company has the choice to reduce their cost by downsizing their operations. When their profit stabilizes, their share price will also stop dropping. When the profit increases with the return of economic growth, the share price will show a good gain.

It may take a few years or longer, but it will eventually happen. In the meantime, the dividend yield will continue to be quite attractive. To avoid the risk of selecting the wrong shares (i.e. of a company that may go bust), it is important th diversify the investment into a fund (e.g. an exchange traded fund).

My view: Invest when the share price is deflated, due to the pessimistic situation. Invest for the long term.

Beware of bubbles

A bubble occurs when market prices are inflated beyond their real values. This has happened with the property market, stock market and more recently, with the commodity market, oil market, China stockmarket and India stockmarket.

All bubbles will lead to a collapse. All the markets mentioned above have collapsed.

Many people may not realise that there is another safe market that is in a bubble. It is the Government bond market. Due to risk aversion, many people put their money in long term Government bonds. The excess demand has pushed up the price and reduce the yield.

If the long term yield for safe Government bonds should be 4% (to cover inflation and cost of money) and excess demand causes the yield to drop to 2%, the price has gone up by about 25% in the case of a 15 year bond. If the yield returns back to the real value of 4%, the price will drop by 20% to get back to the normal level. It is possible to have a bubble in safe investments as well.

If you are caught with long term bonds yielding 2% (and the market price has dropped by 20%, you still have the option of keeping your money at the low yield of 2% for the 15 years).

Lesson: Avoid bubbles. Avoid paying a high price for your investment. Take a long term view.

Insurance that worsen crunch

Read this article. It explains the challenges faced by the economy during the global credit crisis.

Insurance that worsen crunch

The solution? Credit insurance should be operated by the government as a non-profit business.