DIGRESSION: GAZA CONFLICT

I'm surprised to learn that the Palestinians now have some rockets with a 50 kilometre range. Israel is 300 km long and 100 km wide. Apparently some 600,000 Israelis are now within rocket range.

I wouldnt be surprised at all if this involves some exaggeration by the Israelis to provide some excuse for their actions. But I've followed this conflict for the last 15 years or so and this is the strongest I've ever known the Palestinians to be. The rockets will cause few Israeli casualties; but the psychological effect would be far larger.

There are also reports that Hamas has built a Vietcong style tunnel network under Gaza and are itching for an urban battle.

Maybe the Israeli juggernaut will be beaten after all.

Update: Interesting essay here about how Israelis feel very threatened by Hamas, Hezbollah, Iran, and most of all Israeli Arabs, who may form the majority of Israelis by 2040.

Flashback

I've just discovered that 5 months ago I wrote this:

"The stock market is down... The only trouble is the companies that I like will need to go down about 20% before I get interested."

Well, the market is indeed 20% down from July. And I have entered the market.

The housing bubble was obvious 3 years ago

I clearly remember reading this article from The Economist 3 years ago, which pronounced that the housing boom was "the biggest bubble in history". I wonder if I could have done more to take advantage of it- like short american banking stocks.

I suppose there'll be other opportunities.

Morality has no place in economics

There is an ongoing trend, among financial experts and lay people alike, to explain away the financial crisis by saying that the hardship is "deserved", e.g. the american public was too spendthrift and now they're paying for their sins.

This sort of moralising can sway the mind towards certain ideas relating to economic policy e.g. since the recession is deserved we might as well egg it on by increasing interest rates or reducing government spending.

At the end of the day, moralising has no place in economics. So says this writer in espousing Keynesian economic intervention:

"Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge."

As with much of life, macroeconomics doesn't always work the way it should. And so I'm a qualified supporter of measured government intervention to face this crisis.

Stock List

Its time to walk the talk. Or at least talk in more detail.

Below are two tables: one contains stocks that I believe are cheap. The other shows the expensive ones. No prizes for guessing which's which.

Good Times

With all the gloom and doom going on, one can lose sight of the fact that these are good times: for long term investors, that is.

I am quite excited about the discounted prices of stocks right now. Wait, let me qualify that- I dont feel that stocks in general are particularly cheap. They're cheap if you compare them with the prices of the last 10-15 years, but they're actually priced just about average if you compare with the 70s and 80s.

What really gets my heart racing are the prices of small cap stocks, particularly those with strong businesses. Some are very cheap. At some point I'll point out my picks and we'll see how well they'll do over the next couple of years.

United States House Price to Rent Ratio

Above is a chart of the US' house price to rent ratio for the last 23 years. Taken in isolation, this chart shows that a very obvious bubble grew from about 1999 onwards.

On a more personal level, I'm wondering whether a similar bubble exists in the KL high end property market. For example, the house price to rent ratio for landed Bangsar properties is in the region of 2.5 to 3 times, which is far more expensive than the US bubble.

I feel that Malaysians in general should strongly consider renting instead of buying a house.

I try to know what I'm doing

I think it is one of the great blessings of my budding investment career that so early into it, I have been witness to some of the seminal events of global economic and market history. My first year was spent watching the KLCI rocket from something like 1,000 points to 1,450 points, amidst the greatest commodities boom of the last 30 years. And in my second year I watched what was probably the fastest commodities crash since the great depression, the worst global credit crunch since the great depression, a 40% fall in the KLCI and the S&P 500, ongoing devaluations of western currencies and failures of iconic western investment banks like Lehman Brothers and Bear Sterns.

I think one of the things that I think I've learnt from this experience is that as an investor, one should buy into an investment only when one really knows what one is buying into. In other words, Buy What You Understand. And buy for the right reasons. Buy into a business because you believe its undervalued, not because you believe its stock is going to go up. Because a stock could very well go down. If the stock has good value, however, given some time its price will recover.

To put it in another way, whenever I invest into something these days, I pretend like the stock market doesn't exist. When I look at stocks, I pretend that i'm being offered a small stake in a private company. Hence, I pretend that it would not be easy to sell my stock, which makes me choose more carefully.

A Pound Crisis?

A couple of days ago I was shocked to discover that the RM/ Sterling exchange rate is now RM 5.13 from RM 7 about a year ago. That's a fall of about 30% for the Pound. I havent a clue on whether it will recover from here or simply keep on getting lower. Currencies are really not my field of expertise (to put it mildly). The only thing that sticks out in my mind is that The Economist's Big Mac Index (yes, funny huh) has long suggested that the pound was one of the world's most overvalued currencies. I have no confidence in the reliability of burger prices to forecast currency movements, but I suppose recent events have shown that the Big Mac Index may have something going for it after all.

The ongoing currency and budget catastrophe engulfing Iceland really astounds me. The Wall Street Journal has an interesting video about it at http://online.wsj.com/video/how-iceland-collapsed/F7F0A5B0-EF8C-425C-96D0-6579D5955AFD.html . Getting back to the subject at hand, here's an essay on how the UK has a small possibility of undergoing a similar disaster: http://blogs.ft.com/maverecon/2008/11/how-likely-is-a-sterling-crisis-or-is-london-really-reykjavik-on-thames/#more-359. Basically the writer feels that Britain is also highly leveraged (albeit not as badly as Iceland) and could also suffer a similar currency and financial crisis.

I will be honest enough to say that I am not educated enough on the subject to make any of my own pronouncements on the matter.