The Shanghai rubber bubble of 1910 holds a lesson for today
Friday, 12 April, 2013, 12:00am
Business
Tom Holland

Speculative excess has a long pedigree, given how easily human desire for quick gains can overcome concerns about long-term profitability

When you are reputed to be London’s most highly paid hedge fund manager, you can afford to indulge in a few whims.

David Harding’s whims are a tad unusual, however. Among other things, the founder of US$26 billion hedge fund company Winton Capital has endowed a Cambridge University professorship in the public understanding of risk, and is patron of the Harding Centre for Risk Literacy at the Max Planck Institute for Human Development in Berlin.

A former theoretical physicist, Harding sponsors the Royal Society’s Winton Prize for science books, and in 2009 he donated £20 million (HK$238 million) to Cambridge’s Cavendish physics laboratory.

His latest project is equally eclectic. It’s a massive and lavishly illustrated 300-page coffee table history of foolish financial speculations, co-authored with the head of Winton Capital’s historical research department, James Holmes.

Harding and Holmes cover all the obvious episodes, from the Dutch tulipomania of the 17th century, through England’s South Sea Bubble of 1720, right up to the 2007 subprime boom.

But it is in writing about less well known incidents of speculative excess that Harding and Holmes really excel.

They describe the Florentine credit bubble of 1339, punctured when Edward III of England defaulted on his sovereign debt.

They write about the land reclamation and property development frenzy that gripped Bombay in 1863, and the Constantinople crisis of 1895, when the monopoly Ottoman Bank collapsed after investing unwisely in South African mining shares.

Closer to home, they also describe the Shanghai rubber bubble of 1910.

Demand for rubber was already running high in the early years of the 20th century. But when Henry Ford began mass-producing his Model T cars in 1908, it ballooned.

Then, in 1909, when the world’s biggest producer, the Brazilian state of Pará, restricted supplies in an attempt to bump up its income, rubber prices surged.

Rubber plantations in Malaya made huge profits, and paid shareholders handsome dividends.

In an attempt to cash in, Shanghai-based financiers immediately began setting up Malayan rubber companies and selling their shares to eager investors.

Many of these issued prospectuses were “highly mendacious”, write Harding and Holmes, grossly overstating their acreage under rubber.

Even the genuine companies were high-risk investments, however, considering it takes four to five years of growth before rubber trees can be tapped – and before plantation companies can begin paying dividends.

The prospect of quick gains easily trumped such long-term concerns, however, and a lively derivatives market soon developed on rubber shares.

According to one witness, “brokers had the clothes almost torn off their backs by excited plungers who desired to buy shares ‘forward’ at three or four hundred per cent premium”.

And in an account that will resonate loudly today, the British consul at the time described how money flowed into the market from all over China.

“Chinese officials in charge of government and railway funds recklessly cast them into the melting pot in the sure and certain hope of making their fortune.”

The mania couldn’t last, and when American demand for rubber slackened, the market “let out a whoosh of hot air and sank to the ground”.

“Shanghai’s stock exchange, shortly beforehand a hive of activity, sank into a deep torpor that lasted for several years,” write Harding and Holmes.

In the aftermath, several of Shanghai’s leading brokers were convicted of gambling and sentenced to 80 strokes of a bamboo cane before being exiled to at least 3,000 li from the city.

It’s a deterrent that may well appeal to the authorities today.

But if there’s one piece of wisdom to learn from Harding’s latest vanity project, it’s that human folly is timeless.

The threat of punishment won’t make financial markets efficient, and episodes of speculative excess will recur again and again, regardless of any lessons the past may try to teach us.

Aberdeen outperformed all other China funds with a 1 year return of (-1.84%). The rest: JP Morgan (-15.76%), Fidelity (-15.84%), Templeton (-15.78%), HSBC (-17.97%), Manulife (-20.67%).

Pruksa Iamthongthong explains which positions paid off for the portfolio.

Given uncertainty and higher costs of living, experts advise saving 6 to 12 months of pay
01 Apr 2012
by AARON LOW

One of the most basic rules for personal financial planning is to establish a personal emergency fund for a rainy day. The conventional wisdom is that the emergency fund should comprise between three and six months’ worth of one’s salary. So for instance, if a person earns $4,000 a month, his emergency fund should be built to at least $12,000.

But increasingly, this conventional wisdom is being challenged on many fronts.

For one thing, financial advisers say that the uncertain economic outlook and higher costs of living mean that three months of savings may simply not be enough.

Mr Patrick Lim, director of financial advisory firm PromiseLand, advises his clients to save between six and 12 months of salary as an emergency fund.

“I see a lot of people who, in their 40s, get retrenched, and they can’t find a job easily. They may take up to a year (to find another job) and even then, they may have to face a pay cut,” he says.

“Call me conservative but I prefer to be safe than sorry.”

Mr Christopher Tan, chief executive of financial advisory firm Providend, agrees and adds that it is not surprising that in the United States, financial experts are saying 10 months of expenses should be set aside as emergency funds.

But whether it is six or 12 months, all financial experts say putting aside a sum of money should be a top priority for everyone.

Financial adviser Leong Sze Hian says it is absolutely crucial that people focus on building this fund first, even before thinking of buying a house or car.

“They spend and spend, then they lose their job. They end up having to sell off to pay debts or cashing out on their insurance policy before maturity which will cost them a lot more,” he says.

It is unclear whether Singaporeans have adequate savings for such emergencies, but anecdotal evidence from financial advisers points to an alarming lack of awareness.

Mr Lim and Mr Leong say the majority of people they meet do not consciously set aside such funds, either because they think it is not important or they are unaware that they need to.

Says Mr Leong: “It’s not that difficult to achieve and everyone, whether low-income or high-income, should try to do this.”

For the big spenders, here are five tips to get started on building the emergency fund:

Budget, budget, budget. You can’t start saving until you know how much you spend, says Mr Leong.

“Get your family together to sit down and figure out what money comes in and what goes out. Then you will be able to see what can be cut and how to save,” he says.

Set up an automated transfer that channels part of your salary to a savings account.

Says Mr Tan: “Every month, upon getting your net salary, before you even spend your money, stash away your monthly saving amount to another account.

“Continue to do this till you reach your emergency fund. Beyond that, the monthly ‘saveable’ can now be invested.”

Save before you invest. If you have just started working, you should save first before buying a car, says Mr Lim.

“One way to accumulate savings is to look at topping up your Central Provident Fund. For the first $20,000 of your Ordinary Account, you get 3.5 per cent; for the Medisave and Special accounts, you get 5 per cent for the first $40,000,” he says.

“Given the low interest rate environment, that’s a gold mine. Focus on maximising the returns first from these savings.”

Break down your expenditure to the last dollar, including credit card bills. Once you see exactly how much you spend versus how much you bring in, it will be clear how much you need to cut back on, says Mr Tan. Stay clear of debt, including charge and credit cards. If you need to swipe the plastic, make sure you pay it back in full. There is always the temptation to spend more than one has, since one does not quite see the bill until later. But if you need to use the credit card, pay it back in full. Snowballing on credit card debt is the surest way to destroying any kind of savings.

Money, Happiness, and Sustainability

2012: The great wheel of time is making its inexorable turn, granting us a new beginning and an opportunity to step back, review, and renew.  You can use this moment of transition to start the new year with a fresh attitude and a doable plan about the spending, saving, and sharing of your money—to live your priorities with greater satisfaction and happiness.  Perhaps you are among the many who have suffered from the financial anxiety epidemic—you want to shed your fears, and regain a sense of being in charge of your financial destiny.

But how to get there?  What will make this year different from all the rest?  Yes, you have started many a new year with good intentions, maybe tried a new tack, and then found yourself once again, adrift on the seas of old patterns and habits. How can you get on a positive financial track when we see (and feel the effect of) world economies struggling to accomplish this goal? How can you live a happy and satisfying life making decisions that result in financial sustainability?

We know you can,  And the fact that there is change in the air, and butterflies in your gut, will help motivate you to step outside of old habits and patterns, increase your Affluence Intelligence, and take actions that will give you a life that is aligned with your values, that is fun, and that is sustainable.

Let’s start with an attitude adjustment.  Too many of us make financial decisions based on impulse (“I must have it now”); finding comfort in old ideas and habits; and well worn, obsolete facts.  It is time to wake up to the fact that the economics of today is not the economics of your past, or the economics of your fantasy life.   You can blame it on the internet, globalization, population growth, rising 3^rd world economies, expensive wars, too much or too little government, or the Great Recession.  It is all of the above, and more.  Truth be told:   Your psychological and economic operating system is going through a major firmware revision. You need to upgrade your program or find that your software won’t run very well or may not run at all.

So we need to think about our money and our lives with a broader perspective, with a mindset/operating system that can handle the dynamics of economic and systemic change in our lives and in the larger community.  Certainly, we can no longer expect or rely upon any single institution, whether it is a corporate employer, or the government, to be a reliable contributor toward your financial sustainability.  But how do we make decisions that will result in the ongoing sustenance of our personal and financial resources?  Instead of asking the economists, who don’t seem to have any great answers these days, let’s consider some key ideas from Environmental Science.  All living systems are characterized by either regenerative (growing, building, spiraling upward) or degenerative (reducing, depleting, spiraling downward) processes.  Regeneration creates and harnesses energy, degeneration depletes and wastes energy.  In our financial lives, we make financial decisions that are regenerative, such as starting a business that grows and thrives, or saving money to attain long term objectives—purchase of a home, or retirement.  And we make decisions that are degenerative, such as living outside of our actual means, accruing a massive creating credit card debt, or buying gifts that we can’t afford.  Degenerative processes can get progressively worse, in which (for example) your debt becomes the primary driving force of your financial destiny.

In fact each of us has a unique balance of both degenerative and regenerative financial processes.  Few of us will only make only regenerative financial decisions; we live in a culture that continually pushes us to ‘have fun and pay later’; to enjoy immediate gratification and not think of its price.  But if we want money and happiness, if we want sustainability and financial resilience, then we need to make sure that our regenerative actions trump our degenerative actions.

Therefore, sustainability in and of itself is a moving target.  What you really want to aim for is what we call Regenerative Economics, in which you make money and lifestyle decisions that support you, your family, and your community’s capacity to grow and regenerate.  Each of us needs to craft a plan, a personal lifestyle design that is attuned to your unique personal and financial ecology that will guide your financial decision-making so you can reach your unique balance point.  Simply put:  there can be no sustainability without regenerativity!

So it is time to turn up the thermostat on your Affluence Intelligence: Take the test, determine your Affluence Intelligence Quotient, and make a plan to leverage or improve your AIQ.

Here are some tips to inform your new year’s intentions and actions, based on our many years of working with people who have attain both personal and financial success:

1.  Have your values drive your money not your money drive your values.  Money is a tool to live your values, to help provide for your sustenance, care, and satisfactions.  This is the single most important lesion we have learned from our successful clients.  Know that your self worth is not equal to your financial worth.   Don’t let money become your primary value.  It is not a substitute for self esteem, love, connection, real productivity, or personal integrity.

2.  Use a Regenerative Economics mindset:  Review your spending and saving decisions.  Are these decisions regenerative or degenerative?   What do you need to do to shift the balance?

3. Practice conscious consumption:  Ask yourself:  is this purchase a need or a want?

4. If you need to earn or save more money, keep in mind: Spending less is earning more.

5. Nourish your physical and emotional health.  Don’t defy common sense:  if a financially related activity is making you sick, stop doing it….now!  Your health, your time is precious, and not for sale.

6. Take Action:  Create a three month plan for yourself, with doable action steps that you will implement tomorrow.   In our book we describe a step by step method for creating such a plan.

• No excuses. Walk your talk, implement your plan.

7.  Get support.  Find a person (not your spouse) who is willing to be your Affluence Intelligence Buddy, a source of support and accountability.

8. Buy Local: Purchasing from local business enterprises put money back into your neighbor’s pockets, an activity that is regenerative for you and the community in which you live.

9.  For each discretionary dollar of spending,  put a predetermined percentage of that amount into saving and or charity.

10. Give to a charity or cause that matters to you.  Giving, whether it is in the form of money or your time, will make you feel rich, and is regenerative. We have been amazed by the powerful sense of fulfillment and satisfaction that many of our successful clients experience through their generosity in giving both their money and their time.  Whatever you can afford, no matter how little time you have to give, it will make a difference-for you and for the receiver of your gift.

This is a post by d.o.g. from the ValueBuddies forum.

WARNING: LONG POST

There are a few basic types of insurance available to the consumer:

1. Life insurance

This pays upon death or total permanent disability (TPD). It can be for a limited term i.e. 5, 10, 20 years etc, or it can be for the insured’s lifetime (whole life).

Term insurance is very cheap because it only covers the actual risk of death/TPD. Since it is pure insurance, all the premium paid is an expense and cannot be recovered. It is very useful for paying off liabilities that have a reasonably clear expiry date e.g. children graduate from university (age 25), aged parents pass away (age 100) etc.

Another reason term insurance is so cheap is because it’s a commodity – you are either dead or not dead (produce death certificate) and you are either TPD or not TPD (produce doctor’s certificate). So the insurers cannot try to mislead you with smoke and mirrors or fancy names. Delaying payout will just hurt their own reputation and future business. So they are forced to compete on price, which is a great benefit to consumers.

Term policies are usually structured so that the payments are level during the life of the policy. However, since the age of the insured will affect the odds of death/TPD, the premiums will be calculated based on the aging of the insured during the policy. A term policy of any given duration will be more expensive for an older person than a younger one.

Whole life insurance essentially splits the premium paid into 2 portions: a small part actually pays for term life insurance (and is not recovered), while the bulk of the money is invested on your behalf by the insurer. Over time, the invested money grows, while the actual insurance coverage declines. The sum of the invested money and the remaining insurance coverage forms the “sum assured”. This is not seen by the consumer – the internal offset is calculated by the insurer and only the sum assured is shown to the consumer. By the time the consumer is old e.g. age 65 there is actually little or no insurance coverage left, only the investment sum.

Endowment plans are dressed-up whole life plans where even less of the money pays for insurance. They are basically an investment product masquerading as insurance. Education plans are just endowment plans with a nice name.

Insurance-linked products (ILPs) are even more blatant investment products where as little as 1% of the money is actually used to buy insurance initially so the insurance cover is laughable, usually only 125% of the invested sum. Since your investment sum is already 100% of this amount you are only buying an additional 25% of insurance cover. More insidiously, as you get older the sum deducted for life insurance (mortality charges) goes up, so less and less of your money is invested. When you are very old the mortality charges increase exponentially and exceed your investment returns, so the total value of your investment will decline rapidly.

I have discussed term, whole life, endowment and ILP policies together because they offer varying combinations of insurance and investment. Unless you are totally incompetent at investing AND cannot find the discipline to invest in a low-cost index fund, the most sensible ratio is 100% insurance and zero investment i.e. completely separate insurance and investment.

2. Hospitalization & Surgical (H&S) Insurance

This pays hospital bills. Qualifying expenses are paid up to the limit specified in the policy. There is usually both an annual limit and a lifetime limit. Beyond these the consumer must pay, first out of Medisave and then out of pocket.

There are Shield-type plans offered by the local insurers that serve this function. The premiums can be paid out of Medisave. The limitations are that they all set a minimum bill size (excess) before the policy kicks in, and the qualifying amount is only partially reimbursed, usually 85%. So for small bills the consumer pays everything out of Medisave and his/her own pocket. Some insurers offer a rider, payable only by cash, that can pay the 15% co-payment, or cover the excess. Talk to an insurance broker if you are not clear.

There are also other non-Shield plans that do not require an excess and can pay 100% of the bill, but the premiums must be paid by cash.

H&S premiums go up as you get older to reflect the increased likelihood of hospitalization as well as the increased bill size. The Shield-type plans have lifetime coverage versions available. IMHO everyone should buy the most coverage they can afford, because (a) it’s paid from Medisave which cannot otherwise be used, and (b) coverage can be reduced in future if premiums go up, but is almost impossible to increase if illnesses strike.

3. Disability Income

This pays when you are unable to work for any reason, or when you are disabled and can only earn a fraction of your former wages. The policy kicks in after a set period, usually 60 days, and pays a percentage, often 75%, of the difference between your new wage and your old one. It will pay until you are 65. So if you earn $3,000 at age 30 and are suddenly struck down and become a quadriplegic, after 60 days the policy will kick in and pay $2,250 per month until you are 65.

This type of policy is very useful because few people finish their working life without any type of extended absence from work. So if you get into a car accident and are out of work for 6 months, you only lose 2 months of income instead of 6. In the worst case when you become a vegetable, your policy will cover your long-term care until you are 65. It is also of the greatest value at the point when you need it most – at the start of your career when your only asset is your ability to work.

Policies differ by waiting period, percentage of reimbursement and last payment. Obviously the cheapest policies will have longer waiting periods e.g. 90 days, lower reimbursement e.g. 2/3 and earlier last payments e.g. age 50.

However, it is not easy to find a good disability income policy. Some of the insurers have revised their policies for the worse. So read the fine print carefully.

Some insurers offer a “hospital income” policy which pays you a set sum for each day you are in hospital. This is basically an inferior version of disability income, since it only pays when you are in hospital and not when you are at home recovering. The sums are typically about $100 per day which will not cover the hospital bill, and there is no payment when you are recovering at home. Use H&S to cover the hospital bill, and use disability income to replace lost income. A hospital income policy is basically a waste of money.

4. Critical Illness

This policy pays upon diagnosis of the onset of any one in a set list of 30 “dread diseases”. The local insurers now use a common pool of definitions for the diseases, so it is no longer possible to shop around for the most lenient insurers. However, different insurers have different diseases in their set of 30 e.g. some may have lupus (for women) while others may not. Note that the required diagnosis can be very specific. If it says “2 or more artery blockages” and you get a heart attack involving 1 blocked artery, tough luck, there will be no payment. Once payment is made the policy expires. Some policies allow multiple claims, but this is obviously a marketing trick – you have already paid for the higher coverage in your premiums.

Since it is rare to get a dread disease without going to hospital, it is debatable whether critical illness coverage is truly useful. It CAN be useful for miscellaneous expenses like a wheelchair or a maid, but these can often be self-insured from savings. It may be OK to not have critical illness coverage. It is not OK to go without H&S coverage.

Critical illness policies come in both term, rider and whole life versions. The rider is basically an extra premium on top of an existing policy that gives the critical illness coverage. Again, if you decide to buy a critical illness plan, it is probably best to buy term. That way you get the most coverage for your dollar.

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IMHO the order of priority for insurance expenses should be:

1. H&S
2. Disability income
3. Term life (if there are liabilties that need to be paid)
4. Critical illness (optional)

It may sound obvious, but people who do not have dependents should not buy ANY life insurance since nobody will be financially worse off if they die. Likewise there is no point buying life insurance on the life of a child, because the death of a child does not result in economic loss (emotional loss yes, but money can’t make up for that).

Also, VERY IMPORTANT: make sure that whatever H&S and critical illness policies you buy are GUARANTEED RENEWABLE, not just renewable. The reason is that H&S policies that are merely renewable (not guaranteed) will obviously not be renewed once you make a claim i.e. your coverage is one-use only. The insurer may also decline to renew your critical illness coverage if you fall ill, even if you don’t make a claim. Such “renewable” plans are MUCH cheaper and the agent may try to sell you one on the basis of affordability. DO NOT TAKE IT. Only buy GUARANTEED RENEWABLE plans.

Finally, remember that by law all regulated financial products in Singapore, including insurance, must come with a 14-day “free look” period during which you can cancel the purchase and get all your money back. No questions asked, 100% refund. So you can change your mind – but do it quick!

mrEngineer wrote:Lastly, I believe all the agents I have met have wasted my time by trying to sell me life policies. Where should I go to look for term policies? Should I go to the insurance company directly? Any recommedations from forumers?

I personally use an insurance broker. An insurance broker represents many different insurers so you can pick and choose the policy that best fits your needs. Because some insurers e.g. Great Eastern and AIA only use exclusive (tied) agents, you won’t be able to buy their policies from an insurance broker. So you may need to talk to 3 people (one broker and 2 tied agents) if you want to get a complete overview.

If you are short of time then at least talk to the insurance broker. At the least, even if you can’t get the best policies, you will avoid the worst policies.