Some people call V. Prem Watsa the "Canadian Warren Buffett".
People who are heavily invested in the tech-sector might want to take note of the below excerpts, and especially the last line:
Showing posts with label Bubble. Show all posts
Showing posts with label Bubble. Show all posts
Saturday, 14 March 2015
Fairfax: "tech bubble will end very badly"
Fairfax Financials posted their year report, in it the Chairman's letter to the shareholders.
Some people call V. Prem Watsa the "Canadian Warren Buffett".
People who are heavily invested in the tech-sector might want to take note of the below excerpts, and especially the last line:
Some people call V. Prem Watsa the "Canadian Warren Buffett".
People who are heavily invested in the tech-sector might want to take note of the below excerpts, and especially the last line:
Saturday, 30 November 2013
The Bitcoin Bubble
The Economist published today an article "The Bitcoin Bibble":
"Bitcoin is booming. Investors are piling into the digital currency, which is not issued by a central bank but is conjured into being by cryptographic software running on a network of volunteers’ computers. This week the price of a Bitcoin soared to above $1,000, from less than $15 in January.
Having long been favoured by libertarians, gold bugs and drug dealers, Bitcoin is attracting some surprising new fans. Germany has recognised it as a “unit of account”. Ben Bernanke, chairman of the Federal Reserve, told a Senate committee on virtual currencies that the idea “may hold long-term promise”. A small but growing band of shops and firms accept payments in Bitcoin. Some like the way it allows funds to be transferred directly between users, without middlemen. Others are attracted by the potential for anonymous transfers, or by the fact that the number of Bitcoins in circulation has a fixed upper limit—so there is no way a central bank can inflate their value away by issuing more.
But the recent price surge, driven by Chinese investors stashing money offshore, looks like a classic bubble. Hoarding means that Bitcoin is currently more of a speculative asset than a currency. And a crash is not the only risk Bitcoin users face. As the price rises, Bitcoin theft is increasing, both from individuals and from online exchanges that store the coins and convert them into other currencies. Around $1m in Bitcoins was recently stolen from BIPS, a European exchange. GBL, a Chinese Bitcoin exchange, abruptly vanished in October, taking $4.1m-worth of deposits with it."
The article ends with:
"... if you are lucky or clever enough to have owned an asset whose price has risen 60-fold in a year, it might be time to sell."
To be honest, I don't understand much of Bitcoins, to me it does resemble a classic pyramid scheme, including some rationale concepts (like the mining), which tries to give it some credibility (in itself very normal for these kind of schemes).
The price of Bitcoins fluctuates very much (sometimes 20% in a day), which makes it not very suitable being a currency.
Using Bitcoins for cross border payments would make live me easy, however, how can central banks check that the purpose of the payments was legal?
David Webb wrote an insightful article "The hole in Bitcoin", concluding:
"...here is the biggest flaw: the economics of it. For Bitcoin to succeed, it has to become a transaction currency, widely-accepted by the real world for goods and services. With a cap of 21 million Bitcoins, the accepted wisdom driving prices is that spreading the limited supply of Bitcoins over all these real-world transactions, even with fractional reserve banking, would necessitate a high valuation per Bitcoin.
Unfortunately, most of the people getting into Bitcoin, either with cash, goods and services or by buying and running mining rigs, are just hoarding the Bitcoins, either expecting the price to go up because they believe in this transactional utility, or expecting the price to go up because other people will - people like the Winklevoss twins, who proposed setting up an ETF to hoard Bitcoins (SEC filing), rather like the SPDR Gold Trust.
The flaw then is that most Bitcoin owners are hoarding something which they expect to become a widely-used transaction currency, and if everyone holds on to their Bitcoins, then it won't become a transaction currency.
....
Even if we are wrong and Bitcoin becomes a widely-accepted transaction currency, the second flaw in Bitcoin is this: when the rate of coin production is reduced towards zero, the only economic incentive the nodes will have to convert electricity into blocks (and heat and noise) is the transaction fees. So far, these are very low, but if the people who control the Bitcoin specification don't increase the fees to a commercial level then the amount of machines running the algorithm will plunge for lack of reward, and it will become much less expensive to take control of the network by holding more than 50% of the hashing power. However, if fees become a significant part of transaction values, then a lot of users (not seeking illegal goods and services) will wonder why they don't just use traditional payment networks denominated in real currencies. So there's the conundrum: charge too little, and someone will put in enough capital to take over the network and turn it, in effect, into just another MasterCard, Paypal or Visa. Charge too much, and people will use other payment networks."
Marc Faber in an interview on CNBC:
a "massive speculative bubble" has encroached on everything from stocks and bonds to bitcoin and farmland. He attributed the vast bubble to "symptoms of excess liquidity."
Faber said the markets, which have reached record highs, could still rise before the bubble bursts, if stimulus programs such as the Federal Reserve's massive monthly bond purchases and super-low interest rates continue.
"Now can the market go up another 20 percent before it tumbles?" Faber said on"Squawk Box". "Yeah, it can go up even more, if you print money."
Warning investors that they could see disappointing long-term returns in equities, Faber said he thought a correction in equities was overdue when the S&P 500index crossed 1,600 points. The benchmark index surpassed 1,808 points this week.
Faber pointed to a high Shiller price-to-earnings ratio, a market indicator named after Yale University professor and Nobel Prize winner Robert Shiller, which relies on 10 years of adjusted inflation, as an indicator of the bubble. He said a high Shiller P/E ratio suggests low returns in the future.
Faber also referred to the rapid rise of bitcoin, the digital currency that crossed $1,200 early Friday, as an area affected by excess liquidity.
"Farmland is up 10 times over the last 10 years," Faber said. "And bitcoins are up now and who knows what next will go up."
Thursday, 14 November 2013
Value fund managers go on strike
Partly due to the QE (Quantitive Easing = money printing) programs of the FED (and other central banks) strange things are happening. Lots of rich valuations, for instance:
"Can you put a price on friendship? You can if it’s in a painting by Francis Bacon, whose three-part portrait of fellow artist Lucien Freud has set a record for the most expensive artwork ever sold. "Three Studies of Lucien Freud,” a 1969 triptych by the Irish-born Bacon, sold for $142.4 million in a Christie’s auction Tuesday night in New York." according to this article.
"A 59.60-carat pink diamond sold for $83 million, a record for any gemstone at auction. The oval-cut stone’s price exceeded the previous record by 82 percent at an auction last night in Geneva held by Sotheby’s, which called the gem one of the earth’s greatest natural treasures. Those prices include the buyer’s premium." according to this article.
"Today the Wall Street Journal reported that Snapchat turned down a $3 billion or more all cash acquisition offer from Facebook. The news has taken many by surprise, as Snapchat has no revenue, and is an exceptionally young company." according to this article.
Snapchat is a mobile apps where users can send photo's or pictures that disappear in a few seconds. Needless to say, the apps is quite popular with youngsters, but USD 3 Billion (please notice the "B") is also quite a bit of money, especially if the company has not yet shown any revenue nor profit (only losses).
Property prices in Singapore, Hong Kong, Melbourne, Sidney, Beijing, Shanghai etc, are also sky-high, hardly affordable for young people with average incomes. Also in Malaysia, the property market is pretty hot.
We notice the same in the share market, smallcaps are being played, warrants, all kind of speculative companies (especially in the mining and energy industry).
Greenspan and Bernanke can be truly proud of their "experiment", bubbles start to form in many places.
If there is one thing I learned from 20 years investing in the share market: if valuations are pricey, don't try to find the last value stock, better raise some cash.
The following article is from Bloomberg, stressing this same point:
Value Fund Managers Go on a Buyer's Strike
Wally Weitz beat 90 percent of his rivals in the past five years by buying stocks he deemed cheap. Now he says bargains are so scarce that he’s letting his cash pile up. “It’s more fun to be finding great new ideas,” says Weitz, whose $1.1 billion Weitz Value Fund (WVALX) had 29 percent of its assets in cash and Treasury bills as of Sept. 30. “But we take what the market gives us, and right now it is not giving us anything.”
Weitz, whose cash allocation is about the highest it’s been in his three-decade career, joins peers Donald Yacktman and Steven Romick in calling bargains elusive as stocks trade at record highs. The three are willing to sacrifice top performance for the safety of cash as stocks rally for the fourth year in the past five. The mutual fund managers’ comments echo those of private equity executives Leon Black and Wesley Edens, who say steep prices make this a seller’s market.
As the Standard & Poor’s 500-stock index has risen 23 percent in 2013, the average amount of cash in funds that invest in U.S. stocks increased to 5 percent as of Aug. 31, from 3.7 percent the previous year, according to data from research firm Morningstar (MORN). Some fund investors frown upon equity managers who sit on large piles of cash, saying they prefer stockpickers to stay fully invested. “We hire them to run stocks, not time the market,” says Richard Charlton, chairman of Boston-based NEPC, which advises institutional investors.
Value managers, who look for stocks that are cheap compared with a company’s earnings prospects, cash flow, or assets, have sat on their hands before, including during the runup in 2007 and 2008 to the financial crisis, says Russel Kinnel, director of mutual fund research at Morningstar. Most of the cash-heavy managers say their decisions are based on individual stock prices, not any attempt to call a market top. Holding cash during market rallies can depress returns. Yacktman trailed 60 percent of rivals this year through Nov. 1 and 82 percent in 2012 at his $11.4 billion Yacktman Focused Fund (YAFFX), according to data compiled by Bloomberg. The fund, whose cash level rose to 21 percent as of Sept. 30, from 1.4 percent at the end of 2008, bested 92 percent of rivals in the past five years. “We are having a more difficult time finding bargains,” Yacktman wrote in an e-mail.
Romick, managing partner of First Pacific Advisors, took a similar stance in his second-quarter letter to shareholders of the $14.1 billion FPA Crescent Fund. “We find it difficult to invest in an environment that seems manipulated to engineer higher asset prices regardless of business fundamentals,” he wrote. His fund, which outperformed 68 percent of rivals over the past three years, had 40 percent of its assets in cash and short-term securities as of Sept. 30, according to FPA’s website. It beat 97 percent of its peers in the 2008 bear market. The fund had more than one-third of its assets in cash equivalents as of March 31 that year, filings show.
In bear markets, value managers find it easy to put their money to work. Weitz’s Value Fund had 7.8 percent in cash at the end of 2008, regulatory filings show. “It was a wonderful time,” he says. “There was so much to buy.”
"Can you put a price on friendship? You can if it’s in a painting by Francis Bacon, whose three-part portrait of fellow artist Lucien Freud has set a record for the most expensive artwork ever sold. "Three Studies of Lucien Freud,” a 1969 triptych by the Irish-born Bacon, sold for $142.4 million in a Christie’s auction Tuesday night in New York." according to this article.
"A 59.60-carat pink diamond sold for $83 million, a record for any gemstone at auction. The oval-cut stone’s price exceeded the previous record by 82 percent at an auction last night in Geneva held by Sotheby’s, which called the gem one of the earth’s greatest natural treasures. Those prices include the buyer’s premium." according to this article.
"Today the Wall Street Journal reported that Snapchat turned down a $3 billion or more all cash acquisition offer from Facebook. The news has taken many by surprise, as Snapchat has no revenue, and is an exceptionally young company." according to this article.
Snapchat is a mobile apps where users can send photo's or pictures that disappear in a few seconds. Needless to say, the apps is quite popular with youngsters, but USD 3 Billion (please notice the "B") is also quite a bit of money, especially if the company has not yet shown any revenue nor profit (only losses).
Property prices in Singapore, Hong Kong, Melbourne, Sidney, Beijing, Shanghai etc, are also sky-high, hardly affordable for young people with average incomes. Also in Malaysia, the property market is pretty hot.
We notice the same in the share market, smallcaps are being played, warrants, all kind of speculative companies (especially in the mining and energy industry).
Greenspan and Bernanke can be truly proud of their "experiment", bubbles start to form in many places.
If there is one thing I learned from 20 years investing in the share market: if valuations are pricey, don't try to find the last value stock, better raise some cash.
The following article is from Bloomberg, stressing this same point:
Value Fund Managers Go on a Buyer's Strike
Wally Weitz beat 90 percent of his rivals in the past five years by buying stocks he deemed cheap. Now he says bargains are so scarce that he’s letting his cash pile up. “It’s more fun to be finding great new ideas,” says Weitz, whose $1.1 billion Weitz Value Fund (WVALX) had 29 percent of its assets in cash and Treasury bills as of Sept. 30. “But we take what the market gives us, and right now it is not giving us anything.”
Weitz, whose cash allocation is about the highest it’s been in his three-decade career, joins peers Donald Yacktman and Steven Romick in calling bargains elusive as stocks trade at record highs. The three are willing to sacrifice top performance for the safety of cash as stocks rally for the fourth year in the past five. The mutual fund managers’ comments echo those of private equity executives Leon Black and Wesley Edens, who say steep prices make this a seller’s market.
As the Standard & Poor’s 500-stock index has risen 23 percent in 2013, the average amount of cash in funds that invest in U.S. stocks increased to 5 percent as of Aug. 31, from 3.7 percent the previous year, according to data from research firm Morningstar (MORN). Some fund investors frown upon equity managers who sit on large piles of cash, saying they prefer stockpickers to stay fully invested. “We hire them to run stocks, not time the market,” says Richard Charlton, chairman of Boston-based NEPC, which advises institutional investors.
Value managers, who look for stocks that are cheap compared with a company’s earnings prospects, cash flow, or assets, have sat on their hands before, including during the runup in 2007 and 2008 to the financial crisis, says Russel Kinnel, director of mutual fund research at Morningstar. Most of the cash-heavy managers say their decisions are based on individual stock prices, not any attempt to call a market top. Holding cash during market rallies can depress returns. Yacktman trailed 60 percent of rivals this year through Nov. 1 and 82 percent in 2012 at his $11.4 billion Yacktman Focused Fund (YAFFX), according to data compiled by Bloomberg. The fund, whose cash level rose to 21 percent as of Sept. 30, from 1.4 percent at the end of 2008, bested 92 percent of rivals in the past five years. “We are having a more difficult time finding bargains,” Yacktman wrote in an e-mail.
Romick, managing partner of First Pacific Advisors, took a similar stance in his second-quarter letter to shareholders of the $14.1 billion FPA Crescent Fund. “We find it difficult to invest in an environment that seems manipulated to engineer higher asset prices regardless of business fundamentals,” he wrote. His fund, which outperformed 68 percent of rivals over the past three years, had 40 percent of its assets in cash and short-term securities as of Sept. 30, according to FPA’s website. It beat 97 percent of its peers in the 2008 bear market. The fund had more than one-third of its assets in cash equivalents as of March 31 that year, filings show.
In bear markets, value managers find it easy to put their money to work. Weitz’s Value Fund had 7.8 percent in cash at the end of 2008, regulatory filings show. “It was a wonderful time,” he says. “There was so much to buy.”
Friday, 1 November 2013
Bonia venturing into property: deja vu?
I still remember one event in 1997 very well: property prices had risen, many players went fresh into the game, lots of hot money was poured into it, and then Bonia decided to also take a punt at it. Many commentators were amazed why a (reasonably successful) consumer brand like Bonia would want to venture into an unrelated industry.
The rest is history, soon afterwards all came crashing down, the stock market, the currency, the bond market, the property market and the ego of certain people who thought they were on top of the world.
It was with this in my mind when I received an email from a friend with the text:
"Bubble peaking? Fashion and shoes maker buying into property ... totally unrelated business"
pointing at this article on the website of The Edge:
"Bonia adds prime KL property to its real estate investment arm".
A clear "deja vu" moment for me.
Another related article:
"MOL’s Ganesh Kumar Bangah morphs into … property tycoon?"
Ganesh has been a very successful internet founder (MOL, invested by Vincent Tan), what is he doing developing property?
It is not 1997/98, after the crisis many steps have been taken to improve the strength of the banks, the corporate governance of companies, etc., that kind of crisis happens only once every 30-40 years or so. But Malaysia could be hit by a more moderate crisis, the one that hits countries on average every 7 years or so (both 30-40 years and 7 years are just indications). And the above two events (and many more, for instance the punting in penny stocks) do indeed point to a market top. But market tops are hard to predict, and bubbles can grow pretty large, so it does not mean that things will come down any time soon, it could easily happen in 2014 or even in 2015.
The rest is history, soon afterwards all came crashing down, the stock market, the currency, the bond market, the property market and the ego of certain people who thought they were on top of the world.
It was with this in my mind when I received an email from a friend with the text:
"Bubble peaking? Fashion and shoes maker buying into property ... totally unrelated business"
pointing at this article on the website of The Edge:
"Bonia adds prime KL property to its real estate investment arm".
A clear "deja vu" moment for me.
Another related article:
"MOL’s Ganesh Kumar Bangah morphs into … property tycoon?"
Ganesh has been a very successful internet founder (MOL, invested by Vincent Tan), what is he doing developing property?
It is not 1997/98, after the crisis many steps have been taken to improve the strength of the banks, the corporate governance of companies, etc., that kind of crisis happens only once every 30-40 years or so. But Malaysia could be hit by a more moderate crisis, the one that hits countries on average every 7 years or so (both 30-40 years and 7 years are just indications). And the above two events (and many more, for instance the punting in penny stocks) do indeed point to a market top. But market tops are hard to predict, and bubbles can grow pretty large, so it does not mean that things will come down any time soon, it could easily happen in 2014 or even in 2015.
Happy Deepavali to all Hindu readers.
Sunday, 21 July 2013
SPACs, a bubble in the making?
Article in The Star by Risen Jayaseelan:
"Sizzling SPACs, Promoters and investors race to be part of this investment vehicle"
Some excerpts:
"SPACs (special-purpose acquisition companies) are red hot at the moment.
The massive demand for shares of the soon-to-be-listed Sona Petroleum Bhd is testament to that. By some estimates, a whopping RM3bil of liquidity was chasing to get a slice of the RM550mil worth of shares being offered in that IPO. And banking sources claim that demand was more than that RM3bil figure.
Investors are no doubt drawn to the 327% total returns that an IPO investor in Hibiscus Petroleum Bhd (the first listed SPAC) is sitting on.
SPACS will also go down in history for the mind boggling ‘value creation’ it could potentially give senior management types in Malaysia. Just using the example of the promoters of Hibiscus and CLIQ and considering their initial cost of 1 sen per share, they are sitting on returns of 245 times and 124 times respectively. In other words, every one sen they put in is now worth RM2.45 (for Hibiscus’ promoters) and RM1.24 (for CLIQ’s promoters).
No wonder then that there is no dearth of parties wanting to float their SPACS. Market talk has it that Datuk Tan Ang Meng, the former Fraser & Neave Holdings Bhd CEO, is mulling a SPAC focused on the food and beverage sector, using his experience and contacts in the industry. Then there’s Shahul Hamid Mohd Ismail, a director in the Daya Group of companies, who is in the midst of planning an oil and gas SPAC.
In the past, there were other SPACs that were toyed about but have yet to come to fruition. One of them include property player Datuk Terry Tham, the MD of Eastern & Oriental Bhd, to put together a SPAC to invest in overseas properties in locations such as London.
There had also been plans by some parties to set up a plantation-focused SPAC."
To me, this all sounds rather scary. I have written about SPACs before, in a not very positive way. I have written that they appear to be very good (actually: too good) for their promoters/managers: hardly any risk (they even receive very decent salary in the millions), but lots of possible return. When I read that investors have a return of 327% (not bad, I agree) and promoters of 24,500% (75 times as high as the normal investors) then one can indeed wonder if things are fair.
Also, the promoters of the first SPAC received warrants with an exercise price of RM 0.10 while the normal investors had to do with warrants with an exercise price of RM 0.50, a huge difference and not exactly fair. It seems that the Securities Commission has indeed looked into this matter.
Regarding the above high returns: apparently there are some investors at this moment prepared to pay these high prices for previously listed SPACs. However, what the fundamental value is at this very moment, nobody knows, it is much too early to tell. SPACs will have operational losses over the first few years since it takes a lot of time to get the actual exploration going. Cost overruns and delays are also very common in these kind of industries (oil & gas and mining). If the financial results in the long term will support the current share prices through good profits (and possibly dividends), that is very hard to tell. As one person commented in my blog, SPACs look like junior mining companies, whose results are very volatile and risky.
If I read about the hot market for SPACs, then it reminds me of the (in)famous South Sea Bubble:
I highly recommend the reader "Memoirs of Extraordinary Popular Delusions and the Madness of Crowds" by Charles MacKay:
"....In the mean time, innumerable joint-stock companies started up everywhere. They soon received the name of Bubbles, the most appropriate that imagination could devise. The populace are often most happy in the nicknames they employ. None could be more apt than that of Bubbles. Some of them lasted for a week, or a fortnight, and were no more heard of, while others could not even live out that short span of existence. Every evening produced new schemes, and every morning new projects."
"....Some of these schemes were plausible enough, and, had they been undertaken at a time when the public mind was unexcited, might have been pursued with advantage to all concerned. But they were established merely with the view of raising the shares in the market."
"But the most absurd and preposterous of all, and which shewed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled "A company for carrying on an undertaking of great advantage, but nobody to know what it is." Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project."
The similarity with SPACs is striking, to say the least.
It is true that the assets to be acquired by SPACs have to be approved, but then again, how often are proposals from majority shareholders voted down by minority shareholders? It hardly ever happens in Malaysia.
The iTulip website on the same subject:
"The prospectus promised unheard-of rewards. At nine o'clock in the morning, when the subscription books opened, crowds of people from all walks of life practically beat down the door in an effort to subscribe. Within five hours a thousand investors handed over their money for shares in the company. Not being greedy himself, the promoter promptly closed up shop and set off for the Continent. He was never heard from again."
I am confident that the Securities Commission is doing a decent job, and that the above (promoters running away with the IPO money) will not happen in Malaysia, at least that is what I hope.
But I still don't like SPACs, they simply go against my (investment) grain. The initial risk of companies should lay with their founders and the angel investors. In a later stage other investors (like Venture Capital funds) are asked to do follow up investing. When the company goes public (this could easily be 10-20 years down the road) it should have a proven business model, possibly having established a brand name, a clear revenue model and customers for their products/services. People who invest during the IPO can study the track record of the company versus their direct competitors.
In the case of SPACs, there is nothing, except some promoters/managers with a track record in the industry, they might not even have worked together before as a team.
That is for me not a sufficient enough base for investing in a public listed company, the risk at that moment in time is simply much too high.
I hope I am wrong, but to me it looks very much like the start of a bubble (partly driven by yield hungry investors, given the low interest environment), and bubbles always burst, even though it can take years for that to happen. But when the bubble bursts, it is never a happy end, except possibly for some insiders who sold on time. Buyer beware!
"Sizzling SPACs, Promoters and investors race to be part of this investment vehicle"
Some excerpts:
"SPACs (special-purpose acquisition companies) are red hot at the moment.
The massive demand for shares of the soon-to-be-listed Sona Petroleum Bhd is testament to that. By some estimates, a whopping RM3bil of liquidity was chasing to get a slice of the RM550mil worth of shares being offered in that IPO. And banking sources claim that demand was more than that RM3bil figure.
Investors are no doubt drawn to the 327% total returns that an IPO investor in Hibiscus Petroleum Bhd (the first listed SPAC) is sitting on.
SPACS will also go down in history for the mind boggling ‘value creation’ it could potentially give senior management types in Malaysia. Just using the example of the promoters of Hibiscus and CLIQ and considering their initial cost of 1 sen per share, they are sitting on returns of 245 times and 124 times respectively. In other words, every one sen they put in is now worth RM2.45 (for Hibiscus’ promoters) and RM1.24 (for CLIQ’s promoters).
No wonder then that there is no dearth of parties wanting to float their SPACS. Market talk has it that Datuk Tan Ang Meng, the former Fraser & Neave Holdings Bhd CEO, is mulling a SPAC focused on the food and beverage sector, using his experience and contacts in the industry. Then there’s Shahul Hamid Mohd Ismail, a director in the Daya Group of companies, who is in the midst of planning an oil and gas SPAC.
In the past, there were other SPACs that were toyed about but have yet to come to fruition. One of them include property player Datuk Terry Tham, the MD of Eastern & Oriental Bhd, to put together a SPAC to invest in overseas properties in locations such as London.
There had also been plans by some parties to set up a plantation-focused SPAC."
To me, this all sounds rather scary. I have written about SPACs before, in a not very positive way. I have written that they appear to be very good (actually: too good) for their promoters/managers: hardly any risk (they even receive very decent salary in the millions), but lots of possible return. When I read that investors have a return of 327% (not bad, I agree) and promoters of 24,500% (75 times as high as the normal investors) then one can indeed wonder if things are fair.
Also, the promoters of the first SPAC received warrants with an exercise price of RM 0.10 while the normal investors had to do with warrants with an exercise price of RM 0.50, a huge difference and not exactly fair. It seems that the Securities Commission has indeed looked into this matter.
Regarding the above high returns: apparently there are some investors at this moment prepared to pay these high prices for previously listed SPACs. However, what the fundamental value is at this very moment, nobody knows, it is much too early to tell. SPACs will have operational losses over the first few years since it takes a lot of time to get the actual exploration going. Cost overruns and delays are also very common in these kind of industries (oil & gas and mining). If the financial results in the long term will support the current share prices through good profits (and possibly dividends), that is very hard to tell. As one person commented in my blog, SPACs look like junior mining companies, whose results are very volatile and risky.
If I read about the hot market for SPACs, then it reminds me of the (in)famous South Sea Bubble:
I highly recommend the reader "Memoirs of Extraordinary Popular Delusions and the Madness of Crowds" by Charles MacKay:
"....In the mean time, innumerable joint-stock companies started up everywhere. They soon received the name of Bubbles, the most appropriate that imagination could devise. The populace are often most happy in the nicknames they employ. None could be more apt than that of Bubbles. Some of them lasted for a week, or a fortnight, and were no more heard of, while others could not even live out that short span of existence. Every evening produced new schemes, and every morning new projects."
"....Some of these schemes were plausible enough, and, had they been undertaken at a time when the public mind was unexcited, might have been pursued with advantage to all concerned. But they were established merely with the view of raising the shares in the market."
"But the most absurd and preposterous of all, and which shewed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled "A company for carrying on an undertaking of great advantage, but nobody to know what it is." Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project."
The similarity with SPACs is striking, to say the least.
It is true that the assets to be acquired by SPACs have to be approved, but then again, how often are proposals from majority shareholders voted down by minority shareholders? It hardly ever happens in Malaysia.
The iTulip website on the same subject:
"The prospectus promised unheard-of rewards. At nine o'clock in the morning, when the subscription books opened, crowds of people from all walks of life practically beat down the door in an effort to subscribe. Within five hours a thousand investors handed over their money for shares in the company. Not being greedy himself, the promoter promptly closed up shop and set off for the Continent. He was never heard from again."
I am confident that the Securities Commission is doing a decent job, and that the above (promoters running away with the IPO money) will not happen in Malaysia, at least that is what I hope.
But I still don't like SPACs, they simply go against my (investment) grain. The initial risk of companies should lay with their founders and the angel investors. In a later stage other investors (like Venture Capital funds) are asked to do follow up investing. When the company goes public (this could easily be 10-20 years down the road) it should have a proven business model, possibly having established a brand name, a clear revenue model and customers for their products/services. People who invest during the IPO can study the track record of the company versus their direct competitors.
In the case of SPACs, there is nothing, except some promoters/managers with a track record in the industry, they might not even have worked together before as a team.
That is for me not a sufficient enough base for investing in a public listed company, the risk at that moment in time is simply much too high.
I hope I am wrong, but to me it looks very much like the start of a bubble (partly driven by yield hungry investors, given the low interest environment), and bubbles always burst, even though it can take years for that to happen. But when the bubble bursts, it is never a happy end, except possibly for some insiders who sold on time. Buyer beware!
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