Monday, April 03, 2006

Financial education for Singaporeans 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
The reader of our Singapore newspapers would have noticed a trend: more and more financial news are hitting the headlines, such as Temasek's acquisition of Shincorp and of a stake in Stanchart, as well as PSA's attempted bid for P&O etc. At the same time The Sunday Times also has been publishing a new section for Money and Investing since 2-3 years back advising on issues like stocks and personal finance (the virtues of which some argue is rather limited), which helps to educate the general public. There is talk of introducing financial education for the young in schools, and today's papers reported that the Monetary Authority of Singapore is even coming up with a TV game show to promote prudent financial planning.

The multi-pronged approach targeting the various age categories from the mature to the young is indicative of the direction Singapore is taking: from a savings-oriented nation to an investment-oriented nation. It is a natural progression for a country as it becomes developed: in the early stages, banks draw in savings and direct them towards debt financing of the most promising ventures; as the capital markets mature, companies are able to secure less risky financing through equity placements and long-term bonds. It is obvious that the source of such financing will have to be from a public that is comfortable with the financial markets.

As for the impact of an increasingly financially well-tuned public on the stock markets, one only has to look at the US bull market of the 1990s. It was the rise of the individual investor, triggered by personal responsibility to invest their retirement funds, that brought about the huge flow of liquidity into mutual funds (or unit trusts) and the ten-year bull market.

Fisher's Equation, for those acquainted with economics, actually can be applied to explain this point.

M:Money supply; V:Velocity of money; P:Price level; S:Output level

This is of course used to describe the inflation level based on the relative levels of national output and money supply in a country, but if one were to transpose the idea onto stocks it wouldn't be a bad fit, in my view, especially in a market experiencing a steady trend. Hence M becomes the money going into stocks, V is the trading frequency (low for investors, high for traders), P is the stock price level we all are enamoured of, and S is the supply of stocks (outstanding shares). In a bull market, Buyer A takes over a line of stock X from Seller B at a higher bid, who in turn uses the liquidity obtained to take on another line of stock Y from Seller C at a higher bid, and so on. The faster the trading (as indicated by high trading volume), the faster prices will be bid up across the board, as reflected in the stock indices (It will eventually end in tears, of course.)

If we concentrate on the left-hand side, it is clear that a well-educated public comfortable with investing their money instead of into low-paying savings accounts immediately raises M by several notches. The question would be on V: does the average individual increase his buy-sell frequency as he becomes more educated? It varies from individual to individual, and the answer might not lie here. In fact, V is probably most dependent on market sentiment; as the higher money volume (M) brings about a higher P(stock prices), sentiment trends upward and people's investing horizons shorten, with a resultant increase in V. It's a self-reinforcing bull cycle. One can also argue that exposing people to financial TV programs and analyst reports pushing various asset classes and stocks will usually trigger them to turn over their capital more times per year.

So, incumbent investors should not see it as a zero-sum game where they fear more financial education of newbies takes away their "competitive advantage" of better knowledge. Rather, a well-educated public tends to bring about a more efficient market that will trade at higher PEs due to (1)perception of better transparency and lower risk; (2)higher liquidity; (3)better marketing by the sell-side to investors on the buy-side who can now understand them well (they say man's greatest fear is fear of the unknown).




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