A housing bubble occurs when the prices of real estate or housing rise at an increasing rate because of increased demand and lack of adequate supply. This may also occur when there is emotional buying in the markets.
Once this rise in price is realized by the market players, the bubble tends to rise further as more buyers enter the market. However, investors and speculators are aware that the prices would eventually come down as the property market gets overvalued. Thus, this phenomenon was given the name of a “bubble” as it is eventually expected to burst.
There are various factors that contribute to a housing bubble. During the boom phase in the economy, usually households have more money to spend. With greater disposable income, people may spend more on housing.
Thus, people are willing to take on debt during such an expansionary phase. Additionally, if interest rates are low then consumers are tempted to buy more on credit. Thus, the economy develops a greater appetite for risk. This can quickly lead to the economy spiraling out of control.
At such a time, there can be high levels of speculation and risky behavior. This can eventually lead to a sharp rise in prices. Thus, an inflationary pressure sets in on the real estate prices.
A bubble is expected to set in when the price of a commodity or asset is much higher than what the commodity or asset is worth. This actual worth of the commodity is known as the benchmark. However, there may not always be a defined benchmark for all types of assets.
The benchmark is only an estimate based on a collection of variables affecting the supply, demand, and price of the commodity. Some of these variables may include population growth, average income, average household size, etc.
It may be difficult for different speculators to reach a common ground while determining the threshold price of the commodity/asset. However, there are certain methods that are acceptable by a majority. One such method is finding long run averages based on the historical data. If asset prices overshoot these averages or the trend, then there may be a bubble present in the economy.
However, any small spike in asset prices may not directly be termed as a bubble. It is only when the asset prices reach outrageous levels that speculators and investors declare that a bubble is persisting in the economy.
Most bubbles, including housing market bubbles are only discovered in hindsight. Thus, it is extremely hard to predict when the next bubble might arise. However, there are always some warning signs that can be paid attention to.
Economists have tried to base this estimation on certain indicators that can help identify bubbles in specific areas. The first step is comparing current prices to the prices seen during historic boom cycles. This lays out an idea about whether the current prices are showing a similar trend as before or not.
There are other indicators falling into two broad categories: valuation and debt. Valuation is done by finding out the price to income ratio to determine the percentage of income people must pay to buy a house on credit. Whereas the debt side is measured by finding out the debt-to-income ratio or the total cost of home ownership relative to a family’s income.
A bubble can affect the real estate markets, personal wealth, and the economy overall. Bubbles can make everyday items more expensive, as well as rack up the prices of mortgages. Consequently, homeowners may be compelled to dive into their retirement plans.
The housing bubble, once it pops, can cause severe damage to all sectors in an economy. As people are trapped in the bubble, they keep expecting prices to go on increasing. Thus, people may end up buying more than what they can afford.
The pop eventually comes when increasing supply remains unmet by decreased demand. Due to consistent growth in the home prices, buyers now become wary of paying higher amounts. Additionally, many homeowners end up borrowing more than what their house is actually worth.
Thus, when prices start to slide, homeowners may realize they have landed in a debt trap which becomes extremely hard to come out of. This can lead to increased foreclosures, which drives the housing prices further low. Due to increased risk-taking, the economy enters a saturated space where it can no longer cater to the increasing supply.
Once the bubble pops, investors can buy when prices reach their lowest. This would allow investors to buy more property for a given amount of money.
The most prominent housing bubble was the one observed in 2007-08 crisis. The real estate bubble had begun during the early 2000s and came to a crash during 2008. Housing prices had shown a peak in early 2006, which eventually started to subside in 2007.
However, the full effect of the crash was visible in 2012 when prices reached rock bottom. During the coronavirus pandemic, prices seem to be overvalued in various states within the US. However, it is difficult to estimate when such a bubble of would again be seen in the county.
What is data warehousing? Data warehousing is defined as the method of gathering & handling data from different sources to get meaningful output and insights. Data warehousing is central to the BI system and is built for data analysis and reporting. Source: © nfo40555 | Megapixl.com In simple terms, a data warehouse is a large collection of data utilized by businesses to make investment decisions. What are the characteristics of data warehousing? Data warehouse has supported businesses in making informed decisions efficiently. Some of its key features are highlighted below: The data in a data warehouse is structured for easy access, and there is high-speed query performance. The end users generally look for high speed and faster response time – two features present in data warehousing. Large amount of historical data is used. Data warehouse provides a large amount of data for a particular query. The data load comprises various sources & transformations. What are the benefits of data warehousing? The Companies which used data warehousing for analytics and business intelligence found several advantages. Below are some of them: Better Data: When data sources are linked to a data warehouse, the Company can collect consistent and relevant data from the source. Also, the user would not have to worry about the consistency and accessibility of the data. Thus, it ensures data quality and integrity for sound decision making. Faster decisions: Through data warehousing, it is possible to make quicker decisions as the data available is in a consistent format. It offers analytical power and a comprehensive dataset to base decisions on tough truths. Thus, the people involved in decision making do not have to rely on hunches, incomplete data, and poor quality data. It also reduces the risk of delivering slow and inaccurate data. How does a data warehouse work? A data warehouse is like a central repository where the data comes from various sources. The data streams into the data warehouse from the transactional system and other relational databases. These data could either be structured, semi-structured or unstructured. These data get processed, altered, and consumed in a way that the end-user can gain access to the processed data in the data warehouse via business intelligence (BI) devices, SQL clients and spreadsheets. A data warehouse merges the data that comes from various sources into a complete database. The biggest advantage of this merged data is that the Company can analyze the data more holistically. It also makes the process of data mining smooth. Copyright © 2021 Kalkine Media Pty Ltd. Component of a data warehouse A data warehouse can be divided into four components. These are: Load Manager Load Manager, also known as the front component, does operations related to the mining and loading the data into a data warehouse. Load manager transforms the data for entering into Data warehouse. Warehouse Manager The warehouse manager manages the data within the data warehouse. It analyses data to confirm that the data in the data warehouse is steady. It also conducts operations such as the creation of indexes and views, generation of denormalization and aggregations, modifying and integrating the source data. Query Manager Query Manager is a backend component that does operations concerning the supervision of user queries. End-User access tools End-User access tools comprise data reporting, query tools, application development tools, EIS tools, data mining tools, and OLAP tools. Roles of Data Warehouse Tools and Utilities The tools and utilities in a data warehouse are used for: Data extraction: The data extraction process involves gathering data from heterogeneous sources. Data cleaning: Data cleaning consists of searching for any error in the data. Data transformation: Data transformation process involves changing the data into a data warehouse setup. Data loading: This process involves data sorting, recapping, consolidating, verifying integrity. Refreshing: This process requires revising data sources to the warehouse. Application of data warehouse Data warehouse plays a considerable role across multiple sectors. Some of the sectors it caters to are highlighted below. Aviation sector In the aviation sector, a data warehouse’s role can be seen in crew assignment, route profitability analysis, any promotional activity. Banking Industry In the banking sector, the focus is on risk management, policy reversal, customer data analysis, market trends, government rules and regulations and making financial decision. Through a data warehouse, banks can manage the resources available on the deck effectively. Banks also take the help of a data warehouse to do market research, analyze the products they offer, develop marketing programs. Retail industry Retailers act as an intermediary between the producers and the customers. Hence, these retailers use a data warehouse to maintain the records of both producers as well as the customer to maintain their existence in the market. Data warehouses help track inventory, advertisement promotions, tracking customer buying trends and many more. Healthcare industry In the healthcare industry, a data warehouse is used to predict the outcome of any test and taking relevant action accordingly. Data warehouses help them to generate patient treatment report, offer medical services, track the medicine inventory. Many patients visiting hospital have health insurance. Through a data warehouse, hospitals maintain the list of insurance providers. Investment and insurance sector In the insurance and investment sector, the role of data warehouse becomes important in tracking the data pattern, customer trend and market movement. Services sector In the services sector, a data warehouse is used for maintaining financial records, studying the revenue pattern, customer profiling, resource management and human resource management. Telecom The telecom sector uses a data warehouse in the promotion of its offerings, making sales decision, distribution decision, features to include in case they decide to launch a new product based on the customer requirement. Hospitality The hospitality sector involves hotel and restaurant services, car rental services etc. In this sector, the companies use a data warehouse to study the customer feedback on the various services offered and accordingly design and evaluate their advertising and promotion campaigns.
What is impact investing? Impact investments are the investments seeking to generate a positive and measurable impact on society and the environment, along with the financial return. It includes investments that define measurable impact alongside financial returns. Impact investors look for investments that could offset the negative impact and generate a positive impact. A positive impact could include generating jobs, serving low-income consumers, accessible and affordable - healthcare, housing, and education. Impact investing is relatively less popular compared to Environment, Social & Governance (ESG), Corporate Social Responsibility (CSR) and Socially Responsible Investing (SRI). The differentiating factor in impact investing is the intention of financial return along with constructive outcomes. Impact investing can be undertaken in any market, be it developed markets or developing or emerging markets. The avenue for investments could depend on the expected return of the impact investors. Impact investment markets provide funding to the sectors solving today’s challenges, including renewable energy, conservation, sustainable agriculture, housing, financial services, education, and healthcare. Also read: Why And How To Invest? What are the characteristics of impact investing? Positive impact and return: Investors seek to create a positive impact on society and the environment, thus providing capital to overcome any challenges arising from them. An investor would require capital seeker to set financial and impact goals. An impact investor is also responsible for the investment thesis, which defines the strategies used to realise financial and impact goals. It becomes imperative for investors to articulate the optimal and scalable impact and financial return. Evidence and data: Impact investors use extensive quantitative and qualitative impact data and evidence to support investment thesis. Extensive research allows setting targets about the investment contribution. It also helps to design investment strategies based on the solutions to address the needs and understand the potential negative impacts. Evidence and data also enable to improve capacity to undertake impact analysis. Impact outcomes: It is essential to measure the performance for effective decision-making on investments that are made to address the challenges in society and the environment. Managing impact performance is crucial for potential investments. It includes evaluating risks to achieve the stated goals and formulation of risk-mitigation strategies. Evaluating impact performance also seeks to mitigate the unintended consequence of the actions undertaken in the past. Increasing impact investing: Impact investors also seek to improve the impact of investing by enabling more investors to consider impact investing. It can include sharing of best practices, learning, evidence, and data. Why is impact investing important? Impact investing contradicts the conventional view that social and environmental issue could be handled by means of donations and philanthropy. It also challenges the traditional view that investments are made with a single intention of financial return. It defies the logic and promotes investing in a way that seeks to deliver societal and environmental change alongside financial returns. The conventional methods to bring positive changes to the society and environment have resulted in wealthy people evading tax through donations and philanthropy. Enterprise and entrepreneurs are now looking to tackle the complex challenges faced by society and the environment in the age of global warming and rapidly depleting natural resources. Impact investing provides capital to such enterprises and entrepreneurs. What are the challenges in impact investing? The market perception about impact investing has been that superior returns cannot be realised through impact investing compared to non-impact investments. Impact investing initially became popular among philanthropists and charities, who have the appetite to accept below-par returns compared to the market. International Financial Corporation (IFC) published a report on impact investing in April 2019. It was noted the IFC’s equity impact investments had delivered similar or better returns than the Morgan Stanley Capital International (MSCI) Emerging Market Index between 1988 and 2016. There remains a lack of clarity among market participants on how the investment would deliver the impact on society and environment. Impact investing industry also needs to formulate common standards to manage the impact investment portfolio. Investment managers have a set of standards that are applied for asset selection for investment. Similarly, impact investor should develop appropriate measurement systems to monitor the performance of targets. Also Read: Smart Ways to Invest on a Small Budget Some impact investing firms Vital Capital Vital Capital is a private equity firm engaged in impact investments. It was established in 2011 and is focused on sub-Saharan Africa. Vital Capital has observed that trade-off between commercial viability and impact of the project is not necessary. It engages with investors, portfolio companies, international organisations, impact investment funds, banks to deliver better outcomes. Vital Capital believes that achieving returns and having an impact on the society and environment could go hand-in-hand. 361 Infrastructure Partners 361 Infrastructure Partners is sustainable infrastructure platform on a mission to resolve infrastructure challenges and impacting environment and society. It seeks to invest in social infrastructure projects that empower public and private entities. 361 Infrastructure Partners believe that upgrading modern systems allow for safeguarding overall public health and safety, while also reduce CO2 emissions. Its goals are to enable impact-driven entrepreneurs to take a leadership position in solving the challenges faced by the environment and society. Adjuvant Capital In 2012, JP Morgan and Bill & Melinda Gates Foundation established Global Health Investment Fund (GHIF), which sought to construct an impact investing portfolio of drug, vaccine, medical device, diagnostics to address public health challenges. After incubating under GHIF, Adjuvant Capital is now an independent investment platform. It seeks to drive meaningful change in the public health of low and middle-income countries, while also chasing financial returns. It focuses on reproductive and sexual health, maternal and new-born challenges, improving nutrition in the undernourished nations, high-burden health challenges, emerging infectious disease such as pandemic threats. Aqua-Spark Aqua-Spark is an investment fund which emphasis on sustainable aquaculture businesses worldwide. It invests in small & medium projects which are focussing towards the production of safe and accessible aquatic life. Aqua-Spark does not seek exits early and look for entrepreneurs seeking to build scale for the future. They prefer entrepreneurs who believe in the business opportunity and contribute food security and environment challenges over the long term. Conclusion Investors should be practical and socially responsible in choosing companies that fulfil their views along with giving due respect to human rights, environmental protection and so on. So be A Smart Investor and choose wisely.
What is the October Effect: a myth, or a reality? October effect refers to the theory that stock prices crash in the month of October. This happens without any methodical reason or any specific factor affecting the stock prices. However, the theory has come into existence because of repeated crashes observed in October over the years. October effect is more of a psychological concept than a real-stock market concept. There have also been price crashes observed in September. However, the reasons for these crashes have been varied. How does October Effect impact the markets? The hysteria around the October effect might make investors scared in this month. The expectations of a price decrease might lead to many investors selling their stocks in early October. If too many investors end up selling stocks, that might inadvertently lead to more panic selling among the investors. Why do investors believe in the October Effect? Often investors let emotions get the best of them. People might lose out on their money because they let their emotions guide them, which may include fear, greed, or a herd mentality. Behavioural finance suggests that investors might be motivated by factors other than their rational decision making. Some of the biggest crashes in history have happened because of the poor decision-making of the investors. People might follow a crowd and put their money in stocks which are more popular among investors, without having any other reason for doing it. At times, the media accounts about the market and a general notion, which is framed without any rational explanation, end up misguiding investors into the wrong direction. These factors may lead to investors giving in to the mass hysteria prevailing during October, which may end up fuelling the October Effect. Therefore, investors must consider all the factors before putting their money in a particular stock. Why was the concept of October Effect formed? The following historic incidents led to the phenomenon of stock prices crashing during October: Panic of 1907: This occurred in the beginning of October. It started with the bankruptcy of two small brokerage firms. Two investors failed to buy shares of a copper mining firm, which led to a run on banks associated with them. This resulted in a domino effect. The crash started with New York city, but it eventually spread to other parts of America. As money was withdrawn from the economy, financial institutions faced the brunt. It also led to the shutdown of Knickerbocker Trust, which had been refused a loan by JP Morgan. The crash was ultimately resolved when the US government gave a fiscal credit of over $30 million, which led to the consumer confidence coming back. Stock Market crash of 1929: This is also referred to as Black Tuesday and it occurred on October 29, 1929. During the 1920s, the US economy was going through various expansions and peaked during a period of high speculation. This was referred to as the Roaring Twenties. As a result of this rise in speculation, there was overvaluation of the stocks, when their prices went way beyond their actual value. However, the bubble burst with reasons attributed to low wages, a downfall of the agricultural sector, and a multiplication of debt. Black Monday: This event occurred on 19th of October, 1987. There were many factors at play, which led to the stock market crash. These included a widening of the trade deficit, incoming of computerised trading and various other geopolitical reasons. The computerised models used for trading were programmed to give a positive feedback. This led to the model generating increased buy orders when prices were increasing, and more sell orders when the prices began to fall. International tensions between countries also led to the crash and loss of confidence in the market. Other events in September: There were historical events which led to a crash in September, like the Black Friday, Black Wednesday, the WTC attacks in 2001, and the housing market crash of 2008. Black Wednesday occurred on September 16, 1992. A collapse in the Pound Sterling led to the UK to opt out of the European Exchange Rate Mechanism. All these factors occurred because of different reasons, which were specific to that particular time period and set-up. Thus, it can be argued that the fact that these events occurred in October is a coincidence. Is the October Effect real or just a coincidence? It is safe to say that October Effect is nothing more than a mere coincidence. The events discussed above happened without any methodical linkage connecting them to the month of October. There has been further evidence proving that the October Effect failed to occur in the years when the market remained strong in this month. The historical crashes mentioned above occurred because of issues which had been specific to those times. Stock exchanges and trading platforms have incorporated the necessary changes to ensure that these events do not get repeated. Regardless of these regulations, it is safe to say that some of these crashes were Black Swan events and could not have been predicted under any circumstances. Therefore, it is difficult to say whether the current market is immune to phenomena like the October Effect or any other crash.
What is Value Investing? Value investing is an investment strategy seeking to target business that is selling at a level below their perceived intrinsic value. The investment philosophy was developed by Benjamin Graham and David Dodd, and it was elaborated in the book Security Analysis. Value-driven opportunities are found by evaluating companies according to book value or tangible book value. It is understood that value stocks are those trading at a discount to their book value or tangible book value or intrinsic value. A lesson in investing strategies: Types of Investment Strategy in Equity Market What are value stocks? Earlier in the last century, the markets used to pay more attention to annual dividend yield, which was an important metric. Also, the tangible asset backing in the company is also assessed by the investors. The price-to-earnings ratio (P/E ratio) grew popular in the US during the late 1920s. It also reflected that earnings could grow higher than the dividends. While dividends yields, P/E ratio and asset-backing were the main things to be assessed, the retained earnings of the business were also evaluated. Although the P/E ratio remains popular, the essence of price-to-book ratio (P/B ratio) grew in evaluating value stocks. Evidently during the times of stock market bubble, the P/E ratio for companies with high expectations has reached to extraordinary levels. Value stocks are traded at prices well below their perceived intrinsic value, typically due to some sort of headwinds that the business or the sector is undergoing. The intention is to buy stocks that are underestimated by the market at given price levels. It is also understood that market prices of stocks should reflect intrinsic value over time. Value investing is a long-term strategy seeking to buy such stocks. But not all quantitatively cheap stocks reflect value, therefore the focus on quality of businesses increased as quantitatively cheap stocks could sometimes reflect true value rather relatively lower multiples than peers. Benjamin Graham called this difference between intrinsic value and market price as the margin of safety. Value stocks should provide a sufficient margin of safety to be determined as a value stock. This margin of safety exists due to the inefficiency of markets to price stock accurately. The disparity between the intrinsic value and market price of the stock can extend to years; it is the reason why value investing is a long-term approach. Over the years, value investing has been championed by great investors like Warren Buffet, Peter Lynch, Seth Klarman, Templeton etc. Good read: Should you follow Templeton's investment mantra in today's scenario? Modern considerations in Value Investing Competitive advantages: A firm can be better off rival firms through developing competitive advantages over its rival firms. Competitive advantages are strategies for operating a business that gives an edge over the firms. Companies can develop competitive advantages by investing in intellectual property, know-how, improving labour productivity, geographical presence, manufacturing at relatively lower costs, developing brand image and awareness. Competitive advantages enable a business to generate better margin than peers, therefor generating value for the business and owners. At the same time, they must be hard to replicate to avoid competition. Cash flows and applications: Investors prefer cash-generating companies, and companies tend to strive for high cash generation to achieve better profits and scale. Cash flows are crucial to pay-off obligations and investments. Free cash flow is a widely used metric in corporate finance to evaluate the business’ capability to pay off its obligations after incurring cash outflow on capital expenditure. It reflects the cash generated by a business operationally after capex. Value investors look for businesses that can reinvest net cash from operations into the business to increase the enterprise value of the firm. Capital expenditure and investments of the business should be deployed efficiently to expand the business. Asset-backing: The investments undertaken by a firm mostly result in the addition of the assets or increase in the value of assets. Value investors prefer companies having assets that could generate long-term gains for the business. Although they look for the asset base of the company, it becomes imperative to evaluate the return generated on those assets. Capital allocation is one of the key decisions undertaken by firms to grow assets, but capital allocation could sometimes prove to be detrimental as well. Value investors evaluate the capital allocation decisions of the firm carefully to assess the potential impact on the business over the future. Investments undertaken by the management can either make or break the company’s future. Barriers to entry: These are the obstacles faced by new competition while entering a new market where existing players have developed a barrier to entry to avoid competition. Barriers to entry can include technological challenges, intellectual property, high start-up costs, licensing, Government regulations etc. Value investors have stressed on the need for barriers to entry as it allows the business to grow profits across cycles. Read: Become A Millionaire By Investing In Value Stocks! Balance sheet: It is a financial statement of the company which enumerates the assets and liabilities of the business as of business date. A balance sheet reflects the obligations of the company and assets, which can be used to settle obligations. Value investors prefer looking at the balance sheet as it allows to assess near-term and long-term obligations of the business. Read: Be A Smart Investor, Escape These Myths While Investing In Stocks Value investing Vs Growth Investing Value investing is usually applied to investing in companies that are profitable and established. Growth investing can include companies that are relatively new to the markets and are growing relatively better than their peers. Even though legendary investors have avoided value and growth debacle, noting that both are same. The divergences in the expectations from the business also set two investing philosophies apart. Investors expectation are high for growth, translating into a higher premium in the share price, while expectations from value stocks are relatively lower. Read: The battle of Investment Philosophies; Growth Vs Value Investing in Australia