What is a bubble? …

Dutch investors were ruined by an insane market in tulip bulbs, being valued at ridiculous prices far in excess of their true value. Anglo-Saxon investors were severely damaged by the Dotcom Bubble, where prices and investments were at ridiculous levels far in excess of their true value. Recently the Americans have been literally wiped-out in 2008, by lending in excess of peoples ability to re-pay and everyone convincing themselves, yes, you guessed it, that homes where worth far more than their true value.

In each case, when the real value of the assets was revealed, everyone acts with surprise, and in each case, disdain blaming everyone else but themselves. Usually, promises are made to put in regulatory checks and rules that prevent it from happening again. Only it always will because people will find a new asset to overvalue. Oil and commodities, anyone?

Due to Globalisation the bubble no longer affects one area of one country, but whole countries, like Iceland. Clever people who earn lots, take risks with other peoples money, use new ‘assets’ which are not identifiable (pieces of paper), overvalue them and sell them. They are selling a lie. A lie that has brought down institutions, frozen lending, affected perfectly viable companies as well as poorly run ones, and could bring down governments.

So how do you avoid the lie that is a bubble. Fundamentals screams out. If for 60 years something has been done in a certain way, and then new ‘rules’ or ‘ideas’ are applied that improve it, be sceptical. When for example lending on houses was no longer restricted to multiples of income, or in fact income was ignored totally, then do not be surprised if the whole "house prices can only go one way" argument turns out to be a charade.

So, if you do not understand an investment, or if everyone around you is blindly saying the same thing without questioning it, when returns look too good to be true, and if you have not researched it or got a plan (or PAID someone else to do it) then do not invest. It is often said, for every winner there is a loser. I would say that for every winner there are a lot more losers. In the most recent case for every multi-millionaire investment banker, there are thousands who are about to lose investments, jobs and possibly houses. Be warned, and do your research.

Please note that the opinions expressed in this letter must not be construed as statements of fact – you should carry out your own further research before coming to a decision and before taking any action.

The views in this letter represent the opinions of Aisa and should not be construed as a statement of fact. Further advice should be sought before actioning any investment or tax advice. The Financial Services Authority does not regulate opinions on the economic outlook, nor does it regulate some forms of tax advice or comment such as this.

Dated 2 October 2008 – valid for 6 months. Aisa Direct Ltd, authorised and regulated by the FSA as Independent Financial Advisers. 1 Fordbrook Business Centre, Pewsey, SN9 5NU

* This newsletter has been prepared with all possible care to ensure its accuracy. It is based on our current understanding of legislation and HMRC practice. 

* Neither Aisa Direct Ltd nor any of its employees can accept responsibility for any errors or omissions. You should seek further professional advice prior to action.