In this chapter, our excursion to Manialand returns home. I shall attempt to describe and analyse the three stock market boom‘and-bust cycles that had taken place in Malaysia/Singapore in the last fifteen years. That there should be three severe crashes (and a less severe one) in a period of fifteen years shows the great need indeed for our local people to learn from the lessons of history. The first crash (hereafter known as the Crash of 1973) lasted for nearly two years. The second (hereafter known as the Crash of 1981) lasted for sixteen months while the third Crash (the Crash of 1987) started in October 1987 and is possibly still going on at the time of writing of this book. 1 shall discuss these crashes in this chapter while the analysis of the less severe Crash of 1984 will be discussed in Chapter 30. I shall be analyzing these crashes differently from the crashes described in the last chapter because I am personally familiar with the circumstances of these three crashes and am in possession of adequate data to carry out some analysis.
When going through the events described in this chapter, again, it is worthwhile to note the factors behind the rise and fall. In all cases, it will become clear that the sharp price increases towards the end of the bull runs were totally unjustifiable from an economic viewpoint. Like all other crashes, the sharp price increases were predicated not on expected economic return but on the fantasies and images that existed in the minds of the speculators. Such fantasies can be created easily but they can be destroyed just as easily. Prices, based on these fantasies cannot possibly be sustained once the fantasies are destroyed. On the Other hand, if stocks were purchased on soild, sound economic principles, the investors are much less likely to get burned.
This is a boom~and-bust that should never have taken place, or at least should not have taken place at that point in time. Since the Crash of 1929, the Western stock markets have gradually become, what is called ‘efficient’. This means that stock prices in a stock market reflect all the known economic facts. That is, the stock market can be used as an indicator of the economic performance of the country. If the economic situation of a country is good, the stock prices would be high and vice versa. In an economy that is fast growing and strong (for example japan), the stocks would command a high price while in an economically weak country (for example the United Kingdom during the 70s) the Stock prices would be low. It is a well-known fact that in the West, stock prices follow closely the economic ups and downs of the country. In fact, stock prices are so efficient that they are known as leading indicators in that they tend to foretell future economic situations. In the US for example, the stock prices tend to lead the gross national product (GNP or the total income of a country) by an average of about six months. This means that the stock market tends to turn down six months or so before the start of a recession and tends to turn up six months or so before the economic recovery gets into gear.
However, in less mature markets, there is no such rhythm or rationale to the movements of stock prices. On occasions, they can be very expensive and yet on other occasions they can be very cheap. People new to the stock market scene may be unclear as to what a stock market commentator means when he says a share’s price is expensive or cheap. Is there a rational basis for measuring the price of a share?When one says that a share is expensive or cheap, he does not mean the market price per se. Thus a share selling at $10.00 can be regarded as cheap and one selling at $1.00 can be expensive. Investors evaluate a stock as cheap or expensive not on the basis of its price but in terms of other more objective standards. At this point, it is necessary to digress from the main body of this chapter in order to introduce a method for evaluating stocks.