PLDT-Digitel Deal Finally Gets NTC Approval

IN THE NEWS from Business World Online

After seven months and three postponements, the much talked about PLDT-Digitel deal, which first broke out on Investor Juan, finally gets the approval of the National Telecommunications Commission. The deal provides the PLDT-Digitel union with a dominant 70% share of the market and leaves Globe at farther second, eliciting criticisms from various sectors who fear that the industry might revert to a monopoly.

The approval comes with the following conditions:

1. That PLDT-Digitel offer Sun Cellular's unlimited text and call services permanently.
2. That PLDT and Digitel "continue providing high quality service to their respective subscribers."
3. That PLDT divest 10 megahertz of 3G frequencies held by Smart. Said frequencies will be auctioned off and PLDT will not be allowed to bid.

All three parties involved--PLDT, Digitel, and Globe--have reportedly expressed their acceptance of the conditions laid out by the NTC.

If we take a closer look at these conditions, it seems that the only one that matters to Globe would be the last one, that the most important (or perhaps, only) reason why it tried to block the deal was that it wanted those valuable 3G frequencies as a form of concession. I mean, who is the NTC kidding? The first two conditions are clearly inutile. First, I don't think NTC is in any position to dictate what any player should sell, much less sell permanently. And even if by the slightest chance NTC does have that power, it does not say anywhere that PLDT-Digitel cannot increase the price of these unlimited services. Second, what does "high quality service" even mean? Would Sun Cellular's services pre-merger qualify as being "high quality"? This one has so many holes, a blind man would have trouble not seeing through it.

Anyway, perhaps what's important is that everyone seems to have gotten what everyone wanted. That is, everyone except investors and consumers; what happens to them remains to be seen. Would investors finally be able to see their bet from seven months ago pay off with NTC's approval. Maybe. Would the deal really benefit consumers in the long run, as what the major players and some observers argue? We'll see.

Revisiting that Real-World Exam-Type Problem

DEAR INVESTOR JUAN

Dear Investor Juan,

I hope that my e-mail finds you well and patient for yet another question.

I have been a little concerned with the knowledge that my insurance plan is now owned by another insurance company, Philfirst. From my point of view, it just shows how fickle insurance companies are... Because of this, I have read several articles on how to check if your insurance company is stable. 
First, they say, is to check with the insurance regulation commission, next is to check for financial ratings and financial statements,then listen for current news about the insurance company and then watch stock trends.

Most of these things are foreign to me. I don't know how to get those information or maybe what to make of it once I see it. The farthest I could go was to check that Phil first is indeed listed in the government insurance site. But what assurance can that give me (as you said) that the company would still be in business after 10 years?

I understand that this may be a decision I have to make for myself. I do not want to end up being another "CAP" victim and yet I also do not want to over worry myself for nothing. Would it be too much to ask if you give me your personal opinion about the matter i.e., what would you do if you were in my shoes?

I am not financially savvy as you may have well guessed from my emails but I just want to find a better way to know if my insurance company will still be there when my plan matures. I understand no one can guarantee an answer but isn't there a way to make a good guess, at the least?

Respectfully yours,
Anonymous


Dear Anonymous,

Hello again! Let's try to take a look at and think about things without having to bother with financial statements and all that boring stuff.

First, I don't think the offer (to retire your investment early) signals any trouble on the side of the new owners, as that comment of one of our readers seems to suggest: what it essentially is is the company's attempt to pare down its future obligations in an above-board manner as it tries to generate new sales from the purchase. Out of, say, thousands of policy holders, I'm pretty sure that more than a few will find the offer attractive enough to bite, especially since a lot of us still take the time value of money for granted or don't know how to apply it to situations outside the classroom. It's a strategy that is meant to boost the firm's value, and even if only a small proportion of plan holders accept the offer, it's a strategy that will have worked. In fact, since the offer actually decreases the risk that the firm will not be able to meet its future obligations, it actually works in favor of those who do not accept it.

Second, you would have to form an opinion about the new owners, namely Philfirst and STI. STI is more familiar to most of us: it has a solid business model which generates a lot of cash, although admittedly the computer and nursing education businesses are not as glittery as they once were. Philfirst, I'm not very familiar with, and less so the firm's controlling figure, Mr. Eusebio H. Tanco. The information on the group's website, though--assuming everything is true--should be able to allay some of your concerns. The group is supposedly awash in cash, and a big part of it is in a trust that no errant manager could be able to put his or her hands on. All this means that in terms of capacity to meet future obligations, Philplans seems to have enough to erase (at least some of) your worries.

Finally, I think it's unlikely that Philplans will be another CAP. First, while like CAP, Philplans is also in the pre-need educational plan business, unlike CAP (as far as I know), it's also into life insurance and HMOs. And unlike pre-need educational plans, where policy holders are certain to collect at a particular future date, risk is better spread in the life insurance and HMO businesses, which makes them more lucrative and less risky to both the insurer and policyholders. So even if, for whatever reason, Philplan's pre-need educational business tanks, life and HMO should be able to generate enough business to stem the bleeding of the company as a whole. Essentially, being diversified into revenue streams or businesses that are not perfectly correlated lessens the risk exposure of Philplans which customers would also benefit from.

Well, I guess that's the best I can do short of actually performing due diligence. Just to make myself clear, my personal opinion is that you reject the offer and stick with your plan.

Good luck, and I hope to hear from you again.

3 Ways Cha-Ching Can Help You and Your Kids Become More Financially Literate

How I wish we also had this when we were growing up...

Cha-Ching is a new series on Cartoon Network that aims to teach kids basic financial concepts and money management skills. The stories revolve around six kids who form a band called--yes, you guessed it--"Cha-Ching" and how the group deals with real-world financial situations. I haven't seen any episode yet, but I've spent some time on the accompanying website, which I think would probably have much more to offer than the show itself. In fact, the website alone offers several fun ways you and your kids could learn more about earning, saving, and spending money.

1. Through song

Perhaps the reason why a lot of young people (like my students) are not very interested in finance is that it could become quite boring real fast (as some of you readers already probably know :| ). The creators of Cha-Ching decided that the best way to teach the young and old alike the intricacies of finance is by adding catchy tunes to otherwise bland and boring verses and turn them into colorful music videos. Take a look at this one entitled "Entrepreneur," for example.

At the very least, we'll learn how to pronounce the word correctly. ;)

2. With games

Perhaps the best way to make the most out of Cha-Ching is to play the games featured on the website. "Cha-Ching Saver" is a cross between a Super Mario World-like platformer and a typical RPG: you earn coins by playing platform mini-games and then decide how to use your coins on the world map. The objective is to earn as many coins as you can and be featured on the Leaderboard for bragging rights.

The second game is called "Entrepreneur" where, as the name suggests, you get to form and run your own virtual business. This game is actually pretty cool since you get to see (and learn) how decisions in different management fields like marketing (see the 4P's below!) and operations (wow, inventory management for 10-year-olds!) could affect your bottom line.

3. With helpful tools

Finally, Cha-ching provides users with helpful tools like the iPhone "Pocket Money Manager" app and the "Family Budget Manager" which is a watered-down version of the Excel budget planner I featured a while back. These tools can help kids and parents alike apply some of the things they have learned from Cha-Ching to real-life situations.

All in all, Cha-Ching is a welcome development in promoting financial literacy both in children and adults. Since financial literacy is not part of the official curricula in elementary and high school, Cha-Ching stands as perhaps the most effective way to teach young people to be more mindful of how to earn, save, and spend money.

ETFs and REITs for Investors Abroad

DEAR INVESTOR JUAN

Dear Investor Juan,

I've been following your blog for quite sometime and I really find it very informative. Just this month I started working here in Singapore and I would like to explore some investment opportunities here. I am particularly interested in ETFs and REITs and have been reading about them. However, I am having some difficulty in understanding since most of the explanations online are too "technical". I hope you can enlighten me.

Thank you.

Syd


Dear Syd,

Exchange traded funds or ETFs and real estate investment trusts or REITs are popular investment vehicles in more developed markets abroad such as Singapore, as you have mentioned, Hong Kong, and the US. They were designed to give "ordinary" investors like us an opportunity to invest more efficiently, so it's important that we learn as much about these investment instruments as we can.

I actually already discussed these topics in previous posts, but I don't mind discussing them again here briefly, and hopefully more simply.

Exchange traded funds

There are perhaps a hundred different kinds of ETFs available in the market, but the simplest are just pools of funds that are invested in either stocks or bonds, just like UITFs and mutual funds. There are two important differences between ETFs and UITFs and mutual funds, however. One is that ETFs are close-ended, meaning they have a fixed number of available shares and regulatory approval is needed before additional shares could be issued, unlike UITFs and mutual finds which are open-ended. Another difference is that ETFs are traded in stock exchanges whereas UITFs and mutual funds may only be sold back by investors to the issuing bank or financial institution; the implication is that whereas UITF and mutual fund unit/share prices only change daily, ETF prices change as they are traded, in real time.

Perhaps the most popular ETFs are index ETFs, be it stock or bond. A stock index ETF in Hong Kong, for example, would mimic the movement of Hong Kong's Hang Seng index by being invested in the component stocks of the index, much like equity UITFs and mutual funds. However, since index ETFs are not actively managed unlike comparable UITFs and mutual funds since the proportion of each stock in the fund is based on the composition of the underlying index and not determined by a professional fund manager, they are significantly cheaper; this is the main reason why we often hear investment gurus recommend index ETFs to investors. Finally, ETF investors earn as they do from stocks, from dividends and capital gains.

Real estate investment trusts

REITs are an important financial innovation in recent history. They give ordinary investors the ability to diversify into real estate-backed assets without having to shell out a huge amount of capital. Basically, a
REIT is pooled capital that is invested in income-generating real estate projects like commercial buildings or malls; investors participate by buying shares of the trust, which are also traded in stock exchanges, and also earn from dividends and capital gains.

While there also are investment funds like UITFs and mutual funds in countries like Singapore, ETFs and REITs often offer better and more inexpensive opportunities to diversify, so you might want to consider them first. A big portion of my capital here in Hong Kong is actually invested in a stock index ETF and a REIT, and I'm not worried a bit about these investments despite the global financial uncertainties we currently face. I'm not exactly sure how things are in Singapore, but as far as I know stocks are relatively cheap, in general, so it might be a good time to invest in a stock index ETF now; and I remember reading somewhere that the real estate market in Singapore is healthy especially compared Hong Kong's and China's, so it might be a good idea to buy some REIT shares as well (you have to do your own research about this first, of course). You may want to take a look at this previous post where I discuss specific investment alternatives in Singapore.

I hope you now have a better idea of what ETFs and REITs are, and are now hopefully confident enough to seriously consider investing in these assets. Good luck!

Spent: A Practice Run for Real Life

I recently came across a simple online game called "Spent." You start the month with $1,000 and are asked to make simple real-world decision each day. The objective is to last the month without going bankrupt as each decision you make impacts your financial position.

While various details are tailor-made for Americans (e.g., incomes and expenses are expressed in US dollars, there are some circumstances Filipinos would not ordinarily find themselves in), anyone would be able to relate to the myriad of decisions that come with every day life. With each decision, you see the degree to which your financial position deteriorates--because certainly, that's the reality many of us face every day. In the middle of the game, don't be surprised if you find yourself being asked--forced really--to make a decision you know you would not even consider in real life. Maybe that's the point of the game: that life sometimes gives us bad cards, and that regardless, we should always play the hand that we're dealt the best that we can. That, and how many of the "small costs" that we take for granted could quickly add up to a lot.

Try it and see if you'll last a month.

Solving a Real-World Exam-Type Problem

DEAR INVESTOR JUAN

Dear Investor Juan,

I bought a pension plan in December of 2003 at 2,700 pesos monthly. I paid 60 installments of 2,700 pesos so by November 2008, I was already fully paid. The yearly cash benefits of the plan will start on 2013 at 22,500 per year. I'll be receiving this for 10 years and on the tenth year (2023), I'll be receiving an additional 150,000 pesos. A few days ago, my agent called me and said that they are offering an Enhanced Plan Incentive which means I could cash in on the insurance now at Php 172,088.67 (option available only until November so your speedy advice will be greatly appreciated). Should I take this alternative and invest the money on other wealth management options like UITF's or would I be earning more if I go with the original payment schedules?

Respectfully Yours,
Anonymous


Dear Anonymous,

I hope you won't mind if we skip the pleasantries and go to the heart of the matter.

The first step in analyzing a problem like this is to organize and present the given information in a more understandable manner. I have taken the liberty of doing this using Google Spreadsheets, as I present below.

To keep things simple, I have aggregated monthly cash flows in yearly terms, although you may apply the procedure I'll discuss here to monthly cash flows as well if you want more precision. You made your first 2,700 peso payment in December 2003, which means that you have completed a year's worth of payments--or 32,400 pesos--in November 2004, which I have designated as end-of-year 2004, or the end of the first year of our analysis (year 1). Four such annual payments follow, up to 2008. I used parentheses to represent these cash flows to indicate that they are negative cash flows or cash out flows, a distinction that is necessary for the spreadsheet formula that we are going to use later.

In the spreadsheet above, we see the two alternatives that you are presented with, which we label as A and B. Option A represents the original terms of your investment: ten annual payments of 22,500 starting in 2013 plus 150,000 pesos in 2023 (Is this correct? Or does the last 22,500 payment coincide with the 150,000 one?). Option B represents the "Enhanced Plan Incentive," which offers 172,088.67 pesos today and we conveniently represent as the end-of-2011 cash flow.

What we can first do is compute for the returns of each alternative, that is, how each alternative will have earned you per year as an investment. We do this by using the internal rate of return or IRR formula of Google Spreadsheets or Excel. Click here and download to get a copy of the spreadsheet. In the Analysis tab, you'll see how the IRR formula is used. The computed IRR represents the annual returns of an investment, meaning choosing option A will have earned you an annual return of 6.48% per year from 2004 up to when you receive the final payment in 2023. That, in itself, is a decent annual return that beats inflation and is comparable to long-run returns of bonds and bond funds. However, it falls short of long-term historical return of equity funds, which is around 10 to 13% per year, although this would be an inappropriate comparison to make since equities would generally be riskier than investments like yours. Option B, on the other hand, will just earn you a paltry 1.25% per year. Clearly, by just comparing the IRRs of the two alternatives, option A, or sticking to the original terms of your investment, will significantly have earned you higher returns and so should be the economically correct alternative to choose.

Another approach would be to directly compare the cash flows before accounting for time value of money. In making a decision like this, keep in mind that two things are irrelevant: sunk or past, irrecoverable costs, and details that are similar to all alternatives. In our problem, the payments you made from December 2003 to November 2008 fall under both categories, and should therefore not matter anymore. This means that the only relevant information are the cash flows that we expect to receive: the offer of 172,088.67 pesos today for option B, and the future payments for option A. If we arbitrarily assume that we are going to choose A over B, then we should subtract the option B cash flows from the option A cash flows to get the relevant incremental cash flows for our analysis, which is presented in the "A over B" column of the Analysis tab. We see in this column that choosing A involves foregoing the 172,088.67 peso cash flow today of option B--essentially a cash outflow, or an investment outlay--for the promise of receiving the future cash flows of option A. We can thus look at the "A over B" decision as an investment in itself, since it has an outlay, future benefits, and consequently, an IRR of its own.

The IRR of choosing A over B is 10.12% per year from today to 2023, a number that represents how much more you will have earned from A than B if 172,088.67 is all you'll get from B. Does this mean you should choose A over B? Well, not necessarily because as you have pointed out, you can always take the cash today and invest it in another instrument, asset, or business. If you have 172,088.67 pesos today and you think you can consistently earn more than 10.12% per year in the next 12 years from it, then it would make more sense to choose B instead. So the next question is, can you?

I hope I was able to sufficiently answer your question, Anonymous. However, please remember that we have only considered economic factors in our analysis; in making this decision, you should of course also be mindful of other factors. Is there pressing need for the money now? What is the likelihood that the insurance provider will still be in business in the next 12 years? And so on. :)

11 Ways to Go on a Budget European Holiday: Backpacking Without Backpacks (Part 2)

In Part 1, we talked about a few ways to travel Europe on a shoestring. In this post, I'll add a few more items to the list.

6. Use bulk Metro (subway) tickets or city day passes instead of single tickets

"Metro" or subway tickets in major cities of Europe cost anywhere from 1 to 1.7 EUR each. If you're traveling as a group and/or are expecting to use the city's subway system extensively, you would save as much as a third of the per person fare if you buy tickets in bulk, like in batches of 10. Some cities even offer "city day passes," which include unlimited use of trains, trams, and buses, and discounts to several establishments like restaurants and museums; the Barcelona day pass, for example, at around 11 EUR per day is well worth the cost.

7. Think in euros

Most things in Europe, at least in the places we've been too, cost several times as much as the same things in the Philippines, and even Hong Kong. For example, whereas Big Mac meals in the Philippines and Hong Kong cost around 150 pesos, comparable meals in France and Spain cost around 6.50 EUR, or a whopping 385 pesos! And to think that a meal at McDonald's would be one of the most economical (i.e., cheapest) you could have on your trip!

Probably the best way to handle this and other spending issues while on a holiday in Europe is to think in euros as much as possible. Converting everything to pesos before you buy will just leave you confused, anxious, and maybe even hungry and miserable. It would probably help if you keep in mind that you're on a holiday, that you're there to have a grand time, and that everyone pays a premium to experience some of the most beautiful cities in the world. Instead of nitpicking the price of each item that you're considering buying, maybe what you could do is be more mindful of which items are worth considering.

Having said that...

8. Eat deliciously without splurging

During our trip, my friends and I set aside 30 EUR per person per day for meals, and here's how we usually spent it: spend 4 to 5 EUR for breakfast, typically a croissant or bocadillo, a pastry, and coffee; around 10 EUR for heavy lunch, which usually consists of paella, a few tapas or racions of local delicacies, and drinks; and the rest on an expensive dinner. I'm sure some of my companions would disagree, but personally I feel that we could have spent less on meals--perhaps down to 20 EUR per person per day--without taking away anything from the experience. This could be done by skipping on drinks in restaurants, for example, since these usually just cost half at a nearby vending machine or convenience store. Or you could just order enough and not treat each meal like it was your last supper--decent restaurants serve hearty per-person meals for around 8 EUR. Of course, you would also have to consider eating fast food from time to time.

9. Bring your Kindle

Not the new 3G models, which offers free 3G internet only for the Amazon Store and Wikipedia, but the one that I have. While most of Europe's tourist spots offer good free WiFi coverage for your iPhones and iPads, at times you'll find yourself needing an internet connection in the middle of nowhere. The old Kindle 3G offers truly free anywhere-internet, useful for on-the-spot researching of tourist places (e.g., bus stops, opening and closing times, restaurant reviews, etc.) and sending and receiving emails. You can even use it for Google Maps, although it is not very responsive on the Kindle; it works good enough for emergencies, though.

10. Selectively enter museums and other tourist sites

Many museums and sites in Europe cost an arm and a leg to enter, usually 10 to 15 EUR per person, and sometimes you cannot even take pictures inside. You would save a bundle if you research the best places to enter and just look at other sites from the outside. Some sites like Versailles do offer free access to scenic views

While others are actually better seen from the outside, like the Alcazar in Segovia, for example.

Another important money-saving decision you could make is whether to skip audio guides for some sites. Audio guides are gizmos that provide audio commentary and information about tourist sites like museums and cathedrals; in the cities we visited, they cost around 4 EUR per person per site. Audio guides are a boon for places with interesting stories like La Sagrada Familia in Barcelona and the Seville Cathedral, but using it could be really tiresome, especially for not-so-interesting places (or your 10th cathedral, no matter how interesting it is).

11. Bring a little less than enough foreign currency

Set a budget, then bring just 80 to 90% of that amount in the currency of the countries that you plan to visit and just use your credit card if you run out of cash. People often overestimate expenses for trips like this. Like me, if you bring enough cash you would probably end up with extra bills and coins near the end of your trip. Thinking that it would be a hassle to bring bank extra euros, you might feel a strong urge to spend the rest of your budget on stuff you don't need or splurge needlessly. Sure, it might be best to rid yourself of currency that in most probability you won't be able to use in the foreseeable future, especially if you don't have enough to convert it to your local currency, but instead of spending what's left, it would be better if you prevent this from happening by bringing a little less than enough. I mean, what else are your credit cards for? Just be careful as some banks like Standard Charted require explicit consent from the user before their cards can be used overseas.

There you go. 11 tips that should be able to save you a couple of hundred euros on your European holiday. Bon voyage!

11 Ways to Go on a Budget European Holiday: Backpacking Without Backpacks (Part 1)

It took many sleepless nights and countless hours of introspection, but I finally was able to convince myself to cough up the dough to go on a European holiday with some friends. Don't get me wrong, I love traveling and exploring new places as much as the next guy, but my frugal nature has, until this last trip, prevented me from even daring to go beyond the borders of near-Asia.

So my friends and I spent the second half of September exploring six European cities--Paris in France and Barcelona, Seville, Cordoba, Granada, and Madrid in Spain, in that order--plus Shanghai in China for half a day. Surprisingly, it did not cost us as much as one would think, although admittedly, we did spend more than I ever cared to. Still, the entire experience was well worth it: I will do it again in a heartbeat at the next opportunity, albeit this time more penny-wisely.

In this post and the next, I will share some of the things that we actually did and some that we realized we could have actually done to make the trip more affordable and without taking anything away from the experience.

1. Use Booking.com for faux hotel bookings

Traveling to most major European cities requires a Schengen visa from one of your destination countries; we got our single-entry visas from the Spanish Consulate in Hong Kong for 667 HKD each (around 3,800 pesos). If you're plan to stay in hotels during your entire trip, you'll be asked by the embassy/consulate to present hotel bookings for your entire stay. Since it would be wise to submit visa applications at least a month before the trip, it would be very risky to pay for hotel bookings or even reservation fees that early... if you book your hotels the usual way. Booking.com is your best alternative for visa-requirement hotel bookings since most hotels that are listed on the site don't charge cancellation fees up to a few days before your scheduled stay. So if you want to be flexible and safe, book any cancellable hotel from Booking.com, apply for your visa early, and just look for better accommodations later. Speaking of which...

2. Go ho(s)tel

In the past few years, networks of hostels in major cities around the world have flourished and attracted young, budget conscious travelers. Unfortunately, this is a global travel trend that we still don't see in the Philippines. Hostels are inexpensive, no-frills travel accommodations: in most, bathrooms and toilets are shared among several rooms, there are no TVs, and sometimes not even room air conditioning. But they are classy, and far from "cheap." During our entire trip, we've had the most pleasant stays in some of these hostels.

Hostels also are the best alternative for solitary travelers since single beds in dorm-type rooms are almost always also offered.

Some of the best hostels are listed in websites like Hostelbookers.com. One downside is that you'll have to pay a reservation fee of 5 to 10% upon booking.

3. Don't take direct flights

The cheapest direct flight from Hong Kong to Paris that we could find cost around 10,300 HKD (around 58,300 pesos, roundtrip), which was way beyond our budget. So we looked for possible itineraries with a connecting flight from a nearby major city. We found a Hong Kong to Shanghai to Paris flight which costs only 8,300 HKD (around 47,000 pesos), so we took that instead and saved 2,000 HKD in the process. We also got to visit Shanghai for half a day on our return trip.

4. Use budget airlines to cross borders

Perhaps watching too much Before Sunrise has conditioned our minds that taking trains is the best way to go from country to country in Europe. To our utter surprise, we found out that train fares are usually double that of budget airlines, and train travel takes significantly more time, to boot. So without hesitation, we took the cheaper--and less romantic--alternative.

A Ryan Air flight typically costs around 15 to 20 EUR, the price of nice dinner or a ZARA polo in Europe, so it really is cheap. The downside is that you're only allowed one hand carry baggage within specific dimensions with a maximum weight of 10 kg. That's why the next tip is so important...

5. Pack light

And when I say light, I do mean light. My friends had to get additional check in luggage for our Ryan Air flights (at 15 EUR for 15 kg, the price of the flight itself) to fit all their stuff, and that's during the early leg of our trip. Packing light means no laptops, no DSLRs, no paper books, and eventually doing laundry during the trip.

Can't wait to go on your own European holiday? I have more tips in Part 2. ;)

Reacting to Concerns about Europe and a Double Dip Recession

I go away for two weeks and see my portfolio down by 10% when I get back? What's a prudent investor to do in such a situation?

In case you have forgotten the things we have talked about in this blog for the past one-and-a-half years (or if you're a new reader), the most important thing to do in situations like this is not to panic and not to sell. Then, if you have both bowels of steel and a bit of extra spending money left, buy to strengthen your position, which is exactly what I did at the end of today's trading session.

It's been close to two months since I said and did pretty much the same things, and the PSEi has been down 9.3% in the same period. If we just spend a couple of moments to think about it, if you believe that two months ago was a good time to buy, then by the very same reasons, today should be a much, much better time to do it.

By most accounts, even if the world economy enters a recession in the coming months, stocks would still be inexpensive by historical standards. This is a sign that investors overreact when they migrate capital from equities to "safer" assets like cash and treasuries. Remember, the best way to make the most out of your capital is to go against the flow and do exactly the opposite of what everyone else is doing.

To help you better rationalize this counter-intuitive way of thinking, dwell on this. Most probably, one of your biggest concerns right now is whether to upgrade to an iPhone 5, get that new Kindle, or maybe finally buy your own car. I would bet that people around you, like your family and close friends, think about similar issues most of the time. My point is that, a European financial crisis and/or a double dip recession notwithstanding, you're doing fine. And so are the corporations that provide you with the things that you need and want. So why would these companies be worth 10% less all of a sudden?