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Could This Be The Best Economic Indicator?

The Motley FoolIt is often said that stock markets can be a good forward indicator of an economy. But I think I might have found a better one – taxi drivers.

Yes, our hard-working taxi drivers, who spend an inordinate amount of time talking with ordinary people like you and me in the back of their cars. They are not just the barometer of an economy – they are the thermometer and the sphygmomanometer, too.

If you ever want to know how a country is doing, be it economically, politically or demographically, just ask a taxi driver. What they know could fill a library. That is why I love chatting with them, whenever I have a chance.

Recently, I was having a natter with a driver who was ferrying me to the CNBC studios at some unholy hour of the morning. We were talking about investing and he revealed that he had lost a tidy sum on the markets.

My ears pricked up like my dog’s on hearing the rustling of biscuit wrappers.

Close encounters

I was curious. I wanted to know more. What on earth could he have invested in that lost him a fortune?

It turns out that he wasn’t actually investing in stocks, as such. Instead, he was buying warrants – those fancy derivatives that give the owners the right to buy an underlying stock by a certain date.

Warrants are complex instruments. It sometimes hurts my brain just thinking about them. Consequently, I wanted to know why someone would voluntarily buy a derivative instead of the underlying share.

We need to remember that buying warrants do not automatically make you a shareholder. They merely gives you the right to be one, should you choose to exercise them. And in most instances, you can’t even do that.

My taxi driver lamented that he could not afford to buy shares. But he could afford to buy warrants. As far as he was concerned, warrants are about the closest he will ever get to owning shares.

A lot of grief

Warrants are usually priced at a fraction of the underlying share price. Or put another way, they are highly geared. Or to put it a third way, it is possible to buy many more warrants than the underlying share for the same amount of money.

Let’s say you don’t have enough money to buy one lot (1,000 shares) of Keppel Corporation (SGX: BN4). At around $10 a pop, that is understandable. One lot of the Singapore conglomerate, which is the minimum that you can buy, would cost about $10,000. By comparison, the outlay for the warrants, which only cost $0.06 each, is going to look a lot more attractive, if you pardon the pun.

Some people might think that is a good thing. After all, a small change in the underlying share price could magnify the change in the warrant price.

However, warrants could just as easily expire worthless. That is not because there is something inherently wrong with underlying share. It might just be that time has not been on your side.

All or nothing

Investing should never be about all or nothing, which is the case with warrants. You are either in-the-money or you are not.

In my view, onerous lot sizes have a lot to answer for. It can turn a nation of potential long-term investors into a country of short-term speculators.

No one, who wants to invest, should ever be forced to choose an unsuitable product – just because it is cheap – over a more appropriate product that is unattainable because of an arbitrarily-set investment barrier.

It is not easy to build wealth when you have one hand tied behind your back, one eye on the clock, one foot in the graveyard of expired warrants and the other on a bar of soap.

The sooner that lot sizes are cut to more realistic levels, the sooner we, private investors, can start building long-term wealth. I long for that day to come.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.