Picture the scene….
…. let’s say I own a couple or three apartments (which I don’t) within a condominium in Singapore. There’s nothing wrong with that. There are many wealthy individuals in Singapore who are lucky enough to be able to do that.
Then one day I decide to sell one of my units. But instead of selling it on the open market, I sell it to myself. Yup, I write out a big fat cheque to myself….
…. What’s more, I sell it for a lot more than the average asking price on the market.
Who is going to object to that? After all, I am both the buyer and the seller in the transaction.
But what kind of effect might that have on my other properties, and also on properties in the vicinity that I don’t own.
Chances are their prices could go up, too.
So, without doing anything extraordinary, and more importantly, without any real cash changing hands, I have miraculously increased my paper wealth because my property assets have risen in value.
I could, if I wanted, repeat the process many times over, with each round of financial engineering effectively pushing up the value of the asset even more, which, in turn, would increase my wealth.
Aren’t I the clever one? There will even be some people out there who might hail me as a property genius.
Problem is, I am not generating any extra rental income from my properties. That is assuming that I even have any rent-paying tenants occupying any of those apartments at all.
So, even though I have engineered an increase in the value of my assets, nothing else has changed.
Does that bear any resemblance to the many tech unicorns that dominate the news these days? How much, exactly, are these companies worth?
Thing is, nobody really knows. And those who say they do are probably only guessing.
What we do know is that after every round of financing, existing investors are happy to pump more money into these cash-burning businesses at increasingly higher valuations….
…. they inject more money into businesses that are often racking up increasingly larger losses in the hope that someone will one day take these loss-making outfits off their hands at even higher valuations.
That is just transferring money from the dumber to the dumb. It relies on there being one born every minute – and…. there usually is.
David Kuo does not own shares any of the companies mentioned. The Motley Fool Singapore does not own shares in any of the companies mentioned. All information is provided exclusively by The Motley Fool Singapore Pte Ltd, a licensed investment advisory research provider (MAS Licence No. FA100056-1). Any information, commentary, recommendations or statements of opinion provided here are for general information purposes only.