The New Alternative » Reality Check

What Bernie Madoff could not steal from me (a video)

Felix — Sun, 31 Jan 2010 19:48:11 +0000

Not exactly what you were expecting, but this video is pretty interesting. Enjoy.

Shawarma Capital by Nizar Alshubaily

Felix — Thu, 17 Dec 2009 12:11:36 +0000

A very interesting and novel piece by Nizar Alshubaily was written as a sequel to an equally brilliant piece by the same author. I’m extracting a few of my favourite lines, but the full article can be found here.

Countless firms no longer have the financials on their web sites and you have to register to request them. I had myself and 4 of my friends register with one and we have had no success so far. Far be it for me to assume that their financials are a disaster. Where one firm were making a least some attempt at financial transparency by disclosing their defaults the management being interviewed on television couldn’t remember the total amount of default involved, they said they didn’t have that number immediately available.

Of course let us not forget the ever increasing number of CEOs who have suddenly left their organizations “for personal reasons”. One company claimed its CEO resigned to concentrate on more personal issues relating to spending more time with his family. Three months later his picture was in the paper as having become a CEO of another company. I feel sorry for his family; I guess they now know their dad thinks they’re boring.

Denial. Some call it The Ostrich Effect, an aversion to receiving negative information. If you don’t talk about it, it hasn’t happened; it will just go away on its own. It is based on the myth of the Ostrich burying its head IN the sand to avoid danger. Not true, the Ostrich places its head ON the sand to relax its neck muscles and hide from predators. Why so many otherwise intelligent people still use this analogy is beyond me. If the Ostrich buried its head, it would die from lack of air.

Once again, the full article can be found here.

Watch it, or go Broke.

Felix — Fri, 28 Aug 2009 13:51:22 +0000

Guts. That’s probably the correct word to use to describe someone who comes up with a provocative yet very real film about the tough times we’re in today. In Broke, Michael breaks the problem down into digestible pieces, through interviews with people on the street, industry professionals, and academics. He answers the question “Why do some people make money, and others lose” by interviewing the best in the industry. He interviews experienced investors such as Jim Rogers, and academics such as Harry Markowitz and Dr. Vernon Smith. Michael even interviews poker players!

Guts. That’s probably the correct word to use to describe someone who comes up with a provocative yet realistic film about the present world that’s crumbling around us, and the sad future that’s awaiting us if we continue to act the same way.

In Broke, Michael breaks the problem down into digestible pieces, through interviews with people on the street, industry professionals, and academics. He answers the question “Why do some people make money, and others lose” by interviewing the best in the industry. In typical Michael Covel fashion, he interviews and borrows the experiences of heavyweight investors such as Jim Rogers and Mark Mobius, and academics such as Harry Markowitz and Dr. Vernon Smith. Michael even interviews poker players!

Like sheep, Michael reminds us in Broke that we’re all constantly faced with tough decisions, and that it psychologically feels better to be with others than to be alone – even if the crowded is wrong. Investing in Real Estate with no money down, believing and supporting State Capitalism, and listening to the Media are taking us down Broker Avenue, and in the film Michael finds people who know what they are talking about to explain to the viewers, why.

A scary thought and reality that is emphasized in Broke, is that a huge number of people around the world depend on the lottery to make enough money for retirement. A larger number also invests in mutual funds. Interestingly, Michael draws a parallel to playing poker or investing in hedge funds, where one would have a higher probability of winning (i.e. making money).

Michael has once again touched the right nerves by producing Broke to remind us all of the realities of life, as a lesser, kinder message would not be put across and taken seriously. The price of the Broke DVD ($19.99) is probably less than the daily average of how much each person spends on lottery tickets. Watch it, or you will be broke. It’s more than just a bedtime movie.

Broke can be purchased directly from www.brokemovie.com.

P.S. If you live in the UAE (Dubai, Abu Dhabi, etc.) and would like me to organize a mass order to save on shipping, please drop me an email.

Book Review: Michael Covel’s Trend Following (Updated Edition)

Felix — Wed, 29 Apr 2009 13:34:16 +0000

Despite the new book cover, Michael Covel’s updated Trend Following book doesn’t horse around. When I received my copy in the mail, my first thoughts were “Ok, here we go again…. another trend trading book…” BUT WAIT! The first 10 pages immediately changed my mindset, in typical Michael Covel fashion. Micahel went straight for the kill, no bull, by saying that this book was not going to teach you any trading strategy in particular, nor was it going to show you how to read charts (or tea leaves). Rather, the book highlights and discusses the most important points that both traders and fund managers tend to overlook when they trade the markets – Trend Following and Price.

Go with the flow or drown in the flood is really the best way to describe what Michael highlights in his book.

If you’re a Market Wizards fan, you’re definitely going to like the interviews and case studies that Michael puts in this book. Just the case studies and interviews conducted by Michael inTrend Following (Updated Edition) is akin to Market Wizards on steroids. There is so much data in this book that an amateur would miss if taken lightly. The case studies, side bar quotes, and the personal stories and philosophy of successful trend followers are extremely good reads and useful in a trader’s business. Fund managers and investors would also find this book a good read, as it explains reasonably well the reason why most lost (a lot of) money in 2008.

Learn more about the book and the other interesting stuff Michael has on his website, http://www.trendfollowing.com/

The Financial Onslaught in Singapore

Felix — Sun, 19 Oct 2008 07:58:37 +0000

The Monetary Authority of Singapore (“MAS”) classifies investors into 3 classes under the Securities and Futures Act – “accredited investor”, “expert investor” and “institutional investor”. There is no classification for retail investor specifically, and generally all other types of investors fall under this classification. The banking sector has been hit hard all around the globe, including Singapore. However, a key difference in the drama in Singapore’s financial sector from other countries’, is not due to bank closures but to individuals (retail investors) losing their life savings by investing in an instrument that was one thought to be untouchable by any market downturns –Lehman Brothers Bonds that were rated A1 by credit-rating agency Moody’s as late as July 2008. Who were the victims of this onslaught and how were they exposed to these instruments in the first place? Are there other investments that the same investors are exposed to and are they aware of the risks of those investments? How can the MAS find the middle ground it needs to prevent something similar from happening again, without over-regulating the financial system in Singapore?

Mr Tharman Shanmugaratnam, the Finance Minister of Singapore was recently quoted as saying ‘The MAS approach is one that balances regulation with responsibility on the part of the institution and the investor. All three play a part, and in all three areas, I’m sure there can be improvements, coming out of the recent problems.’

The Issue

The Monetary Authority of Singapore said about 9,700 people had bought Lehman-linked structured notes worth over S$500 million, and due to the recent Chapter 11 bankruptcy filing by Lehman Brothers, investors in these notes would lose most of their investments. Recently, about 600 investors in Lehman-linked derivatives held a public meeting in Singapore to protest about the way banks sold them the investment products and to discuss ways to get compensation, according to news sources. The problem with Singapore’s financial system is the way financial instruments are being sold and the way sales people are trained and motivated to sell them.

Quoting from the same source:

‘They never told me the issuer was Lehman and I told the manager I was afraid of American banks,’ said Ms Lin Ling, who bought S$60,000 worth of Lehman-linked ‘Minibonds’ from a Singapore finance firm that had marketed the structured notes as a safe alternative to fixed deposits.

‘I didn’t know it’s Lehman. There’s no Chinese explanation,’ said a lady in her 60s who identified herself as Madam Lee. ‘I don’t want interest, I just want my deposit back.’

Observations and Lessons Learnt

Passing the buck to another is always a convenient way out of trouble and that appears to be the route taken by many of the investors hit by this Lehman debacle. There should never be a doubt that there is a risk in every investment. By law, all financial advisors (“FA”) in Singapore are required to sit for and pass a number of Code of Ethics exams before they are allowed to give any form of financial advice. Without diverting this discussion into the effectiveness of the syllabus of these exams, we assume that passing these examinations shows the FAs’ abilities to understand the concept of risk, client classification and the different investment goals of different clients. There is no requirement for these FAs to be able to identify a high risk/return investment product before being let loose on the streets to peddle their products. What does this implicitly tell anyone aspiring to be a FA? Simply, it defines the minimum standard that these FAs need to fulfil, which is their knowledge of the law that governs marketing financial products in Singapore. Armed with this knowledge, FAs then gradually pick up product knowledge from their supervisors and colleagues, many of whom took the same path as them years ago.

What is the role of a FA? No matter how one argues, the FA’s role is to sell. It is not to “help clients manage their risk” or to “help clients save for a better future” – it is to “reach the sales quota to get paid”, “get on the millionaires’ roundtable to be seen and admired by your peers”, “be the first to sell a million contracts and win a holiday to Europe”, etc. Psychologically, FAs are not cultivated to be risk-adverse, they are by the nature of their motivation driven to take more risks, resulting in them advising their clients to take on more risks.

A Linear Solution to an Exponential Problem

Currently, FAs are paid a basic salary (terms and conditions apply) and a bonus based on the amount of sales generated by them. Any good salesman with little or no education would be able to fulfil this role. Alternatively, imagine if FAs were rewarded by how much money their clients made, this would immediately motivate them to do a few things:

Get a proper financial education;
Learn the concept of portfolio management and learn the instruments and how they can work for/against an investor; and
Think twice before selling an investment product.

Relate this to fees made by professional fund managers. Fund Managers are paid a basic salary (management fees) derived as a percentage of assets under management. When they make money for their investors (clients), they are rewarded a certain amount of performance bonus. Should they lose money or break-even for their clients, they would only be given their management fees which are sufficient to keep them in the business but not enough for them to retire on a 20-ft yacht. MAS should conduct a survey on all the FAs in Singapore, the result of which should tell the employers of FAs (Financial Institutions, or “FI”) how they can structure the basic salary of FAs in order to keep them in the business, based on their demographics. Analysing this information with past client data, FIs can then also structure a rewards table for FAs whose clients perform well. Without tagging the reward of FAs to clients’ portfolio performance, it is unfair to blame FAs for the recent losses of Singaporeans who invested in the Lehman bonds, since FAs were not rewarded for any gains derived from investing in these bonds either.

Summary

In conclusion, the recent financial turmoil in Singapore defined as individuals losing their live savings rather than financial institutions closing down, is a clear indication of a weakness in the regulatory system. This weakness is caused by a psychological problem – motivation of Financial Advisors in Singapore – rather than by a technical problem in the financial system. The solution to this is for the Monetary Authority of Singapore to conduct a survey on every Financial Advisor in Singapore, and release the results of this survey to all the Financial Institutions who are licensed to sell investment products to retail clients. MAS should also issue Guidance to these Financial Institutions on how they should revamp their reward structure, the result of which would improve the entire financial advisory industry in terms of knowledge and monetary reward.

Felix.

All work and no play…

Felix — Tue, 14 Oct 2008 04:36:13 +0000

Stefan Nielson over at the Tokyo Hedge Funds Club is putting together another signature year-end party for hedgies in the Land of the Rising Sun. The event is strictly by invitation only, and is organised specially for for hedge fund managers and investors at the exclusive Roppongi Hills Club. Confirmed sponsors include CME Group, J.P. Morgan TSI International and Fidessa.

For more information, please contact the Tokyo Hedge Funds Club at tokyo@hedgefundsclub.com or visit http://www.hedgefundsclub.com.