I read with sadness that quite a number of people have lost large sums of money recently because they invested in structured deposits linked to the collapsed Lehman Brothers bank. For some of these people, the money they lost were their entire retirement savings. I heard one elderly Singaporean couple invested $250,000 and may not get any of their money back.
As for me, I have made quite a few bad investments myself. A few weeks before the dot-com bubble burst in Mar 2000, I bought into ABN AMRO Star Global Information Society Fund. Needless to say, when I sold off the investment after the bubble burst, I got back only less than 20% of its original value. It was only after the dust had settled that I realised that the fund was classified as "high-risk and narrowly-focussed". To make matters worse, the investment was sold to me by a very close relative. I won't deny that our relationship had suffered because of this unpleasant experience.
More recently (in Aug 2008), my wife and I bought some OCBC non-convertible preference shares. We were attracted to them because they paid 5.1% annual dividends - not bad when you consider that interest rates for savings and fixed deposits are only a small fraction of that. As promised, the shares did pay a 5.1% pa dividend, i.e. S$33.53 for every S$10,000 invested for the 24 days which the shareholder had held on to the shares. Not too bad except that the closing price of the share had dropped from $100 to $93.42 within the same period - we had a paper loss of more than $1000 within less than a month and got back only less than $100. Would you have subscribed to the shares if you know that this is the outcome? Of course, with the benefit of hindsight now, the answer is an obvious one.
My many bad experiences in investment make me wonder how people like Mr Oei Hong Leong can make S$7 million by trading AIG shares in such a difficult market condition. No wonder they say that the rich gets richer (people like Mr Oei) while the poor gets poorer (people like me). Alright, Mr Oei did a good and noble thing by donating his S$7 million gain to the Lee Kuan Yew School of Public Policy. (I would like to donate too but now, I am badly in need of donations myself.)
I feel that our MAS has not been very pro-active in its role as a financial regulator. It should not have allowed highly risky products to have been marketed as relatively safe investments to risk-averse investors. This would have constituted as misrepresentation by the sellers. The least it could do is to label the products as "high risk" and this fact should be made known to buyer by the seller. The buyer should also be told in layman's terms the various scenarios which will cause a loss to the investment and by how much.
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actually the loss of money did not upset me so much as some of the remarks made by some unthinking people. to rub salt into the wound, these people said: "greed is the cause of all this".
i had asked the bank officer when he recommended that i invested in minibonds if the risk was low and if my principal would be protected. he assured me everything would be okay.
but i do not blame him for what happened. at the time when he introduced the product to me, he was just as clueless about the position lehman brothers was in.
I'm quite puzzled how those bankers and investors think. I mean, before a collapse, sure got warning right? Technical analysis indicated so, this guy said goodbye to Lehman on September 10, half a week before the crash. Haven't seen the fundamental analysis, but there might be clues inside too.
So as people who manages your money, who should have known better, what are they doing? Unless they are playing shortselling right to the day before the crash.
Sorry, noob speaking here.
I hope what I say is not construed as "as if I am Mr. Know-All". I too lost money before in shares (1980s) but from the lessons I gained, there are a few basic principles to follow when you do your own investments.
1. When your banks markets these investment products, the product life-span before the product features work against you is 6 months. If your payout is >6 months it is classified a "high-risk" product. You can do a quick check on foreign currency deposits, swaps, hedge funds (to spread out your risk across many different financial instruments and/or geographical markets) and insurance-linked investments.
2. One should start studying how does the FUND cover its operating costs. If you find your fresh graduate earns $10K/mth selling such FUNDS, have you wonder how they are going to pay for his salary/bonus? If you find the same young banker can afford a Porsche TARGA parked at Millenium Tower, his wife (not working) yet has a second car like a BMW L730i, you should get worried on wehther it is safe to allow a third-party to manage your funds.
FYI even my university classmate who worked for Bear Stearns in Singapore advised me to do wonders with my money and I was about to call her when I found she no longer works for the company. You get suspicious when she just worked that for 4 months and now she joined JP Morgan/CHASE in private banking. Then you check she last worked for Smith Barney for < 6 months. In the last 2 years life has been very kind to those in the finance industry - changing jobs every 8-12 months. You see all bankers got sales target and if they dont perform in 3 months, they need to "Ji Tung" and move.
3. Dont READ MY LIPS, See everything in print and whether it jives with what my lips say.
At the end of the day, I never heard success getting help from the government - too late lah. Have you guys heard what happened not too long ago about CLOB when Malaysian shares were non-fungible and non-tradable when our friend Dr. Mahathir potong us. I heard we were going to some world court to egt redress. Nothing happened after that. I guess most of us got short memories.
Way back in 1972 when there was a crash involving GEMINI CHIT Fund - so many people burned yet. Also get-rich quick scheme.
The people making noise at Hong LIm are those retail customers. Even more "Chia Lak" are the High Net Worth Individuals; people with >$5m cash to spare. They were courted by the wealth management and/or private investment bankers. They invested in foreign shares, currency swaps, commodities, unit trusts, hedge-funds, etc to broaden their portfolio of investments. They usually tell you keep 20% cash, 40$ securities and 40$ sexy (risky) financial instruments for that good return of XXX%/annum.
Customers need to keep an "open line" meaning a bank account in which your banker can draw-down to invest your funds. You will only be informed about what happened after they draw-down your bank account, and not before a decison is made. So sometimes you find you need to meet margin-calls.
How can you sue them when you sign on the dotted line already, giving them the right to draw-down your account? Many lost millions not a few thousand dollars. They too cannot get redress.
I find it amazing that in Sunday Times, there is a page devoted to interviewing people who made money in the wealth management business (actually insurance lah). Which rich man will you in public and in print how he makes money? In fact it was quoted in the newspaper not too long ago (in the words of a CEO of a public-listed property company)that to make money in the property market today, one must wait for an existing property owner to commit suicide first before you buy his/her property; meaning one must wait until property prices plunge from $2,000/sq. ft to the bottom, then one buys. Sounds terrible right? I get scare when I hear such comments!
Actually Greed is not a bad thing altogether.
Now it may sound harsh to say these investors are greedy. But suppose nothing happened and these people went on to make some good money, I don't think they mind being called greedy.
I think people who put large sum of money into an investment product they have little knowledge about or people who moved their money from fixed deposits to the product for no good reason, greed does play a part.
maybe i should elaborate how i came to buy some minibonds. my fixed deposits matured and, at that time, the rate had dropped to below 2%, much lower than the inflation rate.
naturally, when someone suggested that you could park the money somewhere else, which he declared as low risk and capital protected, you would take it up as you want your retirement money to work for you. i did not go around shopping for a deal that would give me the best rate or the highest rate.
I don't think people who are attracted to a fixed 5% pa dividend payout should be considered as being greedy. That rate of return can't even cover inflation. So the money actually shrunk in real value.
Peter - If what you said is true, isn't it better to keep our money under our mattresses or in biscuit tins?
Victor -read the article in TODAY page 2 "Ignorance and Greed". The journalist was once those u see in the bank branches selling financial products. He gives a a good background of what I had said earlier.
Keeping under the mattress? That's not being smart. Make your money work for you. If we don't have greed or don't wish to take any risk at all, how can we be considered human beings? Everything in life has risk - some are terrible risks, some are "good" risks" but at the end of the day if you dont do anything, you got to blame yourself.
You know, according to Buddhist teaching, the two causes of human sufferings are greed and ignorance. Greed does not just refer to money; it can be greed for power, food, sex, etc.
In the Today article, the 'Greed' was referring to the sales people. The ones who got burned, the retail investors were in fact the 'no-greedy' type who just wanted something safe.
The Finance Sector is touted to be the "fastest growing" sector in Singapore based on various economic indices, GDP contribution, creating employment, etc.
Why should it not be the case when we adopted the Wall Street model? Sell to someone who has the cash? Appeal to the human desires?
Banks here adopt a matrix model of management. Your branch manager of "Bank ABC" is responsible and evaluated on profitability which comes from marketing a mix of products including housing loans, structured products, deposits, etc. The people who work in the branch such as your relationship manager and investment executives report to their respective heads pf that product line back in the head-office, and the branch manager. They too are evaluated like the way TODAY newspaper has described. Is this a good system? Well if there is no trouble then it is a good system.
I received this in an email today and it's a very good one to understand the current market scenario but it may not be relevant to your post;)
*****
Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.
2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.
* The net asset of the country now = 3 dollars.
3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.
*A has a loan to C of 1 dollar, so his net asset is 1 dollar.
* B sold his land and got 2 dollars, so his net asset is 2 dollars.
* C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar.
* Thus, the net asset of the country = 4 dollars.
4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.
* B loaned 2 dollars to A. So his net asset is 2 dollars.
* C now has the 2 coins. His net asset is also 2 dollars.
* The net asset of the country = 5 dollars. A bubble is building up.
(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.
* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars.
* B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.
* C loaned 2 dollars to B, so his net asset is 2 dollars.
* The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation.
(6) Everybody has made money and everybody felt happy and prosperous.
(7) One day an evil wind blew, and an evil thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more."
(8) A also thought the same way.
(9) Nobody wanted to buy land anymore.
* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.
* B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar.
* C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating.
* The net asset of the country = 3 dollars again.
(10) So, who has stolen the 3 dollars from the country ? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B's net asset is still 2 dollars, his heart is palpitating.
(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.
* A owns the 2 coins, his net asset is 2 dollars.
* B is bankrupt, his net asset is 0 dollar. ( he lost everything )
* C got no choice but end up with a land worth only 1 dollar
* The net asset of the country = 3 dollars.
************ **End of the story; BUT ************ ********* ******
There is however a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.
A few points worth noting -
(1) When a bubble is building up, the debt of individuals to one another in a country is also building up.
(2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss.
(3) An over-damped system is assumed when the bubble burst, meaning the land's value did not go down to below 1 dollar.
(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt.
(5) If there is another citizen D either holding a dollar or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land go up and down like a see saw.
(6) When the bubble was in the growing phase, everybody made money.
(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A ) and take part in the game. But you must know when you should change everything back to cash.
(8) As in the case of land, the above phenomenon applies to stocks as well.
(9) The actual worth of land or stocks depend largely on psychology.
Very true what u said.
Politicians and bankers can good "bed partners". Typically in the US, the government pump-primes the economy by printing more paper and injecting into the economic system. Will this help? Initially and temporarily but someone has to pay and somethings have to burst.
With the US holding $3 trillion in debt (the government mind you), over-inflated fixed assets (housing market sinking and bank mortgages in turmoil)and an electoral that does not want more taxes (Do I vote Democrat or Republicans? One helps the citizens, the other is pro-corporation), how do u solve all problems at one go?
Look at Britain after WW2. It had to sell its land for a bail-out from the U.S. Heard about Diego Garcia in the Indian Ocean - that was formerly a British military station called GAN which was leased for 99 years to the Americans.
In Singapore we used to say "Asset rich, Cash Poor". Those lucky few under government pension scheme can still afford to lose on unit trust because they still got medical benefits and monthly pension until death arrives. Not so lucky for the majority who are not on pension scheme.
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