Derivative Trading Losses in Recent Times

2008年10月:中信泰富(0267.HK: 行情)披露,在外汇期权合约上潜在亏损20亿美元.公司称其财务管理人员未获授权而从事澳元和欧元交易.

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Is Mutual Fund a Good Investment? III

Mutual fund promoters always highline the fund is managed by professionals. The first impression you get when you talk about professionals is they are truly professional, meaning that they are devoted their time for the fund management as well as they are equipped with necessary knowledge and skills. This should at least beat down average Joe result in the investment. But, the impression we get not always represent true reality. Checking back to the history and you found out that they are so many fund managers who do not perform, not even by laymen in the street. The reasons? There are too many and I just want to highlight few.

1) Peer pressure
There are 4 variables for the investment results and its outcomes:
i) You are right, others are right: that’s great! You deliver the results as expected.
ii) You are right, others are wrong: that’s even superb! You are among the top of the tops who delivers superior results.
iii) You are wrong, others are wrong: hmmm….. because of unforeseen circumstances such as 9-11 Tragedy, Hurricane Katrina, Tsunami…etc that could not be avoided, thus, delivering the poor results. Since everyone delivers same poor results, no one will blame you.
iv) You are wrong BUT others are right: oooooops…. That’s disastrous. Why you deliver such poor performance while others could deliver a handsome return? Everyone pinpoint at you and you are no way to hide because figures show everything. How? How do you avoid such phenomenon?

If you are the fund manager, which one would be preferred and which one you try to avoid far away? Since the management fee is not based on performance merit, isn’t it PLAY SAFE a better idea? If I could deliver a handsome results, that’s the desired outcome. But, if to deliver such results posses a risk of delivering a poor result compared to others who don’t, I’m better protecting my position first. After all, management fee is sure thing while to be a super star might risk me losing out my rice bowl!

2) Ego
Many fund managers are graduated from Ivy League. They are full of titles and they might be a Nobel Prize winner as well. Take an example, 2 Nobel Prize winning economists with other elite academic traders manage Long Term Capital Management (LTCM). Even with so many highly educated and intelligent people, the fund still failed. As mentioned by Warren Buffett, to ensure a successful investment result, you do not need a rocket scientist, but a Grade 6 mathematics with a rational business thinking.

Next time, whenever mutual fund salesmen try to persuade you to buy from him, ask him about Sales Load, Management Fee, Trustee Fee and so forth and their impact to your investment result. Are they care about the impact? How about their net worth? Are their majority net worth placed where they promote? If not, then why? All in all, is up to you – what’s your objective of your investment in mutual fund? To please somebody, buy it because of relationships, such as family members, friends or colleagues? Or because you really look for the one who could preserve your asset as well as creating value for you? After all, it’s your money and it’s your responsibility to take care of it, if not you, who else?

“Be a man. Place your money where’s your mouth is.” This is what I want to share with all fund managers….

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Investing as a career I

Investing is not a rocket science. You need not high IQ in order to invest. The only 2 criteria needed to ensure a successful investment are Firm Character and Knowledge, the sequence is important – without first criteria, second criteria only destroy you.

As Martin Whitman says:” "Many people on Wall Street know the price of everything but the value of nothing,", I would like to make some changes, “Many people in the market know the price of everything but the value of nothing.” The market mentioned here could be equities, real estate, commodities and so forth. In the era where the information is easily accessible, as long as you wish, you could get the Real Time pricing of any, being it an equity price that fluctuate minutes by minutes, commodities future or option that change every single minute, real estate price that change month by month. But, people should not forget that information is NOT knowledge as data is not information. The well sort and analyze data become information. While knowledge only obtained by the combination of information and Real Life experience that you learnt by hard. This experience is as precious as a rare diamond. People tend to think that as long as he is equipped with sufficient information, he could be success in investment. This mentality is totally wrong. If it is a case, a librarian would be a greatest investor for last century and a person who works in Google or Yahoo would be most successful investor in the world in this new century because they are surrounded by ton of information. But, in reality, this is not the case.

Be prepare that you will make many mistakes for the coming investment decisions. This is unavoidable. Warren Buffett did quite of number of mistakes, so did I. Though making those stupid mistakes, we learnt, we learnt by hard. One must not misinterpret that I am encouraging that we must make a lot of mistakes in order to be succeed in investment. As I mentioned, making mistakes is unavoidable, but one must make sure that the mistake that he made would not failed him forever. History already showed a harsh reality where the investors of Long Term Capital Management (LTCM) lost billions of dollars as well as Japanese real estate investors who also suffered same fate as his counterparts in LTCM. Reason? Over leverage.

Good Bye Mr. Alan Greenspan

31st January 2006 marked the fall of the old era and welcomed with the new horizon – Retirement of Federal Reserve (Fed) Chairman, Mr. Alan Greenspan who served the post for 18 years.

For nearly 2 decades, he was treated as a man of last resort whenever there is a economic crisis. The crash of Dow in Black Monday, October 1987, 90/91 economic downturn, the collapse of Long Term Capital Management (LTCM) in October 1998, the aftermath of Tech Bubble after 2000 are few examples. He believed to have magic hands who could turn an economic downturn back on track by using his monetary policy of manipulating key interest rate. The whole world is lead by him whether the economic will be “soft landing”, “hard landing”…etc. The blind faith of whole world that putting on him made him as the “God” who can rescue the world whenever there is something happen. His retirement made us worried that his successor could safeguard us when there is something happen in the future.



While Mr. Alan Greenspan might have his contribution, we need not overstate it. Take an example, few days before the meeting of the bankers to save LTCM, Alan Greenspan had testified to the House Banking Committee that ‘hedge funds were strongly regulated by those who lend the money. With the LTCM debacle, the belief that Alan Greenspan knew whereof he spoke, a central tenet of the Fed’s status, had been put in hazard.