Posted by: donmihaihai | August 2, 2009

Making that jump

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What advice will the financial pro offer to investors in the rough?

The best way to illustrate the lessons learned from the global financial crisis is captured in the accompanying chart of real-life investor experiences. These individuals, representing three broad types of equity investor, placed exactly the same amount of money in identical portfolios of global equities.

 A) There are investors who made a single lump-sum investment a few years ago and did nothing else subsequently. This approach is akin to a golfer aiming for a hole-in-one. Let’s assume in our analysis that this person invested $250,000 in a diversified portfolio of global equities in April 2007. Since then, the value of the portfolio has been shrinking. One course of action familiar to long-term investors is to hang on to their one-off equity investment in this tranche until the global market recovery runs its course; this could be a long wait to break even. If there are additional cash resources, now is the time to implement a fresh strategy as part of the plan to give the original investment a chance to recover.

B) Next, there are those who did ad-hoc top-ups to their portfolios. They picked the month in any given year to commit their cash savings to their equity investment portfolio. These are well- meaning investors who either wait for annual bonuses or attempt to time the market. For our exercise, let’s assume that this investor pumped $50,000 every April starting from 2005 plus $100,000 from a bonanza bonus in April 2008. No further top-ups since then, as this investor became rattled by the market meltdown. In social golf, this compares with a player who is not able to make a string of consistent shots for a decent hole.

C) Finally, we have the model investor – Ernie Els aka ‘The Big Easy’ – who has a regular investing plan. Let’s assume this individual invested $15,600 every quarter starting April 2005. From July 2008, this disciplined investor increased the frequency to monthly top-ups of $5,200 to the same globally diversified equity portfolio. In slightly over four years, this person contributed $250,000 to their core portfolio.

 All three investors are in the rough. It’s hard to make par for this hole without taking a risky recovery shot. Take out the 5-iron from the bag to be tactical instead of the 5-wood. Our model investor’s portfolio is 24 per cent below the aggregate investment of $250K. Market growth of 32 per cent is required to break even. The other two cases are looking at much higher returns or longer reconstruction period. Some measure of tactical asset allocation with a tilt to Asian equities and bonds may be required by all three investors to get back on track.

Discipline and patience are prerequisites for enjoying golf; the same can be said for investing in these challenging times. The score card is important, and yet there are enough holes left to play to your handicap for this round. The only way you will know you are back on the fairway is when you are swinging the club without being stressed about the next stroke. A golfer should not be upset about a previous bad shot but focus on what lies ahead. The consistent model investor will be rewarded not only when the game is over but all through the course of life.

Roy Varghese from Foundation Adviser ipac Singapore had written an extraordinary wonderful article on BT weekend tittle “From the rough onto the fairway” which talks about golf, properties and investing. It doesn’t really matter what he really up to but these 3 investor types, lump sum,  ad-hoc top ups and model investor “The Big Easy” demostrated  how one can maniplate data, presentation, etc to achieve the desire results.

This is an easy catch and it is entirely possible that the writer really don’t mind other “see” through as he got a “bigger massage” for his readers. But well, the outcome of the whole thing will change just by shifting the lump sum investment date. And if he invested in Apr 2005, chances are, he will be positive while the other adhoc top up and model investor taking hits. But what is the point of shifting the date of lump sum investor? I mean I know investor seldom invest at the bottom(what happen if I shift the lump sum investment date to Mar’09?) and while Apr 2005 was not a bottom, peoples are most likely to invest at the market top than any other times — those standard answers you know.

I don’t like to venture into that “hole” so let skip it, make a jump and look at it from a business angle. A lump sum investor is certainly not as profitable(or business opportunities) as a consistent investor investing for 20 to 30 years, and with all other possible business opportunities in the future. A good relationship can last a lifetime. And this article may targeted at those who invested during market peaked under the advise of “their competitors”. so he is giving signals, telling them, hey don’t be worry, we are smart, we know what happened, and we are able to offer you a recovery plan.

This jump is what CM put it down as the mental jump, or I believe it belong to the mental jump that CM eagerly talking about. The problem is, my jump is too easy so there might be more.

In stock investing, it requires many jumps as well. But what kind of jump? For what being presented in Financial statements(quarterly, half yearly, full years) and press releases to annual reports, the answer is fairly easy one — whats are not being highlighted are those the management doesn’t want “outsiders” to know or question which is the most likely case for most companies. Easy answer to write(type) out, hard part is at doing. So the easy routes many would take are 1) Everyone is saint, 2) everyone is devil until being proved otherwise. But well, it is not logical to think in this way just as call  all S-chips craps.

So the next easy answer is “What he, she or management wants”. Other than fruad and standard requirement from FRS, the “other” materials that being presented are at the option of the management. If they are an extraordinary, shareholder is always no. 1, then what we see will be what the management think owner must know. Even if I am able to make that jump, another bigger wall stay ahead. Do I have the knowledge to make that jump useful. That knoweldge come from business, industry and competitive landscape. Example for a fishing company, the most important information are, cost of vessels, area of operation and tonne catch per annual. And for oil companies, the most important information are, total amount of reserves and the cost(estimates cost) of taking them out.

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Responses

  1. Hi

    I’m quite impressed with your astute sense of sniffing out potential problem(OBS) with B/S, financial statements. Are you an accountant? Appreciate if u recommend a few books at spotting out creative accounting.

    Regards
    Greenhorn

  2. Kion,

    Thank you. I believe I can be better in the future so I will still be reading financial statements… just like taking my 3 meals.

    Anyway you can try Financial Shenanigans. Not a easy book to read but a good starting point.


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