A Trip Down Memory Lane

In October 2008, Warren Buffett wrote an article in the New York Times making a big buy call on the equities market.  In the article, Buffett said that he was buying American stocks, and that "my money and my mouth both say equities."

Fast forward one and a half years later. Singapore stocks have since gained > 50 % from the date of that article, and even more if you bought within the 6 months after its publication. Some non-blue chip stocks even surged multiples from their lows, gaining up to 10x their value.

How prescient that call turned out to be!

Vikram Pandit is a Loser; Berkshire Hathaway 2 - GIC 0

In the latest development of what must be the most eventful year in the history of banking, Warren Buffett's Wells Fargo has snatched Wachovia bank from Vikram Pandit's Citigroup. In what must be the most humiliating and daring bank acquisition to date, Wells bid and closed a $16b deal for Wachovia, an offer that trumped Citi's pathetic $2.1b and that has Pandit and his minions crying foul, or whining, rather.

But Pandit seriously doesn't have much of a chance. Wells Fargo is paying much more and is not requiring any assistance from FDIC, in contrast to Citigroup's relatively pathetic bid which involved "FDIC agreeing to absorb up to $42 billion in losses should Wachovia's $312 billion pool of loans later turn sour." The withdrawal of FDIC involvement will surely mean a goodbye to Citi's bid for Wachovia, but Pandit must have known better than to expect that his paltry offer would have been the best in the market.

No sympathy from me for Lehman Minibonds investors

After the collapse of Lehman Brothers, Bear Stearns, and the unwinding of the credit markets over the past year or so, several Singaporean investors have found themselves burnt, having dumped significant portions of their retirement savings in credit derivatives and other similar financial instruments. One of these products in particular, Lehman's Minibonds, has been completely wiped out following the Chapter 11 bankruptcy of Lehman brothers.

Now, several of these investors (losers), are crying and complaining to the MAS, claiming that the authority did not do enough to protect them from the risks of these investments that are now close to worthless. As quoted in the Straits Times...

ST Sep 24, 2008
Minibonds worry: 'How is the layman supposed to beware when the prospectus is filled with jargon that even the sellers do not fully comprehend?'

MY WIFE and I are joint account holders of Maybank Singapore. We purchased $100,000 of the Minibonds Series 5 from Maybank's investment banker around August last year. We were under the impression then that these were supposedly very safe bonds.

Every few months, I would even call up Maybank to ask about the performance of our Minibonds and whether I should still hold on to them. Each time, I was informed that these bonds were still sound, and there wasn't any need to bail out.

Now that Lehman Brothers is bankrupt, and the public disclosure that our Minibonds investment has, in fact, nothing at all to do with bonds, but are instead Collateralised Debt Obligation (CDO)-related derivatives, we are extremely disappointed, distressed and upset with Maybank's lack of professionalism and poor product knowledge.

The investment advisers are more interested in closing the deal and going through the motions during the investors' risk-analysis.

We fully understand the concept of buyer beware. However, in this situation, how is the layman supposed to beware of what they're being sold when the 60-odd-page prospectus is filled with legalese and technical jargon that even the sellers themselves do not fully comprehend?

Ngo Chee Keong

Nice try mr Ngo, but I think people like you are idiots.

If you don't understand the legalese and technical jargon in the prospectus, WHY THE HELL ARE YOU TOUCHING THE INVESTMENT?

And, if you know that the sellers themselves do not fully comprehend the jargon, WHY ARE YOU STILL BELIEVING WHAT THEY SAY?

Anybody with any knowledge about investing will have heard one of Warren Buffett's principles of investing: Only invest within your circle of competence.

DON'T TOUCH WHAT YOU DO NOT UNDERSTAND

Obviously mr Ngo did not heed Warren Buffett's advice, just like thousands of other 'investors' who got burned by Lehman's bankruptcy.

And now he looks like the idiot he really is.

The minibonds saga should be a poignant lesson to everyone on why you should NEVER TRUST 'FINANCIAL ADVISORS'. Always DO YOUR OWN HOMEWORK. And DON'T TOUCH WHAT YOU DO NOT UNDERSTAND.

Those who diligently do their homework, educate themselves on financial instruments and how to invest well don’t get FOOLED by these so-called ‘financial advisors’

Any tom dick or harry can get a CFP or become a personal banker. just talk to insiders and they will tell you how selfish, mercenary and unethical these financial salespeople are. All they care about is getting their commission.

They DON’T GIVE A SHIT ABOUT THE WELFARE OF THE PEOPLE THEY ARE SELLING TO.

The best and only real protection for your retirement savings is to arm yourself with knowledge and financial education.

The best investors have never depended on the regulator to protect their downside.

These are universal principles of investing that will stand the test of time. Whether it was the go-go- years, the tech bubble, or today's credit crunch. Follow them and you will avoid the hazardous damages to your retirement nest.

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update:

The former CEO of NTUC, Tan Kin Lian, has now called on the MAS to be pro-active, and to 'protect' the small investors' interests:

"I hope that the Monetary Authority of Singapore or the Attorney General can take similar action on behalf of retail investors in Singapore, who had been misled into investing in the Mini-Bonds and similar structured products. These investors were clearly misled by the relationship managers into investing in these products on the advice that these investments were safe.

It is time to hold the financial institutions accountable for their mis-selling activities and for our regulators to be pro-active."

Indeed, how easy it is to point the finger at the bank, the broker, and the fund manager for misleading you. It is easy to point the finger at the regulator.

But, it looks like somebody agrees with me. here's a letter countering Tan Kin Lian's statements in the st forum:

ST Forum - Sep 25, 2008

Ultimately, it's buyer beware

I REFER to Tuesday's report, 'MAS tells banks to give priority to worried investors'.

It may be presumptuous of Mr Tan Kin Lian to assume that the banks erred in selling structured products to retail customers. These products are regulated under the Financial Advisers Act and the Securities and Futures Act. Only qualified advisers can market and give advice on such products. They must have a reasonable basis for any recommendation that is made on structured products and must provide investors with a fair description of all material information.

Be that as it may, investors looking to invest in these complex structures should exercise extra caution before entering into such financial transactions. The decision to invest should be based on your own judgment and not solely on advice given by the bank or its advisers. Before investing, you should consider whether the products fit with your financial goals, risk appetite and personal situation.

Understand the features of structured notes. Even in the case of a 'principal protected' product, the principal may only be insured by the issuer and, thus, may be lost in the case of a liquidity crisis or other solvency problems with the issuer.

Structured products are not suitable for all investors. Each product can exhibit very different characteristics as well as associated risks and rewards. They may appear to be fixed-income instruments, but may contain embedded options which do not necessarily reflect the risk of the issuing credit. These options may be 'plain vanilla' or highly leveraged exotic options.

As each is unique, the risks inherent in any one structured note may not be obvious. Hence, read carefully the prospectus or pricing statement, which explains the risks, tax treatment and other important information in detail.

Ultimately, it is your responsibility to protect your own interests. If you do not understand how the product works, seek clarification with your adviser. Don't buy anything that you do not understand.

Jag Kuo Soon Yong

Lee Kuan Yew vs. Warren Buffett - Round 2

Some time last week, Lee Kuan Yew made a few comments about GIC's investments in the big banks, and also about Warren Buffett. He said in a Bloomberg interview:

Singapore's GIC May Seek More Bank Assets, Lee Says
By Haslinda Amin and Linus Chua

April 30 (Bloomberg) -- Government of Singapore Investment Corp. may add more bank assets to its $18 billion of investments in UBS AG and Citigroup Inc. as it chases stable returns over periods as long as 30 years, Minister Mentor Lee Kuan Yew said.

The Singapore sovereign wealth fund, which manages more than $100 billion, bought stakes in the two banks as they sought to repair balance sheets after writedowns linked to U.S. subprime mortgages. GIC, as the fund is known, may hold the stakes for two to three decades, said Lee, who's GIC's chairman.

``If there are other banks of the quality of the two that we bought into, with the promise and the capabilities and inherent capabilities to recover, we have got the liquidity to meet it, to make such an investment,'' Lee, 84, said in a Bloomberg Television interview late yesterday. ``We will not rule it out.''

This week, Warren Buffett, the wealthiest man in the world, gets his chance to give his take on the credit crunch and the banking sector:

Buffett says U.S. in recession; banks to face pain
Sun May 4, 2008 7:51pm EDT

OMAHA, Nebraska (Reuters) - Warren Buffett on Sunday said he does not expect financial markets to panic as write-downs and losses for bad debts mount in the financial services industry, but said those losses were not over "by a long shot."

The world's richest person, who runs Berkshire Hathaway Inc, said at a press conference the Federal Reserve brought markets back from a precipice in March in helping broker JPMorgan Chase & Co's purchase of Bear Stearns Cos, which was on the brink of bankruptcy.

"There's going to be more pain, sure," Buffett said. "The action of the Fed, in terms of Bear Stearns, prevented in my opinion the contagion where you're essentially going to have bank runs on the investment banks ... The idea of a financial panic ... has been pretty well taken care of. That was a watershed event."

He added, though: "That doesn't mean the losses are over by a long shot ... We've looked at some of the investment banks, and it's clear some more losses are going to be incurred."

Is Lee Kuan Yew listening?

He showed he clearly didn't listen to Jim Rogers by making comments about GIC possibly buying into more banks. And he most probably isn't listening to Warren Buffett either. Hell, Lee doesn't even really understand Warren Buffett's investment philosophy.

Buffett was speaking at his annual shareholder meeting, and had more to add:

In a question-and-answer session at the shareholder meeting, Buffett said that from a risk perspective, some banks got ``too big to manage.''

Sound familiar? What's the biggest bank in the world? I think it's one of the banks that Lee Kuan Yew's GIC invested in: Citigroup! which according to LKY, has

"an enormous spread worldwide as a retail bank".

Well, now we really know what an "enormous spread" is - it's a liability.

To finish off, be sure that it's not just about words, but it's also about making prudent investment decisions. Warren Buffett, like LKY & GIC, had the chance to pick up a stake in the banks. But Mr Buffett chose differently:

And Mr Buffett said banks need better risk management. He said he recently considered the prospects of a large investment bank, which he did not identify, by reading its 270-page annual report. He said he highlighted 25 pages where he did not understand what he had read.

'I decided not to pick that one,' Mr Buffett added.

Lee Kuan Yew and GIC, however, decided to plonk billions into Citigroup and UBS, now two of the greatest loss making banks since the credit crunch began.

Who do you think made the correct decision? Mr. Buffett or Mr. Lee?

I seriously think there's no debate!

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[Update - A reader has kindly informed:
"LKY is a senior advisor to Citigroup which means that he get millions off from Citigroup from deal, salary and payment every month, every year.
http://www.citigroup.com/citigroup/press/2006/060905c.htm
Please add this important disclosure as it might shred light why LKY is so eager to invest in frailing banks."]

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Related Posts:
Lee Kuan Yew Ain't No Warren Buffett
GIC, UBS & Jim Rogers

Do CEOs ever have a responsibility to "talk down" the share price of their company?

Talking down the share price of the company you are responsible for can often invoke an incendiary reaction from incumbent shareholders, especially if you have yet to build up the almost religious cult following that Warren Buffett has. And if you haven’t, doing so either takes

i. a strong sense of moral courage,
ii. a questionable sense of ethics,
iii. questionable business judgment, or
iv. a very good utilitarian reason to do so.

Talking Down in an Efficient Market

Assuming an efficient market, one can consider three main reasons why a CEO would want to talk down his company’s share price.

1. Public information does not reflect inside information

Under the information perspective for decision usefulness, markets respond rapidly and rationally to newly released public information. This means that market value diverges from intrinsic value only if public information does not reflect inside information, and the market has over optimistic expectations of the firm’s performance based on public information that does not give an accurate picture of the company’s inner workings.

When this happens, CEOs have an interest in ‘talking down’ their share price and releasing accurate inside information to the public, in order to manage shareholders’ expectations. The risk for the CEO is that the company will report future earnings that are below shareholders’ expectations that were based on faulty information. This could result in adverse consequences for the CEO’s job or compensation. This also allows the public to have better information of the internal state of the company, and avoids an over-allocation of capital to the company’s shares by the capital market.

2. The CEO wants to reduce expectations to make future performance seem better than it really is

Assuming public information more or less reflects the inner workings of the company, a CEO might be motivated to talk down the share price by making the company appear to be in worse condition than it really is, in order to make future earnings results seem abnormally high. A CEO stands to benefit financially from this practice when earnings performance is higher than expected, but doing so is ethically questionable, since it essentially involves deceiving shareholders and the market.

3. The CEO’s judgment is inaccurate

If public information is congruent with inside information, then a third reason why an honest CEO might want to talk down his company’s share price is because he has an overly pessimistic assessment of the company’s prospects. The converse is true if he tries to talk up share price in an efficient market with little information asymmetry – the CEO may be over estimating the prospects of his company. This is probably much more prevalent in practice.

Talking Down in an Inefficient Market

If, however, public information does accurately reflect inside information, and if a CEO is not prone to questionable ethical behaviour, then one has to consider relaxing the efficient market assumption in order to find reason to talk down the share price. With the advent of new fields of study like behavioural finance and comments of ‘irrational exuberance’ by such luminaries as Alan Greenspan, this may not be such an outrageous relaxation of assumptions after all. In fact, assuming that the market may not be efficient relaxes the need to assume that either:

a. information asymmetry exists,
b. a CEO is behaving unethically, or
c. a CEO’s judgment is inaccurate,

or any combination or permutation of the three.

Assuming public information reflects inside information, a CEO is honest and behaves with integrity, and the CEO accurately understands the value of his company, a CEO would be motivated to talk down the share price of his company if he noticed that the stock of his company was trading at a price significantly above its intrinsic value.

Doing so would:

i.Protect current shareholders from having an inflated sense of their wealth.
ii.Prevent a transfer of wealth, rather than a creation of wealth, from those buying the shares at the inflated price to those selling the shares at the inflated price. This is particularly important if we hold that prices eventually correct to reflect a company’s intrinsic value. When that happens, many retirement funds and children’s college funds can be destroyed overnight when share prices fall from lofty heights.
iii.Prevent the CEO & management team from being the victim of unrealistic expectations that are imputed into an inflated share price.
iv. Encourage efficient allocation of capital in the stock markets.

The very idea of an inefficient market, however, suggests that efforts by a CEO to persuade the market to 'rationalise' its pricing may well be unsuccessful. There is a significant chance that an inefficient market with irrational participants will ignore the talking down of the CEO, since the market has already ignored the public information available and has mispriced the company's stock.

Summary

Whether or not one believes the market is efficient, there are times when a CEO is rightfully motivated to talk down the share price of a company. And none other than Warren Buffet and Charles Munger "like the stocks of both Berkshire and Wesco to trade within hailing distance of what [they] think of as intrinsic value. When it runs up, [they] try to talk it down. That's not at all common in Corporate America, but that's the way [they] act." And if shareholders can suspend their immediate reactions of unhappiness towards such a move, they might well find that the CEO's actions are in the long run interests of the company as a whole.

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References:

Kerin, Paul (2006), "Tactical Retreat," Business Review Weekly
Scott, William R. (2006), Financial Accounting Theory, Person Prentice Hall
Tilson, Whitney (2003), "Charlie Munger's Worldly Wisdom," The Motley Fool