It is easy to be cheated (9) - A better way to gamble

I consider investing to be similar to a gamble. The investor buys a financial product and hopes that the price will go up. If the price goes up, the investor makes a profit. If it comes down, the investor makes a loss. The investor has to take the invested asset does not fail and become valueless.

In recent times, it seems that even money kept in fixed deposit in a bank, which pays a low rate of interest, has the risk of default of the bank. Some people think that it is safer to keep the money under the bed!

To make the matter worse, financial institutions have created products that are risky and do not disclose the actual nature of the risk and do not pay a fair rate of return to the investor for the risk!

To avoid risk, it is better to invest in the following:

a) bonds that are issued by the AAA rated government. They offer a low yield, but is fair and safe.

b) A low cost, diversified fund invested in many bonds or shares, such as an indexed fund or exchange traded fund. Invest for the long term, to average out the good and bad years.

For investors who like the excitement of speculating on the price movement of shares or other assets, be honest and recognise that you are actually gambling. If you wish to gamble, it is better to go to a casino. The odds are fairer to the gambler, and the terms of the gamble are controlled by the authorities. You know the odds, and can decide on which side of the gamble to take!

Singapore is opening two world class casinos. When you gamble, make sure that you gamble an amount that you can afford to lose. Enjoy the gamble and good luck

Tan Kin Lian

Writing fee

Many magazines approach people to write articles, but they declined to make any payment or they pay a very low fee. It seems to be a habit in Singapore for people to be asked to write for free. I hope that mgazines are willing to pay writers at a fair rate, so that it is possible for writers to make a living.

I have been asked to contribute articles to magazines. Although I do not need the money, I asked for payment to be made to a non-profit organisation. If they refuse, I decline to write.

Speaking fee

When a conference organiser in Singapore engages a speaker from overseas, they have to pay the travelling expenses and a speaker's fee. When they engage a local speaker, they pay nothing.

Recently, I have been invited to speak on a few occasions, and have declined. I am willing to speak only if they agree to make a modest donation to a non-profit organisation nominated by me.

I wish to encourage conference organisers, and our media companies, to be fair to local speakers and be willing to make a modest contribution. They should not expect local experts to speak for free, while overseas experts command a large fee. We have to be fair to our local people.

Many of these conference organisers or media company make a profit and can afford to make a modest donation or pay a modest fee. It will not create any significant dent in their profits.

It is easy to be cheated (8) - Your private banker

Wealthy people have private bankers. These private banks are welll trained to convince the customer to invest in exotic products that are created by the financial institutions. These products are quite complicated and are not well publicised. It is easy for the unsavvy investor to be conned into investing in products that have high profit and expense margins for the financial institution.

When the investor found out that the product made a big loss, there is nothing that they can do. The private banker will explain that the market has gone against them. But in reality, the products usually would not give a corresponding return when the market goes in their favour, as a large part of the profit would have been taken away by the financial institution.

The private banker may encourage the customer to invest in certain currencies, shares or other assets that are traded in the open market or exchanges. As the prices of these products move every second, it is not easy for the customer to know if they have been given the fair prices. It is possible for the prices to be inflated or deflated, to the detriment of the customer.

The customer has to rely on the honesty of the private banker or the financial institution in giving the correct price. But, in recent years, there is lack of honesty as financial institutions searched for higher profits.

When times are bad, and financial instituions make losses on their own portfolio, it is easy for them to find some way to push these losses to their unsuspecting customers. The customer does not know if the transactions are properly audited.

Many people have lost large sums of money by acting on the recommendations of the private bankers or wealth managers. They are not sure if the losses are just due to the market or to dishonest practices of these intermediaries.

Tan Kin Lian

A positive attitude

View this meaningful powerpoint.

Finding financial advice in an age of bad behaviour

Read this article. It shows that wealth managers and financial advisers cannot be trusted.

It is easy to be cheated (7) - Cashing out your financial product

Many investors bought the credit-linked notes without understanding the nature of the risks. When they found out later, and some of the underlying assets had turned bad, they wanted to cash out and take a loss. 

The only buyer of the product are the product issuers who quoted a very low price for the product. The investor is not able to assess what is the correct price of the product, as they do not have information about the underlying assets and the extent to which they are likely to default. 

The product issuer has the information, but they are acting with a conflict of interest and a monopolistic position. They can quote a price that is much lower than the underlying value and make a big profit.

What can the investor do? It is best to take the risk and ride it out. If the situation become worse, it is bad luck. But, it could turn out to be better. If the investor accept the low price now, it is likely to be much lower than the value of the underlying assets, and the investor is likely to take a much definiate loss now.

Is this fair to the investor, to be placed in a weak position against the financial institution that has the information and is taking advantage of the lack of information and desperation of the investor?

A similar situation applies in the case of the policyholder of a life insurance policy who wish to cash out. The cash value quoted by the insurance company is likely to be much lower than the actual underlying value. This allows the insurance company to make a profit on the terminated policy. The policyholder already suffered the large deductions to pay the commission to the agent, the cost of the life insurance cover and the high expenses. Why should the policyholder have to take another big penalty to give more profit to the insurance company?

The lesson: do not trust any financial institution that creates proprietary products where there is no free market for selling off the product at its fair value. You will be placed under the mercy of the financial institution, which will seek to maximise its profits at your expense.