31 March 2011

Danger of being short volatility

I usually try to avoid investment jargon and warn clients to be suspicious when they are bombarded with exotic terms that require at the very minimum an advanced degree in mathematics in order to be understood. I use the term 'being short volatility' in order to send a wake-up call to readers. In the ordinary course of investment it is recommended not to write naked options as the investor is exposed to an open-ended risk. Sometimes these option exposures are cleverly packaged (hidden?) in complicated structures that look perfectly innocent to the naked eye.

30 March 2011

UCITS IV - is your money now really safe?

The regulatory machine is (as always) running overtime but the outcome is not always proportional to the effort. After UCITS I, II and III regulators are already putting the finishing touches on the next (but surely not last) version of the framework for investment funds in Europe. When a commentator writes that 'EU laws impose no ficuiary duties on boards of directors and the definition of their role is again left at the discretion of country regulators' (Samuel Sender, FTfm, 28 March 2011) one can have but little confidence in the outcome of the deliberations of the regulators.

And you thought you owned that Silver?

A new court case in the USA highlights the risks of leaving your holdings of physical precious metals such as Silver or Gold with a bank. That the belief that one owns 'hard' assets is naive to say the least is proven by the fact that often all that you really own is a claim on a bank. Should that institution get into trouble you are only the owner of a claim on that bank and have to joins the queue of creditors. In all likelihood you would at best receive a fraction of the worth of your holdings in the eventual settlement of the bankruptcy.

29 March 2011

Leave Derivative Esoterics to the Specialists

An article in a Swiss financial newspaper that is also widely read by more or less sophisticated private investors recently carried an article explaining how to use the 'Barrier Hit Probability' when evaluating a certain type of structured derivative product (often known as Warrant or 'Certificate'). We advise all but the most enterprising investors not only to not burden themselves with the details of such products but to stay away from any investment in them (or advisers that try to put their money into such products). Not even the experts agree on how to value these products and the underlying assumptions are so difficult to predict that the results are only giving a false sense of security.

22 March 2011

So you thought your Gold is safe?

The growing interest in gold as a safe haven in a time characterised by growing attacks on private savers leads many to seek refuge in the ultimate store of value. But beware! Gold that is stored in a bank vault you are not allowed to access by government decree or because the bank has gone bankrupt is of little use - and that would happen at exactly the moment when you would need it most to tide you over some difficult times. The same can be said for the fashionable ETF's that are being created by financial alchemists at a rapid clip as they ultimately are nothing but electronic impulses residing in some remote computer (and we don't even consider the risk of cyber terrorism or war). We think that Gold is best held in the shape of small denomination gold coins. When the going gets tough and you would like to buy some food or bribe your way to freedom a regular 400 oz gold bar would be of little use. Much better to stash away half ounce or one ounce Krugerrands or even the now quite popular mini bars that may be even more fungible.

13 March 2011

Advice or Production? - How much does your Adviser earn

Interesting insight into the financial rewards your adviser may earn for his 'production'. Yes, you are not a client but a cash-cow for your adviser and his employers so the old adage should be remembered: Buyer beware! Any investor must know how to make sure that the safety and performance of his investments rank foremost in the mind of his investment advisers.

11 March 2011

Swatch may sue UBS for mis-selling 'absolute return product'

There is a natural conflict between every Financial Service Provider and Investor/Client. No amount of regulation will be able to overcome this problem. If someone sells you some apples on the market the same problem exists. So the watchword has to be: Buyer Beware! Fee-based advisors like Private Banking Advisory can help to mediate between the opposing parties to any transaction. High moral values can alleviate the problem but no one should rely on that alone. Maybe Swatch should have stuck to its knitting and focused on making good watches?