IPO for 'Shell' Companies

If you think that these companies have anything to do with the collection or selling of shells you are mistaken. This particular type of company is making occasional appearances in the UK stock market. The name refers to the fact that the company has no or only very marginal real business activities and is in the main designed to allow new management or controlling shareholders to raise money for a new venture or use an existing (usually languishing) listed business as a quick way to gain control over a company whose shares can be used as acquisition currency. Unfortunately in most cases the new promoters behind the shell company are able to create an air of excitement and even hype and any new investors that subscribe to shares in the IPO or subsequent secondary share issues are required to pay a hefty premium for the privilege to be on board for the ride. As in any IPO investors should be careful not to fall for a good 'story' and only invest on the basis of value and solid fundamentals.

Do you understand how your advisor is compensated?

Understanding the way your financial advisor is compensated allows you to see the motives that are behind the recommendations he or she may make. The latest revision to the pay plan that Merrill Lynch offers to its brokers is quite revealing as it talks a lot about how brokers will be paid but very little (or nothing?) about how they could and should improve the performance of client portfolios. It is especially revealing the a lot of emphasis (and incentive pay) goes into efforts to move client portfolios into trusts. This may be less an effort to improve performance and more a ploy to make sure that client money sticks with the firm as it would be less easy to transfer assets to another wealth manager. Maybe there should be a 'Certificate' teaching how to interact with financial advisors - there are any number of qualifications for them but they all are no guarantee for cost-effective and well performing investment advice.

Should you listen to the Experts and Investment Analysts?

When two reputable investment experts have diametrically opposed views on the same day (here, here)you have to wonder whether or not you should pay any attention to their opinion. News media as well as brokers and investment advisors constantly have to fight for the attention of current and prospective customers and can also rely on the fact that after a few days hardly anyone will remember what they said on a given day. Investors therefore are advised to stick to a well-thought-out investment philosophy based on their personal circumstances and requirements. They should focus on eliminating any avoidable risks as well as containing the annual costs and fees associated with managing their wealth.

Plan for Retirement with free online course

The return on the time you invest when watching this course might approach infinity as the course is free!

Tweets - a better mousetrap or another hype?

Trying to outrun other market participants with quicker access to news may be the Holy Grail to investment success ever since Rothschild reputedly scored a major investment coup when he got information about the outcome of the Battle of Waterloo before others. So it comes as no surprise that someone would try to mine Twitter for useful and timely investment signals. But be under no illusion - SOME tweets may contain useful information, but which ones, that is the question. This may well be just another momentum-chasing fad - it will be interesting to test the performance record of this approach after a number of years....in the meantime let us remember the old adage: There is a sucker born every minute!

Stock Accumulators - stay away!

The skill of financial product salespeople - often disguised as financial 'advisers' - does not seem to know any limit. Even the majority of experienced finance professionals will never have heard of these derivative products and investors brave enough to have a close look will require an advanced maths degree (and a strong drink) if they want to get their heads around this 'structure'.

Sauve qui peut! Your Pension is not safe!

Any trust you may put into the state providing you with a secure retirement income must be shattered by the news that another country, this time Poland, a honourable (?) member of the European 'Community' has conducted a defacto nationalisation of private pensions. No comment needed. So who is next? The Indian peasants must be on to something when they buy their gold.

How to select a Private Bank - not for Snob Appeal!

Report about Goldman Sachs 'unboarding' the less wealthy among its former employees should be a reminder that snob appeal can be an expensive aspect when selecting a provider of private banking services. The key aspect any investor should consider is performance - not 'prestige' or the art in the meeting room or the architecture of the office building. Unfortunately most investors - even the 'high-net' or even 'ultra high-net' ones that most bankers pursue - find it difficult - if not impossible - to to obtain or compare performance data that is verifiable.

Famous Football Coach picks wrong Financial Adviser - loses £10 Million

Sven Goran Eriksson may hate the man that he claims lost him £10 million. Another warning to all investors to carefully vet any adviser they do business with.

Broker versus Adviser

Investors are often not aware that their investment adviser is to all intents and purposes a salesman who earns a commission (often euphemistically called a 'bonus') that depends on the amount and type of 'investment products' he sells to the customer. Such an 'adviser' has to be seen as a broker. Investors are urged to ask any adviser how he is paid and if his firm gets any commission or other rewards from the fund managers or products he recommends.

Online Trading or Brain Surgery?

The proliferation of online trading sites and investing apps for use on the go pose a dangerous temptation to over-trade one's portfolio. As we said before, trying to be a successful day-trader is as difficult as becoming a good brain surgeon. Unless you are willing to dedicate the time and effort to either of the two activities you will not be successful - and even damage your financial well-being.

Alternative Investments for the Masses? - Treat with Extra Caution

When promoters of 'Private' Equity funds start waxing lyrical about the opportunities to invest in such vehicles that may soon be offered to the average individual investor one has to raise a word of caution. It is already difficult enough for investors to assess risk and rewards in 'traditional' asset classes such as bonds and equities. But 'alternative' assets such as Private Equity, Hedge Funds or Infrastructure Funds - while offering advantages and diversification on paper - are less transparent and usually come with higher management charges than their more mundane peers.

Is my Adviser 'Independent' or 'Restricted'?

That is the question investors in the UK must ask themselves since advisers were banned from receiving commission for selling products at the beginning of 2013. While this reform (known as Retail Distribution Review) may help investors understand how much they pay for financial advice the changes can be confusing for customers that do not spend their whole time studying the intricacies of new regulations that even market professionals and their lawyers find difficult to interpret. One could also ask why reforms that are supposed to be beneficial for British investors are not also introduced in other jurisdictions.

Integrity in Fund Management

"...from the investor's point of view, the integrity of their fund manager is an essential matter of interest, but one which remains extraordinarily difficult to measure or to judge." (Financial Times, 'The temptation of the fund managers' by Jonathan Davis).

Option Writing - treat with caution

Buying shares and writing options against them may appear to offer an escape from meagre yields in bond and money markets but investors should be careful. This strategy and those involving implicit options (like reverse convertible bonds) should not be used in a mechanical fashion without any attention to the market direction. There is a time for selling volatility and there is a time when it should be avoided. Selling any option always carries the risk of major loss should the investor misjudge the overall price trend of the underlying instrument.

Should you check the lifestyle of your Financial Adviser?

Two recent cases involving multi-million investment scams have both highlighted the expensive lifestyles of the main promoters. This raises the question if investors would be well advised to conduct a background check on the personal life of any current or prospective investment adviser. I would tend to say yes as the time when you could rely on self-restraint as demonstrated by the legendary old school Swiss Private Banker are long gone. Ostentatious lifestyles that involve million-dollar birthday parties where rock stars serenade the guests and over-the-top spending on art or property should always flash red warning lights.
See also 'Long jail terms for three fraudsters in £85 million boiler room scam' (Daily Telegraph)

2 Problems with Longterm Investment Strategy

While investors are well advised to follow an investment strategy that focuses on getting the asset allocation right in the long-term they face two major problems when executing it. Sticking to such a plan over many years, even decades, requires an amount of patience and self-discipline that most individuals lack. At the same time advisors and commentators often neglect to mention that one aspect that investors can control are costs and fees that can erode a substantial portion of investment returns. If neglected such costs can add up to an amount equal to the net gains accumulated in a portfolio over a period of 20 or 30 years.

Sceptic recommends small weighting in Gold

Most Economists are sceptical when it comes to the merits of investing in Gold. So it is a small surprise that Gregory Mankiw comes to the conclusion that a small weighting of Gold in an investment portfolio would not be such a bad idea. (New York Times)

Beware of Economic Forecasts

When a leading investment manager states that there is a '60% Chance of Recession in the next 3-5 Years' the firm unwittingly confirms that predicting the economy is nearly worthless as a tool to base your investment decisions on. Nebulous forecasts such as these should be considered to be advertising for the fund manager and a way to get attention in the financial media circus hungry for the next eye-catching headline.

Hedge Fund Performance: do not compare Apples with Oranges

Comparing Hedge Fund performance with the S&P Index is comparing apples with oranges (Goldman Sachs Report). One may have a critical view of Hedge Funds – and they are far from perfect – but they are expected to provide satisfactory returns on a risk-adjusted basis and diversification away from mainstream investments such as large-cap equities that dominate the major stock indices. A less simplistic analysis is needed and in addition those looking to invest in hedge funds need to fully  understand the instrument rather than being taken in by a sales pitch.

How to spot a bad financial planner

Useful article on Money-Rates.com

Eurozone banking - prepare for the Big One!

In 2005 I warned in another blog that to keep one's money in Italian government bonds that yielded a paltry 10 basis points more than German Bunds was not sensible. Now that a certain sense of normality has returned to financial markets in the Eurozone it is easy to forget the major risk that still exists when the next Euro-Quake hits the headlines. Investors have a short memory - only two months ago depositors in Cypriot banks were unilaterally stripped of (part) of their wealth. So I would urge any reader to consider transferring his bank deposits into Eurozone countries that can be considered 'safe' (hopefully there are some that deserve that description). Interest paid on deposits is ludicrously low in all countries so there is very little loss if money is moved out of vulnerable countries and their banks. But the upside is substantial as any break-up of the Eurozone would lead to major losses in the currencies of the countries that are forced out. So depositors are basically getting a free option.

Financial Planning for the Less-than-Rich

Many Financial Advisors are only interested in customers that have a relatively large amount of investable assets. Some firms cater to the Rich or Super-Rich only and require an account balance of $ 5 million or more. But as the trend to fee-based advice gathers speed there are a number of alternatives evolving that will make it possible to get sound advice with a much smaller nest-egg. Pre-condition will be that the investor is able and willing to do a certain amount of self-education on matters financial. The old say that people spend hours choosing the next washing machine but hardly spend any time on important investment decisions should be a warning.

No Stock Bubble, but Crash may come later

So speaks a 'Celebrity' economist. It is not unusual for market pundits to hedge their outlook in a similar fashion and leaving the hard decision to the investor. Forecasting is difficult - especially if it is about the future. So we have some sympathy for the 'experts' that are constantly badgered by the media to have view on the markets on a daily basis. But investors are well-advised to hedge against any market development by using intelligent risk management when investing for the long term and not be distracted by what is in essence public relations and/or entertainment.

Investors gullible and naive - study

"Delegating responsibility for investment decisions make investors vulnerable to the choices of professionals, choices that may be opaque, shielded from market discipline or tainted by conflicts of interest." A study of investment behaviour illustrates 'terrible investment habits' of American investors and the need for impartial advice.

How does your Adviser rate on investment process?

An article in Barron's magazine raises an interesting point when it argues that individual investors would benefit from an institutional approach to the way their investment portfolios are handled. But quarterly portfolio reviews require a certain amount of sophistication on the part of the investors that may not always be available - apart from the question whether they are willing to dedicate the required time and effort (or whether they possess the minimum of investment skills necessary to do so). So in the end investors are well advised to rely on experienced and trusted gatekeepers when engaging investment managers.

Fee, Kick-back or Bribe?

It literally pays to check (CNBC/Reuters)whether your adviser gets paid for putting your money into certain funds or other investment products.

CoCo's are NoNo's

One would have thought that the main lesson of the Credit Crunch and Financial/Economic Crisis is the danger that can be created by newfangled and little-understood financial 'innovations'. The need for banks to raise additional capital has led to the design of 'Contingent Convertible Bonds' (CoCo's for short). These bonds lure investors with relatively high nominal interest rates that make them appear attractive to those who are desperate to get some positive return on their investments. Even so-called sophisticated investors in large financial institutions get tempted. Partially because they do not play with their own money or they will long have moved on to other jobs or positions when the proverbial s*** hits the fan. They may also not be as sophisticated as their clients (pensioners, mutual fund savers and private clients) assume. It will be interesting to see how regulators treat these securities if they become more of a mainstream investment option. They will have to decide whether their role is to protect the banking establishment or the investors. We know on which side they should be and we are definitely siding with the investors on this issue. Dangerous bets such as CoCo bonds should not be in any investor's toolkit but should be strictly reserved for regular visitors to casinos and betting shops. Not for nothing the link above talks of a ticking time-bomb with respect to these securities.

10 things you should ask your financial adviser about
(MarketWatch)

Do not be taken in by fancy offices, glossy brochures or even by the centuries-old pedigree of an investment management company. If you are not sure how to protect your interests in the face of a slick and professional marketing machine you should consider taking impartial advice. And do not even think to rely on regulators - just never forget Cyprus and the fact that EU regulators were powerless (unwilling?) to help depositors in some of the country's banks.

Closing Banks restores Confidence? - Nuts!!

Alert Investors the world over will see through the explanations (CNBC) of the 'experts' that claim that keeping bank closed in Cyprus will 'restore confidence'. What confidence is left in politicians and regulators has been shredded to pieces in the farce surrounding the rescue of Cyprus and/or its banking system. Every investor should have a 'Plan B' to prepare for similar episodes in other financial centres - or get one ready if he has not already done so.

Is it a tax? is it theft? - Lessons from Cyprus debacle

The implications for any alert investor must be clear: analyse carefully where you hold your assets, which country and which financial institution can you still trust? Are you sufficiently diversified so that - apart from the nightmare scenario of a socialist world government - you are not likely to be fleeced by desperate governments that have hit the buffers - intellectually and finanically?

A significant cause of damage for investors

Says article (Financial Times, 18 March 2013) that deals with another mysterious and opaque way that providers of investment services can use to fatten their profit at the expense of their 'clients'. How many investors will know the difference between 'creation' and 'cancellation' prices for their investment funds? But technicalities such as these can make quite a difference and sharp practices should be banned. In the absence of legislation investors are well advised to consult experts that can help them safeguard their hard-earned cash.

How to find a safe haven for your money

Shocking news about the Cyprus money grab by the Eurocracy and assorted unelected bureaucrats demonstrates the need to have unbiased expert advice when looking for a safe haven for your hard-earned savings. All-too-often 'advisers' in established financial institutions have a vested interest in the status quo and try to lull clients in a false sense of security. Thus they avoid that funds that are under their management are moved to a safer and/or cheaper location or institution.

Superstate knows no Respect for Citizen Rights

News that the Obama 'administration' (mal-ministration would be a better word) is drawing up plans (Reuters) to give all U.S. spy agencies full access to a massive database that contains financial data on American citizens and others who bank in the country should send shudders down the spines of all freedom-loving citizens (are there any left?) all over the world. Soon the difference between living in the 'land of the free' and living in a tinpot dictatorship will be only a question of degree.
As pretext the bureaucrats wheel out the same old excuses - fight against terrorism (self-inflicted as no one tells the US to interfere in other countries' affairs) or fight against various 'crimes' (most of them just the outcome of bad legislation, remember the Prohibition and its side-effects?).
Private Banking Advisory stays true to its name and will protect the privacy of any consulting client - wherever they happen to be.

Do you buy the cat in the bag?

A short reference (New York Times) to the purported reluctance of a prominent private client advisory firm to disclose the performance record for its recommended portfolios is a stark reminder that all-too-often investors enter into advisory relationships without doing proper research. The often repeated joke that investors spend hours researching before buying a $500 washing machine but hand over millions on the basis of glossy brochures or fancy offices comes to mind. PBA advises investors to insist on inspecting the performance record of any financial advisor before handing over any investment monies.

'100% Return' on Stocks in 10 Years?

This headline (Jim Bogle via CNBC)is designed to make the mouth of every red-blooded investor water. But what is easily overlooked iJs that behind this attention-grabbing number is the mundane fact that any holding doubling over a period of ten years would have provided an annualised return of 7 percent. While this is nothing to sneeze at - many investors would give their right arm to be able to achieve this performance - it also is not earth-shattering. Above all it reminds us that just a short period of under - or even negative - performance can make it nearly impossible to achieve this return over a period of ten years as any loss has to be made up before the clock starts ticking again in the investor's favour. So the avoidance of mistakes and maximum discipline in keeping the costs of portfolio management as low as possible should be foremost in investor's minds.

Meagre Performance for Private Banking Clients

Private Banking clients find it notoriously difficult to obtain meaningful performance comparisons. Private Banks or Wealth Management departments are reluctant do showcase their performance. To some extent they are justified by arguing that each client requires a different approach as the risk tolerance or tax situation varies in each case. On the other hand, this can easily be used as a smokescreen to disguise poor performance before or after the client engages the firm. The solution for this dilemma should really be that fund management firms offer model portfolios that clients can choose if they are happy with the parameters that are set out in the investment rules for these model portfolios. Clients would then have a choice between a quasi-discretionary approach or a standardised formula that can be subjected to stringent performance evaluation. A look at this survey conducted by a magazine in Austria offers a shocking insight into the poor performance that clients experienced during the past 10 years. Most of the managers just were able to scrape together an annualised performance of around 3-4 per cent. Interestingly it made little difference whether to portfolio was deemed to be 'conservative' or 'dynamic'.

10 Common Investing Mistakes

10 Mistakes that turn Investors into their own worst Enemies (Business Insider)

Swiss Banks client Gold to allocated accounts

The banks are reported (Financial Times) to suggest to clients to move their physical gold holdings to allocated accounts. These gold holdings then are no longer part of the bank's balance sheet and do not require costly equity capital to back it up. To a certain extent this increases the safety of the client's gold holdings as any bankruptcy of the bank would no longer have any detrimental impact on the client's claim to ownership of the gold (assuming the physical gold is segregated properly - which is not always the case as several recent cases in the UK demonstrated where client holdings of various assets were not properly segregated). Investors should be aware, however, that banks (and other custodian institutions) might at any moment be prevented from giving access to gold that is in their custody if the governments/regulators order them to do so.

Honest Rating Agency punished by regulators

It is possible that rating agency Egan-Jones has not followed regulatory guidelines (themselves of questionable value) but to be banned from a large sector of the market for what is the equivalent of a parking offence seems to go to far - even if one never can underestimate the deviousness of regulators and the financial establishment that seems to dictate its actions. So readers are warned if they think that bond ratings  are anything they should pay attention to.

Who will drive Lamborghinis?

Interesting paper extolling the advantages of Gold (or hard currency) in times of (Hyper)Inflation

Where should you hold your Gold?

Still convinced that Gold is always a safe haven? then look at this

Turkish banks are pushing their customers to deposit physical gold in 'gold deposit accounts'. While that may seem to be a convenient - and above all secure - option it negates one of the main reasons why people want (and should) hold a proportion of their wealth in the 'barbarous relic'. This is the fact that gold is not anyone's liability (like all bank deposits, bonds etc) and is not just a blip in some distant computer (as most holdings of shares and bonds are after paper certificates have fallen victim to 'rationalisation' and 'modernisation'). Physical gold - as long as it is held in secret and away from the prying eyes of governments - is the only asset that can survive in stormy times and depositing it in any institution or vault - even if anonymous - means that its main advantage in uncertain times is lost.
12 Jun 2012

Heads I win, Tails you lose

A potential source of fraud that most investors do not know much about concerns the allocation of trades. It is critical that investment advisors or fund managers are not able to allocate winning trades to favoured accounts or funds - or even to their own investment accounts. A recent example is found here (Los Angeles Times)