THOSE OF YOU COMING INTO THEIR SIXTIES & HAVE BRAINWAVE CONCEPTS HAPPENING READ THIS
Concept of risk. In reality it is easy. It is the probability of loss, absolute or relative.
The second major job of a financial planner is to understand his client’s attitude to risk. Without understanding this he can’t develop a financial plan that will “satisfy” his client. To work out a clients’ attitude to risk a planner asks a number of questions like, how would you feel if you lost 20% of your money in one year? How about you were not showing a profit but rather a loss of 20% after 5 years? Now the sad reality is most people who go to a financial planner OR Million $$ scheme, do so out of greed or need. And whether they realize it or not they will mislead the planner as to the attitude that they have to risk. So it is really a bit of a waste of time asking these sorts of questions. As in reality we are all pre-programmed to a point with an attitude to risk that is constant.
Life is like an hour glass. We are born and the sand starts to run from the top to the bottom, it is just that the reservoir at the top is concealed from our view. When we are young there is very little sand in the bottom of the hour glass, we feel invincible and immortal, and as a result the young take greater risk than the old. By the time you reach your mid 40’s the glass is getting quite full and you sort of realize that you are likely to have less sand upstairs than has already passed through the neck of life. As a result time has some concept to you in respect of its limited duration. If you make it into your 60s or 70s you realize that time is rushing though very quickly and there is not much left in the top half of the hour glass.
Thus the young have a cavalier attitude to risk, the middle aged a circumspect more experienced view and the old have a risk aversion, and these are truisms of us all. Of course the reason for this is simple, the best way to mitigate a risk is time, and the older you get the less time you have. Put another way, if you go broke at 20 you have enough time to start again. At 40 you also have enough time to start again, but you are experienced enough to know how hard it is and at 60 you’re stuffed.
The finance company debacle has mostly wiped out the old middle class. They can never recover and will now be a burden on the rest of society which they would not have been but for this meltdown. Despite all this pre-programmed biological programming human nature is very diverse. Around 7 years ago I attended a general meeting of a defunct company that was considering a resolution to liquidate. At this meeting I had the opportunity to observe directly the attitude of people to the reality of total loss of investment. The company was Vortec Energy. Over its life of around 8 years it raised over $30 million from approximately 3000 investors to commission a new windmill. The company had acquired Grumond Aerospace technology. These were the people that put man on the moon, so it should be good technology. They also had access to a new construction material that significantly lowered the cost of manufacture and the combined theoretical result was a huge windmill with a diffuser on it that would produce 2 units of power for the cost equivalent of 1.5 bare windmills. The diffuser would do a number of useful things: Reduce the cost of power, increase the wind flow over the blades, thus making more sites economic for development, protect the blades in storms and thus lower the operating costs and insurance risks. Wonderful venture capital stuff.
For the first three years money flowed in from investors and eventually a windmill was built just out from Huntly on the West Coast of NZ. It was a scale model of the real thing, but it was by any standard a big mother. The full scale plan was to build these things as big as the Vero Centre and each one would produce a megawatt of power, no shit! The first warning sign was the official opening of the scale model. The shareholders and invited guests were bussed out to the windmill to watch an official welcome and then taken back to Hotel Du Vin for a slap up event. Such wanton waste should have been the first warning. At that opening I also witnessed my first official Maori welcome. It was quite funny watching a rag bag group of indigenous people filling into a hilltop compound surrounded by barbed wire and then being locked in. In a way it was uplifting. Max Bradford, who was then Minister of Energy, found my amusement at this process somewhat unusual when I explained it to him and Bill Birch. The years rolled by and at each AGM the optimism increased but delivery of an outcome continued to be just over the next hill. Fresh capital was raised at ever increasing prices. The shareholders thus left each meeting feeling good---does this ring a bell??
That too should have been a warning as feeling good based on the price someone else pays for a share rather than the company doing something useful, like making a windmill that works, is in someway just a bit sick. AGM’s were well catered affairs and always self congratulatory. Then along came the dot com bomb and raising capital got harder and share price momentum stalled. Meetings become a little more fractious. Finally the research data gave us the simple numbers which were these: Windmill cost $1, unit of power output 1. Cost to build diffuser $1, and the assisted windmills power output 1.8. I.E. it was useless unless we could drive even more cost out of the diffuser. So the board called a general meeting to consider the company’s future. Liquidation was an option. This time it was not a swish affair and the venue was the Tamaki Yacht Club, with some nice beams. so I, anticipating a lot of disappointment from shareholders, took with me a hangman’s rope. The first resolution to consider, which also had a very detailed plan attached to, it was a plan to tip the windmill upside down and put it underwater. This apparently looked like a promising line of research if shareholders would stump up some more money. The second resolution was liquidation.
The shareholders divided into four groups each of which characterize the human response to risk.
1/. The first and largest group, around 50%, were the possums. “This just can’t be true, where are the great refreshments this year…. They seem to be saying something different this time”…..these people did not vote on either resolution.
2/. Then, I kid you not, we have the optimists, blind stupid optimists. This was around 20% of the group. They asked questions like… “How much more money do you want from us to prove that we have not lost the money we have already given you?”
3/.Then, in around equal number, you have the lynch mob…. “You bastards you have stolen my money, you must pay, Give me the rope I will string them up.”
4/. And the final and by far the smallest group: “OK it’s a bum deal, bit of a shame, stupid me should have seen the writing on the wall earlier. Where is the next poker table as despite it all I still like the game.”
The biggest mistake an investor can make in investing is not learning to move on. Winning and moving on is best but not moving on is worse that losing and moving on. It is the moving on that allows you to use the time in front of you. Not moving on is time and life theft.
So the task for a financial planner is to categorize attitude to risk, between possums, optimists, blame others, and move on types. Of this group only one of them is completely unsuitable in terms of demeanour for risk taking, and these people should never be exposed to risk. They are the blame others group. The remainder can all cope with risk at a personal level, albeit, that their response to adversity may not always be rational.
There are two main reasons why a planner should not expose this group to risk. The first is self preservation as this group will sue you, picket your house, kidnap your kids. Ugly stuff. The second reason is more altruistic, while these investors are pouring energy into lynching advisors and fund mangers they are not getting on with living their life and working out how to recover. Adopting this approach is just another way for them to lose all over again. So what should people do over the finance company and Blue Chip scams and windmills & brain wave motors etc? Simple, push the regulators and trustees to wind them up, chase the perpetrators down and bankrupt anyone who can be bankrupted and do nothing more. Let justice or the lack of it take its course, and learn the lessons from the experience. But don’t stand outside the initiators house with a “you stole my money” placard. He won’t care and it is the placard holder who loses again.
Now if you are investing, which character type do you want to give your money to?
The management of Vortec were the optimist type. The best managers of money are the last group, losing and moving on is OK so long as they don’t habitually make the same dumb decisions that caused the loss. The worst fund manager is one who does not know when to move on or get the ball rolling so watch out kiddos you could be next.
Source NZder: Bruce Sheppard
September 2008 was one of euphoria following the US government rescue of the two US mortgage giants Fannie Mae and Freddie Mac. Then followed a dramatic weekend in which two of the four remaining Wall Street investment banks, met unintended fates while the world's largest insurer AIG is struggling to raise up to $40 billion in capital. Lehman Brothers has collapsed and Bank of America has acquired Merrill Lynch for $50 billion. AIG instead sought $40 billion from the Federal Reserve.
In 2010 nothing has been learnt from the crash and things are still the same with more finance companies having the same problems with bad investments.
LEHMANS, WACHOVIA BANKRUPT, MERRIL LYNCH sold BUT GUESS WHO GOT THEIR MONEY:
The bailout helps the Execs and banks not the taxpayers and in fact thery lose out completely. The firm Lehmans, in the days before it filed for bankruptcy, sought board approval to pay three departing executives more than $20 million, according to Waxman."Even as Mr. Fuld was pleading ... for a federal rescue, Lehman continued to squander millions on executive compensation," Waxman displayed a chart that detailed what he said was $480 million in compensation since 2000 and pointed out that Fuld owned a $14 million oceanfront home in Florida, an extensive art collection and another home in Sun Valley, Idaho. "Your company is now bankrupt, the economy is in a state of crisis, yet you get to bring home $480 million," said Waxman. "Is this fair, when the CEO of a company that's bankrupt has made that much money?" Now guess what all the other Execs of therse bankrupt companies have taken home????? and you will see whay you should not invest in finance companies etc
Ben Jenkins, head of Wachovia's general bank, would receive $13.3 million in severance payments and a pro-rated bonus of $3.7 million. Steve Cummings, head of corporate and investment banking, would get $12.8 million in severance and a bonus of $3.75 million. And David Carroll, head of capital management, would get $10.3 million in severance and a $2.75 million bonus. The government assisted in the deal. As for CEO Robert Steel, we applauded his move in July to use his own money to buy $16 million worth of Wachovia stock (in the $15 to $17 a share range). He's going to lose most of that, but he put his money where his mouth was. He deserves credit. Merrill Lynch's newly recruited chief executive, John Thain, stands to share a $200m (£111.4m) payout with two senior lieutenants for less than a year's work which culminated this week in the bank surrendering its 94-year-old independence.
SO NOW YOU SEE THE CRISIS HELPS THE BANKS AND BANK EXECS NOT THE TAXPAYERS