06/05/2010 - 00:00

Crises bring out the harsh investment truth

06/05/2010 - 00:00

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Goldman Sachs’ troubles in the US throw up some interesting questions about advisers.

IN whose interest is a stockbroker or investment adviser acting?

That question lies at the core of the case being mounted against the investment powerhouse, Goldman Sachs, in the US Congress, and by the proposed new Australian laws governing advisers.

The naive answer to the question, and the one politicians believe to be the case, is that advisers, brokers, bankers, superannuation fund managers, insurance companies and everyone else working in the world of money is acting in the interests of the client – you.

Sometimes the moneymen think of the client first, so long as the client’s interests coincide with the interest of the firm selling an investment product.

In other words, the primary aim of everyone in the money-managing business is to make a profit for himself first, and the client second, while hoping that there is enough in the deal to keep everyone happy.

This might seem to be a terribly cynical view of the money world but it is a proven fact; and it is on display every time we pass through an event like the 2008 financial crisis and then examine who did what when the fine-print in the paperwork hit the fan.

In Australia, the most disgraceful aspect of the investment advising industry has been the conflict of interest between an adviser recommending a product to a client while taking a fee from the company behind the product. That might soon be stamped out, possibly.

In the Goldman Sachs case in the US, what seems to have happened is that the firm bought exotic securities for some clients, and sold the same securities for other clients, while also buying and selling in its own name.

What Goldman did is called ‘making a market’ and it happens every day, with the problem being that no-one really understood the product (a collateralised debt obligation, or CDO), and most people still don’t.

Simplify the product, and ask your local stockbroker how many BHP Billiton shares he sold last week on behalf of clients, or how many he bought on behalf of clients, or how many went into the firm’s own account. It’s a fair bet that some went in each direction.

Understanding what drives the advisers is not rocket science. It’s called self-interest, and in the good times no-one complains. In the bad times everyone pretends they’re amazed at what happened.

There is a solution to this never-ending problem. It’s called education, and a realisation that managing your money is your job.

No amount of political posturing, or new laws which create a veneer of comfort will ever get away from the fact that the owner of money has a duty of care to that money.

To think that a fresh layer of paperwork will protect investors from being seduced by offers of above-average returns, or get-rich-quick schemes, is fanciful because the paperwork is merely a fresh coat of paint on a profession which competes for the title of world’s oldest.

Rule one in investing is said to be never lose money. Rule two is said to be never forget rule one.

The truth is really that rule one is ‘learn to look after yourself’. Rule two is ‘don’t expect someone else to do it for you’.

Crunching numbers

KERRY Stokes had a big win last month when shareholders in Seven Network approved his plan to create a new business that sells advertising space and tractors, one of the more curious combinations in Australian business.

Forgotten in the euphoria of merging Seven and Westrac was his other experiment in business, the merging of management at Seven’s Perth television station with the local daily newspaper, The West Australian, a deal which makes more sense, on paper, than bringing television and earthmoving equipment together.

The jury, however, remains out on the newspaper and television deal with some stockbrokers giving the third quarter profit result from WA Newspapers a tick, and others saying they would wait for ‘a second shoe to drop’.

That second shoe is a circulation update for the newspaper, which has been busily reinventing itself as a true tabloid in the mould preferred by media greats such as Rupert Murdoch.

In its stock exchange filing, but not in its own reporting, The West acknowledged that a “softening” in circulation had been revealed by internal data but investors would have to wait for the release of the March audit.

Analysts at the investment bank, UBS, were less patient, suggesting that circulation had “declined by about 4 per cent”. If correct, that tip probably represents the impact of the financial crisis and economic slowdown, but it also represents the first look at how the newspaper-television merger is going.

No beer goggles

FALLING sales are not confined to the media world. In a report that falls into the ‘shock and horror’ category, it seems the rate of growth in Australian beer sales is also slowing.

The latest AC Nielsen data on beer sales shows that growth in the March quarter dropped to 1 per cent, a number which is on the positive side of the equation but a big fall on the 6 per cent growth in sales enjoyed in the March quarter of 2009.

It was a broadly similar story in the wine sector of the booze market, with total wine sales around Australia showing no growth at all.

It is possible that Australian drinkers have suddenly decided to adopt a more healthy lifestyle, though it is more likely that beer and wine sales are an indicator of the national economy still struggling to gain traction after the economic slowdown, despite solid growth in WA and Queensland.

Small change

FINALLY there’s some good news on the global economy. Freshly revised figures from the International Monetary Fund reveal that the world lost $US500 billion less in the financial crisis than was first estimated. The updated loss was $US2.3 trillion, not the original $US2.8 trillion. Phew, just the $2.3 trillion.

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“We are so happy to advise others that occasionally we even do it in their interest.”- Jules Renard

 

 

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