How wealth was destroyed

We heard stories about people who lost heavily in this depressing economic climate. Most had made their fortune in past years from 2003 to 2007 when the financial markets were rising consistently. Huge amount was made as they took big gamble on their investments. In an up market, it is possible to make bets and win on these bets. But in this volatile time, no one can predict how the markets will move from a short term to medium term basis. Hence, you can be caught on the wrong side of the curve.

Past success is not a predictor of future success. Someone who had made huge fortune with relative ease in the past, tends to be reckless and bet big without batting an eyelid. This behaviour caused lost fortunes in this present time.

 

Teh Hooi Ling, senior correspondent for The Business Times, related some tales of lost fortunes and they are featured below. (Source: The Business Times Weekend, 22-23 November 2008)

 

1) One man invested $100 million in only one stock – Cosco Corp as at last year. By early this year, the stock lost 50% from its peak of $8.50 in October 2007. He picked up some more Cosco Corp shares using margin (borrowing) thinking that it has bottomed and will rise again. Instead, the counter plunged another 80% to $0.70. The $100 million is more than wiped out.

2) Another person invested all his net worth of $2-3 million (including using margin finance) in FerroChina on “reliable” information that the company will be taken over at higher price than the market price traded in the stock exchange. FerroChina became suspended because it ran into financial difficulty. He will not be able to recover his investment.

3) An investor thought that Thailand was cheap a few years back. He concentrated on one company which was trading significantly below its book value. The bet paid off initially and his portfolio grew to $26 million. However, the stock has plunged to below 0.7 baht last year from 3 baht before. The value of his portfolio is now down 50% on his original capital.

4) Another man thought that the stock market was overvalued and sold out his stock investments by end 2007. He thought he was the smartest investor around since he predicted correctly. In June or July 2008, he thought the market has fallen enough and bought stocks using margin financing. But the stock market lost severely in September and October thus wiping out his investments.

5) One investor was bearish about the market towards the end of last year. Initially, he sold or shorted shares. However, in October 2007 the market suddenly rose to new high, he lost his resolve and started to buy shares, which was a wrong move since the market had moved significantly lower in November this year.

6) Another made a bundle on the Singapore stock market. He moved on to big stage and buy into the US stock market on margin. The US market went into nose-dive recently and he had several margin calls made on him.

7) A young banker made $2-3 million from the property market in last few years. He bought a $10 million property with the profits and at same time took a loan of $7 million to finance the property. He is now saddled with mortgage payment of some $30,000 a month.

 

There are few lessons we can learn from the above tales.

1) Do not use debt such as margin financing to invest in shares during this volatile time. Set aside a sum of personal money which you are prepared to lose when investing.

2)  Do not borrow huge amount and assume that you have the means to pay the mortgage amount during this time.

3)  Do not bet on just a single stock. It is risky. You either get the bet right or get it horribly wrong.

4)  Do not act on insider information which is often just hearsay and it is also not legal.

5)  Do not time the market because this may lead to you investing or divesting in the wrong period.

6)  Do not speculate but instead invest in value stocks for long term gains.

7)  Do not put all money in equities, but diversify into different investment classes.

8)  Do not be greedy but be contented for gains made.

 

Written on 11/26/2008 7:12 PM

 

Copyright © 2008, the author known as LKT in Singapore.

 

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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