Vital Investment Question: What's the Catch?

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

November 2008

The ‘Mini-Bonds’ issued by former Lehman Brothers and sold to thousands of investors in Hong Kong had burst months ago, leading to accusations of misrepresentation on the part of the consumer banks (who sold them), lack of oversight on the part of the Hong Kong Monetary Authority and the Securities & Futures Commission, and immoral preying on the (innocent? / naïve?) investment public on the part of the issuing investment bank. The saga is still on-going and the legislature has decided to investigate the case(s) further. Bankers may be subpoenaed too.

It is not the intent here to dwell on the legality or morality of the matter but to take the opportunity to put across a few important points so that investors will not get burnt again in future [fingers crossed here though]:

A)     When an investment appears ‘too good to be true’ = it generally is and investors are advised to avoid it, or at the very least must learn to ask “what’s the catch?” which generally turns out to be hidden and higher risks than perceived. In no way can an issuer offer a higher investment dividend yield than the bank deposit rate while incurring no additional risk.

B)     Do not equate big scale, long history, impressive offices, and Armani suits with ‘good advice’ = the correlations between these and advice are probably very weak, if any. In fact, big means many people which in turn mean herds which in turn mean probable herd mentalities, especially when the going is great. Add alpha-male type (which could include women) leaders to the equation and dissent is swept away i.e. no counterbalance in decision-making which in turn may mean whatever reasons have been used to back up the decision are there to simply fit the (pre-made) decision.

C)     Debate with yourself = according to unconfirmed reports, George Soros uses this approach when making investment decisions. Be your own devil’s advocate and attack your perceived decision from the opposite or a different angle. If the attack fails, all the better. If it succeeds, reevaluate one’s decision.

D)     Don’t just ask what profit there is = ask what the loss will be assuming similar probabilities in occurrence. Divide the former by the latter and you get a rough profit to loss ratio. 1 to 2 is bad, 1 to 1 is not good enough, 2 to 1 starts to deserve some attention.

While your humble author empathizes and probably sympathizes with these mini-bond investors, many of whom are elderly folks investing their pensions into such investment instruments, he could not help wondering if there had been cases where the investors, seeing their friends receiving better interest dividends via such instruments, pressed the banks to sell these instruments to them too, prior to the burst of course.

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