“Greed is good.” Gordon Gekko
By John Lohr
Understand this about investment risk. It is created by greed. The financial world has used fancy algorithms like standard deviation (basically volatility) to define risk, but that’s not it. I prefer a simple definition like” investment risk is the likelihood of losing your money.”
Why do we buy stocks instead of keeping money in federally insured CDs or federally guaranteed Treasury bills. Greed. That’s why. The prospect of using what we have to make a little bit more than the next guy leads us to make investments that have a higher likelihood of trashing all our money. That’s why we buy unregulated private placements like hedge funds. That’s why, if we have to buy stocks we buy foreign stocks. That’s why, if we have to buy foreign stocks we buy those in “emerging markets”. Keep going as we go further out on the limb of risk. There’s an investment advisor right behind you ready to lend you a saw.
Investor enthusiasm for regions with rapid economic growth drives us to emerging markets. The thing is modifiers like “rapid” growth and “emerging” markets should trigger a caution light on our road to retirement. But, Greed takes over the wheel.
Take Dubai, for instance. Think Dubai and what images come to mind — the Las Vegas of the Middle East, the world’s tallest tower, indoor ski slopes, man made islands, gold-plated limos and wealthy tourists? Or, when you think of Dubai do you think of a stable industrial and financial-based economy that would be a good place to park your money? I didn’t think so.
This vague semi-autonomous city state is shrouded in secrecy and exists to perpetuate the obscene wealth of the few. Last Friday (Black Friday to us shoppers) something called the Supreme Fiscal Committee told their creditors that they wanted to delay paying on their $60 Billion debt for six months. Apparently they have a cash shortage (Don’t we all). What they did is like you asking your mortgage company to give you six months of no mortgage payments because things are tight. Good luck with that.
Greed drove investors to what has been called “promiscuous” buying of Dubai bonds the past few years when other markets were adjusting downward. Let’s see, the Dubai bonds were backed by the full faith and credit of the Dubai government (whoever they are). In fact for the past ten years, the entire Gulf has been a major international investment as European (and some US) banks threw money at the home of the “street of dreams”. Oil-rich next door neighbor Abu Dhabi, the home of the United Arab Emirates federal government bought them through their Central Bank. A sound investment? There is no transparency in Dubai investment. No information comes from under the tight lid they put on what they’re really doing. We had an investment guy here pretty much like that recently–named Madoff.
So when there a minor global fallout in the markets and the Dow dropped a percent or so, generally there is light trading which usually exaggerates market moves. Where oil dropped to $40 a barrel and other commodities followed suit, some pundits said there was a global concern about what companies may have been invested in Dubai Bonds. You can bet my buddy Warren Buffett was NOT.
What happens when the Greed takes it’s pound of flesh (and it always does) is a flight from riskier assets into dollars and US treasuries go up. The dollar and Treasuries are considered to be safe havens when other markets act goofy, and that’s what happened last week.
So think of risk in terms of whether you have a chance of losing your money or not and stay away from countries that oppress their women and don’t allow guns or alcohol.
John Lohr can be reached at john@islepress.com