So I'm finally catching up on some reading, post-vacation. After getting about halfway through this piece of reporting at Bloomberg.com, I'm once again led to wonder who the hell would buy a principal protected note. Ever. From anyone.
The Japanese and Chinese investors, apparently, and as usual. Somehow they seem to embrace a product just as it is getting ready to implode.
Think about this shite. After some term, you are guaranteed - GUARANTEED - to get back your principal. Return of principal versus return on principal. Fair enough. However, did no one calculate the loss due to inflation?
If you're that inclined to lose money, why not just get a regular bank account (in the US)? I don't know what the HK folks had at their disposal, but somehow I imagine there were safer products, plain vanilla products, available for purchase. The whole notion of principal protection, while it sounds good, should more accurately be considered an insurance policy against doing one's research. We see how well that works out. Doing the research improves your odds.
(It made sense in my head. Hopefully it makes sense when you read it. If not, that's what the comments are for.)
So what have we learned, if nothing else, childrens?
1. To hell with the bells and whistles. If you don't understand the product, and most importantly, the risks attendant with investing in the product, you don't purchase it. Salient advice for all time.
2. The game IS risk management. This is a world of probability. While it could be said I am re-stating #1, I don't fully agree. You must always be present to the risks around you, because EVERYTHING, even the safest of activities, have some level of risk. Look at the swap spreads on US Treasuries to see what I mean - even the "risk-free" investment has risk. Can you live with the risk? Can you hedge it? Because you can't eliminate it.
3. Beware asset gathering. Any firm which has rumors swirling around it that introduces a high return product is probably trolling for funds. So consider this, and be sure about where you land in the capital structure if said firm goes tits up. Basically, see #1. If BSC had already been chewed through, and you're an unsecured investor in Lehman Brothers, the #4 investment bank, you're next in line to be chewed through. So if you MUST buy, buy quality, and that means buy Goldman unsecured products. Duh!
4. Don't bet what you can't afford to lose. This goes for the $100 I blew in Vegas playing craps this past week, and it goes for the $2B US that those suc...investors in Hong Kong will be blessed to recover. (I'd say lucky, but you create your own luck.)
5. Do your homework. Swap spreads and the death of BSC should have told people to avoid Lehman structured debt products.
6. Homie don't play dat!
Oh, and if you ever feel the need to be separated from your money that badly, just give it to me. I accept PayPal donations. At least that way, you know its going to a good cause - liquor and women, although not necessarily in that order.