Earlier this week, news came out that legendary Singaporean oil trader O.K Lim has been hiding $800 million in trading losses. While the fall from grace is just beginning to unravel at his firm Hin Leong, I guess it’s safe to say that not only is his career over, he will probably be cooling his heels in jail. Hin Leong owes major multinational banks billions in trade funding, including a $3 billion he reportedly owes HSBC, all on fictitious collateral.
While this story perhaps has more to do with outright fraud than with genuine risk-taking, it offers good testimony to Warren Buffett’s famous aphorism, “Only when the tide goes out do you know who has been swimming naked.” It is not just the oil market, thousands of scams are going to be exposed before the current financial hurricane finally ebbs. Aggressive traders and imprudent risk takers will not be spared either. Billionaire Richard Branson is begging for a government bailout or his businesses will collapse. I think Branson is a suave businessman and he will make it through, but the fact that he is willing to sell his beloved island home just to put his hands on some hard cash surely spooks me.
Obviously, our conditions are much different from those of the aforementioned billionaires. Still, risk is something that most people commit very little brain space to, if at all when thinking about personal finances. But with the tough lessons that are about to be meted out, things are about to change.
You see, financial advisors can yell about risk all day and financial bloggers can type their fingers off about the subject, but when it comes to money, debilitating losses are the best teacher. I personally have tried talking people off the ledge in the past, begging them to be more pragmatic about financial decisions they are about to make. My efforts are oftentimes unsuccessful. But when your entire net-worth sinks 50% in a week because you put it all on a stock or an apartment, you won’t need much convincing that it wasn’t such a good idea after all.
I know someone who invests all his savings with a friend of his that is a profitable wheeler-dealer. I have always made clear my reservations about the risks involved and suggested that he diversifies and keeps some money elsewhere even at a lower return. As fate would have it, some contracts were lost just before the coronavirus outbreak. As we speak, with the subject business is in a vegetative state, neither the investor nor the investee can make rent, let alone turn profits.
It is also in the public domain that a popular local fund manager has informed clients in one of their funds that they will be having their placement terms extended. I have seen some of their investors putting on a face and saying that this is happening everywhere, and hence should not be a cause for concern. However, without getting into whether that is true or false, I guess we can all agree that this is not something many people ever gave a passing thought to. The idea that we could experience an event that would make it impossible for you to access your funds with a firm so rated. If your life savings are locked up in such a place, you will not need sermons in future from any risk high priests.
Another friend of mine “from the mountain”, a staunch real estate devotee, always scoffed at the idea of investing in “computer money” referring to having in place some money market deposits for a rainy day. He has everything he owns tied up in undeveloped land. He is a flipper, buying and selling pieces of land rapidly. Sometimes he buys a big piece of land and subdivides it into smaller plots. He has done very well for himself and is a multimillionaire. However, given that land offices are closed and that most people would rather be hoarding cash for food anyway, he has not sold anything in more than a month now. He has office rent to pay and a small number of staff to pay. The problem, there is no cash. He has now told me that tying up every available penny in land deals is not something he will be doing again once business resumes.
If you see moving trucks in well to do neighbourhoods, it is not because the tenants are upgrading. It is because, despite salary levels, many of us never care to have some money saved. And I am talking about upwardly mobile uptown folks here: cushy job, affluent neighbourhood, live fence, two cars, nice crib, and nothing in the bank. At least not enough to last more than a few days if the paycheck fails to show up. Finances: When You Should Use Your Emergency Fund
What we have never imagined could happen did happen and will change the world forever. Closer home livelihoods, jobs, savings, and pensions will be lost. It will be a tough several years for individuals and businesses. We are in the early phases where people are happy to have their salaries cut in half – the alternatives are too dire. Hopefully, this slap in the face will be enough to keep our risk antennas activated for decades to come.
Maybe people need to go back to the drawing board in terms of finances – How To Get yourself Organized
