Monthly Archives: November 2015

Soliciting investments? Please do so transparently…..

Cigarette manufacturers are coerced into placing a health warning on their cigarette boxes. When soliciting for investments, especially those risk-inclined, shouldn’t there be a warning “investing in our product may cause you to lose your money”.

High yield

 

Around a year after the Madoff ponzi scheme blew up, I asked a senior lady who had lost her wealth in this crime what had induced her to invest with a scheme which was obviously too good to be true. “You should know,” she answered “that I was inundated with investment offers. This one offered 28% return, this one doubled in two years. Madoff’s 12% was a solid, conservative decision.”

Its been several years since the Madoff crime exploded across headlines. But when I see adverts similar to the above, it never ceases to annoy me. Cigarette manufacturers are coerced into placing a health warning on their cigarette boxes. When soliciting for investments, especially the risky type, shouldn’t there be a warning “investing in our product may cause you to lose your money”.

If government bonds are paying under 0.5%, then any investment paying more has a level of risk. An advert which claims to be high yielding and guaranteeing principal and interest must be misleading on one of these counts.

There were many many lessons to be learned from the atrocious theft committed by Bernie Madoff. Here are my 10 takeaways from the scam. Businessinsider lists 10 of these:

  1. Due Diligence: You must understand what that means, and have the ability to perform it competently. If you do not have the tools to perform adequate due diligence, you should not be invested in any hedge funds, VC, or private equity funds or private schemes.
  2. Too good to be true?:  By now, everyone should recognize this: Anything that sounds to good to be true probably is. Low risk, high gain outcomes are extremely low probability. Stop buying lottery tickets, and stop chasing last year’s performance.
  3. OPM: Ask yourself who profits from this investment, what interests and conflicts are involved. Is there an incentive to take wild risks with other people’s money? Are managers’ assets at risk alongside investor money? Recognize what OPM does to the process.
  4. Instincts: Don’t be afraid to rely on your Spidey-Sense if you are skeptical about an investment. If something seems amiss, walk away. Someone doesn’t charge fees? Performance is improbably stable for equities? They give you a Wink Wink Nudge Nudge that something is borderline illegal ?  WALK AWAY
  5. Know What You Own: Do not invest in anything you do not understand: How does this make money? What makes this unique? What is the basis for this investment? What are the risks? If you cannot answer those questions, you should not be risking your capital.
  6. No Outsourcing: Do not outsource your thinking or due diligence. Do not rely on 3rd parties, fund of funds, lawyers, advisors or consultants. We have learned that most are worthless. What is the value add does this fund manager provide? What are they doing, and should I be doing that myself? This is true for consultants, economists, strategists, traders, and managers.
  7. You must not keep all of your money with one manager: I was astonished how many people had all their money with Madoff. If the worst happens, this is a recipe for disaster. Diversify your holdings across several professionals in unrelated firms.
    And firms that Self-Clear are simplyverboten.
  8. People:  Which leads to this you must understand the people of any organization, along with its principles and partners. What are their ethical standards, history, and reputations? Do you know them well enough to know their hobbies, foibles, personal vices?
  9. What if you suspect you are in a Ponzi scheme?Withdraw your cash. Send an fax and a registered letter. Never reveal to the scammer why, simply insist upon getting your money back — If you must explain, only say “Its for personal reasons.”  Then you must create meticulous records as to what your contributions were, what your net gains were. Set up a second account for any gains — you must assume that they can be clawed back within a certain number of years.

10. Its Your Money: You are on your own — don’t expect help from the SEC or the media or anyone else. Its your cash and your retirement. You best act that way. I am not seeking to exonerate the many failures of 3rd parties — rather, I am emphasizing that it is your responsibility.

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Doughnut Nation – deep fried and deep pockets

The economic facts of doughnuts

Israelis will eat more than 47 million doughnuts during the Chanukah, and as a result will absorb about a million four hundred thousand liters of oil.

It is estimated that Israelis will consume an average of some 37 commercially produced doughnuts per household during the holiday and will spend approximately $17 million on this custom. This does not include the production and consumption of homemade doughnuts.

To produce these doughnuts will take approximately 33,000 work hours, meaning around 200 full-time jobs (on annual basis) are added to the economy. $1.6m will be spent on placing advertisements, designed by graphic artists and marketing experts.

No less impressive than the Israelis’ ability to eat doughnuts, is the Israelis’ ability to talk about the doughnuts that they eat. An estimated 250 journalistic articles will be written for local and national newspapers rating the various doughnut manufacturers, and a further 4,000 bloggers will post online articles about this custom during the eight days of Chanukah.

For anyone looking for Chanukah variety, Wallmart seems to have provided viable alternatives this year:

Wallmart chanuka
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For the sake of the future of Israel’s economy, don’t chase away the overseas investors

Please Mr. Kachlon…For the sake of the future of Israel’s economy, don’t chase away the overseas investors.

Like the majority of small countries, the economy of Israel is heavily reliant on foreign investments. Even before the State was officially declared, overseas investors and philanthropists financially supported the country. Since 2008 overseas investments have risen by more than 300% as investors see Israel as a young, vibrant, stable yet growing economy.

In his desperation to show that he is actively trying to reduce housing prices, Israel’s Finance Minister Mr Kachlon has openly stated that he no longer wants active foreign buyers in Israel’s property market and has taken steps to achieve this. This is a mistake that Israel will live to regret.

Out of the 105,000 properties purchased a year, less that 3% are by foreign buyers. They usually purchase in specific towns and neighborhoods. These 3% cannot affect the prices of 97% and the price of an apartment in Jerusalem’s neighborhood of Talbieh has no influence on the prices in Shikun Gimmel in Beer  Sheva. The mere claim is ridiculous. They do, however provide a fitting scapegoat for politicians who are failing at the jobs.

The negative ripple effect is, however, huge. These overseas buyers not only visit Israel regularly by virtue of owning property, they spend sizable funds which infiltrate the heart of the local and national economy and become active in businesses and philanthropy.

However, this is only a small portion of the damage. Of the 30,000 new units built in Israel per year, over 10,000 are built using the initial equity of foreign investors. These are people who bought their first apartment 15 years ago, realized that Israel is not a complex place to invest in, and slowly built up small property portfolios. Eventually they moved up to small building projects and ultimately progressed to building high-risers and office blocks. They are now invested not only in notorious “ghost” neighborhoods, but are active investors in every angle of the property market.

So when we chase away the foreign investors, we might save 1,000 apartments today for the possible gain of the local buyer. At the same time, we lose tens of thousands of units for the next generation.

Mr Kachlon, please view the long term picture and the good of the present and future economy.

In my next post I will present a simple practical solution which can work for both the government and the investor. Watch this space…