Tuesday, September 8, 2009

A new society (7) - a fair price

In a market economy, a fair price is obtained when there are many sellers and buyers of the product and all parties have the relevant and accurate information to make their decision. The fair price is likely to be based on the cost of producing and distributing the product, plus a fair margin of profit to the parties involved.

Usually, the buyer does not have the accurate information about the product and may be misled into paying an inflated price. This can occur under the following situations:

a) When the seller mis-represent the cost or value of the product
b) When the seller is unethical in profiteering, i.e. making an excessive profit at the expense of the buyer
c) When the seller has superior information that is not available to the buyer and use this information to an unfair advantage

Consumers may be misled or cheated into paying an inflated price for many types of investment products and for medical, legal services, legal and other professional services.

For investment products, it is easy to mislead the investor by making unjustified projections of the future profits from the investments. They pay a high price and do not get the value from the investment product.

For professional services, it is difficult for the consumer to judge the value and price of the professional service and may be easily over-charged.

It is important to have a system of tranparent and fair pricing for these financial products and professional services. This requires guidelines of prices to be established in a consultative manner, involving sellers and buyers, and easy access to relevant information by all parties.

Fair pricing is for the benefit of all parties and promotes honest and ethical dealings.

Tan Kin Lian

MAS respond to feedback on sale of investment products

Here is the MAS report.
Give your comments here. What do you like? What is still missing?


Gambling on foreign currency

If you buy foreign currency, you are gambling on its exchange rate in the future. If it goes up, you make a profit. If it goes down, you make a loss.

If you lose on your position, you can decide to hold to that position, and hope that it will recover. It may recover or it may get worse (and increase your loss). This is gambling, so it is better to recognise its nature and think like a gambler.

It is all right to gamble, provided that you get the full benefit of any upside, and take the full loss of any downside. Make sure that your cost of the transaction is small, i.e. less than 0.3% for each side of the trade. The cost is the spread between the buying and selling price at the same time, and the additional charges that you have to pay to the bank.

There is another type of gambling that you should avoid. Do not gamble when the odds are loaded against you. If you gamble on a card game, do not gambling against a shark who has marked cards. He has superior information and is likely to win against you.

Similarly, you should not gamble on dual currency trade when the terms of the transaction are set by the bank who is taking the other side of the trade. You can be sure that the terms will be loaded in favour of the bank, who makes a profit when you make a loss.

One year ago, the Australian dollar dropped 30% against the US dollar over two weeks. The investors who were "long" on Australian dollars suffered a 30% loss. Those who were "short" on Australian dollars did not benefit from a 30% gain. They only get 2% or 4%. The rest of the gain goes to the bank who wrote the terms of the dual currency trade.

Are there circumstances where the bank will lose? Maybe, but the risk is small for the bank. They employ financial engineers to set the terms of the trade. These financial engineers look after the interest and profit of the banks. Guess who loses?

In some countries, the regulators ban this type of product as it is unfair to retail investors. But there is no such scrutiny in Singapore, so retail investors can be given unfair terms of the trade, i.e. "taken for a ride".

Lesson: never gamble on exotic products where the terms are written by the other party of the trade.

Tan Kin Lian

SCMP:Peace of mind at last for the minibond investors

What a difference two months makes. During the July 1 protests, minibond investor Peter Lee was desperate and stressed - chanting slogans and trying to storm the Bank of China headquarters in Central. Now, he is relaxed and cheerful.

Having struggled for almost a year, Lee last month received a partial refund of more than HK$3 million after accepting an offer by banks to repay customers at least 60 per cent of their initial investment in minibonds.

"I'm very happy because the year-long distress has come to an end," Lee said. Lee was among thousands of Hongkongers who lost billions on minibonds guaranteed by Lehman Brothers when the US investment bank went bankrupt in September last year.

Unlike previous Sundays in the past year, during which he staged protests or met other investors, Lee yesterday had a relaxed lunch and then went hiking with friends. "I was suffering before," he said.

Lee said he would set aside HK$1 million to fund his son's studies in New Zealand - delayed by a year because his savings were tied up in minibonds. The rest would be used to pay for a flat he had bought.

"Although I accept it unwillingly, I don't think we can do more to fight for a better deal," Lee said.

He said his family of four will join other minibond victims at a protest tomorrow to mark a year since the US investment bank's collapse.

Yu Shing, 79, who invested HK$1.08 million in minibonds and got 70 per cent back late last month, also felt relieved. "He feels much better now," daughter Eileen Yu said, adding that stress had contributed to a stroke he suffered in November.

Monetary Authority figures show that from August 7 to September 2, about 70 per cent - or 17,717 - of the 25,000 eligible Lehman-linked minibond investors had accepted the banks' offer. So far, 183 customers have turned it down.

Meanwhile, dozens of investors classified as "experienced" or "professional" marched from Chater Garden to the Monetary Authority yesterday demanding that they be included in the offer.

The Securities and Futures Commission defines "experienced" investors as those who, in the three years before their first purchase of minibonds, executed at least five transactions involving leveraged products, structured products or a combination of them. "Professional" investors have a portfolio worth more than HK$8 million and at least two years of investment experience.

Minibonds are not corporate bonds but high-risk, credit-linked derivatives, marketed as a proxy investment in well-known companies.

Life settlement

A life settlement is the practice of selling a life policy to a third party, who will continue the policy and take over the interest of the original life assured. Read this article to explain the pros and cons of this practice.

Higher productivity - reduce commitng cost

I have a simple suggestion to increase national productivity - by reducing commuting cost. Read this article.