“NO RISK IS THE BIGGEST RISK”

Profile Series: Patrick Tan, Chairman

What would be your response when you’re informed that an investment has no risk?

Would you have gladly gone ahead with the investment, delirious that you’ve found a “gem”; or very curious about what’s behind the product that was marketed as “no risk”?

Patrick Tan, Unicorn’s Chairman, who heads Unicorn’s Investing Committee, believes in being a steward of the wealth that clients have placed with Unicorn, and he was not satisfied with such a reply.

 

Lehman Brothers Minibond Notes

To reciprocate clients’ trust and confidence, he exercised due diligence and investigated the Lehman Brothers Minibond Notes with a supposed dividend yield that was advertised as more than 4%. “For each of these products, the investor was paid a regular stream of interest/coupon until maturity, at which point the investor was entitled to a redemption amount as described in the terms and conditions of the product. Pegged to considerably higher interest rates than fixed deposit rates, the notes were eagerly taken up by investors1.”

What our Chairman discovered were that “with multiple risk exposure(s), there was no guarantee that investors would get back their principal when the notes were redeemed, either upon or before maturity. (Lehman Brothers) was also the swap counterparty, which meant that its collapse would cause the notes to default on their scheduled interest payments. This would, in turn, lead to an early redemption of the notes and liquidation of the underlying assets1.”

The next course of action he took was to cease all applications to the product from his team with no exceptions as he had deemed the risk to be too high – “no risk is the biggest risk”, he cautioned.

Our Executive Committee (from left): Kevin Wilkinson, Chua Hui Xin, Patrick Tan, Robin Tan

 

We could probably all agree that everything comes with risks. If something is too good to be true – it is likely that it isn’t real, or comes with very, very high risk.

Besides being shrewd, our Chairman also shares insights so that it becomes easy to understand the background behind money and why we must invest to accumulate wealth.

 

Nixon Shock

The money that we use right now is called fiat money, that is, it doesn’t have intrinsic value, and it only has value because a government guarantees it or because the different parties exchanging it agree on its value2.

You might ask – hasn’t it always been this way? What’s the concern?

The price of one troy ounce of gold was pegged to US$35 before 19712. However, money was decoupled from gold after that by then US President, Richard Nixon. The dollar plunged by a third during the 1970s2. After 1971, “the Federal Reserve (Fed) is not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate. There are powerful advantages to such an unconstrained system. Above all, the Fed is free to respond to actual or threatened recessions by pumping in money,” explained economist Paul Krugman.

It sounds divine to simply print money, but there are always consequences.

Our Chairman wisely described it thus: the current stock market is like a heavy-set Lamborghini sports car, and yet a small stone could derail it when it’s running at 300km/h.

A relatively light Toyota sedan, however, wouldn’t overturn encountering the same stone on the road as it’s only running at 90km/h.

The current stock market can be compared to a person with a credit card, instead of a debit card. For someone who’s been spending indiscriminately, it’s very easy to upend him or her when a crisis hits; like a speeding sports car encountering a tiny stone. “When the Fed prints money, gold-standard advocates say, it cheapens the value of a dollar, promotes inflation, and effectively steals money from the citizenry3.”

This has led to money behaving quite differently from in the past when it enriched the hardworking. Now, it exacerbates the transference of wealth from the poor to the rich instead. The rich could easily borrow to buy assets to create more wealth. However, the poor may not have the means to borrow and create such wealth, and continues to exchange time for money, which would never outrun the leverage created by wealth grown from investing.

As he advocated “building one’s success on rock, not sand”, our Chairman role-modelled investing in assets steadily to build the Unicorn we have today.

Unicorn was established more than 8 years ago by our Chairman with Kevin Wilkinson, Robin Tan and Chua Hui Xin, with the clear purpose to provide clients with authentic, personalised and holistic financial plans which also include the element of investment advice customised to our clients’ needs. This team continues to steer the company today with the exact same clear purpose and understanding that each one of our clients requires dedicated, unique and individual care, because YOU are a treasured member of the Unicorn family.

We look forward to serving you and your loved ones for a lifetime.

 

References:

1.Singapore Infopedia

2.Wikipedia

3.The Week

 

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