Rio Hedge: Excerpt from Investopedia.com

TERM OF THE DAY - MAY 05, 2008

Rio Hedge

What Does it Mean? A situation where a trader who is facing financial or legal troubles hedges his or her position in an investment with a ticket to a tropical location. The idea behind the Rio hedge is that if the investment goes bad (either legally or through financial loss) the investor will use the ticket to escape.

Investopedia Says... The Rio hedge is a joke in the investment community regarding the risks involved in trading. A traditional hedge will protect against potential financial risks associated with an investment. The Rio hedge pokes fun at protecting against risks, such as getting caught by the authorities, lenders, or owners of the funds under management. Haha.. was reading through the daily email from investopiedia.com and found this really funny term of the day... And since I'm an options and derivatives person, i thought I'd post it here and have a laugh together! Well, in this current economic situation, I'm sure that many a fund manager would really love to go for a Rio Hedge! hahahaa..... Related Posts: Option to ride Option to ride II Getting hot around the collar To ride a bus

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We are Wolves

Once upon a Saturday morning, I heard a slightly muffled 'bang' and the muffled screeching of tires followed by a very muffled pained cry. Startled, I looked out of my window and saw the back of a 7-seater Honda sticking out of my void deck (which is the ground floor area of a high-rise residential building).

The first thought that came to my mind was: Is the driver hurt? Did anyone call the ambulance? Afraid of jamming the ambulance lines, I looked around the accident scene and at the opposite apartment block to see if anyone was making a call. Then I witnessed something I could never quite forget.

Windows of the opposite block started opening up and everyone was armed with it. Some carried big ones, some small. Others held it with one hand while the shakier ones held it with both hands. It came in SLRs, mobile phones and compact digital. Everyone had a camera.

I looked at my own block and I saw this man, 4 levels below me, armed with a SLR leaning over his window ledge trying to get a clear shot of the Honda. He looked like he was going to topple over anytime. I reeled with disgust at this typical Singaporean behavior but I decided to indulge in my national identity and joined in the photo fracas. I even went one step further by going downstairs to take a close-up picture (which cannot be posted here because it captured the license plate of the vehicle and the driver's anguished look).

Now I must admit this is a poorly taken picture but I was under pressure (with all 500 residents of the opposite block looking at me) but the moral here is that we behave like wolves. Wolves hunt in packs to trap deer and we click in packs to trap unfortunate drivers.

The recent volatility in the markets has led many to believe that the US is in recession and to claim that it is a bad time for investors. The sub-prime incident was bad news and if there's anything worse than bad news, it is uncertainty. Uncertainty keeps investors away and stoke the fears of recession further.

What then would be a good investment strategy for this period of uncertainty?

Wolves would split into groups to surround a herd of deer. Each group would take turns to charge at the deer, driving it to a group that is already in wait. Hence a wolf strategy involves complex planning at minimal expense. A deer strategy is blindly following the crowd without any planning.

Many propose that it would be good to invest in bonds and fixed income securities for the time being but with the vast majority going into the fixed income market, driving prices of bonds up, would that be a wolf strategy or a deer strategy?

A wolf strategy in this period is to stay invested and stay diversified. Taking the Straits Times Index (STI) as an example, after the 1997 Asian crisis it dropped from a record high of 2493 to barely over 900 points. Fast forward 10 years, the STI index hit another record high of 3800 in 2007.

Do not be mistaken. I am not encouraging you to dump your money into index funds for a 400% return. However index funds are one of the most diversified assets and I would strongly encourage such investments. Ho

Do not be put off by the volatility and pull out of the market. Remember this: We are Wolves.
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To Ride a Bus

The Bus (yes the one you pay a fare to get a ride, that one) is my passport to adventure. Once I plonk my ass down on the seat and play my music, I'm transported from a participant to an spectator. It detaches me from life and I seem to be watching other life stories roll past as I look out the bus window (assuming I get the window seat). It gives me a chance to reflect on the simple things in life, admiring the fluffy clouds or the hot babe that just sashayed past me (mostly admiring the babe) and it was on one such trip that I realized I've ignored the simple things of Sense n Cents.

In my previous post I blabbered on and on, thinking that I was on a roll, without caring to explain any of the financial jargons I've used. So this time, let us strip (woohoo!) to the basics. Sticking to the essence of this blog, I will neither attempt to go into details, nor will I be politically correct.

In the crazy financial markets, there are often many terms that refer to the same thing, its almost like they (crazy people working in financial markets) want to prevent anyone from understanding anything they say. To me, a bus is a bus is a bus.

Unit Trusts / Mutual Funds. There is actually a slight difference between these 2 but when most financial professionals use them interchangeably, the difference is probably not that different. Well, here's how they work. They get many money from many people in many countries. Then they buy many stocks in many companies in many countries thereby forming a fund. Finally, they put someone in charge of monitoring the fund and call him the Fund Manager.
So it achieves 2 goals for the investor (that's you). Firstly, risk is diversified (by buying so much in so many). Secondly, costs are kept low (compared to you buying that many stocks in that many countries individually). Incidentally, it also achieves 2 goals for the Fund Manager. Firstly, he gets a job. Secondly, he gets paid. Very well. Hence, mutual funds are mutually beneficial.

Stocks/ Equities/ Shares. Once again, a bus is a bus is a bus. My guess is everyone knows what stocks are, so everyone knows what equities are and so everyone knows what shares are. For the lesser-informed, buying a share of a company is buying a share of it and you get to share its profits!

There it is, stripped to its core and allow me to explain the key term of this post: The Bus. A form of transport for some, an enjoyable ride for others but when stripped to its core,

“A bus is a vehicle that runs twice as fast when you are after it as when you are in it”

Related Posts:
Option to ride
Option to ride II
Getting hot around the collar Read more ...

Third Party Ink

The time was midnight and the task was installing my third party ink (TPI) from Ink Station. This was no ordinary TPI, it came in a bottle and all I had to do was to draw out the ink with a syringe(provided by Ink Station) and refill my ink cartridge. Piece of cheesecake, or so I thought.

Some information for the lesser informed: such bottles cost $10 each and they give you up to 10 refills which makes it a dollar per refill!!!! Compare that to $20 per cartridge of authentic ink which translates to over 95% savings per cartridge and you'll be in tears of joy.

I carefully drew out a syringe of that yummy yellow ink and thought (in a sing-song tone): cheap cheap cheap cheap cheap. Now came the insertion, which I did expertly though somewhat excruciatingly. Now for the pump so I pressed the syringe. Emptiness flooded the cartridge. I pressed again, this time harder. Emptiness remained. My fingers are so weak, I thought and I pressed again. My world turned yellow.

The ink squirted over my face, walls, floor and ink cartridge (but not a drop went in the ink cartridge). Horrified and yellow-faced, I let out the a death-defying silent shriek (for fear of waking my sleeping folks) and half limped, Mas Selamat style, to grab a mop (for fear of staining the floor with my yellow feet).

Now you say, what on earth has this got to do with finances other than a wasted $10? Well it is hell more than that. It is Risk.
I took a Risk by buying TPI hoping to capture the savings of 95% and ended up incurring a dead weight loss of 50% ($10 is half of $20). This is not unlike how people risk buying stocks instead of going for the good old boringly stale mutual funds. Mutual funds, like original ink, come with a price. The price you pay to the fund managers for managing the portfolio. Stocks or shares seem so much more exciting and mutual funds are for wussies.

People always complain about the 'hidden costs' that come along with mutual funds but you seldom hear about people complaining about the 'hidden risks' in stocks! In my opinion, its a pretty simple situation. You park your money in mutual funds (preferably index funds which follow the movement of indices) and that's pretty much the end of your homework, no more scanning of financial news, research of company accounts, waiting for insider information etc.

The most important 'hidden cost' of any mutual fund or unit trust is whether it is a front-end load or a back-end load fund. Front-end loading simply means a sales charge incurred at the point of purchase of the fund. Back-end loading correspondingly means an 'exit' fee when you sell the fund. Not exactly rocket science.

There are so many reasons why I find mutual funds seductive and in time to come, I will cover them all. Meanwhile it is recommended by most financial experts not to have more than 30% of your portfolio in stocks.

It is also recommended by most printing experts not to buy TPI because it will spoil your printer-head and spray your walls yellow.

Not convinced by me? Well go ahead and buy all the stocks you want.

Just be careful not to end up yellow-faced. Read more ...