In a recent broadcast in the once upon a time famous blackberry messenger, someone advertised his service of collecting cash from a number of subscribers who would latter receive an accumulated amount based on the month they ended up with. That is, for example; 10 subscribers will provide 5,000 each of let’s say currency X over a period of 10 months, and then each would receive a total of 50,000 of currency X on that specific month. So this basically guarantees that you save your money since many of us only say that they will. However, the guy that was managing this was asking for an amount of 3,000 of currency X per subscriber to, as he claims; cover expenses of having to collect the cash from everyone involved and to secure the checks of the total savings amount provided by each subscriber as collateral. Now the interesting part is that he makes a total amount of 30,000 of currency X without quite doing what such an amount should be paid for. In other words, he is not managing as an investment fund.
Speaking of the latter, I actually tried my luck with establishing a financial consulting service to individuals and corporations, as well as government institutions. To do so, there was a basic requirement to provide a bank statement that shows a deposit of 1 million UAE Dirhams in the bank. So when the person in charge informed me, keeping in mind that he has in front of him my bachelor degree in finance, I said: “what kind of a financial consultant would I be if I keep 1 million UAE Dirhams in a bank where annual interest rates are between 2 and 4%?” And even though their argument is based on that financial consulting might mean providing investment tips which may cause people to lose their money; aren’t you anyways supposed to gain and lose in any cash investment that you make? Well, unless you are China and you invest your trade surplus of Dollars in US treasuries that pay ridiculous though secured interest since printing more Dollars shouldn’t be a problem, then risk is always there but with different degrees.
Risk, as explained in almost all finance and economics books, can be of two types: diversifiable or un-diversifiable. The former is the one that you can mitigate by investing in stocks or others that are negatively correlated. In human vocabulary, it means that they move in opposite directions securing your investment with reasonable returns and bigger capital gains if investments’ worth increased due to whatever reason. The other type of risk is the one associated with the type of industry you operate in. For example, a higher risk of competition in the market for smart phones which you can’t decrease but probably maintain at close to normal levels by always enhancing your research and development capabilities. With investment funds, in which I would like to include not only equity companies but also insurance companies and pension funds; the trick is always in acquiring as many funds as possible and then investing them the right way and making sure that you make your payments on time, in reasonable time.
Now, did you seriously think that the premiums acquired by insurance companies with the 10-25% of repair cost that you pay actually cover all incurred expenses? If so, then think again. Those, along with pension funds, should be good at using those little amounts that they receive from a huge number of people and then channeling them into investment pools that can include anything. For instance, rent from real estate can secure payments out of pension funds and cover up the extra cost incurred in totaling a car while equity markets provide dividends and capital gains. Currently, with percentages favoring younger generations in many developing countries while the older cling to their jobs to make up for lost savings in developed countries due to crisis, I mean those still with jobs, pensions funds are at such a great advantage. Keeping that in mind, and seeing that Bank of China is now in Paris, it won’t be wrong to think that the Chanselise is now owned by pension contributors, yet naive to think that this is all that there is.