THE emails started coming in the morning after “Discipline outperforms prediction” ran on May 28.
“When did you start investing?” one reader from Tabuan Jaya asked because we never teach asset allocation and risk management in schools.
But knowing how to earn money and profit from putting your assets to good use, then how to borrow and ensure that you do not fall into debt or liquidity traps, are essential for good financial housekeeping and becoming financially secure.
It is never too late to learn.
I grew up in an attap house, where my family made ends meets through a patchwork of odd jobs.
My father had tried to save but lost most of it during the 1998 Asian Financial Crisis — we knew how tough it was to manage our money.
Perhaps it was the insecurity and rebelliousness that pushed me towards becoming an income-earning professional rather than a civil servant.
Bureaucracy, to me, felt like fences around what my math could do.
I wanted more and investment banking gave me the runway to test that edge.
As soon as I realised my salary couldn’t support my ageing parents or secure my retirement, I accepted a high-profile role that launched what would become a rising-star trajectory at Goldman Sachs.
Managing public money was tougher than managing my retirement fund, but the principles are the same.
When I was posted to the Hong Kong office, my former boss told me that buying an apartment there, one of the most expensive real estate markets in the world, was not an investment.
You can’t sell your residence, because you will always want a roof over your head.
Buying a second property was an investment.
At the time, I had just stepped into a role as senior quant overseeing reserves management, drawing on five formative years under David Solomon—then head of the Investment Banking Division, now CEO—where I refined my specialisation in financial systems architecture, asset allocation frameworks and quantitative modelling.
What I lacked, however, was direct exposure to reserves operations.
Thankfully, an executive director seconded from London, with deep asset management experience, helped close the gap.
I had to learn quickly through our weekly discussions on reserves allocation, since our performance was measured against public benchmarks for all to see.
On my first day on the job, a portfolio manager came to me to say that there was big volatility in the Hong Kong dollar, so what should we do?
I asked whether dollars were flowing in to make the HK dollar stronger, or was there capital outflow, so that we would be losing dollars if we intervened to protect exchange rate stability.
The answer was that money was flowing into Hong Kong.
I immediately overrode his models, ran a fast mental calc, and ordered him to go long USD despite every conventional metric flashing red.
The pushback was instant.
“Are you out of your mind?” he snapped.
But I trusted my equations, and more importantly, the structure of Hong Kong’s currency board, which kept the HKD within a tight band around 7.8 per USD.
It turned out to be a profitable trade.
Money coming in was better than losing reserves.
Asset allocation was confined in the early days to top quality AAA bonds, gold or fixed deposits.
My executive director did not like gold, as it did not yield any interest, but he was very clear on managing the portfolio in terms of returns, risks and liquidity.
Any asset portfolio yields a return on capital, but that carries risks such as price fluctuation, credit quality as well as liquidity, meaning whether you can convert the asset to cash quickly.
Asset liability management arises when your balance sheet also comprises liabilities or debt.
When you must pay interest or principal on time on your bank loans, trade credit or to meet emergency needs, you must maintain cash or very liquid assets such as Treasury bills to meet such commitments on time or suffer default risk.
Thus, a crucial part of bank portfolio management is to manage the duration (time frame) of assets, as well as duration of liabilities.
A simple rule of thumb is that long-term assets should be financed by long-term liabilities, otherwise you face duration risk, meaning that if all your assets are long term, and you do not have enough cash to meet short-term commitments, you will trigger either a default or be forced to sell assets in a hurry and then bear price losses.
The experience in managing reserves and equities prepared me better for my next position as head of quantitative strategies, overseeing one of the largest stock markets in Asia, with a market cap of HK$3.2 trillion (US$413 billion) in July 1997.
As of last week, it was HK$63.7 trillion or US$8.1 trillion.
The biggest lesson I learnt about stock markets is that there is always volatility, so I cared less as a regulator about the Hang Seng Index level and more about turnover and liquidity.
Investors love volatility, which makes money for day traders.
Long-term investors like Warren Buffett concentrate on valuation and basic governance, looking for good companies that deliver value because they look after their franchises (business model) well.
When there is an overall shortage of liquidity in the market, such as during a period of high real interest rates, watch out for the bear trap. The standard portfolio benchmark is 60 per cent equity and 40 per cent bonds or cash position.
Standard valuation of portfolios depends on the interest rate, yield or dividend, but professional investors concentrate on total return on equity or assets, which would include capital gains or losses after factoring in the yield.
Short-term traders like hedge funds usually work on arbitrage or the carry trade.
Arbitraging means buying low and selling high making the difference in security price.
The carry trade means borrowing at a lower interest rate in a currency and investing in an asset in the same or different currency to obtain a higher yield.
The foreign exchange carry trade that was very profitable over the last three decades was to borrow yen at low Japanese interest rates and buy higher yielding US bonds or stocks in US dollars.
Because the yen devalued against the US dollar and had very low interest rates due to loose Japanese monetary policy, the yen carry trade made a lot of money for hedge funds and specialist traders.
This incurs both foreign exchange risk as well as maturity risks and is not for the faint-hearted or low-risk retail investor.
There are very simple rules to follow as a retail investor — buy what you understand and understand your own risk appetite as well as your risk capacity (how much you can really afford to lose).
You don’t bet your retirement or your children’s education on very risky assets.
You must also work with advisers you can trust.
Comedian Woody Allen had a joke that “his stockbroker is one who invests his money until it’s all gone”.
As stockbrokers or financial advisers make money from commissions on your trade, they may encourage you to trade more to earn more.
This is why many retail investors prefer passive funds like exchange-traded funds, an index-linked basket of stocks or bonds that track how the market or niche is doing, or well-managed mutual funds.
Investors always pay to learn — there will always be mistakes or losses, but make sure it is not fatal.
Markets in fields new to you, such as high-tech stocks, could make a lot of money, but there are more likely to be losers than winners.
You should put your money in areas you understand, that are both highly liquid and yield enough to accumulate wealth over time.
If you listen to rumours and follow your friend, you may find out that you bought a position that may not be liquid when you want to sell, or the market may move far too quickly for you to profit from the sharp ups and downs.
Certain countries may be growing very well, but the stock market may not perform for reasons peculiar to that economy.
Other economies do not perform that well, but the stock market yields a steady return.
If you are not sure, consult a trusted and reputable investment manager or financial planner.
Today, artificial intelligence chatbots can also answer questions on stock picks, but remember, it is not the planner, adviser or chatbot that loses money — you are the ultimate loser when you make mistakes.
No one is perfect and the market can be capricious.
There is also the element of luck.
Investment is a life-long discipline, but if you know yourself and your own limits, and if you know what you are buying, then you have better chances than those who speculate blindly depending on pure luck.
Ultimately, all corporate governance is about whether you trust those who manage your money, whether it is the corporate captains or asset managers.
There are great companies destroyed by mediocre managers, whereas weak companies can become great with visionary leaders.
One of the best asset managers, Berkshire Hathaway, which until recently was managed by the legendary pair of Buffett and recently deceased Charlie Munger, focuses on a few stocks or sectors which they believe are run by great managers who can defend their franchise against competitors.
Berkshire Hathaway today is nearly one third in cash, which means it is patiently waiting for the right opportunity in uncertain times.
One piece of advice I have learnt over time — follow the smart money.
Medecci Lineil leads a specialised quant team within Goldman Sachs’ investment banking division. He’s also a founding board member of consultancy firms in Kuala Lumpur and Singapore. Reach him at med.akilis@gmail.com.
