Sunday, 21 June 2015

Risk Free Investment?

Recently I have been attending general shareholder's meetings in the companies I have an investment. What I have found is that most attendees or otherwise passive minority shareholders know very little about what the companies should be doing to create greater shareholder value let alone the risk free nature of their investment.

Board Members @ Sagicor

The company's management is at liberty to say whatever they want with the assumption that they are responding to questions that the passive minority shareholders may want answers to. Some boards of directors are frank and courteous and some are really just dodgy and unfriendly to passive minority shareholders.

However, I particularly liked the lessons I learned at the Sagicor Investment shareholder's meeting this past week. A minority shareholder asked about the credit card business of the bank subsidiary of Sagicor and was flatly told that the bank had to take risk, but that was not the lesson. The chairman went further into sharing with the shareholder that the greatest loss suffered by the company was on risk free investments and he alluded to the Government of Jamaica (GOJ) debt restructuring program. The GOJ debt restructuring exercise titled JDX and NDX were most impacting to the company's bottom line as it had cost many investors millions in foregone interest payments and mention other counter party losses. GOJ effectively defaulted on their bonds and recalled the bonds at a lower interest rate. Some investors collected their principle and whatever pro rata interest earned up to that point and found another home for the cash. The notion of risk free investment in government papers is no longer as safe as once thought and no matter what the minority shareholder believed the ultimate decision rest with the GOJ. Look at what is happening in Greece now.

Greece is in a similar situation as Jamaica was a couple of years ago and the tailspin of their debt restructuring effort will resonate across all of Euro Zone at bigger scale by far when compared. No one can believe that the International Monetary Fund (IMF) could be so beaten back by its debtor, and this is not like that there won't be consequences, but there is a stand off between Greece and IMF and they are not talking to each other now. Even at this level there is no such thing as risk free investment.

The question for the passive minority investor is, what is the extent of the loss that one will suffer in the worst case scenario should the risk be realized? On one hand banks will, in most cases, have the option to resort to a collateral of greater value than the ordinary loan issued. But in the case of a credit card, the bank charges, what I regard, as excessive usury to compensate for loan default. The concept of "win on a lot" will cancel out the "loss of a few". The passive minority investor unlike the bank has nothing more than a piece of paper with a perceived value, but it gets worse if the investor have no say. The passive minority investor really don't have much power to do much other than to sell your shares and vote with your feet. A t least that exercise don't have to be a standoff.

There is no risk free investment, but make sure there is some margin of safety.

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FII