Dennis Jones is a Jamaican-born international economist, who has lived most of the time in the UK and USA, and latterly in Guinea, west Africa. He moved back to the Caribbean in 2007. This blog contains his observations on life on this small eastern Caribbean island, as well as views on life and issues on a broader landscape, especially the Caribbean and Africa.







**You may contact me by e-mail at livinginbarbados[at]gmail[dot]com**

Wednesday, May 14, 2008

The skinny on alternative investment schemes: If you want a job done, do it yourself.

While legal processes are underway regarding Cash Plus in Jamaica, I won't speak specifically about that entity. For that matter, I won't speak specifically about any of the "alternative investment schemes" operating in Jamaica, or elsewhere in the region. People say that there is no alternative way to make money than through hard work. I agree, up to a point. They say there are no free lunches. That depends: many of my friends give me food without asking anything in return, now or ever, and I reciprocate likewise. When it comes to money matters, though, I would wonder when the bill for a "free lunch" is going to come. They say that if something seems too good to be true then it probably is too good to be true. Not true. There is a question about for how long the good times can roll, but that applies to everything. They say that nothing ventured nothing gain. I second that.

I have been conducting a bit of applied economics research to a particular topic--Jamaica's alternative investment schemes. Whether they state it upfront or not, these have been giving monthly returns in the order of 10 percent to those who were able to open accounts. That means, that within much less than a year, it would be possible to double your initial investment. Now, while I know people investing in OLINT who have been able to take out their original capital and were taking out interest every month, their current gains may now only be on paper as this scheme and others face several problems with banks in Jamaica, and "investors" are not getting their money paid out on time or at all.

Now, I have invested through some of the world's best investment banks and I have benefited from markets doing what markets do well, that is go up and down. Taking a risk with money from the forced sale of a house as part of a divorce, I floated on the dot-com bubble or wave in the late 1990s, got out near the peak and well before the crash. Based on that profitable investment, I bought another real asset rather than more financial assets--another house replaced my paper portfolio, and that too rose in value, by a factor of about 2. For me, that house is not an investment so I am not too concerned at the moment about the US housing market crisis and falling property values there, and I have plenty of positive equity. I have also traded myself equities just for a bit of fun, using an eTrade account, during a period when I had not much time to do so on a continuous basis, but wondered if I could do better than my investment broker. I did, then cashed out as I couldn't sustain the market monitoring and you have to know your companies for equity trading to work well.

Having had a regular job, with regular salary, and regular hours, and feeling that my finances were more or less under control, I had no real need to seek alternative investment options. Also, I had the continuing costs of a wedding and fitting out a new home trailing behind me, so I was more cautious with my finances. Divorcees tend to have to fund their own weddings, as parents probably feel "we paid for this thing once already, now you're on your own dime" or they have moved onto life in retirement and really don't have the dosh available. I also had two older children going through university, and although I did not have to carry all the costs, there was still a lot that needed to be shelled out on them beyond just covering books. Sounding like a cracked record, kids studying in north America have different expectations of higher education including not really accepting that this is a time of financial hardship. All I remember from going to university in England was that I had to eat as cheaply as I could--hence my love now of Indian food; Chinese tasted good but it never seemed to fill the belly. When it came to furnishing, raid from someone's cast offs, and if it smells of cat pee then buy some good deodorant spray. Most students I knew had to put off buying lots of things until they were earning their own pay. Enough said. All being said, I became a conservative investor, looking to have liquidity and a good rate of return, which I got from a mixture of higher yielding bank deposits and some investment in equity indices.

Now, Jamaica's investment schemes are a different set of animals compared to investing with some entity like Merrill Lynch or many other types of conventional investment. The former are not transparent, and how they generate their gains is stated but never verified. It's hard to see how the portfolio is actually generating its returns. With no personal distrust of any of the principals in these schemes, that sort of thing always makes me a bit nervous. Call it occupational skepticism: I worked for a while in financial regulation in a central bank; I worked in an international organization that does a lot of its best work by finding financial inconsistencies in what governments tell you and what their data show. I have had a lot of experience with so-called honourable government officials who swear that "we have done nothing untoward" but the numbers just don't add up. You can't identify specifically what has gone on, but you can see the inconsistencies, and the equivalent of some millions or billions of US dollars of spending has not been properly recorded in the government's books but the figures on transactions through the banking system tell you that a huge bunch of lolly has been spent on something or someone. Sometimes the excess spending is on arms and you can't argue with the need to defend the country. Right. Sometimes it's on glam-gear, like a fleet of vehicles or a jet plane for the president, or the first lady or the "second office" just has to have some diamonds or a new apartment. The man has to cut the right figure, right, and what's a few Mercedes or a Boeing or an apartment in Mayfair between friends when you can't feed your countrymen? And so on. So, with that background, when I can't see the numbers that make the picture make sense, I ask questions.

So, when I asked myself what is the real deal with those Jamaican investment schemes, I floundered. A part of what some of them purport to do seems totally feasible: they are supposedly trading foreign exchange. If you engage in that activity, you can make large gains. But it's a zero-sum game, meaning that someone has to be losing, so it's hard to be winning all the time, and to win big you have to take large risks, and with that can come large losses. But, if you manage losses well, the overall gains can be good. Foreign exchange broking firms, who gain on every deal, as they take the difference between buying and selling prices, tend to make good money from foreign exchange trading. That's in large part how many of the New York banks get their foreign exchange gains, so they told Alan Greenspan and he retells in his autobiography, "The age of turbulence". But the dealing companies or so-called managed funds have problems generating returns over 50 percent in a year. So, 10 percent a month as offered by the Jamaican schemes is pushing it, to put it mildly.

So, let's cut to the chase. I wanted to see how this thing could work and if it could be replicated at least on an individual basis. Well, an idea came to me when my regular salary was a thing of the past and I needed to do some teaching to try to help pay my bills. I was overlooking the beautiful hills and azure waters of Tortola, while passing my days ahead of teaching management students at night. I met some investors with one of the Jamaican investment clubs and got some information about their returns. Sure enough, chunky monkey money every month, not always 10 percent but say between 5-15 percent a month, from those who said they were doing foreign exchange trading and those who said specifically they were not (that really did make me wonder). I did a bit of research and found myself a set of companies who would allow me to become a foreign trader. I preferred the ones whose credentials I could check and those located in the US rather than in Switzerland or some offshore centres in Europe. If this thing could work, then I would prefer to do within a banking system I understood and with which I had relations already. I also wanted to be without any middle man, and know upfront how I was doing.

So even faster forward. I read a little. I played with a few practice accounts and decided which one I liked most, and within a few days I felt I had enough experience to play with real money. Idiot! Let's say that I would have given myself a better chance by knowing what I was doing, but being a bright button I figured "What's so hard, dude?" Prices move, so just get on the bandwagon and giddy up, off we go to the winning line. I began in September--the fall--and did I fall. I traded with a frenzy befitting my freshness, and lost a whole bunch of money faster than ice melts in a volcano. Not five figures but not far off. The money really gone? "Yes, oh wise one" came the voice from the toilet. Was I shocked? Oh yes. Was I depressed? No. Trading is addictive, and though I have never gambled much I knew the symptoms from having spent some hours in a casino with a confirmed gambler. Lose? Spin again and double the bet, etc. It takes a while to avoid this, and also to avoid what is termed "revenge trading": lose on a deal but don't see the trend and go in again for the same deal and of course lose again. Kawabunga! So, I came up for a breath. Christmas was coming. Santa knows I have been good. I should get a present. I did. I traded on and off during December, and took a chance on trading in the illiquid and highly uncertain holiday periods, in between some reading and when the families were all too drunk to notice that they had been eating turkey for five straight days--baked, sauteed, in soup, sandwiches, salad, cold, hot. And I started to get Santa's little helpers on my side. Chunks of change started to roll into my account. Yippee! I recovered one month's loss, and though my intention was not loss recovery, I was on my way. I just wanted to understand what to do to make this thing work.

Holiday over, I resolved that I would be a good boy, and mend my trading ways. Think before you trade; get out of a trade if the conditions were no longer valid. Only put at risk a stake that was a small percent of your overall capital, etc. As my judicial friend says, "Dennis, you so full o' ****!" I could feel my old ways coming back fast. I could take time to adjust but I needed help. Most of all I needed more money to help me trade: with a small base (say US$250-1000) the market's movements knock you off track and you cannot gain by taking larger positions. You just dont have the margin needed to support your trades. They say, plan the trade and trade the plan. I had my mantra, but could I follow it? Like the little engine who could, I chugged into the trading days humming "I think I can..." and hauled my trading train into the station called "Profit" from the sidings called "Big losses". Without the help of the trader's equivalent of Alcoholics Anonymous, though, I did slip back and got into a really awful deal, that I regretted after holding a losing position for a week. But I was determined to hold it and not eat a loss bigger than my accumulated total; so I did for nearly the whole month of January, and then I said, the loss has to be eaten, and ate it I did. I had made profits within this losing position so the eventual hit was not so big. But it was a salutory lesson.

Do not just get into a trade without knowing your exit strategy. When you've lost a lot any loss is really painful. You wince and squirm to avoid it. But sometimes it's the only medicine to take. I had a one-on-one session with a trading advisor, who said "That large position you're holding, where is your stop-loss?" I did not have one and like topsy I got deeper and more entangled. But I ended that gig. (I will say in passing, though, that his correct advice in principle did cost me money in practice, when I was a good boy and put in my loss limit, which was just met and then the pair traded off into the sky. I could have made mega-buckaroos on the rise of the euro against the dollar, but I am not grudgeful. Grrrr.)

Well, new year, new dawn. Since February, I have been determinedly watching what markets do, and understanding how they inter-relate most of the time; watching and listening to Bloomberg; taking a view on where I think stock markets are headed; guessing what the US Federal Reserve will do; setting daily and weekly objectives. My main objective was a one percent gain each trading day, on a constant base, which should give me around 20 percent over a month, but I said to myself that I would be happy to show 10 percent a month--that would put me on a par with the investment schemes. The one percent a day was random but it turned out to be a good figure as it allowed me to have the cash needed to cover my alimony payments each month, which in the absence of regular pay and any benefactors is a great motivator.

Some people are inherent bears (markets are going to fall), some are bulls (markets are going to rise). Of course, markets go up and down. But I am currently an inherent bear, with some bullish inclinations. So, off to trading I did go, looking to work with those falling markets. I found that I could meet my daily objective, no matter how the day started, no matter what the market conditions. I traded very few pairs of currencies, and favoured certain, in particular those whose economic basis I could understand. I also decided that 24 hour trading was not necessary. The markets did not need sleep but I did, not least to avoid silly mistakes. I tried to go to bed around the same time as my little daughter, 7.30pm, and wake a bit before dawn; I decided to trade most during those early morning hours, when London and New York overlap. Life could go on as normal: tennis around dawn several days a week; school drop off sometimes, school pick up in the early afternoon; after school activities; evening functions--all could happen. My deals would take care of themselves or I would be a good day trader and just make sure my account was cleared whenever I was not there and for avoid overnight positions.

Trading need not be especially intensive, though sometimes there is a need for nimbleness and opportunistic action. There are trading periods which offer better opportunities, for example between 4am-noon Eastern Standard Time, after which the London traders head home for a few pints of beer and New York traders get to focus on equity markets alone. I try not to put myself into awkward positions when important data are due to be released, after which markets can move dramatically. I watch for reactions then decide if I am going to the party. I see oil prices rise US$ 10 in a week to new record levels, and I see if changes in oil prices affect what they used to. Markets hear bad news and shake it off. I wonder why. If traders are determined to go a certain way they will. Economic logic only has a small part to play. Experienced traders discuss what they see and come to contradictory conclusions. Me, with all my naivete? I make up my own mind. No one really knows what's happening for sure. I have some instincts and a bit of understanding, which seem to be serving me well. I am learning some important technical things, which I put into play a bit at a time.

I checked with the husband of a friend, who runs a managed fund, how I was doing. His eyes popped and he told me don't change what you're doing, those numbers are great. He added that it might be hard to sustain, but go for it. So, five months later--and I did the sums over the weekend and redid them-- I have fully recovered all of my starting capital and some. If I were to look at 2008 alone, I would report a 75 percent gain; if I exclude January, I would report a 100+ gain. So, I'm done with the get-rich quick investment schemes before I even started.

So, what about those investment schemes? They keep saying that they have funds to pay out, at very high monthly rate; but I still don't know what they really do and more people are realising that maybe they are too much smoke and mirrors. They have been averaging 10-ish percent a month in their statements; I averaged 13 percent in touchable wonger. They are falling foul of laws and so far I think I remain totally legal (I have a tax statement that I can submit if needed) and I have details of my deposits and withdrawals). They are middle men and they now face uncertainty about payouts; I know where my money is and it is available when I need it. There were always questions about their sustainability; but there are also questions about whether I can sustain my performance but it's my own business. I can do without the headaches they seem to be causing. But seeing what it takes to generate 10 percent or more a month on a flat base, I really find it hard to see the investment schemes generating the same rate of returns on increasing balances. So, my doubts about them just increase.

For the sake of neatness, I may carry on trading until the end of June (end of calendar quarter) or perhaps September so that I can say I did it for a year, and blog a bit more about it. For the schemes, I would say, show me what you do to do what you do. For me, I will say, like the little train, "I thought I could..." I was brought up to believe that I had ability and it was only my lack of willingness or laziness that would send me toward failure. Thanks Mum and Dad. There is no substitute for hard work: dealing is not arduous like hauling bricks, but it's mentally very demanding, especially accepting red ink on the books. Most people cannot handle the strain of the market gyrations. There are some free lunches (usually accidents), but always be ready to pay the price for the meal; it may not be needed but don't take anything for granted.

For those who want to see their money double in a year, take a course, learn how to trade, practice for a while till you can make a decent return regularly, then play with real money but make sure you have a good sized base. That way your money can work for you. If you cannot handle the pressure of seeing your money dwindle, then it's not your sport. If you cannot turn off the trading platform and let the market figure out where it's going without you (like I have done most of today), then it's not for you. If you can lose one moment but understand where you went wrong, and get back on the trading horse again quickly then it could be for you. One of the professional trading strategists from whom I sometimes get daily trading ideas says "constantly reassesss" and just wrote regarding his failed deal from last night "Eventually there will be a clean break, but for now the direction is unclear, so I must stand aside." He is a multi-year professional so if he is confused then I should be confused: my trading platform has been closed since I dealt this morning and scratched my head about how the markets were responding. When conditions change do not hold on for dear life, or life could become very dear. Like life in general, when confusion reigns just step aside and let things clear themselves.

I will think about what to do next as a "trader". Maybe I will get a licence and manage funds for others and take the fees or teach others to trade. It's less work and perhaps better paying.


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Anonymous said...

Brilliant blog on your history of trading, Dennis. But this calls for a what's next question. I've had the feeling for a while that you are cooking up something and have been wanting to ask you.