Monday, July 6, 2009

Learn From The Super Rich Where & What To Invest

How the Woes of the Wealthy Can Guide You to Global Investing Profits
(by Martin Hutchinson 7/2/09 Money Morning)

"The Capgemini/Merrill Lynch World Wealth Report appeared last week and it makes for some grim reading.

"But it also provides global investors with some insights into the best markets to invest in.

"Among the ultra-high-net-worth-investors (ultra-HNWI) - those with investible assets of $30 million or more - the population plunged 24.6% and their wealth by 23.9%. That’s as you might have expected, in a year when global equity values fell close to 50% and real estate was also weak. Nevertheless, there were some regional variations that were significant - and that should help us decide which global markets to play for profit, and which ones to avoid."

"For a start, how bad the year was depended very much on where you lived. German HNWI wealth declined only 2.7% in U.S. dollar terms, and Brazilian HNWI wealth only 8.7%, in spite of a sharp fall in the value of the Brazilian real against the American dollar. At the other extreme, Hong Kong-based HNWIs saw their wealth decline 61.3% and Indian HNWIs 31.6%, in spite of the fact that the Indian economy remained robust.

"These disparate performances reflect the different asset allocations of the various HNWI groups. German and Brazilian HNWIs invest primarily in bonds, while - at the opposite extreme - Hong Kong HNWIs were very heavily invested in stocks, with the total value of the Hong Kong stock market being five times the island’s gross domestic product (GDP) - the highest ratio anywhere the world."

"A second lesson investors can learn from the experiences of the HNWIs is that many of the so-called “alternative” asset classes provide poor diversification. Real estate and commodities did poorly in 2008, while hedge funds and structured investment vehicles did only slightly better than equities - but with a lack of transparency and an excessive fee structure that made those alternative investments truly unattractive. "

Hmmm. So it's Germany and Brazil, and cash and bonds. And it is not to make money but to not lose money badly.

And there is this increasing concern for price inflation caused by monetary inflation. If that happens, cash and bonds won't help much in preserving the wealth, big or small. As the author concludes [emphasis is mine];

"Apart from putting all your money in cash and bonds (which will not help if we get high inflation, about the only one of the deadly financial plagues mercifully absent in 2008), The Global Wealth Report offered no real defenses against sharp wealth downturns in recessions. I would suggest one only: A purchase of long-dated out-of-the-money index “put” options, traded on the Chicago Board Options Exchange. In flat or rising markets, these will lose you money, but they have the huge advantage that in a real bear market - such as that of September to March - they will potentially provide a real lump of cash if sold near the market bottom. And that cash can then be used to buy stocks and other assets while they are at their cheapest."

The stock market still hangs in no-man's land, although a lot of traders are salivating at the apparent "head and shoulders" formation on a major index (S&P 500, see my post in the other blog). They want to go short so badly here, so the market may throw a curve ball yet again.

But the author's time frame - September to March for potential "real bear market" - happens to agree with mine, and it seems to agree with what people who follow Elliott Wave seem to be saying ("P3 is coming"). I like his suggestion, and I wish I had known what I know now back in September last year.

Now that the government may be taxing each individual rich person for carbon emission, even the super-rich will need a extra good hedge.


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