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MAKING CENTS OUT OF THE NEWS
Blog #46
(December 3rd, 2009)
TOO MUCH ADO ABOUT DUBAI, TOO LITTLE ABOUT INVESTMENT MANAGEMENT
By Tom McAllister, CFP®
"Enlightened leadership, a high-quality educational system, a dominant middle class, and a benevolent government combine to make this country of one million people a business paradise," I enthused in April, upon returning from a visit to the United Arab Emirate of Dubai (see my blog post #14-09). In defense of my unbridled enthusiasm, Dubai does represent a great example of capitalism fostered by a benevolent monarch.
But even in glamorous Dubai, we learned last week, "chickens come home to roost". It turns out that Dubai and its ruler are guilty of the same reckless over-borrowing that, last year, nearly brought down Wall Street! Dubai announced last Thursday that Dubai World, their wholly-owned venture capital company, is seeking a six-Month moratorium on its debt. Stock markets worldwide reacted to the news with sharp drops in value, albeit less here in the United States than in Asia and Europe.
Dubai's debt in question is $26 billion, a great deal of money, to be sure. Yet Dubai's problems pale in comparison to the debt issues of even just General Motors or of AIG here in the U.S.. What's more, Dubai has close connections of the right kind. Neighboring Abu Dhabi, political capital of the UAE, has announced it stands ready to assist in whatever way necessary from its vast reserves of oil and gas.
Since Islamic law forbids charging interest on loans, look for some very creative ways for Abu Dhabi to buy up partial interests, or even entire properties, from Dubai World. Neighboring Saudi Arabia, an important trading partner and outlet for Dubai, would undoubtedly also lend a helping hand.
In contrast to the somewhat overblown "ado" about Dubai's affairs, I find widespread risk-taking and lack of diversification in investing is something worth worry. Studies consistently show that, while stock market levels rise an average of 9.6% per year, with mutual funds as a group showing returns in the 7-8% range, the average mutual fund investor receives just 2.5-3%. These sad results are due to investors' buying in when markets are high, then selling in fear when markets are low.
I read a fascinating Swedish study of identical twins indicating there is a genetic component to successful investing, with 45% of investment success deriving from genetics, 10-15% to the environment in which each twin was raised, with 10% attributable to family wealth.
During my 47+ years in the investment world I have run across many people who handle their own investments. While some fare quite well, many others are really speculating rather than investing, taking excessive risks and under-diversifying. What I have found is that only 10% of independent investors succeed versus the market. These few have some characteristics in common - They are decisive and disciplined, and follow a formula. They tend to buy and hold, yet have the mental discipline to recognize their mistakes and weed out losers from their portfolios. I make it a practice to congratulate such people on their success.
I also make it a practice to suggest that, while investors are still sharp and "on top of their game," it would be wise to select among the myriad of investment managers, allowing professionals to handle a part of their portfolio in preparation for the inevitable day when they can no longer do it themselves. Their dependents and heirs will have reason to be grateful they did. I extend a similar invitation to all my readers and clients, as well as to their friends (see box above).
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