# How to lose $900,000 in 3 months?



## Investor (3 May 2005)

In today's newspaper The Age, on page 14, an investor handed $1M to a funds manager. After 3 months, he only had $100K left. 

$900K was lost in 3 months by a professional funds manager. He would have been better off getting 6% risk free from a bank for $60K p.a.

The story goes like this:

"....buying shares in a company going ex dividend with a high yield, and simultaneously buying put options and call options....."

I wonder whether some of the people out there actually know what they are doing and actually understand what risks are involved. Prima facie, the answer is "No".

To all readers here in this forum who have invested money with funds managers, if you have not done so already, check where your money has been "parked". If your fund manager has invested a chunk in companies that have announced big profit downgrades or even worse, collapsed, you probably have already lost money except that you might not have been told yet. Buyer beware.


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## clowboy (3 May 2005)

How would you feel?

I guess alot would depend on how much 1 mill was worth to you (ie was it life savings or lose change)  if the first it kinda puts things in perspective for "Im a loser post"


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## wayneL (3 May 2005)

WOW Investor!

I'll bet they were told it was low risk as well.


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## krisbarry (3 May 2005)

It is Impossible to imagine, how a so-called 'professional' can let a fund return a 90% loss.  Yeah I kinda think you would be better off trading yourself, even if you knew nothing about the market I am sure you could beat a 90% loss quite easily, maybe even break-even or make a profit.

Do your own research, trade your own money and trust no-one but yourself!


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## clowboy (3 May 2005)

One has to ask if he was even monitoring his investment.

Most managed funds (if not all) have daily unit prices.

Did he/she simply watch it tumble hoping that it would soon turn positive only to watch it pass the point of no return?

Investor is there an online link to the article or is it hardcopy only?


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## rozella (3 May 2005)

Here is the Article 

rozella


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## salz (4 May 2005)

haha.... did the broker invest the funds in bets on football instead?


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## emily (6 May 2005)

hey can u give me a rough idea wot a fund manager is ? whats the difference between a fund manager and a broker?




ta


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## bvbfan (6 May 2005)

Fund manager decides which securities to hold for the fund, they also decide the investment style - whether they buy for growth or income or a mix of the two
The fund is basically a pool of funds from like minded investors.

A broker just acts as an intermediatary to allow the transfer of ownership between a buyer and seller. They also provide advice to clients on what to buy/sell and opinions on the market.


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## RichKid (6 May 2005)

emily said:
			
		

> hey can u give me a rough idea wot a fund manager is ? whats the difference between a fund manager and a broker?
> ta




Emm, calls for some humour here, mine is a bit dull but I'll get the ball rolling:
A fund manager is someone who loses all your money in one hit (and charges you if you try to take it back), while a broker is someone who slowly eats into it bit by bit- and tells you how to lose it on a regular basis.


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## Investor (6 May 2005)

Both categories will take your money (fees paid), whether you make money or lose money.

They merely find new clients to replace those who leave. Sometimes, merely by holding free investment seminars.  

I attended a free lunchtime seminar by a broker at the ASX theatre in Melb. mid last year, for the first time.

There was a smug looking broker/analyst (whatever) in his 20's, on stage acting and talking like a Master of the Universe. It nearly made me throw up.  

Most of the audience were grey haired retirees, busily taking notes. 

Some of the recommended "buys" later proved to be disasters in April 2005.

I pity the people who might have fallen for the spin.

One stock was a recommended buy because "we see growth".

Q. That's it?????? ..........."We see growth". 

What crystal ball do you use???

Another recommended buy was "RMG". This co. has gone into administration on 29/4/05. 

Needless to say, I ignored the kid and decided that was the first and last free investment seminar I will ever bother to attend.

Some of the kids out there might cause a few financial ruins.


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## ghotib (6 May 2005)

OK Have we all read the article now? 

The money was not in a managed fund. 

Repeat:  The money was not in a managed fund.

This is an Awful Warning, but it's nothing to do with managed funds. 

Merrill Lynch were acting as a broker; not as a funds manager. These were his own investments, not part of a pool.

The guy is suing them because he reckons they didn't make sure he was aware of and understood the high-leverage high-risk transaction he was undertaking. It's called a HEIL - wouldn't that make you nervous before you even started?

Don't know who's most at fault in this one. Don't care. Point is that it's not an argument against investing in a managed fund. 

Ghoti


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## DTM (6 May 2005)

RichKid said:
			
		

> Emm, calls for some humour here, mine is a bit dull but I'll get the ball rolling:
> A fund manager is someone who loses all your money in one hit (and charges you if you try to take it back), while a broker is someone who slowly eats into it bit by bit- and tells you how to lose it on a regular basis.




LOL.....


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## keebab (6 May 2005)

Agreed Ghotib, 

This is more an example of a managed portfolio where you authorise a broker to take action on your behalf without needing your authorisation. This is supposed to be done in close consultation with your financial objectives, risk profiles (ie you fill out there form and they know what you need instantly?!) 

In terms of who's the fool in this scenario. I don't really see how this guy could get his cash back. Brokers have to act on your instructions and unless they are guilty of gross misconduct or deliberate fraud there isn't much you can do. If you authorise a broker to transact on your behalf, they will! Every broker has a phone book full of disclaimers saying that if they lose money then its tough cookies for you. In order to enter such a high leverage/high risk scenario he would have had to sign his life away. Can't see see a company like Merril Lynch leaving any legal recourse to someone losing their portfolio through bad market conditions. Worst case scenario for them is bad publicity. 

Guess the moral of the story is that if you want high return you have to manage your money closely. Bankwest @ 6% requires no effort, NWS leveraged to buggery with both put & call positions written close to dividend?? Might be a good idea to pay close attention next time Lowell. 

Cheers

MICK


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## tech/a (6 May 2005)

I personally think there is a case to answer here.

But Ill leave it to the courts to determine an answer.

However in general.
Its been my experience that the financial industry is full of "Advisors" who are nothing more than authorised representatives of one firm or another who push various or even one product.

Not only that but many people who take trades and even advise on methods of trading are just simply not qualified to do so.
Ive known cases where they have just come from a presentation from a company and are pushing it to clients purely on the basis of the presentation.

The whole industry in my veiw is sadly lacking.
Like anything very difficult to find great help----everyone wants a piece of your pie and few are capable of growing the pie and eating it at the same time.


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## Investor (6 May 2005)

Well said.


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## RichKid (6 May 2005)

keebab said:
			
		

> Agreed Ghotib,
> 
> This is more an example of a managed portfolio where you authorise a broker to take action on your behalf without needing your authorisation. This is supposed to be done in close consultation with your financial objectives, risk profiles (ie you fill out there form and they know what you need instantly?!)
> 
> ...




Issues I suppose would relate to the level of sophistication of the investor (rather than the size of his bank ac, which would be a bit smaller by now anyhow) how much reliance was placed on the broker, the broker's conduct and representations etc. I'm no lawyer but they can't just disclaim their life away because they are brokers. The banks get done in regularly for ripping people off and you know how detailed their fine print is.


Also, as for reports on co's, some 'journalists' just spit out a co annct with some minor editing and silly investors read it thinking it's a critical appraisal of the co and buy based on a second hand news article. Many ways to lose money in stocks, maybe somene should write a book on it, bet it wont sell much.


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## tech/a (7 May 2005)

Think Ill start a thread what what you should ask your 

Broker/Advisor/Accountant/Bank Manager

There are a few of us here that Im sure could make up a great list.


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## mime (7 May 2005)

I wonder how much the fund manager took for himself.


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## Mofra (7 May 2005)

Why did nobody ask the "brokers" the obvious question that even the cleaners should have been able to pick up on:

For a strategy based on spreads on stocks going ex-dividend, why pick NWS?

I cannot fathom the intellectual contempt some brokers must hold for their clients. Of course, if someone wants to pay me thousands of dollars to risk their funds, please PM me


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## Investor (7 May 2005)

Here is the article that we can keep here, in case The Age removes it from their website:

"Merrill Lynch Equities is being sued for more than $1 million by an investor who crossed over to the broking house from The House of Sachs.

One Lowell Catalano has taken Supreme Court action and claimed that Merrill Lynch did not properly advise him of the high-risk nature of using a hedged equity investment loan (HEIL).

The statement of claim described a HEIL transaction as buying shares in a company that was about to go ex dividend with a high yield, and simultaneously buying put options and selling call options "so as the total risk of profit and loss at the expiry of the options is known".

Catalano stated that $1 million worth of his shares were transferred from Goldman Sachs JBWere to Merrill Lynch in 2000 but that he only wanted to invest one-third of his funds, as he was looking at buying a flat.

He claimed that the opening balance of his account at Merrill Lynch was $1,099,288 but that three months later and after share, derivative and options trading, the balance was $102,637.

Catalano said Merrill Lynch did not properly advise him of the high-risk nature of investing with a HEIL and did not ensure he was aware and understood what a HEIL transaction was.

*He said Merrill Lynch made very large trades relative to his account balance*. "For instance, the very first trade on October 9 of buying 100,000 News Corporation shares cost $1,901,636 of which the plaintiff, unknown to himself, put up equity of $301,636.10 and borrowed from companies associated with the plaintiff $1,600,000.

"Overall, the equity committed by the plaintiff while trading with the defendant amounted to $828,069.30," the claim stated.

Catalano said that when the price of News shares was falling, Merrill Lynch, through an adviser, told him he still had plenty of cash to buy more shares, and that as a result he did buy more.

He said News shares were inappropriate to use in a HEIL transaction as their dividend yield was too low.

Catalano alleged Merrill Lynch bought and sold shares and financial derivatives in his name for the purpose of creating brokerage fees and interest payments on HEILs, rather than for the advancement and protection of his best interests.

He claimed Merrill Lynch did not have an appropriate strategy to minimise losses on trades.

He further alleged Merrill Lynch failed to exercise reasonable supervision over its employees to ensure that the firm and its staff complied with the Corporations Law.

Catalano said he had no knowledge that the nature of a HEIL transaction required that all his shares had to be sold and his option positions closed at a certain date in order to repay the HEIL regardless of his then equity position.

"He was given no information about HEIL and a HEIL transaction until after his last trade with the defendant," the claim, filed by Lennon Settle Mazzeo, said.

Merrill Lynch's defence will not be known until it is filed with the court."

The Age.

I will post a new thread on Managed Funds (as opposed to a broking firm) soon, to demonstrate that there can financial problems with that category as well. However, it happens with every group of occupation (or any human activity). There will be good ones, bad ones and average ones.


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