This has been an interesting thread to follow, but I can't help thinking that there are some basic inconsistencies in the Storm story. There are other investment advisers who used a method like Storm, to promote double gearing into the share market (ie property loans used to purchase shares/funds, which is then used as equity for a margin loan). The interesting thing is that they did not all fail like Storm did.
I know of one firm who specialize in this method exclusively (AFAIK), and successfully managed their clients through the GFC. I know of another firm who also endorse this double gearing method, and still operate today. The former had trigger points to act on, in a falling market, and did so reducing client exposure in increments along the way. They are still operating under the same type of plan as Storm today. As far as I understand, none of their clients were margined out. What this tells me is that the Storm model was not basically flawed, as seems to be the conclusion the media and a lot of forum contributors believe. Storm failed their clients, because they went too far with their gearing, and did not implement a strategy to manage a falling market. To put all proponents of a Storm type model in the same basket, and accuse them all of being shonkies, when some of them have looked after their clients investments well, would be an injustice.
Just thought I'd put a bit of balance to the discussion, but don't think for a moment I condone Storm's actions, lack of actions and deals with banks, that their clients knew nothing about.
Storm promoted that they had a strategy in place, if the market went into decline. It seems quite possible that they did have a strategy (since other planners did), but chose not to use it.
As I see it, the success or failure of a double gearing strategy like Storm used is dependent on three main components....
1. The amount of gearing.
Storm’s strategy used ridiculous level of gearing, and kept revving up the gearing even further by the use of ‘steps’. I’ll take a guess that other firms using a similar strategy would have geared to more conservative levels – therefore less damage to their clients accounts when the market caved in.
2. The action taken once the market starts falling.
Storm took no action to lighten off client’s positions as the bear market set in. On the contrary, they kept gearing their clients further even when the market was in serous decline and dire economic warnings were plastered across the media every day.
Contrast this with the prudent action other firms took in lightening off their clients positions in increments as the market fell.
3. The size and the speed of the fall.
Trigger points sound good in theory, but they offer no defense against a situation where the market gaps downs severely from the closing price one day to the opening price next day.
1987 is good example – the crash was brutal right from the start, with the US market losing 22% on ‘Black Monday’ October 19, 1987. Next morning in response to the huge hit on the US market, our market opened 20% lower than the closing price of the previous day. By the end of the day it was down another 5%, making a total fall of 25% in a single day - the biggest one day fall in history in percentage terms.
By comparison the 2008 bear market saw a slow decline over about 18 months, except towards late 2008 when sheer panic sent it into free-fall.
Lightening off clients positions worked well enough in such a slowly declining market. It would have been a different story though if the sharp and sudden plunge of 1987 had ben repeated.
The whole enquiry into Storm seemed to conclude that Storm's computer system could not provide accurate data on portfolio valuations...so was completely useless. To me this is total garbage! The funds tracked the major indicies, so a very good indication of clients positions could be easily assessed, at any moment in the day. Certainly, this would have been just just as useful as accurate data, when the market was falling quickly.
And there was the scrambled bank data allegation used by Cassamatis to excuse his failure to manage his client’s portfolios. Some Storm clients agreed with him, I suspect in an attempt to gather ammunition to fire at the banks whose data was supposedly scrambled.
The reality was that the performance of the All Ords was mirrored by the index funds that Storm clients invested in, and the latest All Ordinaries figures are published and broadcast in the media several times a day. Therefore it was simple for Storm and their clients to know every day how their investments were performing.