I will record the on-going events of the current situation and pen down lessons that can be learn. After the entire crisis is over, people will forget what happened and they will start doing silly things again. For future new investors, they have no memory as to what happened in the past. My aim of bogging down these lessons is to serve as a memory bank for future new and seasoned investors on how NOT to invest.

Summary of events happened:

At this point in writing (16 Sept 08), 11 banks in the United States have collapsed. Asset not insured by the FDIC is finished. Lesson: Cash is not king if it is outside the sum assured. Fixed deposits are not safe if it is not insured. The safety of the cash that is not insured is as good as the credit rating of the bank.

Lehman Brothers have filed for bankruptcy. Lesson: No matter how popular or well known or large a company is, it is never 100% safe. So never put all eggs into a single basket (such as buying lots of bonds from one company or lots of shares from one company). 

One of Lehman Brothers' products called the Minibonds were marketted aggressive to conservative investors. I know of many people who bought it thinking it is very very safe. Unfortunately the fate of the Minibonds is hanging in the air (see What Will Happen to my Lehman Minibond?). When the MiniBonds series were introduced, I couldn't understand the prospectus at all. Jargons such as counterparty swaps, reference entities and CDOs were completely alien to me. Lesson: Do not invest in complex products because its risk is unclear. Safe products are not complicated.

Merrill Lynch has to be taken over by Bank of America. Merrill Lynch seems to be secured as there is a buyer willing to help. However, shares of Merrill Lynch has already plunged by 63% year-to-date as on 16 Sept 08 (this has already included Merrill Lynch’s rally for the good news of being bought over by Bank of America). Lesson: Shares can go all the way down even if the company has a buyer to save it.

Freddie and Fannie are viewed as US government-back enterprise. So everybody thinks it will never fall. True, when it was in deep crisis, the US government took over the companies. Thus its bonds did not default. However, its preference shares were downgraded to “C” (which is called junk grade). Lesson: Preference shares are NOT bonds. Preference shareholders can be very very miserable even thought the company’s bonds did not default.

FTSE ST China is down 64% year-to-date (as on 15 Sept 08). Imagine investing SGD500,000 into it and having lost SGD320,000 in less than one year. Really crazy. However, S-chips (China related counters) were very hot investments previously. Lesson: In the bear market, there is no mercy. Only bloodbath.

I have seen fund managers giving lots of data and charts to show that there will be a decoupling between Asia and US. The charts and data were shown when market was still good last year. Looking at the current situation, all markets are very very down all over the world. Thy are highly correlated. There is no decoupling. The decoupling story was an imagination of the mind. Lesson: The world is still interconnected and likely remain highly connected forever. Lesson 2: Do not listen to the experts. They will bring great disappointment.

Many unit trusts which did well during the bull run will sufer by a LOT during the bear run. They have no skill. They increase their return during the bull run by having very high beta instead of high alpha. During the bear run, they losses a lot of money. There is no point holding them long term. Invest in the market index is better off. See these examples of lemon funds: Bad products , Do you believe in the star?, Global Fund using ETF to be hedge fund , Avoid high beta unit trust, they have no real skill