Saturday, February 27, 2010

Dangers of Personal Investing

I received a thick prospectus for a share that I invested in. The company is giving a rights issue to existing shareholders to subscribe for shares of another associated company. The deadline was about 1 week.

The prospectus was complicated. I have no idea about what the new shares were and if the amount to pay for the shares are at a fair value. I do not know if the rights issue had diluted the value of my existing shares.

I send an e-mail to ask my stockbroker to give me a summary of the rights issue, and also to tell me if I can sell my rights at the exchange. Fortunately, I have access to a stockbroker who is able to get his company's research department to answer my questions.

Many retail shareholders are placed at a disadvantage when a company has a rights issue. If they do not act on the rights, the value of their existing shares may be diluted. They should, at the least, sell the rights in the market and get a value that can cover the dilution in value of their "mother" shares.

Here is a real story. A retail investor bought the rights to subscribe to new shares and paid $60,000 to the owner of the rights. He is required to pay another $65,000 at the ATM to subscribe to the rights. As this is the first time that he is subscribing to the shares through the ATM, he entered the amount in the wrong field, i.e "apply for excess rights" rather than "apply for the subscribed rights". The company treated him as failing to subscribe for the new shares. He appealed to CDP and to the company to rectify this mistake but they told him that "nothing can be done". He lost $60,000 due to a small mistake.

There is a small chapter on personal investing in my book, Practical Guide on Financial Planning.  You can order here. There is a 15% discount if you order before 1 March 2010, two more days only.


Anonymous said...

I just ignore those thick prospectuses on rights subscription and what not, especially if it needs further action and $$$ from me and the share prices are also already "underwater", which is usually the case.

Unless it is a case of cashing it out and can recoup at least the original amount I put in.

Createwealth8888 said...

As a child, crossing the road is highly dangerous thing to do. But, soon the child becomes older and learn how to cross the road safely.

In personal investing, one also need to learn how to invest safely and the good news is many people are willing to share their investing experiences.

Anonymous said...

Before 1995, IPOs and rights issues were almost a sure way to make money.

Since 1995, things have changed and nothing is certain anymore with rights and IPO issues.

I have my own theories, but will refrain from commenting further. We are an alleged financial hub, but people have very thin skins.

Anonymous said...

I estimate that there are only about 5% of the consumers who can invest on their own becuase they have the knowledge, experience and they are professionally and financially qualified to do so. The rest need help and proper advice.And the fit and proper people who can dispense this advice and play the role are advisers who are honest and competent and definitely not the salesmen.
But unfortunately, in their over eagerness to turn Singapore into a financial hub and more importantly to help the FIs and the insurance companies, MAS thinks they can quickly turn consumers into savvy consumers by offering public education and seminars so that these consumers can make informed decision and invest on their own and bear responsibility or caveat emptor..and therefore absolve the FIs and their agents of the responsibility. This is frightening. Becuase out there are a lot of charlatans , hungry , greedy and ever ready to pounce and prey on these newly graduated 'savvy' consumers who know only a little bit of crap knowledge.
MAS must take responsibility to ensure the sellers of these products do it rightly following a set of rules and punish those who fail.
Even in the jungle instinct of animals know young animals require protection until they can fend for themselves. MAS doesn't seem and willing to protect and is trying to disavow its responsibility as regulator. The Casino Regulating Authority seems more enthusiastic to protect the vulnerable ones than MAS.Sometimes it is suspected of its role.

Everlearning said...

This should not be viewed as dangers in personal investing but rather the incompetence of CDP or the company to rectify the mistake.

Are they hoping that retail investors press the wrong button and bingo, they can continue to collect free money???

AK71 said...

Dear Mr. Tan,

The person who suffered this unfortunate loss is a regular reader of my blog. He posted his comments in my blog and asked if there is anything that could be done. Unfortunately, I could not think of any solution for him.

Could you help him?

Anonymous said...

i am your "real-story" is misleading... in what way did the retail investor lost $60K?

Tan Kin Lian said...

Reply to 4:06 PM
Do not be rude and describe the story as misleading, just because you do not understand it.

The investor paid $60,000 to buy the rights and due to this mistake, he did not subscribe to the shares, so he lost $60,000.

AK71 said...

The "real story" is real. It is not misleading. Please check out this link:

AK71 said...

And here is the link to the first time the person wrote in my blog regarding his mistake. This story is real. Mr. Tan did not post anything misleading:

Anonymous said...

There is danger of a conman too.On second thought ,not just one but many in the midst of us if you include the insurance agents who claim expertise on investment. Investors have problems. You don't know who is real honest and an expert on investment. Everyday at the mall, MRT and in the streets you see insurance agents masqueraded as experts peddling investment products. Their title of financial consultant or executive financial consultant is delusive becuase they are the proverbial wolf in sheep clothing.
How then? Safer only, is to look to financial association like Financial Planning Association of Singapore (FPAS) for help or FISCA where honest and competent advisers are. So it serves you well to be careful and do not hand your money easily to first person who comes along and makes claim of expertise.
Remember, insurance agents are no expert on investment.They are not even expert on their name sake, insurance. They are salesmen and women who peddle products for commission and any product so long they can earn a commission.

Anonymous said...

CPF is littered with losses caused by insurance agents .Is it a wonder ?
How can salesmen help you in investing.They are either clueless and anyhow sell funds which may or may not make money or advise on the so called low risk single premium endowment which these salesmen pitched as FDs.This single premium 'FD' is sold as one size fits all, a popular product with local insurer.
BOth are dangerous becuase the first may by luck achieve your goal. The second, ie, single premium endowment, at the best preserves your capital and at the worse fails to achieve your goal except if your goal is capital preservation.
You can see it is dangerous to leave your hard earned money with salesmen disguised as investment adviser or stock brokers for they do not know one end of investment to the other.
I wonder MAS knows this and that MAS is exposing consumers to these wolves in sheep's clothing.
It is no surprise that many cannot afford to buy CPFLife let alone retire.

Kin said...

Hi Mr Tan, I've recently decided to take a more pro-active approach in managing my money. With almost zero financial background, your blog has provided me with a lot of easily comprehensible information, so thank you for that.

You had mentioned in one of your Oct entries about landbanking not being a Ponzi scheme. Could I ask if you've heard of companies that deal with gold buyback e.g. 'The Gold Label' or 'Genneva Gold'? There seem to be many agents acting for these companies recently. Would like to hear your view on this.

Thank you!

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