Witch Hunt By Circus Monkeys

So the SEC decided in all their endless wisdom to put a stop to “abusive” naked short selling of shares in the financial sector. These ‘wise’ monkeys have now singled out as public enemy number one, investors that benefit from shorting rotten financial institutions. Very interesting. So when shares go up to the point that they represent a bubble, and shed loads are being made regardless of the fundamentals, nothing can be done about it, as Alan Greenspan so famously said himself. In this situation everything is fine, and markets are working as everyone would like them to. But all of a sudden when asset prices start falling, for very legitimate reasons, and people then try to profit from it, it suddenly becomes “unlawful manipulation” that “threatens the stability of financial institutions”, according to Chris Cox (SEC chairman). Wow!

I am increasingly questioning the sanity of American governing organizations, and officials. First greedy banks and financial institutions loan trillions to people that cannot afford it (and the companies being shorted the most are those at the forefront of this frenzy). Then when the whole thing blows up in their faces, because of their own greed and leverage, they run home to mother Fed crying to treat their self inflicted wounds, like little baby teenagers. The Federal Reserve then steps in and starts giving out charity loans to everyone, instead of letting the market do its job and punish the greedy and stupid. When that doesn’t work as well as hoped, the government goes on a witch hunt, blaming things like speculators, shorting, rumors, and who knows what other enemies their feverish hallucinations will conjure.

The SEC has been investigating whether false rumours and “abusive” short selling contributed to the collapse of Bear Stearns in March and the declines in Lehman’s shares. And this has nothing to do with bad investments, and stupid risk management made by Bear Stearns; such as their hedge funds, High-Grade Structured Credit Fund and the High-Grade Structured Credit Enhanced Leveraged Fund, among write-downs of $2 billion? Investigating false rumors? It sounds like something out of The Lives of Others, where the communist government monitors every conversation of any suspected citizen. It won’t surprise me if the SEC discovers that it was some extremist terrorist organization spreading these rumors to destabilize the great American nation’s financial system. To really understand why Bear Stearns collapsed I refer them to a wonderfully simplistic article on Investopedia, that lays it all out in layman’s terms.

Mr. Cox previously said the emergency order was a preventive step aimed at restoring market confidence. How on earth do they think by manipulating free markets (or should I say short free markets, since markets in America are only free when they go up forever) with such unthoughtful bullying tactics will ever restore confidence? It achieves quite the opposite if you ask me. It makes me VERY nervous when people start taking random, desperate actions, like someone that’s drowning and can’t swim, grabbing at anything to stay afloat. Personally I’m not sure whether I’m shocked and amused at how American authorities deal with the credit crises, but I’m definitely hearing that famous circus jingle loud and clear…

Time Diversification Of An Investment Portfolio

A very important diversification and portfolio structuring technique is to arrange your portfolio into different expected maturity classes. The broad underlying rule is that those investments with a longer expected maturity date are less risky. This will help the investor to balance his portfolio and risks between higher risk short trades, with fast profits (and equally fast losses), and longer term trades, that allow more freedom to wait for the appropriate moment to trade for maximum profit.

Stanlib recently determined that in any calendar year there is a 27% chance to lose money on the stock exchange. The picture is significantly different over a four year period, where the chance for a loss is almost next to nothing. Therefore by allowing yourself more time to identify the best time to buy or sell a share, you can reduce your risks significantly. Although you might have a slow growth rate for the first three to five years, you are positioned to achieve excellent returns outperforming inflation.

I divide my portfolio into the following expected maturity periods: 1 or less years, 3 years, 5 years, and 10 or more years. On the JSE Exxaro is a share that trades well between the R110 to R125 range as a short term trade. It’s also a very good buy for the longer term.

So next time you invest in equities ask yourself into which risk/time category the share falls, and whether you can commit to a five year period to reduce your chance of a loss.

Invest In Silver Bullion In South Africa

A private South African investment firm, Shinobido Corporation, bought some silver bullion from Gold Reef City Mint. I highly recommend any investor to at least keep some of his portfolio in physical assets such as silver or gold, bullion or coins. Gold Reef City Mint also sells Kruger Rands, and a range of collector and investor coins, such as old coins containing a high level of sterling silver. Personally I try to stay away from these coins as it is (1) difficult to determine exactly how much silver they contain, and (2) the investor pays a premium for the collectors value of the coin. These factors make them less liquid investments, with higher transaction costs. It can also be a pain to transport and store a few thousand Rand’s worth of old silver coins.

Silver bullion is therefore the perfect solution to these problems, except maybe the storage part, depending on how much you’re planning to buy. Storing silver bullion bars to the value of R100,000 can be problematic. Storing your bullion bars at different sites, is highly recommended. Should an issue arise at one of the sites, a part of your investment is still secure.

Contact Gold Reef City Mint at +27 11 496 1405, or e-mail them at grcmint at iafrica.com.

Orion Causing Losses At Accenture and JSE

With great interest I read about Accenture’s failed Orion project for the Johannesburg Stock Exchange (JSE). Apparently it’s not that the project is a failure in the sense that the deliverables are of poor quality, but the project is now more than 2 years late, from an original estimate of 2 years, with no end in sight. This mistake will cost Accenture R75m in penalty fees. Freda Evans, the JSE’s Chief Financial Officer (CFO), said that Accenture will take over management of project Orion, and take the project to finish. Orion was supposed to produce 16 systems from the integration of 42.

Project Orion started in June 2004 and was supposed to finish early 2006, but is now way over time and budget. Interesting to note is that according to Business Day journalist, Renee Bonochris, Orion’s delay is not affecting the JSE’s profitability. How was this conclusion reached? Just like any investment the sponsor pays a certain amount for the project asset, and expects certain cash inflows or benefits to accrue after a certain period.

Surely the late delivery of these benefits will diminish their value? Unless Orion wasn’t of a strategic importance, we might agree with Renee. But the R75m penalty price tag suggests otherwise.

Another reporter from the Business Day, Colin Anthony, revealed that the project was a fixed-price contract (or at least the construction and deployment phase). According to him the JSE might “be able to salvage itself” from the part failure of Orion.

This brings me to the following points:

1. How did Accenture estimate that reducing the JSE’s systems by 62% is going to take only 2 years? This seems like an extremely optimistic estimation. I do not know how big and complex these systems are, but from my experience just integrating two or three average systems with homogeneous technology is a moderately formidable task, that can easily take 5-10 months.Just integrating 23 systems from the same organizational unit would pose a number of administrative challenges. If they are owned by different departments, and worse different organizations, I can already see a huge administrative burden, with a very unpredictable and probably uncontrollable impact on the project.
   
2. The danger of fixed-price projects. If you fix the price of a contract, you have to be extremely sure about the amount of work to be done, and very importantly the things that could go wrong. I don’t think I have ever worked on a project where at least one thing didn’t go according to plan. So the question is really did you think about the potential impact on the project, and how are you going to handle it if it does go wrong.Also if you have an inconsistent customer, that isn’t keeping to his end of the fixed-price contract by randomly changing his requirements, you are in for a rough ride.I am not against fixed-price projects per se. But I am definitely a believer in the incremental and phased approach to projects. This reduces risks on both sides, and provides clear exit points for the project. Estimating for only the current increment is bound to be more accurate because it’s not far into the future, and you have the experience of past increments to guide you. Initially it might look like the project is going to take longer to complete, but I believe that anyone going for a straight run of the project is fooling themselves. If something goes wrong, the whole project is at risk.

   Scott Amber, IBM Agile Development Practice Lead, has the following to say about fixed price contracts: “Well, contractual negotiations are difficult no matter what you do. So we need to recognize that. But there’s fixed price, you know, there’s some realities, you know, the clients force us to do this. But at the end of the day fixed price isn’t good for anybody involved. It actually increases your risk. It forces you to do a lot of up front work that doesn’t help you at all and actually decreases your efficiency. So it’s just bad news. Yes, you can do, you know, agilists can do fixed price along with traditionalists: we can do the same sort of thing, we’re going to do a little bit too much work up front and we’re going to…you know, we’ll make up a number just like the traditionalists do.
   The main difference is that we’ll be honest about it and we’ll say, you know what? This isn’t such a good number, and if you insist on an exact number we’re going to pad the bid. And so that’s just the realities. There’s no magic.”
   

3. The JSE might have ‘protected’ themselves by inserting a R75m penalty fee into the contract. But did they really completely protect themselves? At this stage they still don’t know when the project will be completed. Getting the new contractors and Accenture project management up to speed will add to the project’s delay. If it takes too long, the new system might become outdated, technology and feature wise, before its even completed. And who wants to work on a project that’s 2 years behind schedule, and now the current developers have to work under immense pressure and bear the brunt of others’ mistakes?

I believe strongly that when it comes to software development there should be a partnership between the customer and the vendor. Inherently the nature of software development is very unpredictable. Accepting this fact, and working together to minimize its effect is the best approach. Merely adding a penalty fee to the contract might reduce the impact of a failed project, but you are still going to have a failed project. No-one wins from a failed project. There are just big losers and smaller losers, but everyone is still a loser.