In our last year of school my friends and I formed the Simon Fraser University Finance and Investment Club. The Dean allotted us a small office in a quiet wing of the campus where five of us "executives" squeezed in to brainstorm. With the help of our sponsoring professor, we soon found our purpose.
At the time, one of the big banks was conducting a national investment contest for business students which provided a stylish Seiko watch for top individual performers and additional team awards of impressive briefcases for members of the winning school to take home. Each contestant took $100,000 in imaginary money to invest in a portfolio of securities of his own design for a specified period. The mock investments were traded and tracked in real time on live markets.
I suppose the contest sponsors envisioned bright young minds grinding away at carefully-designed portfolios, cautiously weighing the risks and opportunities. Our finance professor even touched on this a few times during class lectures on portfolio theory.
Maybe it's something in the West Coast water, but the thought of slugging through a detailed portfolio construction with Monopoly money was uninspiring to us at SFU. (Four years of studying ABC Company making widgets weighs a guy down.) Since we had no real capital to lose, we devised a much more exhilarating go-big-or-go-home strategy, which was exactly the opposite of what the contest design team meant to encourage.
Now duly enthused, we called an emergency Finance Club meeting and presented our strategy. Each team member was instructed to ignore everything they had been taught about portfolio construction and place their entire $100,000 in to the exact same idea. If we would win, we would win big together, and share the prizes evenly -- if we would lose, there was no real loss. The clincher was our investment solution, which we could have retired on if we had been using real money.
It was 1990. The Nikkei index in Japan had reached a ridiculous height of 40,000 points that year, but had been falling sharply. The precipitous plunge charted a knife-edged peak-and-crash, which made Mt Fuji look like a rolling foothill in comparison. We bet on its continued fall, throwing every penny into "put warrants" -- something I would absolutely, never, ever do as a professional advisor.
A quick look at the historical charts of the Nikkei index will tell you the outcome, as will a tattered certificate from the sponsoring bank, which I keep hanging inconspicuously on my office wall. We won handily, and several of the top portfolios in the country were from our team, including my own.
Although it was just a game, the lessons of the Nikkei loom like a proverbial elephant in my office.
Lesson 1) Spikes burst bubbles. There are strong similarities between the excess of Japan's 1980's and the behaviour of the western world in the decades to follow, and these were clearly reflected in stock market fluctuations. Both experiences hinged on real estate hubris and easy credit and both resulted in humiliating declines and national disgrace. This brings to mind the next point.
Lesson 2) Money which flows like tap water tends to slip through our fingers like liquid. It's fun to buy Boardwalk and Park Place when there is nothing to lose, but when your actual, real-live hard-earned money is at stake, tuition is very expensive, and slow learners quickly go broke.
Lesson 3) Householders should learn from the above national errors in judgment. Debt may sometimes be a necessary evil but excessive leveraging is dangerous. You may need to borrow for a modest home or a practical car, or even to support a proven business, but be prudent and have a realistic exit strategy - one which would neither frighten your mother, nor your finance professor.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected].
