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Set Fire to the Rain

November and December are great months for me to be back in Singapore (I live between my homes in Melbourne and Singapore) as the almost daily rain allow me to do what I love – running in the rain from my house to the East Coast Beach and back, a 10 km route.  The feeling of running in the rain and being totally drenched is really tremendous and I readily recommend it to my friends.

As I run in the rain, I cannot help but reflect on Adele’s “Set Fire to the Rain” song which has become even more popular this year as we wind down the year, the 5th anniversary of the Global Financial Crisis in 2008 (GFC)

While many reasons have been put forward to explain the GFC - greed, conflicts of interest, credit bubble, credibility of credit agencies, to me, the GFC was a perfect case of ignorance, compounded by the disastrous error of Hank Paulson, the then US Treasury Secretary, to allow Lehman Brothers to collapse.  It was an ignorance of systematic market risks.

5 years on, the finance industry has hardly changed and I think , another crisis looms.

The GFC was not a case of stupid people making stupid mistakes.  It was a case of bankers, whom we trust with our hard-earn money, turning blind eyes or possibly hiding the problems, till they could not be hidden anymore (for example, the first mortgage problem rear its head at HSBC in March 2007, but was brushed aside) that took down the markets.

Rationale bankers of course, choose to ignore these problems as their remuneration structure were inclined that way.  As in the words of the then Citigroup CEO, Chuck Prince, they “had to keep on dancing till the music stops”.

It’s like –
“Let it fall, my heart
And as it fell, you rose to claim it
It was dark and I was over
Until you kissed my lips and you saved me”
The first verse of “Set Fire to the Rain” lyrics, except there was no one to come kiss investor lips and save them from the follies of bankers.

It is strange that banks sold better-quality assets that they held on while bankers took risks that no one who knew a crisis was coming would take.  Or was it emotional or economic bias that blinded the bankers?  Why did so many fund managers, bankers and economists fail to see the looming crisis?
Some economists failed in their endeavours as they assumed that people and investors and rationale and understand the drivers of the markets.  Or were they assuming that others can calculate the outcomes correctly?

One thing I learn in crisis conditions is that most smart people can be quite emotional and base their decisions on fear as opposed to rationality.  To me, one of the basic economic assumption that investors and participants are rationale and understand the markets should be blurred to irrational and ignorance.

If one assumes that, then it is clear that when crisis comes, the chorus in Adele’s “Set Fire to the Rain” –
“But there's a side to you that I never knew, never knew
All the things you'd say, they were never true, never true
And the games you'd play, you would always win, always win
But I set fire to the rain
Watched it pour as I touched your face
Let it burn while I cry
'Cause I heard it screaming out your name, your name”

Becomes far more relevant in economic and markets analysis rather than traditional economic assumptions.

Sometimes I wonder if classical economics should be studied at all since it is humans emotions at great play at both extremes of bull and bear markets.  Perhaps behavioural finance or economics should be integrated in finance syallabus as they are probably more relevant in modern markets.

Perhaps a good grasp of behavioural finance will help investors “Set Rain to douse the Fire” and help us navigate financial markets better during crisis.

Psychological research has found that individuals who are generally inclined to assume the best of other people, and therefore to trust them, tend to be happier than those whose inclination is to be suspicious and distrustful.  However when it comes to investing, I always uphold that a high level of open mind and distrust of companies would be a better psychological moat to protect one’s investments and prepare ahead for crisis conditions.

As we welcome in another new year, perhaps we should be prepared to “Set Fire to the Rain”as we steel our psychological make up to withstand whatever typhoons that the markets may deliver?

Gabriel Yap
Gabriel Yap

Mr Gabriel Yap, CFA was Senior Dealing Director with various stockbroking organizations, including a 3-year stint in Wall Street, for 20 years before he retired in 2009 to devote his money and time to philanthropy.  He has donated and assisted the Charities Aid Foundation, Australia and Little Bird NGO, the largest NGO in China.  He also oversees the running of Golden Saint Resources Anti-Aids clinics, a humanitarian and charitable program for the people of Sierra Leone and Liberia.

He still appears in popular media like CNBC,Bloomberg TV, CNA and Mediacorp Radio on stock markets, capital markets and industry analysis and travels round the world to give investment seminars and conferences. He runs investment firm GCP Global which invest in global equities, bonds, reits, derivatives, real estate and commodities.  GCP Global is anchor investors in several IPOs in Asia and Australia.

Mr Yap anchored the Money Savvy column in the venerable Readers Digest magazine for 2 years.   Mr Yap also currently contributes to MillionaireAsia and The Independent newspapers on all things finance and investments.Mr Yap is also Special Advisor of London listed Golden Saints Resources, GSR which owns 340 sq km of diamond and gold mines in Sierra Leone.  GSR presently has a market capitalization of S$100 million.

Mr Yap splits his time between his home in Australia and Singapore as well as Europe, Hong Kong and China.