Investment Tragedy in 2008: Snowball Accumulated Massacred Mainland Rich People in His Past Life

Author: Tom I really don’t want you to step on thunder Source: Wall Street Journal

This article is relatively long, but if you want to buy Snowball products, please be sure to read it.

A boss of a foreign bank once said: Those who are still buying snowballs do not have old money, it is all new money. Why? Because old money has already been cut off once in 2007-08.

In 2007, a financial product called Accumulate became popular in Hong Kong. The full name of this product is Knock Out Discount Accumulator, abbreviated as KODA. It was promoted as buying discounted stocks, but in the end it became "I kill you later", "rich killer", and "financial drug".

How did the rich people be killed at that time? The worst thing was CITIC Pacific, a subsidiary of CITIC Group, which lost 18.6 billion Hong Kong dollars directly on Accumulate. In addition, Country Garden also Lost 1.2 billion.

The nearly 30,000 victims of this wave of thunderstorms are all the richest people in the country, including many private entrepreneurs and corporate executives, including CITIC Pacific , Country Garden, China Eastern Airlines, Air China, Shennan Electric and other companies. Huang Ming, a finance professor at the Cheung Kong Graduate School of Business, also said that he has dozens of students who have bought Accumulate products. Most of them are entrepreneurs in real estate, international trade, etc., and their losses range from tens to hundreds of millions of yuan.

You can search the keywords "Accumulate" and "KODA" on Baidu to see what the news was like around 2009.

Attractive terms

What is Accumulate and why is he said to be Snowball’s previous life ? You will know just by looking at the terms. I also know that many derivatives public accounts are emphasizing that Snowball is not Accumulate, but if the officials open their eyes, they will know that changing the soup does not change the medicine.

For example, it can be linked to a stock or index with a current price of 1 yuan, or foreign exchange.

Agree to sign a one-year contract, and you can buy 10,000 shares at a price of 0.8 yuan every day.

If the stock price is higher than 1.05 yuan, the contract will end.

Put in the stock when the stock price is lower than 0.8 yuan, and continue to buy, but you must buy 20,000 shares every day.

When the contract ends or expires, investors can choose to take stocks or indices, or choose cash settlement.

Investors only need to pay a deposit to place an order, without investing all cash.

This clause is really attractive at first glance. A stock with a current price of 1 yuan can be bought for 0.8 yuan, and leverage is returned. Isn't this a gift of money? . We changed the terms a little and it started to look like the snowballs you usually see.

First of all, let's remove the leverage. There are 250 trading days a year. We assume that in the most extreme case, we buy 20,000 shares every day at 0.8 yuan per share, then we will 4 million ready.

If you type out directly without typing in, you can earn (1.05-0.8)×10000=0.25w per trading day before typing out, compared with the original cost of 4 million. The annualized yield of gold is 15.6%, which is the coupon in the snowball.

If you type in and then type out, then during the process of typing in, you will buy more and earn more every trading day, then when you type out The annualized rate of return is between 15.6% and 31.2%.

If you knock in but do not knock out, and the holding expires, the loss will be the difference between the final price and 0.8 yuan. This loss is not annualized, but absolute.

Have you noticed that after removing the lever, it looks very similar to the Snowball products you usually see? This is why I say Accumulate is Snowball's previous life.

Accumulate, like Snowball, reduces the income when stocks rise and subsidizes part of the downside risk. It is not the same as Snowball, but the operating principle is the same, except that the terms are slightly adjusted, and they are all a type of structured financial derivatives. There are also knock-off snowballs, double-fall snowballs, and lever snowballs. They are all the same thing.

Why did Accumulate sweep Hong Kong in 2007?

1. Keep making money in the bull market, constantly strengthen trust and keep adding more

Because the stock market was relatively good in 2007, investors often started to invest as soon as they bought it. Investors were safe in their pockets and continued to strengthen their trust in this product. In a bull market, it is often the case that one buys something and then sells it out, and then buys and sells it again. Making money all the time leads to more and more investment. I originally bought this product to speculate in stocks, but I felt it was so safe that I transferred all my savings to play, and even started to increase leverage. (Think of the friends who bought snowballs in 19-21)

2. It looks beautiful

Only when the underlying stock or index plummets will you lose money, and everyone always thinks that it is unlikely that it will fall much, and it will rise back sooner or later. When extreme risks do not occur, people tend to be optimistic.

3. Investors have low awareness of structured derivatives

In the past, investors invested directly in stocks and were not familiar with structured derivatives such as Accumulate. They were unable to correctly judge their risk and return characteristics. The product design itself was complex, and it was very easy to form a sales agency and investment information asymmetry between them. The end result is high commissions and low cost performance, which seems very attractive.

4. High commission

Hong Kong’s GDP in 2007 The total amount was only US$160 billion, but the Accumulate sold by investment banks amounted to more than US$100 billion. In 2007, the Accumulate product supported the entire private banks in Hong Kong (just like buying snowballs this year supported the entire wealth management industry), and was mainly sold to mainland investors. According to Xie Guozhong, an independent economist at Morgan Stanley, Accumulate’s total commission was around 5% at that time, and the sales bonus ratio was as high as 1-3%. At that time, Hong Kong private bankers could easily earn millions of dollars a year by selling Accumulate (just like those who sold Snowball in 2021, the highest commission was 5%, and the average was 3%)

There was a saying in the private banking circles in Hong Kong at that time: If you sell one friend to earn US$1 million, sell a few more friends and you will have no friends in your life.

How does Accumulate work?

After investors give money to investment banks or securities firms, the investment banks and securities firms will make a series of hedging actions. Let me briefly explain the big idea to make it easier for everyone to understand.

For example, if you invest 1 million, the investment bank will first use 500,000 to buy the corresponding underlying stock. If it rises, it will sell it, and if it falls, it will buy it. For example, if the price rises by 1%, sell 100,000 shares, and if the price drops by 2%, buy 100,000 shares. If the stock keeps oscillating between knocking in and knocking out, investment banks will keep selling high and buying low to make a profit on the price difference. This is the source of coupons.

.

You bear the loss if the stock price drops.

If it keeps fluctuating in a range, and the investment bank keeps fluctuating by selling high and buying low, then it will give you coupons when it expires, and it will earn the rest by itself.

Essentially, it is a programmed transaction. There is nothing particularly mysterious about packaging it and selling it to you. Just for this package, they can charge more, and you don’t know how much money they make anyway.

But it can actually be calculated. The mainstream algorithm in the industry uses Monte Carlo to simulate the future stock trend, which assumes that future stocks will be random at a certain volatility. Shock, simulate 10,000 possibilities, and then average the results of these 10,000 possibilities, and then subtract the fee for him to earn you, and then the coupon rate is determined.

Just like after the CITIC Pacific accident, CITIC Group sent the general manager of CIC Securities to lead the derivatives team to investigate and calculate, and found that CITIC Pacific had already A loss of 60 million Hong Kong dollars. These 60 million Hong Kong dollars are fees earned from investment banking and sales, but the buyer has no idea. Moreover, due to the huge amount of CITIC Pacific's order, the rate after competition from foreign banks reduced the price is already very favorable.

Regulatory warnings about risks are useless

Although David Weber, the former director of the Hong Kong Stock Exchange at the time Webb called such Accumulators "extremely toxic" derivatives and called on investment banks to stop issuing them to avoid poisoning investors. However, the China Securities Regulatory Commission cannot take any coercive measures to stop it. Because such products are private equity products traded over the counter and are only subject to private contracts. The China Securities Regulatory Commission will only focus on "whether information disclosure is sufficient" and "whether functions are separated." (Think about why supervision has been tightening supervision on Snowball since last year)

Why is this a trap

Where did the word "financial drug" come from? It keeps making you money, and you gradually become addicted. The more you invest, the more leverage you get, and then you reap the benefits.

What is the problem with Accumulate? (Same for Snowball)

You will earn less when it rises, because you only earn an annualized return, and the actual return is not high when you knock out quickly.

When it goes down, you lose a lot. When you lose, it's not annualized, it's directly a percentage of the principal.

There is a high probability that you will make a small amount of money, but a small probability that you will lose a large amount of money. Then describe this small probability to be even smaller, so that you can buy it with confidence.

But if you add up all possible situations, is it cost-effective to invest? That's definitely not the case. As I said before, investment banks are paid to do programmed transactions. In this process, no excess returns are generated. Instead, you pay high fees, which is a proper negative alpha product.

A product with negative alpha and no cost-effectiveness will most likely make you addicted to making small amounts of money, allowing you to continuously increase investment and even increase leverage. The last one Harvest, that's why it's a pit.

Are these products really not eligible for investment?

Neither. Structured derivatives themselves are not a monster. They become a monster when you don’t understand them and encounter unscrupulous sales.

So if we understand it, can we still vote? Let’s take a look at when we can invest in this type of product. I’ll just take Snowball as an example to make it easier for everyone to understand.

Don't invest when the market is rising rapidly, because it will fall out quickly and you won't make much money. You might as well just buy stocks directly.

Don't invest when the market falls. Isn't that just losing money? Of course, you will also lose money if you buy stocks directly.

You cannot invest when the market is violently turbulent, because the knock-in and knock-out are very fast. The coupon you want basically cannot cover the risk of falling, and it is not as good as making money if it rises. many.

Only when you predict that the market will fluctuate within a narrow range can you invest, and you have to reduce the high fees.

But, can you really choose the time? It’s hard enough and impossible to see whether the market is going up or down, but you also have to judge whether the market is trading within a narrow range? If you think you can judge that the future market will fluctuate within a narrow range, please go back and review my article on timing. Portal: "Where Are the Masters of Timing Now?"

I wrote about timing in the past just to slap the snowball in the face. The snowball will only hit you when you judge that the market will not plummet. We will invest only when there is a certain time, and it will be better than buying stocks directly when it fluctuates within a narrow range, but we do not have this judgment ability.

Please just stop touching it, okay? . . Don't invest for many years only to find out that you have been cheated when you look back and settle the accounts.

Reflection

In the process of rapid development of financial markets, there will be many new things It’s better to understand it thoroughly before investing.

The essence of structured derivatives is not to create income, but to make up for another piece of income by reducing one part of the income, which is called demolishing the east wall to make up for the west wall, allowing you It looks beautiful and then charges you a high fee. If you insist on throwing snowballs, then compare prices, and the prices can be lowered a lot.

Accumulate, Snowball, and high-yield urban investment bonds all have one thing in common, which is high winning rate, high fees, and low odds. They look beautiful, but in fact There is no α, pure β. The result of a pure beta that also charges high fees is that you will eventually lose money.

Finally, I would like to quote a sentence from the 2009 report by China News Service, China News Network, "Mainland investors failed in Hong Kong, and KODA became a ruthless "rich killer"" .

It is reported that this product from Wall Street has not yet been sold in the mature financial markets of developed countries in Europe and the United States.