RISK-BEARERS AND RISK-TAKERS
This struggle between investor creditor and company debtor is part of a mismatch of their risk-return appetites. Yet, there are various types of investor in the risk universe. Some are risk-bearing, some are risk-offering players.
Professional investor/shareholder
This category includes the class of professional investor – those who work in banks, fund managers and financial institutions. There are many sophisticated investors who are busy creating their own pension or playing with more than $100 000 to $1 million. They invest to accumulate wealth, sometimes losing on the way. But, this is a burgeoning section of the population.
These individuals operate in addition to the full-time professional bank/fund managers who are investing far larger sums. The different types of investor classes take various time horizons, trading strategies and asset classes.
A conservative or risk-averse investor would like to preserve the value of the original in- vestment, hence to limit the downside risk, and to make a “reasonable” return.
A risk-seeking investor or speculator, on the other hand, can be eager to engage in “double or quits” wagers on the stock market – such as Internet day-traders. In fact, it is often worse than a zero-sum game; after spreads, commissions, fees and taxes, at least 70 % of these short-term traders lose money. It is an uneven playing field just like a casino’s rules: the house always wins.
Yet, there are those in the majority of investors who take a longer term view and believe in the “prospects” of a company. These are the “rational” investors, both big and small, who occasionally get “suckered” into buying a bad stock. The stock-market crashes of 1929, 1987 or September 11th 2001, and the continuing bear run in 2003 offer testimony to the fickleness of share prices. Disaster is good for risk management business but bad for the traditional “buy-and-hold” investor philosophy.
Investment companies/Fund managers
The market is potentially teaming with sharks ,which is why we hire seasoned managers who protect us and nurture our wealth. The directors of investment companies are meant to be professionals who are hired for their ability to create and preserve shareholder value. But, when they fail, the business world either rails against investor injustice, or quietly suffers in silence, which offers no solution. Fortunately, there has been some good research done to search for effective corporate governance solutions.
Investmentbanks
These are the professionals who often rest at the centre of the market action. There are corporate bankers, brokers, company analysts who have been deemed skilled and ethical to handle the vast and valuable amounts of data in the market. Banks are paid to analyse target companies’ prospects, and also to finance and sell these companies to the investor. The chef is cooking, tasting and recommending the same dishes to customers. These roles have conflicts of interest
that have led to successful lawsuits against some Wall Street banks. Some investment banks have split their stock broker and analytical arms from their investment banking arms into different companies. It will not be a complete solution to the conflict of interest that led to the division along ‘ChineseWalls’.