by Laura Conaway

Satyajit Das, our favorite expert in credit default swaps, sent this for your New Year's Eve enjoyment:

"Shell-shocked investors are coming to terms with the financial carnage of 2008. The value of investments fell to such depths that investors needed specialised diving equipment just to find what anything was worth.

 

"Volatility reached astonishing levels. Prices of seemingly unrelated investments moved in unison, mimicking gold medal winning synchronized divers. An investment in a Zambian copper mine behaved almost identically to a bond issued by a high-quality corporation in Scandinavia.

"What the market geniuses with their investment models, risk analysis and trading strategies made of all this is unknown.

"We are, of course, in a 'new paradigm.' Investors will need to adjust their expectations. The new investment mantras may well be:

  • Flat is the new up.
  • Debt is the new equity.
  • Dividends are the only return.
  • If you're looking for the bottom of the market there's a special offer — buy one, you get the next one free.

"The best investment story of 2008 relates to a banker who had a modest shareholding in his employer — a storied investment bank. Upon being transferred to London, he sold the stock to finance a Range Rover. As business in London turned down, the banker was transferred to Dubai.

"When selling his Range Rover, he suffered a loss of around 50 percent of the price he paid barely six month ago. The interesting thing was that the proceeds from the sale of the car (despite the 50 percent loss) would have allowed the banker to purchase five times the number of shares he sold to finance the car. 2008 is perhaps the only year on record in which a distressed price for a Range Rover outperformed equities.

"In Iceland, where there has been an oversupply of Range Rovers after the economic good time ended, the cars are now known as 'Game Overs.' For investors, 2008 was also a case of 'game over.' Look back in horror!

(c) 2008 Satyajit Das

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).