Commentary: Temasek’s punishment over FTX sets unrealistic expectations for investing
Punishing the FTX investing team at Temasek sends an implicit signal to all Singapore investors that nothing short of perfection is ever going to be good enough, says David Kuo of The Smart Investor.
SINGAPORE: When we invest, there is always a chance that we could lose some or even all our money. That is the nature of the beast. It doesn’t matter whether the “we” is a private investor, a professional investor, or even a seasoned investing company such as Temasek, which is one of three Singapore entities responsible for managing the country’s whole-of-Government assets.
The risk of losing money, however, depends greatly on the type of investment we choose. In terms of the hierarchy of risk, cash is the least risky. Bonds are a bit riskier, but they are also deemed to be less risky than property. At the top of the risk pyramid are shares. But even then, not all shares carry the same level of risk.
Unlisted shares that are favoured by many private equity and venture capital companies can carry significantly greater risks than stock-market listed shares. But there is an important trade-off. In return for assuming the greater level of risk, the return on investment could be much higher, too.
Temasek was recently given a taste of what that greater risk could mean. It, along with other professional investors that included BlackRock and Sequoia Capital, was caught up in the demise of cryptocurrency platform FTX. Temasek, which invested US$275 million in the now-failed entity has had to write off its entire investment.
NO MAGIC FORMULA
Some say that the unfortunate incident has damaged the reputation of Singapore’s investment arm. But who are these people who are so quick off the mark to criticise? I can’t think of any serious investor, namely, anyone who truly understands what investing entails, who would say that Temasek has in any shape or form done anything wrong.
Sure, Temasek has lost money on this venture. But losing money is a risk that we must accept when we invest. There are no formulae we can apply that will guarantee success every time. If there was, we would all be using it.
Let’s not also forget that FTX founder Sam Bankman-Fried is under investigation for fraudulent activity, and it is never easy to detect fraud, especially when the perpetrator is adept at covering his or her tracks.
We have to look no further than the Theranos scandal that took more than a decade to come to light. Then we have the Bernie Madoff saga that managed to dupe banks from around the world.
HINDSIGHT IS 20/20
The point is, hindsight is always 20/20. We are all considerably wiser after the event. What is worrying, however, is that the Temasek investment team and senior managers that were responsible for investing in FTX have had their compensation cut. There has been no word as to how severe the reduction will be.
From a position of optics, the cut in compensation might satisfy some critics. But we must ask how the punishment could affect the way that Temasek will invest going forward.
Could it instil a more cautious approach to investing at the company? And could a more careful approach adversely affect its future returns?
Will the investment teams within Temasek now choose to always err on the side caution and run the risk of missing out on above-market returns through a fear of being wrong?
EVEN WARREN BUFFETT GETS IT WRONG, SOMETIMES
On that point, it wasn’t that long ago when Warren Buffett openly admitted that he had overpaid for his stake in the merger of Kraft Heinz. He had to write down his investment by US$3 billion.
That makes Temasek’s write-off of US$275 million a drop in a bucket by comparison. It also highlights the fact that if someone who is as experienced as Buffett can make a mistake, then we can all be fallible, too.
The thing is, nobody ever thought of criticising or chastising Buffett for his mistake. Investors in his Berkshire Hathaway vehicle accept that not all his bets will pay off every time. What really matters is whether the portfolio is moving in the right direction.
The unpredictability of investing in shares was highlighted by one of the best investors of our time, namely, Peter Lynch. He said: “In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten”. So, why would we expect Temasek to be right every time?
DON’T SEND THE WRONG MESSAGE
As far as Temasek is concerned, its returns are far from disappointing. In fact, they border on exemplary. After writing off its investment in FTX, its early-stage portfolio had still generated an internal rate of return in the mid-teens over the last decade.
It is also important to put into context the impact of its FTX write-off. The cost of Temasek’s investment in FTX was 0.09 per cent of its net portfolio value of S$403 billion as of end- March 2022. It is miniscule.
By punishing the investing team at Temasek, we are effectively sending an implicit signal to all Singapore investors that nothing short of perfection is ever going to be good enough. That is not how investing works in real life.
David Kuo is Co-founder of The Smart Investor.