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Jake Van Der Kamp

'For every adjective you add to the instrument you add 1 per cent to the fee. All descriptive words count as adjectives.'

Golden Rule No3

Jake's Golden Rules of Investment

'Double-Up Protect Notes allow investors to enjoy twice the return of the underlying stocks in a rising market, whilst the air-bag protection mechanism helps investors reduce the risk of principal loss in a falling market.'

ABN Amro press release

OKAY, LET US count them. We shall allow the hyphen in 'double-up' and score that as No1. 'Protect' is actually a verb but it counts as an adjective here. That makes it No2. 'Notes' is the basic name of the instrument rather than an adjective but you get a  1 per cent fee to start with anyway and so we are now at No3.

Then we get 'air-bag', which makes it No4, and protection, a noun misused as an adjective (bad grammar is a characteristic of financial jargon), which makes it No5. We should really have had the conjunction 'with' in front of that 'air-bag protection mechanism' but we shall ignore both this and 'mechanism'.

Let us leave it at 5 per cent, which sounds about right for what a middleman takes on average out of a client transaction in a highly descriptive derivative instrument like this. It is better than what the Hong Kong Jockey Club takes out of a horse bet, which is almost 20 per cent, but let us remember that a frequent and sizeable player in ordinary stocks pays a commission of as little as 0.1 per cent.

Time for my disclaimer. I used to work for ABN Amro as an investment analyst and the fact that I am having a go at them here does not mean that I bear them any grudge. I do not. They were always excellent employers.

But double-up protect notes with air-bag protection mechanism is not my cup of tea. I refer you the sage advice of one-time Wall Street guru Peter Lynch, who said he liked ordinary stocks because they gave him infinite upside potential with limited downside risk while derivatives give him infinite downside risk with only limited upside potential.

I cannot prove it in the case of these double-up protect notes. In fact, although I have read the press release closely, I am still a little mystified as to exactly how they work and this after almost 20 years of direct involvement in the business.

The only excuse I can offer is that I was in investment research and investment analysts have always been a mystified bunch.

From what I can make out, you put your money down and ABN Amro makes a geared bet with it on a basket of Hong Kong stocks. If the market goes up, you make double the gain the market makes.

If it goes down, you can jump out early and, if you do not jump out early enough, then you get lumbered with the stock, which is your tough luck.

This may be a brief description but pardon me if I think it is not quite the sales pitch to clients. I think the pitch here is that ABN Amro can show you the way to the magic tree on which money grows, ripe for the picking.

And this leads to a question. If ABN Amro has really discovered eldorado at last, if it has devised the ultimate coin toss of heads-I-win-tails-you-lose, why share it with outsiders? The bank's worldwide operating profits were actually down a touch last year. Surely these earnings could do with a timely lift?

Then again, if my calculations on fees are roughly in the right ballpark, perhaps the bank has truly found a superb way to boost its profits, provided, of course, that it can sell you double-up protect notes in large enough numbers.

But for you I prescribe a cold shower before showering yourself with these things.

I concede that I have not done the maths on the balance of risk and reward here, and I recommend the exercise to our universities as an excellent topic for a doctorate dissertation, but I already know the conclusion that will drop out of all the equations - money does not grow on trees.

What these equations will tell you is that it all balances out to zero compared with other investments you could make, less the transaction cost of making these investments.

On this count double-up protect notes almost certainly do not compare well with simpler investments.

What is more, I think ABN Amro runs a distinct danger here. Our securities regulators and our courts take an increasingly dim view of investment professionals offering complicated instruments to an amateur public on an implied 'sure bet' pitch.

But it is still an attractive game to the issuers. If you want more revenue, take something dull, paint it pink, wrap it in gift paper and ribbons, tell the punters you have something new and forget to tell them that for every adjective you add to the instrument you add 1 per cent to the fee.



Paint it pink, wrap it in ribbons and don't mention adjectival fee