Thursday, 31 May 2012

Book Review - Liar's Poker by Michael Lewis

Liar's Poker Liar’s Poker is a fantastically written expose on Salomon Brothers, the powerhouse of sales and trading in the 1980s.  A cross between an autobiography and a contemporary history of the bond markets and Salomon’s place within them, the book gets to the heart of what it is to be a trader. I rate this book 4 / 5.

Lewis begins Liar’s Poker with his experience getting recruited into the firm and his experiences with the training programme.   He explains his experiences in trying to get recruited into a corporate finance (i.e. investment banking) job without success in a chapter aptly named ‘Never Mention Money’.   Lewis then walks the reader through his experiences in the Salomon training programme (though it was a bit strange that he dedicated the same amount of time describing this as he did his actual experiences on the trading floor). 

There is then a slightly awkward shift in the book to a history of the mortgage trading department at Salomon Brothers, the most profitable section on the trading floor at the time (though this seems to be contradicted in Roger Lowenstein’s When Genius Failed which gives the honour to The Arbitrage Group).   While the history of the mortgage trading department becomes fascinating as you keep reading through it (3 chapters), there is a real disconnect with the first section of the book. 
Liar’s Poker then, almost as suddenly, jumps back to Lewis’ experiences on the trading floor and his experience going ‘From Geek to Man’ and the information and insights contained from this chapter to the end of the book are what truly make this book a standout.  Lewis discusses many of the issues and problems that he saw while working at Salomon Brothers including:

·    The willingness of a multinational firm, and indeed at the time one of the bastions of Wall Street, to sacrifice clients and their well being in order for an inexperienced salesman/trader to get experience
·    The inherent conflicts of interest within a firm that deals with both external clients as well as on its own proprietary account
·    The politics of making money, including the need to constantly defend ones turf on the trading floor
·    Compensation: why

Wednesday, 30 May 2012

Superannuation - An overview

Recently I started to look into my superannuation to see whether there was any way I could do things more effectively (from a fee, returns, administration and tax perspectives) and I thought I would blog about it as I went.  However I realised that many of the readers of this blog are from overseas and would not know how the superannuation system worked so this is a brief overview.

In Australia the government mandates that employers contribute a certain amount, currently 9% per annum of an employees wage towards a retirement account which cannot be touched until the employee gets to retirement.  This retirement account is not managed by the company but rather can be managed by the employee themselves (called 'self managed super funds') or by a superannuation fund manager (which are generally split into fee paying funds and industry superannuation funds which charge no fees).

There are quite complex rules around superannuation including
  • What it can and cant be invested in
  • What sort of leverage can be put into investments
  • The tax treatement of the contributions made by the employer and any additions made by the employees themselves
  • The age at which withdrawals can be and how they may be made
It is actually quite a complex topic which is why most Australians dont really think about it too much and just allow their employer to put the money away every month into these accounts.  This is actually a problem as most people have several accounts (I am in my mid 20s and I already have 3 superannuation accounts - each one set up by a different employer). 

The superannuation system is actually a brilliant one.  We have all read the statistics on how people do not save adequately for retirement and then government social security and pension systems are burdened and are in danger of going bust.  The superannuation system fixes all of this as a person working for ~40 years with forced savings of 9% of their wage for this whole period will not be a burden on the system at all (and it is compulsory for everyone).  There is also a knock on effect to the stock market.  As most superannuation funds only invest in Australia there is a huge pool of money which is constantly searching for a home and which has to be invested in the market which I think adds stability to the system.

This was just a brief overview of superannuation for those who were not familiar with the Australian system.  I will go into much more details in following posts

Tuesday, 29 May 2012

Investing in Shares - European Meltdown: What types of stocks will be hardest hit

In recent weeks we have once again seen markets around the world taking a beating because of issues in Europe.  Currently the issue is whether Greece will exit the Eurozone (the general consensus seems to be that this will not have a massive impact on the Euro or world financial markets) and whether other countries in dire financial trouble such as Spain, Italy and Portugal would do the same (this is referred to as the 'contagion effect' and would definitely have serious repercussions in Europe and financial markets around the world)

While these are very serious issues with the potential to seriously affect investments and investment returns the impact that they are having on world markets seem to be overdone.  When news such as this hits a domestic retailer / industrial company in Australia or the US which has absolutely no earnings / supply or any other ties to Europe then there is the potential to profit from 'Mr Market' being irrational.

The biggest issue that investors face though is identifying which areas are
  • Safe and unlikely to be affected even if the worst does happen
  • Likely to be affected by the worst but will probably trade through
  • Likely to really suffer if the worst does happen
  • Likely to suffer from ongoing uncertainty
Each investor is different and will prefer to invest in different category. 
  • The first category is the least likely to be affected in the short run but will not get the same 'bounce' when the investment return eventually returns to normal. 
  • The second and third categories are where investor judgement comes into the picture and is also where the biggest profits are likely to be made.  If the investment world is placing much higher 'worst case scenario' than you think then you would buy these stocks, wait for the worst to happen or for the situation to muddle through and then take a massive profit once everything returned to normal. 
  • The last category will probably be reserved for investors that are the most sophisticated.  Those that are best able to judge the situation and able to take advantage of whether the market goes up or down.
In this post I am going to identify those stocks which should probably be avoided by most investors with the uncertainty around Europe.  This assumes that most investors have no great insight into Europe and what is going to happen there.  I will therefore focus on those companies in the third and fourth categories.  Stocks which fall into these categories include
  • Stocks listed in the affected countries.  If these countries leave the Eurozone their currency is likely to collapse and investments will collapse with the currency
  • Stocks that derive a large part of their earnings from the affected countries.  Obviously there will be turmoil for several years which will significantly impact the earnings from these regions
  • Stocks that are particularly leveraged to debt markets.  Even if stocks have no earnings links to Europe they may be impacted by the effect that a European crisis has on funding markets.  These include banks which are particularly dependent on overseas funding markets (note not all banks fall within this category).  It also includes infrastructure type assets, utilities and other highly geared assets.  If funding markets dry up then their cost of debt is going to soar.
Note that as mentioned above it is entirely possible to make money from all the above type of stocks but it requires a detailed knowledge and research of each individual company to see whether the market is painting them with a broad brush (e.g. whether the market assumes that because they are a bank they are going to suffer even when they have more than enough liquidity and can tap funding markets even in stressed situations). 

Monday, 28 May 2012

Investing in Real Estate - Picking your Property Manager

This is the eleventh post in my Investing in Real Estate series and will deal with how to choose a property manager and how to negotiate the fees you pay them. 

In my last post I covered the decision to either use a property manager or to self manage a property.  I personally use a property manager so will be blogging about them.  I will not blog about self managing your investment property because I have no experience in it.

Choosing a good property manager is one of the most important things you can do.  Property managers will often either make or break your investment property (quite literally and also from a financial point of view).  If you decide to appoint them there is a level of trust that is involved because they will be looking after what will probably be your single largest investment.

When appointing a property manager word of mouth is the best way of finding a quality manager.  There are certain things you should and should not do when searching for a property manager:
  • Word of mouth is the best way of finding a quality property manager.  The best way to do this is to speak to other landlords and find out what they think of their property managers.  I love my property manager and would tell anyone that asked me that - a relative of mine told me how good they were so I felt more comfortable using them
  • If you can find tenants ask them what they think of their property manager.  You want to find someone that keeps on top of the issues.  A property manager who bends and does whatever the tenant wants however is probably not someone you want
  • Don't just use the agency that sold you the property  It may turn out that these are the best property managers as well but more often than not they aren't.  The fact is that they will try and pressure you into a property management agreement if you buy off them - resist this temptation and see several property managers before you appoint one.
  • This is not a 'set and forget' type of arrangement  You want the property manager to constantly be on top of the issues.  A couple of slip ups is normal (especially over the course of a few years) but if anything major happens do not be afraid to switch.
Negotiating a property management agreement
I was surprised at how much was up for negotiation in a property management agreement.  When I went in with the property manager that I liked and that had a good reputation I was given a standard form contract but I wanted a lot of it changed which they were more than happy to do.  Things you can and should negotiate include
  • The property management fee:  Find out what the standard fee is in your area and then ask for a discount.  I did this and now pay 5.5% of my gross rental (instead of the 6.5% they were asking for).  If you suggest that you may be a long term customer and will bring other property investments to them as well they will be more likely to drop this fee (not this costs you nothing)
  • Other ancillary fees:  Watch these fees!  There are often fees for things like sending out statements, advertising, renting the property for the first time, contract negotiations.  Most of them can be eliminated or brought down substantially.  For example the standard form I was given had both advertising fees for the property and an initial fee of 2 weeks rent when they got a tenant.  I reduced this to no advertising fees and 1 weeks rent when they got a tenant and they did this with no argument.
  • Exit conditions:  You want to be able to exit this contract at any time.  A lot of property management agreement have minimum notice periods of like 1 - 3 months.  You can (and should negotiate this down to nil).  If they are not performing you should be able to move unilaterally.
Setting initial expectations with your property manager
The initial expectations you set with your property manager are all important.  You need to come to an understanding about what you want them to do and what you expect to be informed of
  • Some landlords like to be very involved in their property and know every small thing that is happening
  • Other landlords (like myself) prefer only to be informed of the big things.  I let my property manger know that I did not want to be called in most situations and that I wanted them to deal with most of the minor issues that arise.
Also set parameters and expectations around things like repairs.  If you're a handy type of person and want to do any repairs yourself then make sure your property manager knows this.  As I am rather time poor I let my property manager know that if the repairs are going to cost less than $500, to just do it and send me the bill (I always check the bill to make sure I'm not getting ripped off).

These initial discussions about what you want and the level of communication you desire make a big difference in how effective your arrangement with your property manager will be.

Expect a few teething problems
For the first couple of weeks and months expect teething problems.  No one is perfect so if your funds don't hit your bank account the first time don't stress and look for another property manager.  Just contact your one and tell them you expect it to be sorted out. 

If these sort of 'administration problems' continue beyond two months then you need to sit down and make sure your initial expectations were understood.  If things then do not improve consider changing property managers.

Friday, 25 May 2012

Buying online: not always the cheaper option

While it would be a fair generalisation to say that buying things online is generally cheaper (especially for inefficient and archaic retail models as the ones that exist in Australia) this is not always the case. I know in my (and many other people's) mind that their retail buying preferences go as follows:
  1. Online (cheapest)
  2. Large / well known department store (most likely to honour refunds policy)
  3. Local business
Recently however I have come across several situations where local businesses have given me:
  • The best price - I price shopped everywhere for similar products and couldn't get it cheaper
  • The best advice - A small store owner (especially a specialty store owner) is likely to know much more about their product than a sales assistant at a large store; and 
  • The feel good feeling - You get this amazing feeling by supporting local business but this is definitely third in line when I come to decide where to buy from
I think there is a common misconception that local businesses just cannot compete on price. They have the overheads that online businesses do not but do not have the same buying power as the large chains and department stores. The two following examples showed me how wrong I could be

Note that these two businesses were just so amazing that I wanted to give them some free advertising. You always hear when people have bad experiences but not when they have good ones so I hope they get some business out of this post.

Glasses - Noble Optical

I was in urgent need for a new pair of glasses after I could no longer wear contacts for medical reasons so I went online searching for a pair. I had in mind quite a definite pair that I was interested in (a pair of thick framed Ray Bans).

  • In a big chain store with all their buying power the price was coming to ~$400 - $500
  • Online I couldn't believe the prices I was getting from the US - $180 for the frames and only another $150 for the lenses ($330 total including shipping)
I decided to visit Noble Optical (my local optician) which has been run by the same guy Adrian for as long as anyone in the area can remember. It turns out he had what I was looking for in stock for a sticker price of $200 - $250 for the frames so I thought he would never be competitive. He cut the frame price to $100 for me and charged only $80 for the lenses. He then went one better but taking an extra $20 off so that it was fully covered by my health insurance. I paid half of what I would have paid online.

I couldn't believe how amazing the deal was that he was giving to me and it continued to get better. When I explained to him that I needed them urgently (something you cant do with an online store / large chain store) he told me that he would have them done for me in 20 minutes. I was so amazed at his service that I am willing to recommend him to anyone and everyone. It is definitely worth giving him a call (he doesn't have a website but his contact details are here)


I do competitive rifle shooting and so go through a fair bit of ammunition which is one of the main costs involved in the sport. Given the restriction on guns and the strict gun laws in Australia the major gun shops charged an arm and a leg for most decent ammunition. The cheapest way that I had originally found was to buy them through your local club which tended to provide them for a much cheaper price.

I thought it may be worth trying to buy the ammunition online from the US but after seeing the amount of effort to get the stuff legally into the country it just was not worth the effort.

I found this online store - Ammunition Galore - which provided cheaper prices for ammunition than almost any other supplier around. You may say that this proves that online is cheaper but it is not your typical online store. It is actually just a local guy that imports the stuff and sells it out of his house. If you live in Melbourne and shoot it is well worth the drive. Also if he doesn't have the ammunition he is more than willing to order it in. He also has tested everything he sells so knows what he is talking about and he is cheaper than anywhere else.

Thursday, 24 May 2012

The Facebook Flop

I know I'm probably late to the party in terms of ripping the Facebook (FB) valuation to pieces but I wanted to see where the stock traded during the first couple of days of trading before declaring that we were back to the same valuation silliness that we saw during the Tech boom / bust.  Given FB's tragically poor performance during the first few days of trading I'm happy that the stock has plummeted because it shows me that the market is not going crazy again. 

I confess that the valuations surrounding the whole list of social networking stocks (including Facebook, LinkedIn and RenRen to name a few) has never made a whole lot of sense to me.  The idea of valuing a stock on a 'number of users' is akin to the old 2000s methodology of valuing a stock using 'number of eyeballs'.   While there should be different techniques to valuing stocks in different industries, valuations should always come down to the earnings of a company. 

Traditionally 'new industry' companies have been valued at much higher multiples than their industrial / resources / financials counterparts because of the 'blue sky' factor.  That is the potential for these companies seems limitless and given that the price of the company should be the future value of its cashflows almost any valuation can be justified with enough imagination.  The problem all to often is execution.   Although some companies are able to execute on these visions and justify their huge IPO multiples (Google particularly comes to mind) most are never able to live up to the expectations.

For facebook to be worth the ~100x LTM (last 12 months) P/E multiple it either needed to get a whole lot more users at the same revenue per user OR find a way to monetise the site better.  Given that Google trades on a P/E of under 18 it would need to increase its earnings fivefold before it got to the same point Google is at now.  Given that Facebook already has close to 1 billion users and China blocks it there is not a whole lot of growth to be had in terms of users so it comes down to monetisation.  While it is entirely possible that Facebook will be able to monetise these users in the same way that Google has - there is no way of knowing whether this will come off or not.  For investors this means that they should demand a higher return for taking the risk that Facebook will not pull off this monetisation.  The real problem is therefore that Facebook's IPO valuation already priced in this upside potential so there was nothing left for the new investors making it a terrible investment.

Why the shares were ever in short supply is a mystery to me.  The valuation proposition never stacked up.  I think that perhaps people were hoping to make stag profits on the shares and so didn't care too much what the underlying fundamentals are.  This only works if most people in the market are dumber than you which is always a losing strategy.  I think FB was always a flawed investment and it needs to show that it can effectively monetise it's users before it can ever be considered a good investment.  How people can buy into FB before Google (which actually makes money) is a mystery to me.

Disclaimer: I do not own either Facebook or Google.

Book Review - Monkey Business: Swinging Through the Wall Street Jungle by John Rolfe and Peter Troob

Monkey Business: Swinging Through the Wall Street Jungle
Monkey Business is a funny, outlandish and surprisingly honest insider’s look into life as a junior investment banker.   For any junior investment banker who reads this book, you will be able to relate to 90% of this book straight away and for any student who is considering pursuing an investment banking career (undergraduate and MBA alike) this book offers insights and warnings about the life you are letting yourself in for.  I rated this book 5 / 5.
The book follows a chronological timeline of Rolfe and Troob’s journey through their associate investment banking career at DLJ (since acquired by Credit Suisse) from the MBA and recruiting processes, through the summer associate program to life as a full time associate and then their experiences leaving the investment banking world.
What this book does particularly well is strip away the hype and the mystery surrounding investment banking including answering
·         What does a junior banker actually do?
·         How does the investment banking hierarchy work and what role each level play (from the analyst monkeys, to the Cro-Magnon man associates, to the processing robot vice president and above)?
·         Why do investment bankers get paid so much?
·         Why is turnover so high at investment banks and when do you decide to leave?
Some aspects of the book are a little dated including the now irrelevant word processing department (which typed up the handwritten documents) and to a lesser extent the production

Wednesday, 23 May 2012

Credit Card Rewards Programs: Always take the gift card

I was recently speaking to an acquaintance that works for a rewards programme of a major credit card provider and he made an interesting statement.  He said that you should always take the store gift card as your credit card reward and never ever take the cash or products

I confess that I had never really thought about it too much.  I had two rewards programmes.  One with a credit card that I wanted anyway (that happened to come with a rewards programme) and the other with a corporate Amex card which my employer gave to me where I was allowed to keep the rewards points.  However after he made that statement (and me figuring he knew what he was talking about) I decided to look into it and it turns out that he was absolutely right.

In terms of efficiency of rewards points (generally) speaking - you get the best 'value for points' in the following order:
  1. Gift cards for Retail / Travel stores
  2. Gift cards relating to staples (e.g. groceries / fuel)
  3. Products mailed to your door
  4. Cash
I think everyone realises that cash is a pretty crumby deal however I had never realised the extent to which the products are over-priced in terms of cash-equivalent rewards points.  For example with my Commonwealth Bank Rewards Card I get the following offers:
  • Cash: 200 points = $1
  • Fuel / groceries; 185 points = $1
  • Retail store: 174 points = $1  (164 points even you order more than $500 worth)
It should be noted that for the retail stores you get a scale benefit.  If you are ordering gift cards which are worth more than $500 then the price drops even further making them by far the best value.  If you then do the simple exercise of price matching some of the goods you can buy the results are quite astounding

Example 1: Apple iPhone 4 16 GB
  • Rewards program cost = 177,600 points. 
  • This is the equivalent of 177,600 / 164 = $1,083 in retail store cards
  • The retail price for this phone in Australia is about $600 - $700 depending on where you buy it from
Example 2: Panasonic Lumix DMC-SZ1 Digital Camera
  • Rewards program cost = 50,100 points
  • This is the equivalent of 50,100 / 164 = $305
  • Retail price is about $200 - $250
The mark up on these products has to be seen to be believed.  I tried this on both my Amex rewards as well as my Commonwealth Bank rewards and the outcome was the same (Amex offered better deals for grocery cards vs retail so look to see what your provider offers). 

The best strategy therefore is to buy the cards that offer you the best value and either buy other things you need with them and use cash to buy the item that you originally wanted OR exchange them with others who want them for cash.

Tuesday, 22 May 2012

When not to use the cheapest broker (i.e. Interactive Brokers)

One of the earliest missions I went on with this blog was to find the best value broker around.  They not only needed to be cheap but they also needed to offer the full suite of investment products.  I ended up settling on Interactive Brokers and I have been surprised at how good a trading platform it has been - in fact I would recommend it to anyone who is serious about trading.

One of their enduring faults however (as I have posted about before) is their inability to participate in dividend reinvestment plans.  While this has annoyed me it has never caused me to want to use my other broker who is much more expensive (an Interactive Brokers trade costs me A$6.00 for an ASX trade and costs me A$29.95 with Commsec - my old broker).  Late last week however I came across a situation which caused me to rethink this 'cheap only' policy and I actually used my old Commsec broker.

The stock I was buying had a high dividend yield (~8.5%), I was looking to buy a relatively large portion (~$10,000 worth) and had a dividend reinvestment plan with a 2.5% discount associated with it.  Assuming I held the stock for 5 years (I don't really like quick trades) this is the difference in the outcomes

Interactive Brokers
  • Stock purchase price (including trading costs): $10,006
  • Dividends (assuming no increases in dividends): $4,250 cash
  • Cash received after selling stock (assuming no increase in price and including trading costs): $9,994
  • Total return = (9,994 + 4,250) / 10,006 = 42.35%
  • Stock purchase price (including trading costs): $10,030
  • Dividends paid in stock (get the benefit of 2.5% discount): $4356.25
  • Cash received after selling stock (assuming no increase in price and including trading costs): $14,356
  • Total return = 14,356 / 10,030 = 43.13%
I realise that this is a very simplistic comparison and that if the stock price went down over the period that this would influence the decision and also that it depends on the return that the cash dividend would get vs the stock.  I would argue however that an 8.5% yield is pretty hard to match with any other instrument or stock with any degree of certainty so assuming the stock price didn't move this would be a much better yielding investment.  I should also emphasise that the smaller the value of your trade the less significant this difference is going to be.  On a $1,000 trade the value of the dividend discount is going to be totally outweighed by the trading cost difference.

On a per annum basis the difference is minimal (less than 0.2% p.a.) but if you already have a trading account set up the consider keeping it open.  This is especially true if your broker does not charge you fees if you don't trade and allows you to participate in these types of issues.

If anyone would like me to do it - I can upload an excel file with a more robust calculation so you can see when it is an advantage to trade through interactive brokers or your own broker in situations such as this.

Monday, 21 May 2012

Investing in Real Estate - Property managers vs Self Management

This is the tenth post in my Investing in Real Estate series and will cover the crucial decision about whether to self manage your investment property or use a property manager.  Both sides have their pros and cons and it really comes down to what type of person you are.  I don't subscribe to the idea that one suggestion is always right (a lot of 'real estate gurus' like to promote one way of doing things because it works for them but don't think about what works for other people)

The decision to use a property manager is really a cost versus effort argument.  Using a property manager will reduce your return on the property but it means that you can essentially be hands off on the property.  Outlined below are both the pros and cons of using a property manager and self managing a property investment:

Property managers
  • Overview
    • For a fee, property managers will take care of most of the decisions and duties around your investment.  This fee usually ranges from 5% - 8% of gross rent (in Australia)
    • They do everything including advertising, leasing, rent collection, statements, organise repairs
  • Pros
    • Saves you the time and effort associated with your property investment.  If you think that your time is more valuable than the amount you are paying out then it is a worthwhile investment
    • Provides a buffer between you and the tenants.  This is especially important if you are a 'soft' type of a person who would find it hard to evict someone if they were running late on rent.  The buffer is also important if you live near the property and don't want the awkwardness of your tenants knowing who you are
    • Their systems are often better and more automated.  They will send reminders relating to when you rent reviews are due or when contracts need to be renegotiated
    • The cost of property managers is tax deductible.
  • Cons
    • Rental properties often operate on negative net yields (i.e. after interest) and paying out an extra 5 - 8% of gross yield can definitely affect the long term return on your property
    • If you happen to get a bad property manager things can go wrong very quickly.  They may advise the wrong tenants or may fail to follow up on property inspections and rent reviews.
    • Property managers do not have an incentive to use the lowest cost repairers for the property.  If something needs to be fixed they will normally use the person they 'usually use' and you get stuck with an inflated cost
    • There is the temptation to leave everything to the property manager (even those things that you should be doing yourself)
Self managing your investment property
  • Overview
    • When you self manage your property you have to do everything yourself including advertising, leasing, repairs (or organise repairs), property checks etc
    • There is no overhead cost and you essentially need to value your time doing these tasks
  • Pros
    • Much lower costs for everything including advertising (there are lots of sites you can now advertise your property), repairs (you can do repairs yourself if you are a handy type of person or can organise the cheapest cost) and there is no management fee
    • Results in a better long term return (if you value your time at nil)
    • You care about this property more than any property manager ever would and are more likely to keep on top of all the issues
  • Cons
    • There is no buffer between you and the tenant.  It is hard to think of your property as an investment and evict people when necessary if you feel for them / are soft with them
    • It can be time intensive (especially if you have more than one property) and if you are time poor this can be a burden
    • You have to sort out all the problems associated with the property and will often not have the experience in dealing with issues that a property manager would
Should I self manager my property or use a property manager?

I believe it all comes down to your individual circumstances.  If you are time poor, are a relatively soft hearted person and have no experience with property investment then using a property manager is probably well worth the cost.  This is totally dependant on getting a good property manager and I will post about that next week - a good property manager is essential and make your investment property a breeze)

However if you are a handy type of person (and perhaps are the stay at home partner of a couple so your opportunity cost of time is relatively low) then self managing your property may result in much higher long term results.  You do have to read up on all the relevant laws regarding tenancy and the rights and obligations of both the landlord and the tenant in your country and state.

Friday, 18 May 2012

Planning a cost effective bucks weekend

Bucks weekends (or even just a single night) are one of those events that typically do not come cheap.  This is especially true if you do all the 'regular' bucks activities in the regular venues.  I know bucks that have done trips to Vegas, Hong Kong, the Gold Coast (for Australians) and everywhere in between and everyone has a great time though laments after the fact how much money they wasted.

Having had to plan and attend a bucks night recently I thought I would write a post on how to cost effectively plan a bucks night that did not skimp on most of the frills that people expect.  The first thing you need to establish is those things that the buck (and more importantly the other attendees) consider essentially.  Generally this list is not very long and consists of:
  • Alcohol; and
  • Female 'entertainment'
Everything else should be considered an extra.  I have outlined a 9 step checklist to plan activities that should not break the bank.  I'm going to assume that there are approximately 10 guests and ever guest is paying their own way.  I am also setting a budget of $300 per person for the whole weekend (if you think about how much gets spent on a weekend in Vegas / HK / the Gold Coast including flights / accommodation / alcohol / partying etc you will realise how cheap this actually is.

  1. Pick a location that is not typically thought of as a party location.  The fact is that when you're a group of 10 drunk males it doesn't really matter where you are.  You are kidding yourself if you think that in that state you're going to pick up women and bring them back to the share house.
  2. Book a spacious house with not too many neighbours around (~$800).  The biggest killer is when the police get called because you're being too rowdy.  You want to be rowdy so next to a golf course (or something similar) is perfect.  For that price you are getting a seriously awesome place
  3. Get every person to bring their own alcohol on the way up ($50 per person, $500 total).  This avoids the problems associated with you buying $500 of beer and there being some spirits only / wine only drinkers in the group.  Bars are also way over priced so if you can have the party at the house then you are much better off.
  4. Book the female 'entertainment' to come to the house your are staying in (~$500 total).  This amount of money should provide more than enough 'entertainment' for the weekend. Having done this recently the objective is to really embarrass the buck
  5. Book an activity for the Saturday morning - something fun and different that everyone can get involved in and doesn't depend on the weather (~$900 total).  When I planned this a few weeks ago we went trap shooting with ozshooting.  They were super professional and they do it whether it is sunny or raining.  It took a couple of hours and everyone had a blast.  The best activities are those which are perceived as 'manly' - paint balling and gokarting off the top of my head are other fun activities which will get people going
  6. Don't buy too much food!  This is a bucks weekend.  All you need to bring along is eggs, bacon, bread, cereal and milk for breakfast and some snacks (~$100 total).  When I went away this is all we bought and we had HEAPS left over at the end. 
  7. For all other meals go to a winery / order pizza or fish and chips in (~$200 total)  Guys really don't care that much for a bucks weekend so you should go overboard with meal planning.
  8. The person / people organising the bucks should have some pre-planned activities that will embarrass the buck.  Public humiliation type activities are always fun (e.g. getting them to wear a mankini in public) but there are heaps of activities out there dedicated to activities.  You should not have a rigid timetable but if things are starting to go quiet then pulling out one of those pre-planned activities is a good idea to get the party going.
  9. Drive if possible and take the minimum amount of cars necessary.  For 10 people 2 - 3 cars is more than plenty and will help keep the fuel costs down.  As I used less than half a tank of fuel on the weekend I went away I'm not counting this in the budget.
The total cost of the above weekend is $3,000 or $300 per head.  You would barely get flights and accommodation to Vegas / HK / the Gold Coast for that kind of price.  There is so much fat in that budget that you don't really need to skimp on activities.  I just had a look at the kind of places you could get for $800 for a weekend and there are some amazing options out there.

Thursday, 17 May 2012

Book Review - When Genius Failed: The Rise and Fall of Long Term Capital Management

When Genius Failed: The Rise and Fall of Long Term Capital Management When Genius Failed is a comprehensive look at the amazing rise and fall of one of the most noted and hyped hedge funds of all time.  This book severs as a warning to all investors about the risks of leverage and hubris.   I would rate this book 4.5 / 5.0.

Long Term Capital Management (“LTCM”) was a fund set up by the superstars of finance including the rainmakers from Salomon Brothers (then the premier Wall Street trading firm) as well as stars from academia including Robert Merton and Myron Scholes.   LTCM was considered absolutely foolproof by investors, Wall Street counterparties as well as the fund managers themselves. 

When Genius Failed is broken into two sections: The Rise of Long Term Capital Management and The Fall of Long Term Capital Management which provies an in depth look at the founding, funding, operating and eventually the fall of LTCM.  The book provides a spectacular amount of detail on a range of topics including:

·         The rise of John Merriwether (who famously challenged John Gutfreund to a single hand of Liar’s Poker for $10m as described in Michael Lewis’ Liar’s Poker) and the unlikely team of academics that he hired into Salomon Brothers’ trading floor

·         What a hedge fund is and the prevalence of these at the time LTCM was formed (though the book does not spend too long on pointless filler unlike Liar’s Poker)

·         A basic overview of LTCM’s arbitrage strategies as well as the theoretical basis behind these.  One of the great revelations of the book was how these brilliant minds, who must have known the shortcomings of their models and theories, were lulled into a false sense of security that their models could never fail

·         The inherent secretiveness of LTCM and their ability to play the investment banks off against each other in order to get better terms

·         The greed shown by the managers of the fund which eventually contributed to their own personal downfall and bankruptcy

·         LTCM’s move away from convergence strategies into much more risky areas including merger arbitrage which was well outside the managers experience

·         The collapse of Russia and the total dislodgement of the market for risk including the flight to risk in the market which was catastrophic for LTCM

·         The attempts to re-capitalise and save LTCM and the eventual deal that was pieced together by the banks in order to save the financial system

While this book is not written for

Wednesday, 16 May 2012

Travelling overseas: Credit Cards vs Travel Cards

As I mentioned in my April 2012 expenditure review post I am going overseas at the end of this year and have been looking into the most efficient way to take funds with me.  When I have travelled previously I have used a combination of cash / travel card / credit card and debit card (I have never used travellers cheques as they never seemed to stack up for me).

At the very minimum I carry around A$500 (~US$500) in the local currency when I travel.  About $350 of this is as a float which I use to spend on various things and $150 is in different currencies (I have US dollars, Euros and Canadian dollars) as an emergency fund (I chose currencies that I figure will be accepted in every place in the world). 

On a month long trip I expect to spend ~$3000 - $5,000 so the question becomes - what way should I carry my excess funds around with me?  There are really 4 options
  • Credit Cards
  • Travel Cards
  • Debit Cards
  • Travellers cheques
I am going to cover the relative pros and cons of each of the above options (excluding travellers cheques which I have never used) below.

Credit Cards
  • Pros
    • Typically the best exchange rate of all the options
    • Interest free period on purchases / reward points build up
    • You already have one and you can keep using the same card when you go home
  • Cons
    • You typically get charged interest on ATM withdrawals from the moment you withdraw the cash (i.e. no interest free period) as these are counted as cash advances
    • You also get charged currency conversion fees with most cards (For Australians you don't with the GE Finance 28 Degrees MasterCard which is a brilliant option)
    • There is a real risk in less developed areas that your card details will be stolen
    • If you haven't warned your bank that you will be using it there is a fair chance that they will stop debits on your card until you contact them (which in an emergency is a real pain)
    • Susceptible to exchange rate movements
Travel Cards
  • Pros
    • You can lock in your exchange rate today and have certainty around your holiday budget
    • You are using your cash which you have pre-loaded onto the card so there is no interest payable
    • If you are travelling to a location where you have loaded the relevant currency (i.e. if you are travelling to Europe and have loaded Euros) then ATM fees are lower than most credit cards / debit cards
  • Cons
    • Often have lots of hidden fees
      • You pay a (typically) 1% fee on all amounts deposited onto the card
      • If you go to a country with a different currency to the one on your card then the fees really start to add up (e.g. I went to Egypt with a USD card and the fees were well above 4% plus the ATM withdrawal fee)
    • The exchange rate is typically not as good as the one you get with credit cards or debit cards
    • When you come back to your home country the money left on your card is 'trapped' and you have to suck up the high fees mentioned above to get your cash off the card.  Also you are then subject to the exchange rate risk you were trying to avoid
Debit Cards
  • Pros
    • You are using your own money from your bank account with the same pin.  There is no set up cost to this option and no interest payable on amounts withdrawn from ATMs
    • You do not have any exchange rate risk when you get back
  • Cons
    • Exchange rate risk for the duration of your trip
    • Typically not as good an exchange rate as credit cards (but is often better than travel cards)
    • Very high ATM costs (when I went to Hong Kong it cost about $8 per withdrawal regardless of how much I took out of the ATM)
My preferred option

Having used all of the above options I have more recently started to use a combination of credit cards and debit cards.  If you find a credit card that has very low fees for overseas transactions (for example for Australians the GE Finance 28 degrees MasterCard has no annual fees, no currency conversion fees and no international transaction fees which makes it perfect for international travel) and combine this with a debit card which you use to withdraw large amounts of cash at a time (e.g. $1,000 every few weeks) then you can keep the fees to a minimum.

Having used the ANZ travel card I found that I did not like the travel cards very much.  Any certainty I had around exchange rate was far outweighed by the exorbitant fees.  Further exchange rates can move in your favour and you lose the benefit of this with a travel card.  I also lost significant value taking money off the card at the end and it expired after 2 years which meant that I could not even keep it for travel that I was planning to do in the future.  Also in some places the travel cards are not common and there is a bit of a hassle getting them to accept it.  Overall it is not worth the effort in my opinion.

Disclaimer: I get absolutely nothing for promoting the 28 Degrees MasterCard.  I just think it is a great product which I found recently and will be signing up for in the next few months.

Tuesday, 15 May 2012

Investing in Shares: Generating an Investment Idea

A question I often get asked by my friends who want to start investing in stocks is "what shares are good value?" or "what shares should I invest in?".  I think this is fundamentally the wrong question to be asking - especially if you are just starting to invest.  The right question should be "how do I generate an investment thesis which will lead me to shares to invest in".

The above question is the right one to ask because then you will start generating ideas that you understand.  The problem with taking another persons suggestion (whether it be a friend, broker report, accountant or any other advisor) is that, without even realising it, you are buying into their view of the world (and especially of the investment landscape which you may not believe in).  I have outlined a few steps below which hopefully will help you generate your own investment thesis and should help generate lists of stocks for you to investigate further

Note that this is not the end of the process!  This will only generate a list of ideas.  You then have to do the appropriate amount of research on your stocks.  I have posted on this before so please don't generate an idea and then just go out and invest in it - it may be a perfect thesis but everyone else may have already recognised it and the stock will probably be too expensive.

1. Only invest in those industries you understand
This is not a new idea.  It is one that Warren Buffet stresses all the time.  For a really detailed look at how you can spot ideas yourself I highly recommend the book "You can be a stock market genius" by Joel Greenblatt.  I have linked to this book on the left (if you want to check out fishpond / book depository for pricing there are links on the right of my blog).

 All of us have certain industries we understand better than others.  For most people the simple ones are things like retail banks, retailers (both staples as well as things such as clothing / electronics),  many Internet companies, clothing manufacturers.  We have a detailed understanding of these industries because we (like most people) use them every day.

However there are some industries that you may understand better than others.  For example if you like to gamble at the casino you will understand that industry a whole lot better than I will because I don't go very often.  Doctors / nurses will have a much better understanding of the health care industry (as well as the biotech industry).  Financial professionals will understand the investment banks / fund manager space and the things that drive that.  If you're a builder there are building materials companies as well as home builders and property construction firms.

2. Be on the look out for investment ideas where you can get in before the financial professionals

After you have made a list of things you understand be on the look out for investment ideas.  Often you will see trends before the financial professionals become aware of them. 
  • For example if you are into fashion and you see a new trend start to emerge and you see the company who is at the forefront of that trend.  Chances are that the people that work in the financial world have no idea of this emerging trend and will only start to find out once they start making real money. 
  • If you're a builder and you see demand really start to pick up chances are you are going to see this before the data is released to the financial professionals.  It is all about using your individual knowledge.
  • Doctors are often able to decipher the hype around drugs especially which are actually one of a kind and which can be replaced effectively by others.  The financial community has a hard time separating the good drugs from the hype and so may not pay as much for that great product (and the biotech firm developing it) 
There are so many situations like the two above that it is hard to mention them all.  The key is to constantly keep a look out.

3.  Ideas can come from anywhere - but you need to follow your own train of thought

In the first two points I have really stressed areas where you deal in it personally and are able to see the trends before others.  However you can also make money by looking at a situation differently from others.  You may read something in a newspaper or a magazine article which has nothing to do with stocks but it may cause you to think of an idea or to research something further and go against the grain.  I have said it before but going against the market is the hardest thing one can do.
  • For example: During the GFC all financial institutions and highly leveraged companies were being battered because debt was not available at any price.  There were news articles on a daily basis about the external funding markets drying up and banks with exposure to the US and Europe being in real trouble and going bust.  You could look at this idea and decide to stay from all banks.  Or you could look at these articles and look for those banks which primarily funded their book domestically and lent money domestically. In Australia you would have come up with Commonwealth Bank of Australia which is the largest listed local bank and invested in them as the price had gone down substantially for no reason related to the stock itself.
Ideas don't even have to be that complicated.  One I invested in was much simpler.  I read an article in 2008 talking about diamonds and how they were so cheap because Indian suppliers were flooding the market but no new diamond mines had been discovered in the last 10 years so the price should recover at some point.  I looked around and all diamond miners share prices were suffering even though it only appeared to be a short term problem.  All I had to do was find one with a good resource that didn't have too much debt and wait for the market to recover which it did within a year.

4. After you generate an idea - research the idea properly THEN research the stock properly
If you are going to invest successfully then you need to do the work.  Research your idea or thesis thoroughly and make sure that it stacks up.  After this research your stock and make sure that the value proposition stacks up. 

Following the above advice should have you generating a list of ideas in no time.  Not all your ideas will be good ones and that is why the necessary research is required.  I try for one idea per month.  This may not sound like a lot but if you think about how much money you have to invest - you do not need a whole lot of ideas to start investing.

Monday, 14 May 2012

Investing in Real Estate - Doing the Due Diligence

This is my ninth post in my Investing in Real Estate series and covers things you should check when buying a property.  This is one of the most important steps in the process however is the one which is also the hardest to carry out. 

You have found the perfect investment property, have your finance in place and have gone through the  stress of negotiation with the other party saying yes.  If you have gotten to this stage well done!  However the most important part of the process is the due diligence.  It allows you to carry out the terms you and the vendor agreed to in your contract before there is formal settlement of the property.  It is the hardest stage because by this stage you cannot help but be emotionally involved.  However you need to try and detach yourself because if there are real problems with the property (e.g. structural problems) then you need to back out pretty quickly or you will have some serious problems in the future.

The due diligence that you do is totally dependant on what you put in the contract.  At the very minimum you should include a building and pest inspection clause.  Do not use the pro forma wording that the real estate agents suggest.  Use wording that is as unambiguous as possible for this.  I suggest googling around for appropriate wording - I am not a lawyer and do not want you using a broad suggestion that I put on this website in a contract. 

The building and pest inspection
For your building and pest inspection use a reputable building inspector.  You want a person to tell you the truth, not what you want to hear (i.e. that it is perfect).  In Australia a lot of investors and home buyers use Archicentre.  I have never used them though I have heard from friends who have that they are not as detailed as they could be.  They do not tend to get right into the property to find any potential flaws.  I used a person recommended to me by a real estate agent friend.  He said that this person was hated by real estate agents because he found every single little problem and caused people to back out of contracts.  Make sure you tell the inspector that you want to hear about everything.

At the same time do not run away at the first sign of a problem.  All houses develop their own little problems over time and some are not very serious.  When I got my report back from the building inspector I almost had a heart attack with the amount of problems there appeared to be.  I then asked the following questions which I think are essential
  1. I asked him if he could take me through the whole report slowly and explain it to me in simple terms as I do not have any building experience
  2. I asked him what was necessary to fix right away, what could wait and for how long
  3. Finally I asked in his estimation how much all of it would cost me.  This was important because I discovered that actually many of the 'problems' were super cheap to fix and not really an issue at all
A lot of inspectors are reluctant to give you that information because they fear you will sue them if they get their estimates wrong etc.  If you make clear that you are just trying to put things in perspective I have found that they are normally very good.

Property and title searches
This is a bit of legal due diligence that you should never skip over.  Ensuring that the vendor has the right to sell you the property before you hand over the cash is essential.  This is often done by a lawyer or a paralegal.  People often argue about whether it is better to use a lawyer who tend to be more expensive however have a better understanding of the law if anything goes wrong or a paralegal who do this as their bread and butter work every day, are cheaper though will not be able to help you as well in a bind.

My personal strategy was to use a paralegal (Moira Ryan - I highly recommend her if you are buying a property in Victoria, Australia) who came very highly recommended but to have a lawyer in the back of my mind (I didnt retain them) just in case things went a bit pear shaped.  I found this worked perfectly for me as most times there are no real issues.

Check any and all representations that the real estate agent has made before signing the contract
Contractually representations made before signing the contract but that are not in the contract do not count for anything.  For example if the real estate agent has told you that this land is prime development land, you do not check and it turns out the council refuses to develop any land, if it is not in your contract then you cannot get out of the contract for this reason.

There are some things which you can put in a contract though.   One of the easiest things to check in diligence (and which they should have no objection to) is seeing the rental agreement with any existing tenants.  You should always check this just to make sure that the real estate agent has not inflated the amount that the property is being rented for.  Specifically check the term of the agreement to make sure that the agent has not rented the property at an inflated rate for a few weeks / a month to get a good sale (I actually did see this once and never dealt with that agent again)

There are an unlimited number of things which you can put in your contract for the diligence phase which can give you an out for things you are worried about.  However keep in mind that more conditions are likely to make a vendor nervous about the certainty of the sale.  The conditions above should never be left out so consider them an absolute minimum for your contract.

Most importantly after they are in your contract make sure that you follow up on them in the appropriate amount of time and exit the agreement if necessary.  Not exiting when you know something is wrong or too costly to fix is the biggest mistake you make.  You wont catch everything but if you ignore information that you have been told then it is your own fault. 

Sunday, 13 May 2012

Weekend Warrior: Visa or Mastercard? Does it make a difference?

While I was doing research for a blog post that I want to write on credit cards I came across this great article written by the credit products review website Canstar.  It was a brief article on the difference between Visa and Mastercard (and whether it makes any difference when you are choosing what credit card to select).

Visa and Mastercard are actually only processing systems which allow the retailer to process charges from your financial institution.  They actually have nothing to do with the issuing of cards or the payments that flow too and from you to the retailer.  Nor do they have anything to do with your rewards programme, the fee you get charged or the interest rate you get charged.

Given that both cards are accepted in over 200 countries and that most retailers accept either Visa or Mastercard it actually makes very little difference which one you have as there is unlikely to be a situation where one is accepted and the other is not (note that American Express does not have anywhere near this level of penetration and I have seen plenty of signs saying Visa or Mastercard only). Therefore it makes little or no difference whether you choose Visa or Mastercard.  Much more important is the financial instution that you choose and the deals that they are offering for your credit card.

If you want to be safe then if you have two credit cards you can make one a Visa and one a Mastercard.  Note that if you do want an Amex I would strongly recommend also getting a Mastercard or a Visa.  I would never recommend Diners Club as I don't think they are widely accepted outside the United States (Diners Club is a traditional charge card where the balance has to be paid off every month)

Friday, 11 May 2012

Book review: Who Moved My Cheese by Spencer Johnson

Who Moved My Cheese?: An Amazing Way to Deal with Change in Your Work and in Your Life ‘Who Moved My Cheese’ is a short (should take you no more than 30 – 60 minutes) parable like book about dealing with, and embracing change.  I would rate this book 3 / 5.

At the core of the book is a short story about two mice and two mice sized humans who live in a maze and have to find cheese every day.  When the cheese in one location runs out the story has the mice run off in look for new cheese while the humans complain and bemoan the fact that there is no cheese left in them.  The story has one human slowly embracing the need for change while the other is too scared and stubborn to change.

This book is not necessarily about business but about change generally.  To emphasise this point the author includes a post script to the story where group of friends are chatting about the lessons they took from the story with some applying the lessons to their career, business and even relationships.

‘Who Moved My Cheese’ is written very simplistically (sometimes overly so) but by keeping it as a parable the reader finds it easy to apply the lessons in the story to their own life.  The reader is

Thursday, 10 May 2012

Choosing the right Health Insurance

Health insurance, like investments are one of those products where your own personal situation determines the health insurance that is right for you.  It depends on age, personal well being, as well as habits such as the amount of exercise one does as well as do you smoke etc.

In some countries the health system is so good that private health insurance is unnecessary.  In Australia the public health system is free and very good however there is a major tax penalty for not having health insurance if you earn above $80,000 as a single or $160,000 as a couple (1% extra tax).  In other countries the health system is such that it is almost essential to have health insurance to be able to have peace of mind that they will not be sent broke if they ever get sick.

The issue of having adequate cover was brought home to me because someone close to me was diagnosed with cancer and thankfully they had the right level of cover which meant that we were not worried about the financial side of it at all and the health insurance fund that we had was great (it was HCF).

Health insurance is (at the most general level) made up of Hospital cover and Extras cover:
  • Hospital cover is essential: This is one area that should not be skimped on.  Hospital cover and the ability to get your own room or admission to a private hospital without extra charges (or very low charges is key).  I would make a table of all the health funds that provide coverage in your area, find out which hospitals they cover and how long the coverage is for (or after how many days it kicks in)
  • Extras are where the bells and whistles come in:  Generally speaking if you have the same level of hospital cover at different funds the prices will be pretty similar.  Health insurance funds tend to differentiate themselves with the extras.  Extras are however the things that are most subjective.
  • Always check the exclusions:  Exclusions are almost always in the fine print that no one wants to read but you do not want to get a serious illness and then find out that you have been paying your premiums for years for no benefit.  For myself - I try and make sure that the really obvious things are not excluded (cancer, heart disease etc.) and at the same time try and find an insurer which excludes as little as possible.
  • Check the waiting periods: Most funds have waiting periods before you can claim anything however many offer specials with no waiting period and you can immediately benefit (such as by buying new glasses / going to the dentist etc)
Now that you have found several policies that you think work for you on hospital cover and the exclusions are not too bad then the next step is to work out how much you want to pay for the extras.  I listed a few questions below which should help narrow the field.

Wednesday, 9 May 2012

The 2012 - 2013 Australian Federal Government budget: An exercise in class welfare

I normally try and avoid posts which are very specific to one country / region because in fact most of my readers are not from my home country (Australia) but are spread across the world.  However at the same time this is a blog which also tracks my personal finance issues and as such sometimes this is unavoidable so this will be one of those posts. 

Last night the Australian Federal Government released their 2012/2013 budget (see the full budget here) which I confess was not surprising although a little disappointing.  Australia currently has a Labor government which is geared towards lower income and working class voters.  This budget was reflective of that with nearly all of the benefits going to lower income and working families and the costs effectively being bourne by all the other sections of society.  Key benefits provided by this budget include
  • An extra $300 per week in family payments (not something that affects me)
  • An extra $350 per annum for low income individuals as a cost of living allowance (again not affected personally)
  • A significant small business benefit in the form of a loss carry-back which allow losses to be offset against previous years profits to help businesses back to profit.  This is a significant allowance for small businesses (however does not benefit me at the moment)
  • Tax free threshold increased from $6,000 to $18,200 which means that ever working person in Australia will pay less tax (thankfully myself included)
  • An extension of the payments to parents of school children for educational expenses
Given the current political climate in Australia this is an unsurprising result.  I confess that I was actually surprised at where the cuts came from.  I had expected them to come from the high income earners who had no family to speak of (and so did not get any of the benefits).  As I am in that category I was a little apprehensive of this budget.  In fact the largest savings came from:
  • A cancelling of the proposed cut to company tax rates.  With the introduction of the Mining Resource Tax this year, much of the benefits were supposed to flow to pay for a cut in the corporate tax rate from 30% to 28% over the next few years.  This has been cancelled.  Although I think this will impact my share portfolio valuations it should not be too extreme and may be a time to buy if the market over-reacts
  • Massive cuts in defence spending over the next 5 years: I admit that I thought that defence was one area they would never touch but this is where some of the biggest cuts are happening.  I'm not too fussed about this because (other than wanting to be safe) I have no real affiliation with this sector
  • Cuts in public sector spending:  Canberra is going to be affected quite significantly with the significant budget cuts to public sector jobs.  Again this does not affect me a great deal.
If you have a family or are a lower income earner this budget should benefit you significantly.  However if you are like me and are trying to build wealth it doesn't really do anything for you.  Going through the budget in detail helps you understand a lot of what the news articles are about so I recommend this to anyone who is interested to know how their position is likely to change over the next year.

In terms of investing in Australian companies - nothing in the budget should make too much of a difference.  Nearly all the provisions were already flagged well in advance (such as the mineral resource rent tax and the carbon tax) so these have already been priced into the equities.

Tuesday, 8 May 2012

Investing in Shares: How often should I check the value of shares in my portfolio?

In this post I thought I would answer the question - how often should I check the value of my shares and the portfolio.  Most people when they start investing in shares feel the need to check how their investment is going every day.  This, however, is not what you should be doing.

One of the hardest psychological aspects about investing in shares is that the price is always available.  It create the temptation to look at the share price to see how we are doing.  If you compare this to other investments (such as property) which are illiquid the temptation to constantly look at the price is just not there because the information is not there.

The answer then is to only check the value of the share portfolio when you are reaching a decision point. 
  • If you have bought the shares for a good price (having done all the necessary analysis and valuations) and you know what you think the shares are worth then you only need to know whether the shares are getting close to this 'fair value' that you have ascribed to it.  There are plenty of stock broking programmes that will send you an email / sms alert when the shares hit certain prices and it is very easy to set up. 
  • The other time you should check the price is when you are updating your valuation for results / announcements or any other new information that comes to the market - this is the time that you will discover if you have paid too much for your shares and if they are trading above your new valuation then it is time to sell.
I check my share prices about once a month when I go to update my net worth for this blog and whenever I am updating my valuations for the shares I own.  I found that once I have owned a share for a significant period of time (i.e. more than about 18 months) the temptation to check the share price almost vanishes.  This is not great either as you need to be aware of whether it is time to sell or even perhaps add more to your portfolio. 

The advantage of having a system of when to check the value of your stocks is that it removes much of the emotion involved in investing.  You don't really care what the market is doing because you're not checking it constantly and this allows you to be a more patient and successful investor.

Monday, 7 May 2012

Investing in Real Estate - Getting the Finance

This is the eighth post in my Investing in Real Estate series and will answer the question: How do I get finance for my real estate investment.  I should stress beforehand that I will be writing this from the Australian perspective however many of the tips and advice is generic so can be followed anywhere.

Getting finance for a real estate investment in an ordinary market environment (i.e. not one where there is a real estate crash) should not be a difficult ordeal provided that you have done your work in advance.  There are several things you need to do both before and after you put an offer on a property.

Before you make an offer on a property
  • Work out how much the bank is likely to lend to you: The rule of thumb is that if you are relying on your wages to get the loan (i.e. you do not have lots of investments / business income) the bank will not lend you an amount which causes interest payments to be more than 30% of your gross income after taxes.  (e.g. if your income after taxes is $50,000 and the prevailing interest rate on mortgages is ~7% then the maximum the bank will lend you is $50,000 * 30% = $15,000 / 7% = $214,857).  Note that this is only a very rough calculation.  For investment properties they will also count the amount you are likely to receive from your investment as well as any tax benefits and so lend you more
  • Have a decent deposit before you purchase:  I know a lot of real estate 'gurus' suggest using 'no money down' or using super small deposits so that it leverages your return a lot.  I am not going to give that advice.  Doing that naturally adds extra risk because it does not give your property price anywhere to go before the bank is contractually entitled to foreclose.  I suggest having a deposit of 10 - 20%.  In Australia a 20% deposit will normally mean that you do not have to pay Lenders Mortgage Insurance which costs about $10,000 and is a significant upfront saving
  • Have your sums already done and take them to the bank:  In previous posts I have outlined all the work and calculations you need to do while working out how to bid for your property.  Clean these up and put them in a presentable format.  If you look like you know what you're doing banks will always be much more comfortable dealing with you
  • Get pre-approval from your lender:  Subject to finance clauses always spook people selling houses.  If you can avoid putting one in because you know that you are going to get the finance for the deal then it makes the buying process much easier.
Getting the loan from the bank
  • Do a price comparison between banks before you go to one: Doing your research online is easy and make sure you have all the relevant information under your belt when you go to see a bank.  This includes knowing things like their standard rate, any fees for things like re-draw facilities and fees for early exits and paydowns. 
  • Speak to a mortgage broker as part of the process: Mortgage brokers are a great resource.  They specialise in loans and will often know how to get the cheapest one.  Keep in mind that not all are good and some are motivated by the kick backs they get from different banks.  Most will also try and pressure you into using them but only use them if they are giving you the best possible deal
  • Do not be afraid to negotiate: When you have sufficient information you should not be afraid to negotiate.  Banks want your business and will almost always offer you great deals if you ask for it - this includes lowering the standard variable rate (in Australia if you borrow more than $250,000 they will normally give you 0.6% off easily), waiving of fees and other benefits.  You need to know what comes as standard so you don't think you're getting a special deal when in fact your not.
  • Have all your documentation ready and constantly follow up:  This is especially important if you have put a relatively short close period on your purchase contract.  Banks will always take their times and approve at the last possible moment so it is worth following up with them relatively often to ensure that you do not have to pay penalties for late completion of your contract (this is also true of mortgage brokers)
Other advice about financing your investment property
  • Do not be afraid of using multiple banks:  A lot of people want to use the same bank as their own home loan or where their savings account is.  It is not a bad thing to have loans across multiple banks as it avoids the pressure to cross collateralise.  Further what you want is the lowest possible finance cost for your property and your local savings bank may not be the solution
  • Confidence is key:  It is cliche but true that banks want to lend to this people who don't need it.  So when you go to a bank keep in mind that you are not desperate for the loan, they want your business and you are doing them a favour by using them.  It helps settles many of the nerves that come with an interview with the bank manager
  • Work out what type of loan you want before going to the bank:  I use an interest only loan for my investment property as I am happy with my level of leverage and want to leverage my returns at the same rate into the future.  Some people are more comfortable with principal and interest loans which increase the equity share in the property and reduce the interest payable as time goes on.  Whatever you want - work it out before going to the bank as this will reduce the options they give you.  You want to be able to compare the exact products across different banks