Tuesday, 31 July 2012

What to do when your employee share investment plan vests

In previous posts I have outlined how employee share plans work and how you can make substantial risk free profits from them.  As I also indicated I had signed up for my employers plan and would be participating in it to the greatest extent possible.

I have now reached the stage where the first tranche of shares are about to vest and I have to decide what to do with them.  It essentially come down to a few choices:
  1. Sell the shares immediately and take the gain
  2. Hold onto the shares for the long term and build up a shareholding in your employer
  3. Hold onto the shares for a short period of time to take advantage of prevailing market conditions.

Selling the ESP shares immediately and taking the gain

This is the least risky solution.  If you do this:
  • As outlined in my original posts one of the great things about employee share plans was that you get a very high guaranteed return.  It is only guaranteed as long as you sell it straight away and lock in your gain else you are at the mercy of the capital markets and the swings in value that result
  • You are taxable on the discount you receive on the stock regardless of when you sell it so selling it straight away gives you cars to pay the tax instead of having to pay out of your other funds
  • You however do lose any potential upside that you could get from buying an undervalued stock

Holding the shares for the long term

This option is the one with the most variability and has the potential for both the best and worst payoff.  Some points you need to consider:
  • If you truly understand how your employers business works and you believe that the business has good fundamental prospects for the long term then this could be a great way of purchasing a stock at a significant discount
  • Some of the wealthiest people in the corporate world have made their money by holding onto stock issued to them by their employer over many years
  • If you do this though you need to remember that this should be treated like any other investment and you have to objectively assess your employers prospects and value on a constant basis like any of your other investments.
  • A downside is that you are liable to pay the tax on the gain in the year you get issued the stock and not when you actually sell them.  Thus you need to pay thus tax out of your other earnings

Hold the stock for a short period of time
Often there are circumstances which means that it is favourable to hold the stock for only a short period of time.  This involves more risk than selling it straight away and less effort than keeping track of the business fundamentals over the long term:
  • If you work for a company that is a high dividend paying entity then you may want to wait until this dividend is paid and take advantage of the extra income.  Although share prices typically do fall after a dividend is paid the different tax treatment of capital gains and income could mean that this works in your favour
  • Often the shares will be issued well before the end of the tax year and you may want to wait until then gap is small and take any advantage of any upside price movements
  • If the shares are lifted offshore and your home currency is overvalued you can attempt to play the currency game
  • You are however exposed to movements in the share price which in the shirt term may have little to do with fundamental valuation
  • This should only be done if you have a definite strategy in mind and if you accept the risks that come making with it

Your decision all has to do with your risk profile, your belief in your company and the extent to which you believe you can do better elsewhere in the market.

Personally I will be taking the first option because I do not truly understand the state of my employers financial position and I believe there are investment options which I understand better. Further I get restricted stock as part of my compensation and believe I have sufficient exposure to my employers stock and want to diversify my exposure.

Do you hold onto stock issued to you by your employer? What are your views on he hold versus sell debate?

Monday, 30 July 2012

Electronic voting for AGMs becoming a reality

In previous posts I have done on corporate governance I have lamented the fact that voting was so difficult and archaic.  In fact I believe that it is  one of the primary reasons that retail shareholders do not vote at company meetings and AGMs

I always found it strange that the option was not available to vote online.  After all, you could trade online, change the way you receive your dividends online so why not vote.  It was only going to be a matter of time before the shareholder registries caught on.

Then for the first time last week I noticed that computershare, the largest shareholder registry had the option to vote my Macquarie shares online.  I was absolutely ecstatic to see that.

However the system has a fair way to go
  • There are only a few companies that have adopted the online voting concept so far and while I applaud these early movers I suspect that it will be a fair while before it is commonplace.
  • The biggest issue so far though is that you can only appoint your proxies through the electronic voting process. 
    • Remember proxies vote on your behalf and how they see fit. From what I could see there was no way for shareholders to vote on each resolution.  This is the next step.
The next step is convincing retail shareholders to vote
  • Now that the ability to vote is there, the next step is convincing retail shareholders that it is in their best interests to care about what happens at these meetings and that voting is an essential part of maintaining their investment.
  • This is the truly hard part and involves a combination of both education and empowerment
I'm not sure if there is a golden bullet or solution but I DO know that the person that solves this problem will leave an indelible mark on the finance and corporate world as we know it

Investing in real estate: Essential record keeping

This post forms part of my investing in real estate series which has attempted to cover all aspects of buying your first investment property.  Up to this point we have focussed mainly on the initial aspect if investing, that of purchasing your property and getting tenants in the door.

This post however will focus on what you need to do and what records you need to keep once your property is running.

What should you keep?

As a basic rule of thumb I would keep everything: most of the paperwork you will receive you will probably need to keep.  This includes:
  • All receipts
  • All contracts and agreements including the rental agreement, the agreement you have with your agent etc
  • All correspondence no matter how trivial it may seem such as emails between you and the tenants and the real estate agent

Why is it important to keep all this documentation?

There are several reasons actually:
  1. Receipts need to be kept for tax purposes (the length of time you need to keep these varies between countries - in Australia you need to keep receipts for 7 years).  If you do not have all your receipts and get audited then you may be forced to pay a large amount in tax
  2. The contracts establish your legal rights and obligations.  If for any reason there is a dispute then these documents are your back up and evidence.  Keep in mind that you may also need to produce these I'd you ever want to evict your tenants.
  3. Correspondence also goes to the same point.  How do you prove that someone promised to do something if you have no evidence.  It is all about covering yourself in case the worst happens.

How should you keep the documentation?

A good organised system with sufficient back up in case of a disaster is the most important thing.  This includes at a minimum:
  • Having a dedicated file for your investment property paperwork
  • Having all electronic information sorted within a folder so that you both know where everything is and can retrieve it easily
  • Backing up all important documents so that should you ever lose your file or your house that you can still retrieve the information
  • Back up all electronic data.  Everyone's computer crashes and you do not want to lose everything
In this way no one event can cause you to lose your material and should you ever require it the information is easily accessible and available.

If you have any specific things you do in your record Jeeping process I would love to hear about it so please comment below.

Friday, 27 July 2012

Weekend Warrior: Last Minute Gift Ideas

Although not strictly a personal finance post this post will follow on from the 'how much do I need to spend on a gift' post that I did a few weeks ago.  Note I am writing this post for those people who are really busy (either because of their career or hobbies or because they are setting up their business while working at the same time) and tend to forget presents that they need to buy for partners, relatives and friends.

I have categories these last minute present ideas into cost categories - hopefully this will help others out there who like me tend to be quite time poor with limited ideas or imagination for gifts.

Expensive gifts ($50 - $200)The problem with buying gifts where you need to spend a bit of money is that there is the expectation that you will have put a lot of thought into it and that the present will be 'suitable' for the person you are buying it for
  • My 'catch all' suggestion in this category is to visit an 'experience' type website (for Australians www.redballoon.com.au is a great place to buy last minute experiences). 
  • Because the experiences tend to be out of the ordinary people love receiving them and the perception is that you have put time and effort into choosing the gift
Medium range gifts ($20 - $50)
This is the category where it is probably easiest to get away with a last minute gift as there are lots of things within this price range which you can pick up almost anywhere including:
  • A nice bottle of wine
  • For men you can buy cuff links at almost any menswear store
  • Decent perfumes / colognes
    • I don't know if the phenomenon is happening everywhere but in Australia in recent years you can a lot of really expensive perfumes and colognes for very reasonable prices from the chemist (I believe they are called drug stores in the US)
    • Spend your money wisely - don't go to a high end retailer and pay double or even triple for exactly the same product
  • Flowers / chocolates
    • Note these are quite cliche these days but occasionally the situation warrants it
    • If you are going to buy chocolates buy specialty store ones (and not regular supermarket brands) - you will pay a bit more but the perceived value is so much higher
Cheap gifts ($0 - $20)
The problem at this price level is that for most last minute gifts you are going to look pretty cheap.
  • At this price point effective gifts are ones that are highly personalised
  • If you can find some arty products or something old but not expensive then you can often get away with not spending a lot.
  • Ideas can include
    • For those who love reading, first editions which can be picked up cheap from second hand stores (note that if you are buying first editions second hand is expected and not perceived as cheap)
    • For those who like music if you buy a collection of old vinyl records they look GREAT as a present (and once again don't look cheap).  Vinyl records are a funny thing - even if the person does not have a record player they are a great decorative gift
  • If you have no idea go for something quirky and different that you would like.  Again if it is different then the perceived value lies not in the price of the object but in its quirky and alternative value.

Donating to charity: Save tax and benefit society at the same time

In many countries' tax code there is a deduction available if you donate money to organisations that have charitable status.  What this means is that it costs you much less than you are actually giving and still yields the same benefit (because effectively the government contributes your marginal tax rate).  I don't think this would surprise anyone but it does mean that you can do the most good by planning your charitable givings a little.

Overview: Tax deductions for charitable donations

Where a deduction is available for a charitable donation the system works as follows
  1. You donate money that is recognised by your tax system as being a charity.  Charities have to apply for a special tax status for this to be the case but nearly all reputable charities have this already in place.
  2. You claim this deduction back on your taxes at the end of the year
  3. Note that you have to keep your proof of donation (either through a receipt or summary statement sent to you by your charity) in case you get audited.  For example in Australia you need to keep all your tax records for a minimum of 7 years.
  4. You receive back your marginal tax rate from the government in the form of a tax return.  If your marginal tax rate is 30% therefore this means you are only donating 70c of your own money for every dollar of good that your donation is doing

Structuring your donations for tax purposes

Governments intentionally make it easy to claim back donations on tax because charities perform social functions that governments are either unable to or don't have the funds to do (keep in mind that it only costs the government your marginal tax rate to see the charitable services provided).  The only slightly annoying thing is keeping records for tax purposes.

If you donate money to a stall on the street or to collectors that you pass on the street the issue is around proof of donation.  I don't know many people that would stay around and wait for a receipt for a $20 donation because it perceived as too much effort.  I'm the same - if I donate money to a charity that is collecting on the roadside etc then I would never ask for a receipt even though your charitable donations add up (as does the amount you receive back from the tax office)

The best way to structure your donations therefore is through regular payment plans
  • You can donate however much you like through the payment plans.  Charities always push you for larger amounts but just stick to what you can afford
  • At the end of the year they send you a receipt totalling your donations throughout the year
  • They also have your donations on file should you ever lose your receipt and need it in the future
  • You also have proof through your bank and credit card statements should the tax office ever require it
  • Most importantly it is much better for the charity because then they have more certain cash flows and are able to plan their activities much better

Keep in mind that some activities by charities are not tax deductible

This varies on a country by country basis and the charity you are donating to, especially if they are a large reputable one will explain to you what is deductible and what is not. 

For example in Australia if you donate to a religious charity they will often ask you whether you want your donations to come with a tax receipt.  This is because tax deductible donations can only be used for certain purposes such as health services, education, helping the poor.  They cannot use tax deductible donations to provide religious services such as missionary services.  You may want to provide these missionary services so would opt not to receive the tax benefit back.

The best way is to ask the charity and they will tell you up front what they can and cant do with the money.  As long as you are informed about your choice then I think either option is fine. 

Thursday, 26 July 2012

Book Review: What they don't teach you at Harvard Business School by Mark McCormack

What They Don’t Teach You at Harvard Business School is a book of business wisdom and lessons by entrepreneur and businessman Mark McCormack, founder of IMG – the most successful sports management company in the world. The lessons are short, flow easily and have McCormack’s own experiences sprinkled through so that the reader can see the lessons in action.

What They Don't Teach You at Harvard Business School Oftentimes people interested in business and finance read autobiographies of successful businesspeople (e.g. Richard Branson’s Losing My Virginity) in order to try and extract the underlying reasons for their success and in order to gain insights in how we can improve our business dealings.  The benefit of What They Don’t Teach You at Harvard Business School is that you don’t have to sift through hundreds of pages of someone’s childhood, education and life story in order to find these messages.  Mark McCormack has laid these out for the reader in a simple, easy to read and follow format.

Although this book was written in the mid 1980s its principles are timeless.   If there weren’t constant references to sportspeople of yesteryear the reader would be hard pressed to realise that this book was not printed in the last decade.  I could not find a single tip, or bit of wisdom that was clearly outdated and irrelevant and that alone speaks to the quality of this book.

The book is broken into three main sections:

·         People: Reading people, Creating impressions, Taking the Edge, Getting ahead;

·         Sales and Negotiation : The Problems of Selling, Timing, Silence, Marketability, Negotiation; and

·         Running a Business: Building a business, Staying in business, Getting things done, For Entrepreneurs only


·         Easy to read, simple principles which should stand the reader in good stead in their business career

·         Doesn’t try and appeal to all people.  E.g. many business writers have I have read suggest that everyone should try and be an entrepreneur and it is the best way to get ahead.  McCormack says that 99% of people shouldn’t start their own business and goes through all the wrong reasons to start a business (including the desire to make a lot of money)

·         One of the most appealing things about this book is that McCormack first gained his success in business and then wrote a book in order to share his wisdom with the rest of us.  Too often business authors are known for their books rather than their business acumen.


·         Leaves the reader wanting much more information for almost every topic that he talks about.  The concepts are great but I wish there was more detail.  E.g. In the section on negotiation McCormack says to use emotion to your advantage when the other person displays it first and then does not go on to explain or give an example of how this can be done


·         What They Don’t Teach You at Harvard Business School is a great book for those who are looking to improve the way they do business, interact in the workplace and sell to clients and customers

·         The book is full of lessons, tips, skills and wisdom that everyone can apply (although it is very management orientated). 

·         While I wish there was more information on each of the topics – this is a book that every manager, business person and entrepreneur (or those who hope to be those) should read.

Google Nexus 7: Great value and a decent work tablet as well

I confess that I am not normally an early adopter of technology and prefer to wait until a product is well established in a market before I purchase it.  I therefore surprised myself when I pre-ordered Google's new tablet after reading only a few reviews,

In my review below I'm going to focus on the practical aspects of using this tablet.  There are plenty of great reviews out there if you want to know all about the specifications and performance.

The good
  • The size makes it really portable for business as well as personal use.  It looks fairly big however I was pleasantly surprised to find out that it fit in my inner suit pocket without any sort of bulge.  It really is a portable device.
  • The price is unbelievably low for a piece of equipment of this quality.  When you take into account the $50 Google play credit you get the vale becomes even better.
  • The quality is comparable to any Apple product out there for half the price
The bad
  • Horizontally the screen is too small when you want to use the device for note taking in meetings.  The keyboard simply expands too far to make it useful.  I have yet to find a way around this.
  • There is little advice available on how to effectively use it simply because it is such a new product.  I spent hours yesterday trying to find a note taking programme that would work if I had no wi-fi
  • Insufficient memory if you do not have constant access to Wi-Fi.  Google built this product with the idea that everything can be stored and accessed through could solutions.  I however do not have Wi-Fi access at work so cannot use this solution.

Overall I think this is a great device.  I am not wishing I bought an iPad or some other android solution.  As I work out the best applications for business use I will post them up.

One final note: it took me close to 20 minutes to type this post on my nexus.  On a keyboard I don't think it would have taken me half the amount of time. 

Wednesday, 25 July 2012

There is no such thing as a free lunch

This is an bit of wisdom that I, and I'm sure many others have heard over and over again yet people constantly seem to forget it when it really matters.  There is really no such thing as a free lunch and you never get something for nothing in the world of finance.

The statement is particularly pertinent is several situations including
  • Spotting scams and dodgy investments
  • Realising that there must be a greater inherent risk to a higher return (no exceptions here)

Spotting scams and dodgy investments
If you always keep the rule that 'there is no such thing as a free lunch' in mind when you invest then you are less likely to be drawn in by scams and 'investments' promoted by unscrupulous operators. 

These scams often draw people in by promising high return, low risk products or guaranteed products with a high rate of return.  This is the reason I was immediately sceptical of the art investment offering a 9% 'guaranteed' income return.

Higher rates of return almost always come with higher risk
If you think you have found a product that offers both a high rater rate of return than the market is offering for the same level of risk (or lower risk) then most often you have either
  • Overestimated the returns:  Even when the headline return appears large often there are caps and caveats which lower the actual rate of return on a product.  For example some warrants issued by large banks for apparently cheap prices actually have a buy back clause if they are too far in the money thus limiting your potential gain
  • Under estimating the risk:  This one is often the easiest to spot if you are looking for it but the hardest to accept if you have mentally sold yourself on the investment
    • A good example is the high fixed income returns that small mortgage lenders used to offer.  They were able to offer this return because they were lending to people with lower credit ratings and thus a higher likelihood of default.  Lots of these lenders went bankrupt and investors lost a large part of their capital value
Note that this does not mean that you should always go for the lowest rate of return - there are some institutions that offer rates well below market value but what you should be aware of is those products which are offering returns well above where the market is.

But I've found this great deal...
Most people think they have the investment which is the exception to the rule.  Occasionally there are exceptions, for example where you have found a seller of a product that is truly a distressed seller and no one else has seen the opportunity.  However these situations are very few and far between.

More likely is that you have not taken to account something that other investors can see.  Note that this applies to all types of investments such as real estate, fixed interest products, art investments and shares (see my example of how you can lose your shirt on shares that 'appear' really cheap).

I always suggest approaching any investment with a great deal of caution.  Always remember there is no such thing as a free lunch and to use one more cliche it is safer to assume that if something is too good to be true...it usually is.

When to sell your shares into a takeover bid

Whenever there is a takeover for a company the shares in that company normally jump substantially (but often not quite up to the offer price).  The shareholders in the company are then left wondering whether they should sell the shares on market or wait for the higher price or possibly a higher bid. 

This post will consider those situations where you should and those situations where you should not sell your shares on market after a takeover offer has been made.  I should preface this post by saying that it is a very personal decision - if you are a risk averse person the certainty of a gain may be better than an uncertain higher potential gain (versus the share price dropping back down to where it was)

Pros of selling your shares on market after a takeover offer has been made
  • You have locked in your profits.  You do not care what happens to the share price after this point as you have made your return
  • If the offer involves a scrip component (shares in the acquirer) you may not want these shares therefore may not want to wait until a completed deal occurs as the cash is preferable
  • If the deal falls the share price will probably drop down to the pre-offer price.  You eliminate the possibility of this happening by taking your higher profit.
  • You need to consider the time value of money.  Many deals take months and sometimes years to complete - selling gets you your cash straight away
Cons of selling your shares on market after a takeover offer has been made
  • You lose any potential increase in the price due to higher offers being made.  When there are contested offers the price often goes much higher than the original offer price and you lose out on the extra potential profit
  • Unless you have a special insight into the company you must always assume that others in the market have more information than you.  Therefore the question becomes who is buying the shares off you and what do they know about any potential increases in price than you do not.  If you do follow the company quite closely however then this is probably a rationale that you shouldn't use.
  • The offer price may not represent what you perceive to be fair value:  Many offers are opportunistic and are at a much lower than fair value price.  If you believe the share price will go above the offer price in its normal course of trading over time then you may want to hold onto the shares
  • Often there are rollover tax benefits when you get scrip consideration for your stock.  This means that you get the benefit of the higher share price but do not have to pay tax on it until you sell the new shares.  If you sell your stock immediately though your gain becomes taxable immediately.
What should you do?
  • Each person is different and some of the above considerations may be more important to some people than to others
  • Each situation is unique.  You may have good information in one case and bad in another or you may personally value one share more than the offer price and not want to accept and another share you may feel you are getting a great deal.
  • If you think a deal is unlikely to complete for any reason you should sell
  • If you think there are likely to be competing offers then you should not sell after the first offer
Are there any other considerations that you think are important?  If so please comment below.

Tuesday, 24 July 2012

Where can I get free historical investment data?

Whenever you value a company it is essential that you go through their historical financials in an effort to both understand the business you are looking to invest in and also to understand the risks and opportunities associated with the business.  I have covered those things you need to look at before you invest in a previous post here.

However one of the issues associated with this is that it is extremely time consuming, especially if you are trying to screen stocks that meet certain parameters.  For the first run therefore what is preferable is to find a free data source which has accurate data for a sufficient number of years.  There are many websites that give historical data such as Yahoo Finance and Google Finance however I have no idea who is entering this data and whether it is accurate or not.

If I was going to use a free source for screening purposes I would almost always use the Company Insight Centre data provided by Bloomberg and CapIQ.  CapIQ data is used by almost all the major investment banks for exactly the same purpose and the accuracy of the data is very high.  As the same data is used on both the paid and free services you are pretty sure that it is going to be the most accurate free data source.

Is there any catch?

Not really.  It is not as functional as the paid data that CapIQ provides and you cannot dig into the numbers or export them to excel as you can with the paid service but for a free screening tool it is unparalleled.

Should I use the data when making an investment decision?

I would argue that no matter how accurate it is you should always do your own research.  That means that when you have screened down to a few companies you need to go through their annual reports and validate the numbers yourself and look for things they have missed.

This is not a replacement for the research you should be doing yourself but a great initial screening tool to help narrow your focus.

Monday, 23 July 2012

Setting up a business takes much longer than you originally expect

For the last few months I have been posting on my efforts to start a small business from the idea generation phase through the starting it and hopefully seeing it become a viable business.

In my last post on this topic I mentioned that I had two business ideas in mind and that one was quite practical from a small business point of view and I hoped to have a preliminary website up and running within a few weeks from that post.

As it turns out I have discovered that setting up a small business takes a lot more effort and is much harder than you originally expect when you have the idea.  This was for several reasons which include
  1. When you have no experience in website design doing it yourself feels like a mammoth task
    • I know hiring someone else to do it for me would be the easy solution however I would like to prove there is demand for my product before spending large amounts of money on it
    • It is easy to set up a website that looks like it was built at home but learning enough html / css to make it look decent takes time and effort
  2. There are things  you need to do which you do not even consider at the start
    • One such example is a logo for your website
    • For anyone looking to make their own logo I suggest Paint.net.  It is a great, free tool with lots of free instructional material
    • Also I do not recommend using those free logo maker websites.  They do not look great and often they wont give it to you for free unless you register with them
  3. The time taken to get your product perfect will always be longer than you expect
    • If there is one thing I learned from my investment banking days is that perfection in the product your provide is the best reason for people to come back to you
    • Unfortunately perfection or as close as you can get to it takes time
    • I could have had my website going more than a week ago if I was willing to compromise on the standard of my product however I want to build a good reputation so am willing to put the time and effort into it
I will do an expanded post on this at a later point but I have discovered through this process that it really is possible to develop an online presence on a shoestring.  I am more than willing to invest more money into the project but I want to make sure there is a market from what I'm providing before I do so. 

I will keep updating this thread and hopefully soon I will be able to announce the launch of my small business (my new target is to launch by mid August - my original target was first week in July)

Should I use a general insurer or a specialist insurer for my landlord's protection insurance?

This post falls within my Investing in Real Estate series which attempts to cover all aspects of investing in real estate.   Last time I covered all the insurance that you should have as a landlord including home insurance, contents insurance and landlord's protection insurance.

In this post I will weigh the pros and cons of having a specialist landlord protection insurer versus getting the same protection through a large general insurer. 

Pros of a getting landlord protection through a specialist insurer

  • Premiums are generally more cheaper for the landlord protection element of the insurance:  Note that difference is not often significant so this should not be your primary factor in making your decision.  The cost is not relevant if they are not going to cover you in the event that you need them
  • They have a reputation for paying out more often and quicker than general insurers:  Landlords protection insurance is often the core of their business and where they make their money.  They cannot afford to be seen as being unwilling to pay out claims to landlords.  A bad reputation in this area is deadly to their business.
  • You will normally get staff who know what they are talking about when you call:  This again goes to the point of this being their primary business

Pros of getting landlord protection through a general insurer
By general insurer I am referring to those large insurers who offer almost every conceivable form of insurance such as auto insurance, home and contents insurance, life and everything in between.  Although the pros of a specialist insurer for the landlord protection part of your insurance may seem tempting from the pros above there are definite benefits to going with a general insurer including:
  • Ability to bundle all your policies:  I would always get the house and contents part of the insurance with a large general insurer.  They are almost always cheaper and this tends to be what they focus on.  Often they will let you bundle in landlord insurance for not a lot extra which makes it easier to keep track of your policies.  Also in the event something happens I imagine it would be easier to just deal with the one insurance company
  • Confidence that the insurer will be around when you need them: This is purely a size and confidence thing.  You are almost positive that your general insurer will still be around in the event you need them.  Specialist insurers tend to be smaller and leaner and although I have no doubt that they are re-insured and will probably be there if you need them there is a definite 'sleep at night factor' to having a large insurer
  • You can save money on your other policies:  Almost all insures offer discounts if you have more than one policy with them.  Having your landlord policy with a general insurer may get you a discount on your auto insurance.  Note that this is just an added benefit and should not be the primary reason you choose one insurer.

Other considerations

  • Do not insure your house and contents with a specialist landlord insurer: 
    • I have said this above but they do not specialise in this area, the quotes process is often tedious and on a 'case by case' basis and although they may have a good reputation for landlord protection insurer it is often hard to find out what they are like with home and contents insurance
  • Always look at the reputation of the firm you are going with when it comes to paying out claims: 
    • There is no point going with the cheapest firm if they are not going to pay out when you need them.  Look at what other property investors in your area use and google the companies.  Keep in mind that when people write reviews it is because they are unhappy.  It is a weighing process but you will often find interesting information on the policies through other investors' gripes.

What do I do?

Friday, 20 July 2012

Book Review: The Intelligent Investor by Benjamin Graham

The Intelligent Investor is one of the most well known and most recommended investment books ever written – and with good reason. Written by Benjamin Graham this book summarises and distills the lessons that Graham and Dodds taught in their epic text-book like work Security Analysis. Warren Buffett is probably the most well known disciple of the value investment philosophy (see my review of The Essential Buffett) however there are many more value investors out there who all use this book as the foundation for their investment style.   I believe this is a must read book for all investors.

The Intelligent Investor For those who don’t know, value investing is all about buying companies that trade at a significant discount to their intrinsic value and waiting for the market to realise this discount. It relies on the fundamental valuation of companies and demands a ‘margin of safety’ for any purchase (to prevent against the risk of valuation error on the investors behalf).

The version I reviewed was the one with commentary by Jason Zweig however I found his commentary no value to the original text (it was the cheapest on bookdepository which is why I originally bought it – I didn’t realise however that he would replace the original footnotes with his own and relegate Graham’s to the end. In hindsight I would have bought the more expensive copy with no commentary).

I believe that, although the last version of The Intelligent Investor was written in the early 1970s, this book is still the best book out there for those looking for a foundation for their investment style. It provides sufficient information and guidance that the reader can go out and start applying the lessons learned straight away and it gives step by step examples of what the investor needs to do to make ‘abnormal profits’. The book is also good in that it acknowledges that not everyone wants to spend the time doing this – it therefore steps through what the investor who does not want to spend hundreds of hours trawling through Annual Reports, 10-Ks, 10-Qs, management commentary and industry research should do.

The book flows logically and the reader is never confused about the point Graham is trying to make. I normally try and summarise the lessons learned from the book but this book is simply too dense.  Below are the chapter headings which should give you an idea of what is covered in the book::
  • Introduction: What This Book Expects to Accomplish
  • Chapter 1: Investment versus Speculation: Results to Be Expected by the Intelligent Investor
  • Chapter 2: The Investor and Inflation
  • Chapter 3: A Century of Stock-Market History: The Level of Stock Prices in Early 1972
  • Chapter 4: General Portfolio Policy: The Defensive Investor
  • Chapter 5: The Defensive Investor and Common Stocks
  • Chapter 6: Portfolio Policy for the Enterprising Investor: Negative Approach
  • Chapter 7: Portfolio Policy for the

Shareholde​r activism: Defining shareholde​rs' interests and the way in which companies respond to shareholde​r complaints

In my last few posts on corporate governance, in which I covered the topics of who votes at shareholder meetings and why retail shareholders never really bother I was bemoaning the apathy shown by retail shareholders to issues which directly affect their financial well being.  I personally would like to see shareholders take a much more active role in questioning management and voting their shares in order to protect their interests.

I was discussing this issue with a friend who raised the very pertinent point of 'how exactly would you define these interests you want them to protect?'.  This was in the context of the recent fight between anti-gambling activist group GetUp! and Woolworths (ASX:WOW), a major groceries retailer in Australia which owns a large hotel chain which has a significant number of pokies / slot machines. 
  • The issue arose because under the Corporations Act in Australia a group of 100 shareholders can ask a company to hold an Extraordinary General Meeting (EGM) which the company has to do and it needs to be held at the expense of the company. 
  • GetUp! claimed in court that they managed to convince 257 shareholders to sign the required documentation to request a meeting so that shareholders could vote on whether to reduce the maximum bet size to $1
  • WOW argued that they could roll this EGM into their Annual General Meeting which would save the cost of an EGM and would have the same function.  GetUp! obviously wanted more publicity for their cause which a separate EGM would cause so took the matter to court arguing that WOW was failing to honour their obligations to their shareholders under the law
  • The end result (you can see a full description here) was that WOW was allowed to roll the meeting into their AGM.  This probably turned on the fact that GetUp!'s motion was to limit the size of gambling stakes by 2016 so delaying the vote would not make a difference to anyone
There are several interesting questions that come out of this case with respect to corporate governance

  1. Should shareholders working for a 'social cause' be allowed to influence the way in which a company is run? 
    • Traditionally companies are profit making entities which are run for the financial benefit of shareholders and a real question needs to be asked about whether a small group of shareholders agitating for socially better outcomes are really acting in the interests of all shareholders - i.e. is activism in this case a good thing?
    • Note that there are arguments that can be made (and this is very true in extreme cases) that particularly bad social outcomes harms a company's reputation, therefore earning ability and share price (the James Hardy asbestos case is a case in point) however when things are not as clear cut has adverse health outcomes / breaching social norms (such as gambling caps) then the issue becomes more confusing
  2. It worries me that a large corporation was so easily able to dismiss the rights of it's shareholders
    • The ease with which WOW was able to dismiss the small shareholders and roll an issue they found important into an AGM which presumably covers other significant issues is slightly worrying - it shows the almost disdain that small shareholders are treated with
    • This comes back to my point in the last post that small shareholders often do not vote because they are not large enough to bear any pressure - even when they organise in a matter like this the evidence of them getting anywhere is futile
  3. Sets a bad precedent with respect to the balance of power between management and shareholders
    • When it comes down to it the shareholders own the company and should have a say over what is important and what isn't and management should not be able to dodge these issues
    • While I don't think it is a problem in this particular example the real problem arises if a shareholder has a particularly valid grievance against management and seeks to make a change for the benefit of all shareholders but they are unable to because management do not respect their rights and the courts do not uphold them
What I find particularly interesting in the above case was that it was retail shareholders who were agitating for change, not the institutions.  I like the fact that retail shareholders take an interest in the actions of their companies.  Although I think the decisions by the courts was probably the right one, I am worried about the precedent it sets for shareholders rights

Thursday, 19 July 2012

Trading shares on your phone, ipad or tablet: Benefits and pitfalls

When I started using interactive brokers I was quite interested to see a trading app that allowed you to carry out exactly the same trading functions as their web-trader on your phone or ipad / tablet.  The app was well designed, easy to use and seemed to have everything you needed to trade 'on the go'. 

After doing a little more investigation I found out that almost all brokers offer this service and although the quality of some apps are better than others the service is essentially the same.

I confess that I have never traded on my smart phone but I was thinking about the ability to do so was good or bad from an investors perspective.  Below I have outlined pros and cons of trading on your phone as I see them.  If anyone does this regularly I'd love to hear your feedback on your experiences

Benefits of trading on your phone / ipad / tablet
  • Ability to react faster to news: 
  • If you have been waiting for a piece of news to make a decision or a piece of news radically alters your investment theory / case then the ability to react fast is a definite benefit.  You do not wait until you're back at your desktop.
  • No additional costs: 
  • Generally trading on your phone / ipad / tablet does not cost you anything in addition to your regular trading costs (i.e. you are in exactly the same financial position as if you were to trade using your computer). 
  • Convenience: 
  • If you have forgotten to register a trade, or if the share price hits a value and you want to put a trade on it is much more convenient to enter it into an app on your smart phone / ipad / tablet then to go back to your desktop
Cons of trading on your phone / ipad / tablet
  • The potential to react rashly to news: 
  • The ability to react faster to news is not always a good thing.  In the era of the 24 hour news cycle there is always positive and negative news coming out of financial markets.  Some of it is relevant and should form part of your investment decision and some isn't.  The ability to 'instantly trade' comes with the possibility of making bad trades on the spur of the moment.  While it is true that you can do this from your desktop as well generally there is an opportunity for you to weigh news more carefully
  • Encourages you to trades more 
  • This is great for the broker in that they earn that much more commission (which is probably why they don't charge more).  I am a strong believer in moving slowly in markets and only investing when the odds are stacked heavily in your favour.  As this doesn't happen every day of the week you really shouldn't need to trade that often.  If you don't need to trade that often you can wait until you are back at your computer to enter your trades
  • Overall while there are benefits if you are disciplined the ability to constantly check your portfolio and trade is not necessarily a benefit. 
  • It can encourage you to trade when ordinarily you wouldn't which increases the chances of making bad decisions
  • If however you can be disciplined and only use it on those rare occasions where timing is everything in a trade (this is so rarely the case) then it is probably worth having the app as a back up just in case
  • I personally have the app for both my brokers (Interactive Brokers and Commsec) both installed on my phone though have yet to trade through them.

IRESS no longer supports some international share quotes

One of the reoccurring series on this blog is my monthly update of my net worth and tracking it to my target.  I have a spreadsheet which is largely automated which calculates this every month. 

A core component of this is my stock portfolio tracker.  I currently use IRESS to track my portfolio.  IRESS is an Australian based trading and data platform much like Bloomberg. 
  • Like Bloomberg the prices that you see are in real time (unlike cheaper data services which have a 20 minute delay on prices)
  • Unlike Bloomberg however it is simple to use and is modern (I will never understand why Bloomberg insists of living in the 80s).  You get everything you could possibly need to trade and their charting function is second to none. 
Before you go searching for this online keep in mind that it is a paid service.  My employer subscribes to it so I am able to use it.

However IRESS has stopped supporting some international markets

IRESS has always primarily been for the Australian market however it made it easy for those who needed a daily quote for international stocks to update their portfolios because they had close of market quotes for all other international markets.  You couldn't trade through this platform and the same level of functionality wasnt available as for Australian stocks but it served for checking end of day prices quite well.

Recently however IRESS seems to have stopped coverage of some financial markets.  I did a quick search and stocks listed on the NYSE, NASDAQ and LSE still seem to be working perfectly however those listed in Europe are patchy.  One stock I own - ETR:KH6 is no longer covered which is how it first came to my attention.

If you use IRESS to keep track of your own personal portfolio (you can use it to update excel spreadsheets through formulas) then keep this in mind.  You may find that your European stock prices have reverted to zero and you need to do this manually.

If you have a particularly international portfolio and you are paying for the IRESS subscription you may want to use an alternate data source

There are other data service providers out there like Factset, CapIQ and Bloomberg however these are aimed at institutional clients and cost ~$10,000 per year per subscription.  Your broker may offer you a data service stream for a cost (I know Interactive Brokers does this) or you may want to go for a free option like Google Finance. 

The real benefit of IRESS was the ability to update spreadsheets automatically - it is a pity that they have stopped streaming data for international companies.  I think for an individual investor it is one of the best paid products you can get.  If you know of any others please comment below.

Wednesday, 18 July 2012

How to get the most out of high introductory bank savings rates

 In the current volatile investment environment more and more people are seeking out the relative safety of high interest saver accounts.  The problem with a lot of the interest rates offered on these accounts is that they offer a very high interest rate in the short term (usually 3 months) and then revert back to a relatively low / ordinary interest rate.

The choice between accounts becomes even more complicated when you consider that some accounts offer a high initial interest rate and then revert to a lower rate than accounts which do not offer this same introductory rate.   However there are ways that you can continuously get this high introductory interest rate - the method below was pointed out to me by a bank staff member so apparently it is legitimate though most people don't know about it.
  • Step 1: Find a subset of ~3 high interest saver accounts which offer the highest introductory rates. 
    • Note that as you are investing in savings accounts you should probably stick with institutions that you are completely comfortable with - i.e. a smaller provider may not be what you are looking for.
    • For Australian savers I did a quick search and the top 3 providers that I was comfortable with were (note that I have left out those accounts which require a savings plan to get the full interest rate)
      • Citibank Online Saver: 5.7% for the first 4 months (balances up to $500k)
      • Rabodirect Savings Account: 5.6% for the first 4 months (balances up to $250k)
      • ING Direct: 5.35% for the first 4 months (balances up to $250k)
  • Step 2: Set up an account with the highest interest rate account and deposit your money there for the high interest period
    • Do not set up all the accounts at the same time.  Your high interest period is generally calculated from the date of setting up your account not from the date of putting the money in
  • Step 3: At the end of the first high interest period set up the second account and transfer your full balance in
    • You will now start to receive the new high interest introductory rate (note that if you had left your money in the first account it would revert to a much lower interest rate)
  • Step 4: As soon as you have moved your money out of the first account completely close down the first account
    • You need to completely close this account down not just leave it dormant.  As you have chosen different institutions you can probably close your whole account down instead of just the high interest savings account
  • Step 5: Repeat for the third account when the second reaches the end of the high interest period
  • Step 6: When the third account comes to an end set up once again with the first high interest institution
    • Generally speaking you will get one introductory rate for a new account for an existing customer and a better interest rate for a new customer so if you have completely closed down your account you can claim the benefit of being a 'new customer'
    • This way you can continue rolling the introductory periods continuously
    • Yes it does take a little time for the admin work to go through.  If you can find a bank / institution that does it's application process online instead of which manual forms you can do the process much quicker.
You obviously need to read the terms and conditions of each account to make sure that you can do the above continuously but from what I've seen it is rarely a problem.  You can technically do it with only 2 accounts but I suggest 3 so as to be completely sure that you receive the full introductory rate instead of spending hours no the phone trying to explain that you are actually entitled to it

Is it really worth the effort?The answer really comes down to how much you have to save
  • From the accounts that I had a look at in Australia there is a 1% - 1.5% difference between the standard rate and the introductory rate.
  • Assuming you're depositing $20,000 into an account this is $200 - $300 extra you can earn each year
  • Given you have to set up / close down accounts every four months (which shouldn't take you more than 1 hours of your time each time - with one institution it took me under 10 minutes to open up an account) that's about 3 hours a year spent on structuring
  • This translates to a $60 - $100 benefit per hour your spend
  • I don't know about you but the implied hourly rate I get paid is lower than that. 
  • Also the more you have to invest in a savings account the more you get out of it

Guaranteed 9% return? Something doesnt smell right...

[Note to readers 8 Nov 12: It took me several months but I have finally tracked down how this investment works.  You can see a post on it here

I have received lots of positive messages on my post which looked into a scam related to collectible coins.  Another pretty bad / misleading advertising campaign I saw was related to  an advertisement I received from hotcopper.  Upfront I will say that this case does not appear as bad as the Macquarie Mint collectible coins case.

The email from hotcopper offered a 'guaranteed income of 9% per annum' through a company called Collins & Kent International.  You can see the advertisement here.

The advertisement set of several warning lights including:
  • The word 'guaranteed' plastered all over advertisements are never a good thing.  The first and most basic issue is is who is guaranteeing the return?  If  it is the company offering you the services then the guarantee is only as good as their credit rating.  I will go through this point in more detail later on

  • Ambiguous and misleading language
    • The advertisement has a section that says  "Fact.  Over 10 years a CKI Investment into art can significantly outperform the ASX"
      • This is misleading because it uses the word 'fact' and then gives a nothing statement.  Obviously it can outperform the ASX over any given period.  Cash under your mattress can outperform the ASX as can interest in a bank account and investments in pork belly futures
    • Also they offer a $500 Collins & Kent International Fine Art Investment Voucher.  I have never heard of an investment voucher.  The concept of one doesn't make a whole lot of sense - are they giving you money to invest in the fund? Or are they giving you a voucher which allows you to buy informational products they sell?

  • Claims that art is a 'recognised' element of a successful portfolio
    • While I have no doubt that there are some authors who claim that art can be a good diversification tool (like precious metals and other collectibles) I wonder about their use of the phrase 'recognised element'.  If you claimed that about mainstream investments such as stocks, bonds and property I would have no problem accepting this but I would not put art in the same category.

  • Also claims that it 'enriches' your portfolio. 
    • That is honestly the first time I have seen the word 'enriches' used to describe an asset going into your portfolio.  More common words and phrases used are diversifies, diversification benefits, provides growth options and potential.  Perhaps enriches is trying to capture something of the 'art' nature of this investment

  • Limited information on how the scheme actually works
    • I actually spent a fair while searching for how the investment actually worked.  Legitimate investments generally have all the information up front so investors can decide if this is a product that is good for them.  I still don't have a clear idea after searching for ~2 - 3 hours (honestly the longest time I've ever spent researching one particular post)
    • This is the information they give on how it works:
      • That is nowhere near sufficient to provide an investor certainty around the way in which the scheme works.  It does make the investment seem like the first option below though (a simple loan to the company)

  • Provides useless information and leaves out important information: 
    • Useless information provided about the company is that Collins & Kent International deals in works relating to the Masters such as Picasso, Chagall, Miro and Rembrandt.  It makes you think you are actually buying the paintings.
    • Useful information about the company you are lending to would say that they are primarily an art leasing business (from what I could find) and they lease artworks to businesses for a cost (presumably the rent you are getting)

So what are you actually investing in?
As I said above I had real trouble working out this question.  There are several possibilities which would have been nice for them to set out
  • Most likely - you are lending money to them so they can buy artwork:  It is therefore just a simple fixed interest security instrument with little to do with art (other than this is the underlying nature of the business).  9% is a pretty high return for a fixed instrument but not so high when you consider you are lending to a private organisation that may have debt holders higher than you in the pecking order. 
    • You may  get some security over the artwork but if you don't then you are in real trouble - if they should fail then there is nothing 'guaranteeing' your income each year. 
    • If this is the investment this means that Collins & Kent International would need to earn a greater than 9% return on their art leasing business just to pay you your 'guaranteed' return. 
    • The concept of 'guaranteeing income' is still troubling me - banks don't guarantee your income when you lend to them.  They just promise to pay and you are taking the risk that they fail.  The word guarantee is misleading 

  • Another option - you are buying into an art fund:  It may be that they are trying to set up an 'art fund' where you buy into a collection of works and then receive income from the customers they rent the art to.  You get the capital appreciation of the art and the guaranteed income. 
    • If this is the case they really should just say it as it.  Given their emphasis is on the income return I don't think this is the case however this page  sends a completely different signal.
    • Note that I have massive issues with that page as well.  Those are paintings that have been offered for sale by Collins & Kent International but they do not say whether this was  regular auction process or whether this was to investors in a presumed fund. 
    • Also they talk about the returns on those assets between the 1970s and the early 2000s.  It cannot be Collins & Kent International who got those returns because they were only founded in 1999 (see here)
    • However in a case like this I don't understand how they can guarantee an income return.  Further given they are talking about being specialists in Masters' works - I don't know how many organisations can afford to rent a Master at 9% of the cost
    • Also how does Collins & Kent International make their return? 
      • Do they do it through fees?  If so are the fees reasonable? 
      • Are they selling you work they have in their collection?  If so are they independently valued or are you getting an overpriced investment
Other things don't add up
There are other things that don't really make sense
  • They talk about selling artwork through Collins & Kent International (see link above) however I could not find a recent gallery of theirs online.  I found old art news online relating to a gallery they used to have in Sydney.  This could just be bad advertising and their office on Collins Street in Melbourne may have a gallery
  • Their rentals business is the one most prominently displayed on their website but even that seems weird
    • Their main page here says "Rent the finest European artworks" and "prices start from less than US$3 per day".  I'm pretty sure that those to are uncorrelated statements but I'm happy to rent a Picasso for $1,000 a year if anyone is offering?
    • It also made me wonder how you can get a 9% return of art being rented for $3 per day (because if you think about it Collins & Kent International need to make their return on top of this)

This case was one where there were a whole bunch of problems that did not add up.  I am not saying they are doing anything dodgy - they could just be terrible marketers of a great idea BUT I am not going to spend the time coaxing this idea out of them and the lack of clarity and ambiguous statements right through their advertising really put me off.

Did you consider investing in this?  Has anyone spoken to them - I would love to hear about it.

[Note to readers: 8 Nov 12: If you have read this far you have seen my criticisms and guesses as to what this investment entails.  Several months after posting it I finally discovered it - see the post here]

Tuesday, 17 July 2012

Google Finance Portfolio'​s relative performanc​e chart is an excellent idea...but has one major flaw

I recently posted on how google finance's portfolio function was not yet up to scratch however I believe that given Google's track record they will soon fix this and develop a free portfolio tool which will rival almost any other out there on the market.  As such I am keeping pretty close tabs on the development of it as well as exploring the different functions that it offers.

The ability to track your portfolio against a stock, index or other benchmark is one of the best features I've ever seen...

While a relatively simple concept I have not seen this available on many other free portfolio tracking programmes.  What it allows you to do is see how your stock portfolio is performing against any other benchmark (such as another stock or index) at any given point in time.  While it doesn't break down the reasons for out performance it does allow you a snapshot of your relative performance.

An interesting use of this is evaluating whether direct stock picking is your strength.  If you consistently (i.e. over a 2 - 3 year period) are under performing the broader market then perhaps index funds are a better option.  If on the other hand you are consistently outperforming you will see this as well. 

It is integrated really well into the whole Google Finance Portfolio tool as well.  You are entering the relevant data they require when you enter your trade details.  It also includes transaction costs in the relative performance (as it is based on a total portfolio value) which allows you to see the effect that trading costs have on your performance (albeit there is no way to strip out trading costs and view it on a 'raw' basis)

....But there is one major flaw which needs to be rectified

Because your portfolio is tracked on a total value invested basis (including transaction costs etc) this means that whenever you invest more money into the portfolio you get an immediate performance uplift which is misleading.  If you have a set investment pool then this is not a problem however if you are constantly investing more money into the market (e.g. through your wage or other income sources) then the performance of your portfolio is misleading (i.e. it looks much higher than it should)

This is a relatively easy problem to fix.  All google needs to do is fix the graph so that any additions to the portfolio do not affect the indexed value of the portfolio - however they have not done this yet. Once they get this right this will be quite a useful tool for benchmarking performance.  Until they get this right however it is absolutely useless as an analytical tool.

I still maintain that Google Finance will someday be one of the best tools on the market...

But there are simply too many bugs in the system to make it reliable just yet and the problem for Google is that the more bugs (however small) that people find the less they will trust the system.  When I am doing anything with my portfolio the one thing I am most concerned about is accuracy.  I will sacrifice all the functionality in the world for accuracy. Until they manage to restore confidence in their system and get rid of some seriously basic flaws (like the one above) I would not use it as your exclusive portfolio management tool.

Monday, 16 July 2012

Should you do your own taxes or use an accountant?

I think that this is a question that gets raised every year by almost all people who submit their tax returns.  Those who use an accountant wonder if they should save money and do it themselves and those who do it themselves wonder if it isn't worth the money paying for an accountant so they can save some time.  Below I have outlined the situations in which you should do your own taxes versus when you should use an account

Before I go into the issues I will admit to having an inherent bias.  I believe that people should, to the greatest extent possible, have as much control over their financial lives.  This means that I think people should be making their own investment decisions whether it be related to taxes, shares, loans etc.  The major benefit of doing this is that you are less likely to get ripped off or surprised by anything that happens.  The downside is that you can never blame anyone for your financial mishaps.
Benefits of doing your own taxes
  • Cost: You save the complete cost of the accountant which often range from a couple of hundred dollars to thousands of dollars for complex cases
  • Understanding:  You understand completely what you can and cant claim.  This can help you make better decisions in the future (which in turn helps you save more money by making wise tax choices)
  • You will often get your tax return quicker:  Accountants are often swamped at tax time and while they will get your returns done it will probably be a while before you get your tax return as they tend to submit them in batches
Benefits of using an accountant
  • Time: You save the considerable time it takes to do the tax returns every year. 
  • Less likelihood of mistakes / missed deductions:  You are more likely than an accountant to make a mistake when it comes to claiming something or worse forget to claim a deduction you ordinary may be able to which can cost you money
  • Do not understand the rules when it comes to complex cases:  When there are entities like trusts set up the rules become a lot more complex and not many people understand them all fully
Is there a happy compromise?
I believe there is a compromise that most people overlook.

Investing in Real Estate: What Insurance should you have?

This post forms part of my Investing in Real Estate series which attempts to cover every facet of owning an investment property, from researching to negotiating, to financing and renovating your property and a variety of other topics.  This post will cover insuring your property and the types of insurance that you should have as a real estate investor.

There are three basic types of real estate that every investor should have for their investment property
  • Home insurance:  This is for the building itself
  • Contents insurance: Although you may not have any contents in the house you may be surprised what counts as 'contents'
  • Landlord protection insurance:  Insurance against the possibility of damage and other financial woes your tenants may cause your property
Home Insurance

Most people would never question buying home insurance for their investment property.  They insure their own houses, cars etc so it just makes sense to insure your investment property as well.  When insuring your property (and this is true for your own home as well) you should look out for:
  • Are you adequately covered?  What would it actually cost to repair your house - make sure that you aren't under insured.  I think it's safer to be a little on the high side of insurance cover.  Home insurance premiums are generally pretty cheap so adding a bit more doesn't do any harm.
  • "New for old replacement" - This looks particularly attractive to some people who cannot work out how much they should insure their house for.  It promises to replace all the damaged fittings with brand new products.  Although this sounds amazing there is a sting in the tail - it says nothing about quality.  There is every possibility that the quality will be the same but I'm not willing to risk it so I go for fixed cover packages.
  • Check for specific exclusions:  Often there are specific exclusions to cover which you wont see unless you read the fine print of an amazingly dense product disclosure statement.  A common exclusion is for floods and flood damage.  Australians would probably see the problem with this straight away given recent events (we have had particularly bad flooding recently across the country in areas that have not had an issue in the past) so just because it hasn't happened before doesn't mean it cant happen.
Contents insurance

Most investors try and save a bit of money by not having contents insurance.  They say that since they don't have contents in the property and the tenants should be taking out their own contents insurance that this is an unnecessary insurance cover.  However there are things which you consider part of the house which count as contents
  • Carpets for example are typically classified as 'contents' and not part of the house.  It is a significant cost to bear if you have to replace these yourself when you thought the insurance would cover them
  • Electrical products (included fitted products) such as light shades, dishwashers etc also count as contents
  • Have a look at home insurance exclusions and you should be able to see what you need to cover with contents insurance

Friday, 13 July 2012

How much should I spend on gifts?

My evaluation of my monthly expenditure and budgeting, planning and investing has brought up a question I dont really have an answer to: how much should I spend on gifts?  I realise that the amount one spends on gifts is dependent on the relationships, the person and the expectaitons however this just raises more questions including
  • How close is the person to you?
  • Do I need to spend a lot on a wedding gift?
  • If they know that I'm doing well does that create the expectation of gifts that are worth more?
I honestly think there is no right and wrong answer to this.  There are social norms that must be observed if you are not to be seen as (or more importantly feel like) a miser or spendthrift.  Here are a few tips that I use to conform to the 'social standards' of gift giving.  If you have any more rules and tips please let me know:
  1. Cash will always be the most expensive gift:  This is for the simple reason that people know exactly what they are getting and can thus compare how much they spent for you, how much you gave in previous periods on assess this also against how much they think they should be getting (the big unknown)

  2. One gift worth a certain amount is better than a series of gifts which sum to the same amount:  Don't give a group of small gifts not worth a lot.  People know generally what things are worth and for some reason (unbeknownst to me) value one expensive thing more than a large group of less expensive items.

  3. Giving gifts in groups is goodThis is related to the above point of one really expensive gift being appreciated a lot more than a series of small gifts.  You also end up spending a fair bit less. The downside is that you are 'sharing the giving' so it is less personal and you also have to have awkward conversations about how much each prson is to contribute

  4. If you get a great deal on a gift (i.e. you get it for really cheap but it is normally quite expensive) then you've hit the jackpot - dont ruin it by telling everyone you got a great deal on it - unfortunately perception is everything in gift giving.  Also if you can get these sort of deals then you don't need to spend as much as you usually would have.

Tax time: How does salary sacrificing work?

This post will go through how salary sacrificing works and how you may be able to save significant amounts of money on large purchases if you employer lets you enter into these schemes.  Please note that this is for Australian tax payers only (I have no idea if this system is applicable anywhere else in the world). 

The most complete source of information is the Australian Tax Office website so I'd visit there as well but as they do not really simplify the issue I thought I would summarise it here.

What is salary sacrificing?

Broadly speaking it is entering into an arrangement with your employer whereby you forgo part of your salary for a product / service / good that is provided to you.  The most commonly used example is an arrangement of cars:
  • You enter a lease agreement for a car which your employer pays for
  • This includes all maintenance, insurance, petrol etc
  • This is paid out of pre-tax dollars
  • Your employer has to pay fringe benefits tax for this service provided to you
  • The fringe benefits tax is normally also taken out of your pay
Why would I use salary sacrificing - shouldn't I just purchase or lease the car myself?

The benefit you get is because of the different tax treatments for income tax and fringe benefit tax.  It would be worth your while entering into the salary sacrifice agreement if your marginal tax rate is above the fringe benefits tax rate.  For cars the FBT rate is currently 20% which means if your marginal tax rate is above 20% you can save money by entering into this kind of arrangement.  It varies between different classes of benefits so is always best to check it out before entering into an arrangement.

Note that on some products there is no fringe benefits tax payable.  These are the products that are really good from a salary sacrificing point of view.  They include things like portable electronic devices, security, work clothes and tools. 

How do I enter into a salary sacrificing arrangement?

The first thing to do is talk to your employer.  Not all employers offer it unfortunately.  If you do enter into an arrangement make sure you adhere to the following:
  • Make sure the arrangement is in writing - it doesn't technically have to be but if the ATO asks you to prove it later it is pretty hard if it is a verbal agreement
  • The agreement needs to be for future services you provide - you unfortunately cannot enter into retrospective arrangements
  • The salary you forgo needs to be forgone for the entire period of the arrangement - for a car this means for the entire time your firm is paying your lease payments and other costs
What should you watch out for in salary sacrificing arrangements?

Reportable fringe benefits - if the grossed up value of the benefit you are getting (i.e. the value divided by your marginal tax rate) is greater than $2000 then this gets reported on your tax statement.  This does not make any difference to your income tax but you will have to pay a higher medicare levy and it impacts the rate at which you have to repay your student HELP loans.

You can elect to contribute part of the payment (normally an amount equal to the FBT the employer would usually have to pay) - this actually saves you a fair bit of money because you actually lose less money to your employer.  The best example is the one provided by the ATO.

What products can I use it on?

There is no restriction on the products.  It is normally used for large purchases including cars and property.  It is also a fairly common way of contributing to your superannuation (see my previous posts on salary sacrificing into super).  There are special rules for superannuation.

Thursday, 12 July 2012

Book Review: Freakonomics by Steven Levitt and Stephen Dubner

Freakonomics was the hit book that brought economics and economic theory to the masses in an interesting, witty and oddly trivial fashion.   The book is a great read for those who are new to economics as it is easy to read and simplifies economic theories quiet well, and it is an eye opener for those who have studied traditional economic theories in the various applications that it can take.

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything The primary author of the book is Steven Levitt, a chaired professor of economics at the University of Chicago.  He is probably best described as an empiricist who uses his economic background to answer interesting (though sometimes seemingly trivial) questions.  In Freakonomics he uses economics to answer a wide variety of questions including:
  • What do schoolteachers and sumo wrestlers have in common? (They sometimes have very strong incentives to cheat – and evidence shows that they often do)
  • How is the Klu Klux Klan like a group of Real Estate Agents? (The power of information is on their side)
  • Why do drug dealers still live with their moms?
  • Where have all the criminals gone? (Probably the most controversial point in the book.  Levitt argues that the fall in the crime rate in the US has a direct link to the introduction of abortion in the 70s.  Personally I don’t subscribe to this view though his use of data is compelling)
  • What makes a perfect parent? (What child rearing strategies have an impact on grades in later life)
  • How does naming affect children in later life?
As mentioned previously the topics covered above seem rather trivial and are probably not going to win Levitt a Nobel Prize any time soon.  However for a light read on a weekend or if you’re really looking for some real life application of economics then this is a great book.

  • Easy to read and understand.  There is no complexity here and Levitt and Dubner have gone to significant effort to ensure that most readers can understand what they are trying to say.
  • Easy to put down and pick up again at a later point.  You can read this book in one setting or simply pick it up and read an odd chapter – there is no prior knowledge assumed anywhere in the book
  • The topics covered are generally pretty trivial.  You will not learn anything that you can apply in your life however economics is generally like that so perhaps we should not be surprised.