Friday, 31 August 2012

How to get great value fully tailored suits....and a free holiday

This post will be targeted at my male readers (though I have been told by female friends that the same applies to females too). 

If you live in a country with relatively high labour costs (e.g. US / UK / Australia etc) the chances are that when it comes to buying suits you typically have the following options
  1. A selection of reasonably priced 'off the rack' suits which are made overseas (typically in Asia);
  2. A selection of highly priced off the rack branded suits (made either locally or in a country like Italy); or
  3. If you are willing to splash out A LOT of money you can get a suit tailored to fit you
Note that this applies whether you are looking for a suit for work, an evening suit or a formal dinner suit / tuxedo. 

Historically I had normally bought a mid-range (i.e. $300 - $400) suit off the rack direct from the importers which saved me a lot of money compared to if I had bought it in store.  The suit quality was decent but not outstanding and I would normally need to get it altered to fit me.

Over the last few years I have started to get my suits tailor made 

I had always thought that getting a tailor made suit was a silly extravagance and could not really understand why people did it.  However when I went to Thailand for the first time on holiday I thought I would get one made to see what all the fuss was about.  I was totally converted.

The cut and fit of a well made suit that is completely tailored to your body cannot be compared to anything you can buy off the rack
  • As a side note I think buying expensive off the rack suits such as an Armani or Zegna is about the dumbest thing you can do.  You are getting a better quality material but the fit, which is the most important thing, is still not designed for your body
You notice the difference once you are wearing a suit that is made for you.  It is neither too lose nor too tight, too short or too long and if you have never worn one before you notice the difference immediately.

The problem with tailored suits is that they are too expensive in high labour cost countries

In countries such as Australia, the cost of getting a suit tailored are unbelievably expensive.  Getting a tailored suit made of ordinary material will cost up a minimum of $1200 and this is typically with a single trouser only. 

Further even at this price you are paying for a pretty ordinary tailor.  For a decent suit with double trousers from a good tailor you're probably paying closer to $3000.

The solution is to fly to Asia to get your suits made - the savings you make will more than pay for your holiday

Flying to Asia only to get your suits made may seem a little extreme but when you go through the maths and the see the quality of the finished product you will see that it works out really well. 

I get my suits made in Thailand at Raja's Fashions which was recommended to be by the CEO of a client I was working for at the time (standard comment re my recommendations: I get no kickback from these guys).  They are actually very expensive by Thai standards.  However the upside is that you can be assured of the quality and the materials they use are outstanding.

For a good material, two trouser suit made by excellent tailors you are paying (after a little haggling) about

Thursday, 30 August 2012

Sell your shares when they hit your target price

Whenever you buy shares you should have evaluated what price you think these shares are worth.  Typically you should buy these shares at a discount to the valuation equivalent to the rate of return you wish to achieve. It should also have a margin of safety (an idea first espoused by Benjamin Graham) which allows you to be wrong in some of your assumptions (or allows for unknown factors)

Note that this valuation will continue to change as new pieces of information become available.  As companies report their results, or corporate actions or as your the investment and regulatory and business environment changes around them the valuation of the company will change.  Likewise you should keep changing what you think the target price is worth to take into account all information that you think is relevant.

What will happen in many cases, is that when you have picked the right investment the market will eventually see what you saw earlier and the price will go up as a result.  Sometimes the market sees more than you do or perhaps becomes over-enamoured with a stock or thinks that it is a potential as a buy-out candidate and the price will run well past what you think it should sell at.

At this point - you should SELL

And trust me when I say this - this is one of the hardest things to do.  Your investment bet has come off and you have the gain you envisaged when you made the investment (sometimes a lot more as the stock price has run well past this point) but you do not want to sell because there is something inside all of us that says - "but what if the price continues to rise?".

The FEAR of missing out totally outweighs our rational mind that says what we should do is take our gain and be happy that we made the right investment decision.  We are also misled by statements taken out of context such as Warren Buffett's oft quoted saying that "We intend to hold our stocks forever". 

While this should be true if the stocks never reach the valuation potential, Warren Buffett also often talks about Mr Market, and the fact that Mr Market is irrational and offers you great deals from time to time.  The necessary counter side to Mr Market is that he offers you great deals for the stock you already own (i.e. the market is paying too much).  This is when you should sell the expensive stock and go look for opportunities to buy cheap stocks.

It is often hard to make the sell choice because:
  • The stock gains value a lot quicker than you expect: 
    • When it gains value that quickly we often think that we have missed something or there is this weird feeling that we have not done our investment dues in terms of time the stock is held 
    • Because of the vagaries of the market, it could be that you just entered at exactly the right time 
    • You should not be put off because the market is offering much more than you expected in a short period of time
  • The stock is subject to takeover rumours: 
    • I have done a post on this before
    • The argument I raised at the time was that if you are the least informed person in the market then the risk is that you sell too soon to others who have more information. 
    • However if you have no more information than the market and the stock has done exactly what you expect it to and more then holding onto it is essentially a gamble that the rumours are true. 
    • You may want to do this but make sure you are honest with yourself when you do it
  • We do not know what else to allocate the investment money to: 
    • This is a problem I have been facing more and more recently. 
    • As a lot of my investments are paying off I find myself sitting on bigger piles of cash as I have not found more homes for this cash.
Although these are all valid considerations however if you have done your research, are up to date on what is going on with your investment and you still think the market is pricing it too high then you should sell and be happy with your gains.  If you can - avoid seeing what happens next.  It may be that the stock goes up a lot more.  But you have made the gain you set out to and that should be your only consideration.

Other Posts you may like:
When to sell you shares into takeover bids
Investment psychology: Follow your convictions
Book Review: The Intelligent Investor by Benjamin Graham

Wednesday, 29 August 2012

Why don't banks pass on the full rate cut to homeowners

Throughout the world, homeowners would have noticed the phenomenon that while the 'official interest rate' has been dropping dramatically (in the case of the US it has gone to virtually zero), home mortgage rates have not dropped as much.

I'm not sure about the rest of the world, but in Australia where banks are still making record profits and where they have not had the bad debt issues seen in the rest of the world, every time there is a rate decrease of 0.25% and banks decrease their rates by something like 0.20% (i.e. do not pass on the full official rate cut) there is uproar - particularly among the politicians and the media.

I think this comes about because there is a fundamental misunderstanding around how home loan rates are set, how banks are funded and therefore why your interest rate does not go down as much as the official cash rate

Some basic finance first - how does the official interest rate work?

Reserve banks in different countries operate differently, however they fundamentally do the same thing.  They control one interest rate (typically a very short term one) and this interest rate influences all the other interest rates in the market.

The following description is from the Australian perspective.  Effectively what the RBA (Reserve Bank of Australia) does is control the overnight cash rate.  They do this by controlling the supply of funds available to banks in this overnight market (i.e. more funds mean a lower interest rate and vice versa).  A more in depth discussion of this is available at the RBA's official website - see link.

Because they control this interest rate they influence all the other interest rates in the economy.  This is because if this interest rate moved and none of the others didn't there would be an arbitrage opportunity.  Because of the constant work of traders at banks and other financial institutions such arbitrages don't exist.

So when the RBA decreases their interest rate, the market automatically moves the interest rates on all other interest bearing products.  While the banks theoretically could keep their interest rate the same and take the higher profit, what would happen would be that some other bank would try and gain market share and cut their cost.  As soon as they do this everyone else has to cut their mortgage costs as well.

OK so if official interest rates serve to move all interest rates - why aren't the cuts passed on in full?

This essentially comes down to how the banks are funded.  If I use the major Australian banks as an example.  Most of them are funded through a variety of sources but at the broadest level they have ~60% retail funding and 40% other (mostly wholesale) funding.

For Australia, most wholesale funding comes from international markets.  Therefore any changes to the official cash rate will only move the cost of funds for ~60% of their funding.  BUT where there is competition for deposits (such as term deposits) and banks are paying higher margins on these term deposits, much of the cost of debt will not get passed on.

In Australia over the last few years there have been several factors hitting the funding markets for banks.  Wholesale funding costs have been going up, as has the competition for retail deposits.  Against this the official cash interest rate has been coming down.  The result is that we definitely feel like we should be paying less.

The following diagram was one released by the Commonwealth Bank of Australia in their FY12 Results presentation in August 2012 and gives a great indication of why home loans have repriced in the way that they have (relative to the RBA cash rate) and the things that have been impacting them.

But doesn't that mean that when official interest rates are increasing the opposite should be true?

In short - yes.  However banks use this to recoup a lot of the losses they are forced to wear when interest rates are going down.  They also use this opportunity to 'profit gouge' to a large extent.  Therefore as consumers you should be more annoyed on the way up not on the way down because that is typically when you are actually getting screwed.

Monday, 27 August 2012

Investing in Real Estate: Don't forget to renew the lease

As outlined in my previous post, once you have bought your property and leased it out to your tenants there is nothing much you need to do other than keep track of your finances, the required maintenance and your lease.

This post will cover the last of those points.  Typically properties are leased for either 6 or 12 month periods.  Towards the end of this period you need to renew your lease.  Many landlords and indeed property managers are quite lazy about this and leave it quite a long time.  I confess the first time my lease renewal came up I got onto it straight away but the second time I totally forgot about it (my fault not the property managers).

However it is in your interest to keep on top of this and renew the lease in good time

There are several reasons why keeping on top of this is important for your financial well being.  These include
  1. When you renew the lease you typically are able to raise the rent.
    • This is typically all the lease renewals come back to
    • It is always a balancing process - raise the rent too far and you risk good tenants seeking accommodation elsewhere (and getting no income for a period of time).  Do not raise the rent at all and you are possibly renting your property too cheap and doing a financial disservice to yourself
    • The process is the same as when you were setting the rent - have a look at what the rents are like on similar places around you
      • If rents have gone up a lot then you are probably OK to increase your rent to get it close to the market
      • If landlords are advertising very low rents to try and get people in the door, you probably don't want to be increasing your rent and losing your tenants
  2. A lease locks the tenant in for a specified period of time
    • If they exit the lease early then there are financial penalties for them
    • If you do not renew the lease it typically goes onto a month to month lease basis and they only need to give very short notice to you to move out
    • Having a 6 or 12 month lease is good for the investor because it provides certainty around cash flows
    • Advertising and re-letting a property to new tenants if the old ones move out suddenly because you don't have a lease costs a fair bit of money (especially in terms of lost rent and fees paid to your property manager)
  3. Insurance is typically based on having a lease agreement with your tenant

Friday, 24 August 2012

Don't pay full price for perfurmes, colognes or aftershaves

This is a post that will probably be more useful for the guys than for the girls simply because all the women I talked to already knew what I'm about to type below but for many of the guys it was a genuine realisation.

Traditionally brand name perfumes, aftershaves and colognes were very expensive to buy.  A small bottle would retail for hundreds of dollars and the price differential between the exclusive and standard brands was dramatic.  As a result, many of us (myself included) would hold off buying these until we were going travelling and then buy them duty free (as these types of products often attracted a significant amount of tax in most countries)

Chemists (US: drug stores) changed all of this when they started selling the high end brands for discounted prices

Most of use would have seen the price of perfumes and aftershaves drop dramatically over the last 5 years as chemists started selling high end perfumes for a fraction of their previous retail price.  If you go into the department stores you will still find them selling at the high prices but in the chemists they are often 20% - 40% cheaper.

The result is that if you have walked past a specialist perfume shop you will notice that most of the time it is empty and if there are people in there it is often a hapless male looking for a perfume for his wife or girlfriend.

However not all brands made it into the chemists.  Some brands put some of their range into the chemists (presumably to get customers to try them out) and kept selling their higher end products at the premium prices.  This was true of my preferred cologne which is Ralph Lauren Polo Black - the chemists only sold the regular Polo aftershave range and I had to resort to paying $120 for a small bottle of it from the airport.

This constantly bugged me until I discovered there is a cheap alternative (which doesn't involve you having to travel or line up at duty free stores).

Online retailers charge significantly less for these products

Recently I was introduced to StrawberryNET, an online retailer of skincare, makeup, haircare and fragrances.  All the women I know have heard of and use this site regularly - if you go to the site you can see why very few men would have ever clicked into it.

Guys - this site can save you HEAPS of money on your high end colognes and aftershaves.  Whereas I would normally spend $120 on my Ralph Lauren Polo Black - StrawberryNet has it on sale for

ESG considerations really do affect share values

In a recent post on corporate governance I outlined what ESG is and how it is different from ethical investing.  This post will deal with why, even if you do not think of yourself as a particularly 'activitist' or ethically driven investor (i.e. your decision is first about the return that you get) you should build some sort of ESG framework into your decision making process because it really does affect valuations.

A recap of what ESG considerations are

Investing with ESG considerations in mind can be thought of as a 'positive screen' for those firms and investments which operate in ways which
  • Minimise damage to the Environment
  • Promote Social well being
  • Are proactive about good Governance
How do ESG considerations affect valuations

It is much easier to see how bad performance in ESG considerations affects valuations negatively than how good performance affects it positively.  This is because bad performance often results in valuation impacts that you can point at whereas proponents of ESG investment argue that good performance creates or enhances a business over the business life.

For this reason I will be focusing below on how bad performance with respect to ESG negatively impacts valuations.

  • There are several ways in which companies which do not look after the environment are penalised.  Most of these have to do with legal ramifications or government regulations
    • For example the tragic oil spill in the Gulf of Mexico was expected to cost BP US$7.7 (see link) and this amount comes straight off the valuation of the company. 
    • Another example is the introduction of the carbon tax in Australia which taxes the largest polluters in the country, reduces profitability and thus the value of your investment
  • Although we do not think of environmental concerns as having an impact on our valuations - in a world which is concerned with global warming and the sustainability of resources you should evaluate the environmental performance of your investment and it's impact on your valuation
  • On the positive front, with the current focus on clean energy, companies which actively reduce pollution or deal with environmental issues are seeing a premium attached to their valuations.  You need to decide how much you want to pay for this premium but the fact is that this is also impacting valuations
  • Generally speaking it is hardest to see the impact of social considerations on valuations.  However you can see it very clearly in some situations including
    • When workers strike due to poor working conditions, the business is often brought to a standstill or affected significantly which affects profitability and thus valuations
    • Poor PR can kill a business and in an age where news spreads amazingly fast over twitter and other social media, acting in a way which is seen as socially irresponsible (including something as simple as selling inappropriate children's clothing) can be detrimental to business valuations
  • It is often the hardest to pick the companies which will be affected by social issues such as these.  If you are trying to avoid poor performers perhaps avoid companies which typically have issues with their workforces or companies which offer goods which are considered dubious or questionable by the broader community

Thursday, 23 August 2012

Google Nexus 7 - Post hype review

A few months ago I wrote a review on the Google Nexus 7.  I had just received it and was very excited about it but had not had a chance to use it extensively and under 'normal' situations.  This, second review will hopefully be more objective as the 'honeymoon' phase is probably over for me and I can me more objective with it.

Pros of the Google Nexus 7
Originally the primary 'pros' I had were size, price and quality.  Reassessing these now that time has gone by
  • Size:  Now that I have had time to use it extensively I have found that size is both a pro and a con.  The smaller screen makes it very good as a portable entertainment piece. 
    • I have found that it is the perfect size to watch movies, read articles and magazines on public transport (especially on crowded train).  Because you can hold it in one hand you can effectively use it while standing up which you cannot say about many other tablets
    • The last time I did the review I was particularly impressed with the facet that it could fit in my suit pocket.  However I invested in a slim case (generic brand) which added enough to the dimensions which means it no longer fits in my inner suit pocket.
  • Price:  For the price I still think it beats anything around the same price point in the market and many of the other higher end products.  But before you rush out and buy for this reason make sure you think about what you are going to use it for
    • If you are going to use it for business purposes or need a bigger screen for any other reason, the price is not going to be able to offset the issues that come about because the screen is too small
  • Quality:  I am still very impressed with the build process and Android Jelly Bean still manages to wow me. 
Since I did the original review I have found other areas that I really like with the tablet.
  • Battery life is better than most reviews suggest: 
    • Most reviews seem to have run the Nexus 7 on its top settings to see how fast they can drain the battery and that comes out at 7 - 8 hours of usage
    • In 'normal' use though, which for me includes business applications, games and movies I found it lasts significantly longer.  You are not on the device for several hours straight and I have found that I only really need to charge it once every two or three days
  • Data is less of an issue than I thought it would be
    • If you buy the tablet in countries where there is limited free Wi-Fi availability (e.g. Australia), the chances are that you are going to have to buy a portable wi-fi machine OR tether your Nexus to your smart phone
    • In Australia (unlike the US), tethering to your smart phone is free and encouraged by the mobile networks (they actually give you instructions on how to do it)
      • One thing I was worried about though was busting through my phone data limit very quickly (my data plan only has 1GB of data per month) but I found that I don't even get close to this
      • For most programmes you can choose to sync your data a couple of times a day (I tend to do it twice at work and once at home where I have wi-fi) and you will not have a problem
      • Obviously if you are going to be streaming youtube videos on your device constantly you may need to up your data plan but even this is cheap to do
    • Before you get a portable wi-fi device from your mobile provider - check to see what your mobile data plan is!
  • The drag and drop functionality is great
    • The thing that constantly annoys me about Apple products is the need to use iTunes
    • With the Google Nexus 7 if you want to put a movie on your tablet all you need to do is drag it into the Movies folder using Explorer and you're done
  • The GPS function is amazing
    • I have never really trusted GPS on mobile devices - my Samsung Galaxy takes 5 minutes just to work out where I am
    • The Nexus 7 however is amazing!  It uses little data and the tracking is amazingly accurate.  Google Maps is an absolute dream on it.
Cons of the Google Nexus 7

There are some pretty big cons to the Google Nexus 7.  Some of them I had seen when I bought the device but others I had to spend some time with to discover them:
  • It really is too small for business use
    • I thought I would learn to deal with the small screen and keys but the fact remains that the keyboard just takes up too much space on the screen to make not taking effective at all
    • When you have the Nexus 7 in portrait mode the keyboard is too small and when you have it in horizontal mode, you can barely see what you are typing because the keyboard takes up virtually the whole screen
    • I have not found a good note taking app which you can use offline
      • The problem with most note taking apps is that you need to be connected to the internet and it stores your data in cloud
      • One which you don't need to do this is Springpad however Springpad does not auto save locally (you need to keep saving) and because of the bad set up on the screen the cancel key (which deletes all your unsaved material) is right next to the predictive text - I once lost half an hours worth of a meeting
  • It crashes just that little bit too often
    • While it doesn't happen too often I have occasionally had apps crash.  This could be due to the developer but I've never had that problem when using my brother's ipad
    • I don't know whether this is a Nexus or Android problem but either way it is an issue that you will face if you buy the Nexus
  • The camera sucks
    • I know the camera was only designed for video conference type use but given the camera that is on my two year old phone, Google should have placed a better piece of hardware in there
    • By the way if you want to use the camera to take photos just google to find the relevant app

Overall this device is great as an entertainment device - and I have morphed into use it this way.  I carry it with me basically everywhere (I can guarantee you that I would NEVER do this with a device as big as the ipad).  For business purposes though it is just too small to be able to type fast enough to be able to get what you want down.  The programme crashes do not help either.

Last time I said that I typed my blog post on the tablet.  I have reverted to once again doing this on my laptop as the 'cool factor' associated with doing it on my tablet wore off very very quickly.

As a final point - if you do know a good note taking app can you let me know (I need one that will save my work even if am not online - i.e. one that saves locally)

Wednesday, 22 August 2012

What is income protection insurance?

In looking at various forms of person insurance so far I have covered
  • Life Insurance: An insurance that pays out in the event that you pass away.  In my previous post I mentioned that people who have dependents should definitely have life insurance but singles and those who are financial settled probably do not need it.
  • TPD Insurance: An insurance that pays out in the event that you are so disabled that you are no longer able to work (but does not pay out if you pass away).  In my previous post I had mentioned that I thought that EVERYONE should have this type of insurance, whether you have dependents or not.
This post will cover income protection insurance and whether you should consider investing in it. 

What is income protection insurance?

Generally speaking income protection insurance is a benefit paid on a monthly basis which pays you a certain percentage of your income (generally 75%) of your income and covers you for accidents, illnesses and major traumas. 

Unlike TPD insurance it does not require that you not be able to work ever again but rather pays you for the time that you are off work until you return to work.  It normally comes with a waiting period.  If you cannot return to work it pays you until retirement age (in Australia this is 65).  It is designed as an 'interim insurance' rather than a final type of payout that TPD and life insurance payouts tend to be.

Should I get income protection insurance?

Income protection insurance is often provided by employers (especially multinationals) and Australia this is normally done through your superannuation package.  It is normally bundled with Life and or TPD insurance to provide 'all situations' type cover.

In the event that it is not automatically provided for you there are several things that you need to consider before getting income protection insurance:
  1. If I don't work for a period of time, can I still pay the mortgage, put food on the table and meet all the other necessary expenditures?
  2. How long would any savings I have last?
  3. How old am I and how long is it likely to cover me for?
If you have sufficient savings set aside you probably do not need income protection insurance but you should always ask the second question because you need to consider not only if you could last a few months without your income but if you could last a few years (in case you get really sick but not an event that TPD covers).

This is a type of insurance which is also age dependent.  Because it only lasts until your retirement age (65), it probably isn't worth getting if you are in your this point you are probably pretty close to being set up and if you get really ill it is not going to cover you for very long.

Obviously it is dependent for every person but if you are young and not yet set up it is probably something that you should really consider getting.

What are the the things I should watch out for in the policy?

The biggest things to watch out for (other than the cost obviously) are:
  1. The waiting period between when you actually claim and when you start getting paid.  Sometimes this is several months and you need to make sure you understand exactly when and what you need to get paid.
  2. Any specific exclusions.  Exclusions are often the most overlooked part of insurance contracts but

How to avoid making bad decisions during reporting season

The US quarterly reporting season recently finished and Australian share market is right in the middle of it's end of year reporting season (Australian companies typically having a June year end).  Every day 5 - 10 major companies are reporting their results and as an investor it is hard to know what to keep up with and whether you should be trading based on new information that is being released.

Why reporting seasons bring added complexity to the investment process

For the most part, when you have invested in a company or are considering investing in a company you have done your research, you know what price the stock is worth and you know at what price you want to enter and exit at.  Big price movements therefore work to your advantage if you can be disciplined and stick to your original plan.

The hard thing about reporting season is that you have big price movements coupled with new information being released which adds much more complexity to the equation.  The price may now be at the point you originally wanted to buy or sell at but you have all this new information that you need to process to see whether you should be re-evaluating your buy / sell point decision.
  • For example if you own XYZ Stock and you had planned to sell it at $5 but at their result they announce massive new unexpected markets and sales and the stock shoots to $7, it is above your original sale price BUT given the new information you may only want to sell it at $8 and thus should hold off for longer
Because reporting season happens over such a short time period you are likely to get LOTS of information at once

The above situation is further complicated when you have a stock portfolio that contains multiple stocks.  For example my stock portfolio contains 14 different stocks, 11 of which report in the same 4 week period.  Many people have a much more diverse portfolio than I do.

Imagine the situation with XYZ stock being repeated for every stock in your portfolio and you will see why many investors suffer information overload during reporting season and make bad decisions as a result.

Setting a set of rules for yourself is key to making good decisions (and remaining sane)

You need to set rules for yourself during reporting season.  I use the rules I have listed below to process all the information and make sure I am making the right decisions:
  1. Unless the company is blowing up (i.e. going to go bankrupt or lose more than 20% of it's value) do not make any decisions during reporting season
  2. Deal with the bad news first and the good news last
    • Big good news stories are likely to lead to sustained changes in the price of the stock - if you are looking to sell out of it, the price is likely to remain high so you are not in any rush
    • With bad news stories you need to assess how bad it actually is. 
      • Often the market will be over reacting which will give you a chance to buy cheap during the period it is over-reacting
      • However if you think the market has not realised the extent to which some news will affect the business then you have an opportunity to react quicker
  3. Investments almost never need to be made today
    • A good investment today is often a good investment tomorrow and into the future so rushing decisions is almost prudent course of action
Do you have any other rules that you use to get yourself through reporting season?  Do you keep close track of your companies financials or do you prefer to set and forget? 

Tuesday, 21 August 2012 Unethical...but probably legal

Whereas some of the previous sites that I have covered through my scam series could have just been businesses that were run badly (e.g. Publicity Monster) or businesses which did not accurately represent what their offering was (e.g. Collins & Kent International), there are some businesses out there that can be actually be bad for you and your business and you can do very little about it.

I believe that falls within the category of a business that does business unethically but stays within the letter of the law.  Very simply it is a business that
  • Uses computer programmes to scan government business registers
  • Creates a directory of this register on it's own site
  • It does not seek permission from any organisation to use this data
  • It does not seek permission from the businesses it effectively represents on it's sites
There are many reasons that I think that is a bad business but core amongst them are
  • It does not create any value
    • It is taking data from a registry that already exists (and can be searched) and lists this on it's site (i.e. they do nothing themselves)
  • Businesses cannot remove their own business from the site without an onerous process
    • The process for removing your business is a joke
    • You have to fill out a business removal form and then email to them a signed identity validation form
      • If you have signed up for a service then I completely understand this - you do not want people removing your details from directories
      • However given they never asked for your permission to put it up there - requesting a form with your pertinent details is ridiculous
      • Further you are required to give your contact details (phone number, business address) even though this is what you are trying to remove in the first place
        • I am more than happy to give these details to a service I signed up to but refuse to do it for an unethical business who ripped my details off another site
  • Because they add no value and appear to be a computer crawling site - they cannot update your site details - they tell you to get the government agency to do so
    • If a business directory is going to list your details you should be entitled to change them
    • However because is such an bad concept and operator they have no ability to edit your details but rather require you to get the government agency to change your details and then their computer crawler will eventually update it
  • There are reports that they have requested payment to remove listings
    • This is the one thing that makes me think it is a scam. 

Monday, 20 August 2012

How to get webcasts of results presentations

A quick mid-reporting season post from me on why you should listen to webcasts of results presentations during reporting season and how you should get them.

During reporting season you are more than likely to be inundated with information from the companies that you have shareholdings in and ones you are looking to invest in.  Later this week I will do a post on how to avoid making bad decisions when you are getting these constant flows of information.

In all reality most people look at the media release (2 page result overview) and the presentation which tends to summarise all the information in an easy to read format. One of the most overlooked (and valuable sources) is the webcast of the management presentation

Why you should listen to the management presentation of results

Most people that listen to the webcast of the management's presentations give up with 5 minutes because it sounds like a sales pitch.  Worse they often just read out the presentation slides (which you could probably do yourself more quickly).

However if you do this you are missing the most important part of the webcast.  At the end of the management presentation (which usually takes about half an hour) they open up the floor to questions and the people that ask all the questions are the research analysts that cover the stock.  This is some of the most valuable information that you can get!

Given that most people outside the professional investment community do not have the access, time or inclination to receive and read all of the big investment banks broker research, the fact is that people do not know what they are following, what they think is important and sometimes miss the big issues facing the stock. 

However with the advent of webcasts (previously you had to have dial in details) you can hear EVERYTHING the research analysts asks and the management's response to it. 

Why is this so valuable?
  • All research analysts do every day their whole career is follow a particular sector and for the most part they are more attuned to those issues that are affecting the industry in which you are looking to invest
  • You get to hear what they are asking (which is often more important than the answer itself). 
  • They do not go easy on management and will ask them the hard questions - it is possibly the only time you will hear management give answers to hard questions that need to be asked
It is worth listening to the whole webcast for the Q&A session alone - it may take an hour of your time but if you come away with something you didn't know at the end of it about your investment which affects your investment decision then it is probably time well spent.

How to get webcasts of results presentations

Given that most results presentations are done during the work day, it was previously hard for people not in the finance industry to dial into calls and listen to this Q&A session.  With the advent of webcasts though and the general take up by companies and the investment community - this is easily remedied.  Here are a few ways you can get access to webcasts:

What you should do AFTER you have bought and leased out your property

This blog has gone through in a significant amount of detail all the steps involved in buying and leasing our your property including
The initial phase of investing in your property is VERY time consuming and is likely to consume all of your investment time and almost all of your free time.  After this process is all done therefore people feel like they should be doing more and should continue to be busy...this could not be further from the truth.

After you have set everything up and everything is in place the key is to do close to nothing!

It feels wrong - it feels like with the amount you have invested in this property that you need to keep doing things - there MUST be something else to do.  In fact if everything is going to plan and you have set up everything correct you do not want to get a call from your property manager telling you that you need to do something.

Really the only things from this point on that you need to do is
  1. Keep an eye on your finances to make sure everything is running to plan
    • I do this once or twice a month (typically whenever rent is due)
  2. Keep on top of repairs and maintenance - especially those requested by the tenants

Friday, 17 August 2012

5 Tips for Coming up with Ideas for Blog Posts

I have been dedicating one post a week to non- financial type posts (my weekend warrior series) and this week I thought I would do a post for all new bloggers out there.  There is plenty of good information and tips on the Internet for new bloggers but I thought I would share some of mine. 

As a quick background this blog has been going for approximately 14 months now and is getting ~3000 - 4000 page views a month (as at August 2012).  The blog originally grew very slowly as I only posted 5 - 10 times per month.  In December 2011 I increased this to 5 times a week and in July 2012 increased it once again to 10 posts per week.  I have found that the number of people reading and visiting my blog is exponentially related to how often the blog is updated. 

The hardest part about writing this many posts every week (as a sole contributor) is coming up with the topics.  This post therefore will give you 5 tips to improve your topic generation process and should help you come up with posts much faster.

5 tips for coming up with ideas for blog posts
  1. Don't define your blog too narrowly
    • This is a problem I had with a previous blog that I had started (Investor Book Review) which was dedicated exclusively to reviewing financial books.  There was no way I could read and do insightful posts on even a weekly basis.
    • With this blog I found that having a 'broad mandate'  helps - even if you are stuck for ideas on a topic you usually cover, you can always do another topic and come back.  It is your blog so you can define it however you like
  2. Doing posts in themes or 'series' helps with the idea generation
    •  I found that if you have a certain pattern to your posts that coming up with ideas is much easier than you would expect
    • This blog for example has at least one post a week on real estate, investment banking, shares, corporate governance, a book review and personal finance
  3. Have a pad / paper / note taking app available so that at any time an idea pops into your head you can note it down
    • Ideas will come to you at the strangest times.  You don't need to formulate your post then and there but as long as you can register the broad topic for use later you will have a list of posts that you can call on at any time
    • This especially helps when you are stuck for ideas on one of your regular 'themed' posts.  Because your blog is flexible you can always revert to one of these 'back up' ideas
  4. Post about things you know, understand or are learning about

How Many Credit Cards Should I Have?

Most of us are inundated daily by offers for credit cards, each with deals that seem better than the last.  In the last week I personally have received offers or seen advertisements for credit cards at the following locations:
  • From the bank my home loan is with (which is separate to my everyday transaction account)
  • While filling fuel (gas), the fuel company offered a credit card which makes it faster for you to go through the pump
  • I went to buy a birthday present at a department store and when I was at the checkout the girl at the counter asked me if I would like to sign up to that store's credit card program
  • I received an email from my airline frequent flyer program offering a dedicated credit card
  • From another airline I received a credit card offer where I would get a free flight voucher upfront
Most of us would already have one (maybe two) credit card/s and the real question we have is whether we should sign up for another.  There are plenty of benefits and cons to signing up for multiple credit cards and I have outlined a few below.  I should note very early on that this, like so many other situations, is totally dependent on the individual and their financial circumstances and ability to control their impulses and debt.

Pros of getting an additional credit card
  • Extra 'on demand' finance available should you ever require it in a hurry
    • The benefit of being able to have extra funds available when you are in a pinch cannot be overestimated
  • The up front deals or cash backs on some of these credit cards are actually outstanding 
    • The Qantas Frequent Flyer credit card for example offers you 32,000 frequent flyer points if you sign up to their credit card.  You would normally have to spend $32,000 or higher or do some serious flying to get this number of points
    • National Australia Bank (my home loan provider) offers a fee free credit card if you have your home loan with them with no strings attached
Cons of getting an additional card
  • The temptation to spend on this card may be too much for some people
    • If you are not the type of person that controls your expenditure well then getting an extra card is not for you
    • For example some people I know have a very low limit on their credit card because they know they will spend up to their limit every month.  Personally I do not have this problem so my limit is well above $10,000 even though I rarely go above $2,000 in a given month
  • It impacts your ability to get a loan

Thursday, 16 August 2012

Before you buy with Amazon...c​heck out these two sites

I think almost everyone would realise how much money they can save when buying books online rather than in store.  The price difference is really astounding (the discount is often well above 50%) and the books are rarely out of stock (compared to going into your traditional book stores which actually have to physically stock the book.  It is no surprise therefore that many book stores are going out of business.

When we think of an online book store most people automatically think of Amazon and why not?  It was the first on the scene, it's prices are consistently low and it's reputation for shipping things on time is unbeatable.  However, especially for people outside the US and UK (where the big amazon stores are based) there are other options which you should consider.  The big problem with Amazon is that the shipping charges for customers outside the US and UK are really quite high which makes their books much more than the sticker price that you see.  Here are two other options you may want to consider

1. Book Depository

Book Depository was originally started as a UK site and it's big selling point was that it charged no shipping for customers ANYWHERE in the world.  Even if the book was slightly more expensive on book depository you could save a lot of money on shipping.

In 2011 Book Depository was acquired by Amazon but they kept the free shipping angle.  This means that you get Amazon's great price, service and range but do not get charged shipping at all. 

For some reason the prices do differ between Amazon and Book Depository so it is always worth checking both sites (remembering to including the shipping charges on Amazon's site) to see which gives you the better deal.


Fishpond 1
Fishpond is a site dedicated to Australians and New Zealanders who often pay the highest shipping charges from Amazon.  Like Book Depository, Fishpond does not charge shipping fees to customers located in Australia or New Zealand.  It is not Amazon however which means it's processes are not as good.  Often I have found that their ordering system means that I've had to wait an extra 2 - 3 weeks for a book to arrive (but on the upside occasionally I'll get two books instead of just the one). 

One of best aspects of Fishpond which they do not advertise (but really should) is that if they have a book in their warehouse you can pay $0.50 extra and get it within 2 - 3 days.  For Australian and NZ buyers this is almost unheard off as Book Depository and Amazon typically take a few weeks to deliver anything to Australia.  They tend to keep a lot of popular titles in their warehouse and for a nominal amount more you can get it much quicker.  I LOVE this aspect of Fishpond which is why they are normally my preferred site.

Always check all three before you buy
I ALWAYS check the prices on all three sites before I buy.  The prices vary a surprising amount between sites and you can really save quite a bit of money if you are an avid reader by going to all three before you buy.

Do you know of any other good websites to buy books?  Are there other country specific sites which you would like to share with people?  Please post below if there are.

How to choose a business name

Once you have gone through the business planning process and thought through the pros and cons of starting a business, and then this business and have a good idea of what your product is and who you are targeting - the next step is to choose your business name.

This may sound rather easy but as I found out when setting up my own small business, you spend an awful lot of time trying to decide what it should be called.  The fact is that although you can change it later down the track, as soon as you start operating you start building up goodwill in that business name and your customers will know you by that name from the start.  The name therefore is rather important. 

Here are some tips about what I think a business name should have:
  1. Simple:  You want your customers to remember what your business name is and more importantly you want them to remember it when they are recommending you to their friends.  The shorter it is the more people will remember it
  2. Easy to spell:  In the Internet age people are always going to Google your business name.  Make sure they are spelling it correctly the first time around.  You do not want to choose a name that is spelt in a weird or quirky way because the fact is that most people are going to type your business name into Google the way it sounds
  3. Inventing a word is more hassle than it's worth:  People think they need a new and innovative business name (something that is catchy like Google - which is not actually a word - it is derived from the word Googol).  You don't.  There are many businesses out there that use a combination of real words that become synonymous with the company (e.g. Facebook)
  4. It should have to do with your business in some way:  This is not compulsory however if people can get a general idea from your business name what the business does then you are one step closer to getting them in the door and buying your product and service.  Paypal is a great example of this.
  5. Beware attaching your name to the business:  I know a lot of great businesses have done this but imagine the situation where you are selling your business - the buyer of the business then has the right to do whatever they want with that business (which still has your name on the door)
How to brainstorm business names

Now that you have the basic requirements in your mind it comes down to choosing your business name.  I suggest doing the following:

Wednesday, 15 August 2012

How much superannua​tion will I need when I retire?

For all of us who live and work in Australia, the superannuation system provides a thought free way of providing for our retirement.  Our employers are required to contribute a certain amount of our income (currently 9%, moving to 12%) to a retirement plan that will hopefully pay for our nest egg.
The problem many of us have is that we do not know
  1. Whether we will have enough when we retire to keep us going right through retirement
  2. How much we need to save outside of super
The key is to work back to front
Instead of working from how much you contribute today, expected rates of return and expected wage increases - all of which are VERY assumption dependent, the key is to work backwards from what you want when you retire.  This is totally subjective and there is no right, wrong or unrealistic answer.  If you want to live on a million dollars in today's money when you retire then you can work out what you need to do to get there.
  1. Work out how much money you want per year in retirement
    • The fact is that you don't actually need that much per year in retirement. 
      • You do not have the same obligations as you do now - your house is paid off, you have no mortgage, the children have moved out
      • You are not limited to travelling and holidaying during the peak seasons - holidays are cheaper
      • Chances are that you are not as active as you are now so you will not be able to do the types of activities that you do now
    • Try and think about what you would spend you retirement doing and how much this would cost and then add a bit extra - it is always good to have a bit of a buffer
    • For the purposes of this example I am going to say that I will need $100,000 per annum in retirement (in today's dollars)
  2. Estimate what age you are going to retire at
    • I keep seeing people saying they want to retire at 40.  Honestly I do not know what I would do if I retired that early...I enjoy working and what I do so don't know what I would do by retiring that early
    • For the purposes of this example I am going to say I retire at 60
  3. Estimate how long you will need the money for
    • This is quite subjective but I'm going to say I will need it until I'm 85.  Chances are I will not last that long but we can always home
    • In the example that is 25 years of income required
  4. This will give you your estimated required nest egg
    • In today's dollars that's 25 years of $100,000 which is $2,500,000
    • Calculate this at the point of your retirement (i.e. inflation adjust it until you're retirement age).  For me that is 36 years away.  I'm going to assume an inflation rate of 2.5% p.a.
    • This yields a future value of $6,081,338
Don't be scared by the big numbers.  Keep going through the process
The future value of 6 million dollars looks HUGE.  But don't forget that you are just working out how to achieve it.  You are never going to get anywhere by paring back your expectations.
The next step is to see how much you will have in superannuation assuming you do nothing
Because superannuation is a government requirement of your employer - this is a savings number that you have no choice about.  Thus it should be the first part of your calculation in how to get to your goal.  Follow the steps below using your own numbers.
  1. Take the super you already have as a starting point
    • Most of us already have a super balance so use this as your starting point
    • In my example I will sue $28,000 as the starting point
  2. Work out your total wage and the amount of superannuation that comes out of it
    • For the purposes of this example I'm going to say the wage is $150,000
    • Superannuation is currently 9% p.a.
    • Thus this year I will get a superannuation contribution of 150000*0.09 = $13,500
  3. Work out the amount your wage (and thus super) is expected to increase each year
    • Most of us get at least inflation increases to our wage each year (i.e. 2.5%).  If you are in an industry which typically gets more than this then put this down
    • I am going to use 4%
  4. Work out the expected return on your superannuation
    • If you are in the high growth option in your superannuation plan then use a return figure of about 8%
    • If you are in the cash only bucket then use more like 4% and if you are in between then use a number in between
    • I am quite risk neutral so I will use 7.5% p.a.
  5. Don't forget taxes
    • Do not forget that earnings within superannuation are taxed at 15% p.a. so do not forget to include this in your calculations
  6. Set up a spreadsheet to do your calculations (this should be fairly easy but if you want me to upload one just comment below)
    • For the parameters listed above I get an ending value of $2,944,220

The extra amount is the amount you need to save / invest / contribute over and above your super amount
In my example the difference is $3,137,118 which is the amount I will need to come up with over my investment life.  This again seems like a large number but if you start to break it down over a long period of time (in my example 26 years) it is much easier.  For example the following ways can get you to your goal
  • An extra $25,000 per year (or ~$2,000 per month) in superannuation will get you to your target easily.  This may seem like a lot of money but if you look at my savings plan I am doing more than that consistently every month
  • If you vary some of your assumptions it becomes easier to get there.  E.g. if you include 12% contributions from 2015 you only need to contribute $19,000 per year (~$1,500 per month) to get to your desired target
  • Note these additional amounts are not inflation adjusted.  I.e. even though your wage is going up every year the amount you contribute is staying constant.  If you do want to inflation adjust how much you contribute your contributions are even less
Your goal is achievable - you just need to plan early and work out what you need to do to get where you want to go
All goals are achievable - you just need to work out early what your plan of attack is and then let the power of compounding returns work over a long period of time.  The fact is that you are at a major advantage if you are doing this planning process in your mid 20s compared to your late 40s so start early and retirement can be easy.

A Monster Load of bad publicity for Publicity Monster

As you would have seen from my collectible coin scam and questionable art investment with a guaranteed return post is that I actually quite enjoy busting what I think are questionable or downright dodgy business practices.  When I was reading the newspaper last week I came across a journalist who looked like he had done the same thing.  While I get 3000 - 4000 page views a month on this site (as at August 2012) this journalist wrote for Fairfax Media, one of the biggest publishing houses in Australia and the expose was therefore that much bigger.

The company that was being called out for it's business practices was Publicity Monster, an Australian company which offers search engine optimisation (SEO) services to businesses in Australia.  I will say up front that I have never had any dealings with this company - everything I write here I have sourced from information posted on the Internet by other providers and I will be linking to those sites.  I do not know whether this company is a bad operator but I would recommend reading the independent reviews of them on the Internet before doing business with them.

I first came across this company when I was reading this article ).  This article claims that Publicity Monster
  • Does not deliver on the promises they make
  • Threatens customers who complain with legal action
    • [Edit]: For the removal of doubt I mean that the article suggests that they threaten, with legal action, customers who complain online
  • Does not honour its money back guarantee
    • [Edit]: I have since been informed that they do honour the money back guarantee but that the opportunity to apply for such the refund only exists within a very narrow timeframe (90 - 100 days)
  • Harasses customers demanding payment
  • Threatened to sue Fairfax Media for printing the article about them
Now I honestly thought that this had to be an exaggeration - a journalist who was trying to make a name for himself by doing a hatchet job on a company could be THAT bad.  But then I made it to the Whirlpool forum where LOTS of customers had voiced their dissatisfaction with Publicity Monster - see the link here. It really is worth reading those posts to see the stuff that the people on that forum have dug up on this company (which includes using pictures of missing persons to give false reviews - note once again that these are again claims made by Whirlpool posters - but they provide plenty of evidence to back up many of their claims)

For a company that is all about publicity - Publicity Monster seems to be getting an awful lot of bad publicity.  Actually I found it a little bit suspect that traditional 'ratings sites' such as True Local had either reviews with half a star or ones with five stars.  I've never seen a discrepancy like that unless someone is playing games with the ratings site.

Lessons for those (like me) who are looking to start an only business

Tuesday, 14 August 2012

Simplify your investment process: Make relative investment​s not absolute ones

Investing in the share market is all about opportunity costs (actually when it comes down to it - everything in life is about opportunity costs).  Because we only have a finite amount of money we have to make a decision about which stocks to invest in if we want to obtain a superior return or whether to invest in index funds which mean that we will never outperform or under perform.
This decision becomes much more complex once we start assessing whether or not to invest in the share market after all.  The range of possibilities and the things you need to think about once you start considering whether your money would be better in the bank, in fixed interest securities, in non conventional investments (such as precious metals, collectible items etc) or whether you should just spend it on consumer items.
I think that once you broaden your decision making to this level the decision becomes impossible
Given the inherent uncertainties associated with almost all investment decisions when we get overloaded with choice we tend not to make any choice at all.  This is most definitely not the best outcome for our financial well being.
...So what is the solution?
The solution is not something new or innovative.  It is something that people have been doing for hundreds of years. 
  1. Set a specific amount of money that you will save every month (I do this with my savings goals - sometimes this is called 'paying yourself first')
  2. Split that amount of money between the investments YOU want to invest in (for example $xxx to shares, $xxx to the bank etc)
Once you have done this you no longer have the problem of deciding what class of assets you should invest in!  The decision is already made by your plan.  That is the beauty of this system.
Note that this does not make the decision process 'easy'...just easier than it was...
You should keep in mind that you still need to decide what shares to invest in which is often a complex enough decision - but it is much easier than the one mentioned before.  It is possible to make this easier by
  1. Investing only in index funds 
    • You set up a savings plan every month and every month this amount gets invested in index funds
  2. Invest a certain amount each month into certain categories of shares. 
    • This takes the splitting the investment money to next level.  You allocate a certain amount that will be invested in defensive stocks, growth stocks, dividend stocks etc and then the decision becomes in this category what stocks do you want to invest in?
I do not go to the level that point 2 suggests because I do not have the cash required to make cost effective purchases (in terms of trading costs - even with my cheap brokerage) on a monthly basis if I split the amount I am investing too far.  I allocate a certain amount to shares and try and invest this regularly every month in a share which I think is showing good value.
...the moral of the story is to make relative decisions - not absolute ones
What I mean by this is that you should be deciding between shares or between bank accounts or between alternative investments not deciding which of these classes of investments you should be putting your money into each month.  The relative decision is complex enough without adding an absolute decision which I think would paralyse most of us because of the number of choices and inherent uncertainty

Monday, 13 August 2012

Dirty Letter from Hancock Prospectin​g should have you questionin​g Gina Rinehart's motivations

The increasingly bitter war for Fairfax media took another turn when Gina Rinehart's Hancock Prospecting sent a letter to ALL shareholders of Fairfax which outlined their case for change and what they wanted to achieve.  Normally it is clear why the person agitating for change is doing so
  • Often it is a large activist fund manager who has taken a position and who wants the board to change direction so that their bet pays off
  • Other times it is a shareholder who is trying to push a particular agenda - I did a post on these types of people later
With Gina Rinehart (Australia's richest person and the richest woman in the world) it is hard to say.  There has been much speculation including
  • Wanting to influence journalistic content so she appears more favourably in the news (this is widely speculated in the media and investment community)
  • An activist shareholder trying to enhance the value of their shareholding (what Rinehart is trying to portray herself as)
So here is a brief outline of what she wants for her 15% shareholding in the company
  • 3 board seats (2 for her and an 'experienced independent director') out of a board of 12
  • KPI's for the chairman personally including increasing the share price from the current value of ~$0.52 to $0.87 prior to the AGM which is only a few months away.  If these are not met they ask that the Chairman resign
  • The ability of directors to comment publicly on the state of the company.  Currently only the Chairman and the Managing Director are allowed to make public statements about the company
  • Want to be able to share board minutes and materials with outside parties
Why I think her requests are ridiculous

If Gina Rinehart wants control of Fairfax she should make a bid
  • Although the letter says that she does not want control of Fairfax, having 25% of directors in her pocket before any contentious issues arise puts her in a very powerful negotiating position
  • If Gina Rinehart wants to control Fairfax she should make a public market bid.  That would be one way of making sure the share price reaches $0.87 before the AGM.  She however is trying to gain effective control of the company without doing this
Asking for a Chairman of a company to resign if the share price does not reach a certain level is ridiculous
  • While the Chairman has a fair amount of influence over the company, it really is the management team which determines how well the company is doing
  • Final responsibility should and does lie with the Managing Director and the Chairman however they can no more control the share price than they can people's opinon of the company.  Even if they turn operating performance around there is no guarantee that the share price will move at all
  • This is purely playing on small shareholders' dissatisfaction with the share price performance. 
Wants directors to be able to publicly comment on the state of the company
  • I think requiring all media communications to go through the Chairman is a perfectly acceptable way of operating - it helps the company keep it's message on track.  If there are disagreements the relevant directors should resign and then they are free to speak publicly
  • Gina Rinehart does not want this because in the event she does get her directors nominated to the board, she is probably going to try and make a public case for all the people who do not agree with her to be kicked off the Fairfax board (thus getting back to the effective control point)
Want to be able to share board conversations and minutes with external parties
  • This is just ridiculous.  The way they phrase their argument is that it allows directors to get independent advice.  HOWEVER what it would allow is for directors to share the information with the public, with the media or with anyone else which would destroy the company's ability to keep their business dealings private
Why I think Gina Rinehart should NOT get a seat on the Fairfax board

She will not sign the editorial charter of independence
  • In the letter the shareholders she says that the disagreements with the current board were never about the charter of Independence.  If this is the case surely it would be much better for her to sign the charter once and for all
  • HOWEVER she has refused to do this indicating that her intentions are to control the news and influence public opinion to her point of view
Gina Rinehart has no experience running a publishing company nor of turning ailing companies (like Fairfax) around

Investing in Real Estate with family members or friends

Investing in real estate in some countries (such as Australia) are seen as the 'easiest' way to make money and so everyone clamours to get into the real estate market.  However saving for a deposit is one of the hardest parts about entering the property market and so people who are looking to get on this supposed gravy train look to go with other people to get into the market quicker.

Although there are some positives to investing with others, especially with family, in my opinion these are largely outweighed by the negative factors.  I have listed both the pros and the cons of investing with family or friends and things you should consider before you invest.

Benefits of investing in property with family members or others

There are a few clear benefits to investing with others.  These include
  • As mentioned above it is easier to enter the property market if you are not saving on your own for a deposit.  Banks are also more willing to lend you money as they have two incomes as security
  • It reduces your exposure in any given investment
    • One of the biggest downsides of property investment is that because of the prices of houses it is hard to spread your risk because the capital requirement for each property is so high
    • When you invest with others your effective risk and capital contribution is much lower
  • Provides a fall back in the event one of you get sick or lose your job
    • If you get sick or lose your job, your mortgage still has to be paid and your property still generates expenses. 
    • Having more than one person means that in the event one of you get sick the other can still take over the responsibilities
Cons of investing in property with family members or others

I think the cons far outweigh the benefits when it comes to investing with others.  While I have outlined almost all of the benefits of investing with others above below are just a few of the cons of investing with family members or others
  • You are completely liable for any liabilities at the property
    • This means that if the person you are investing in is unable to pay their share or refuses to for any reason you are liable for the full amount
    • People always say 'this can't happen to me' and you often have a high degree of trust between yourself and family members or close friends but sometimes their inability to pay is not their fault - they may lose their job or have an accident.  The bank does not care about this and they will come after you.
  • You may not have the same investment philosophy or time horizon
    • When you own a property on your own you control everything including when maintenance gets done, when you sell, if and when you refinance.
    • It is very rare that two people are in exactly the same financial situation at all times and so there can be conflict over what is to be done with the property (i.e. they want to sell at any price and you want to hold on to the property because you think the price will increase)
  • There are serious legal implications for buying properties with others
    • In common law countries (Australia / UK / Canada), properties are general bought under one of two types of title - tenants in common or joint tenancy
    • Under joint tenancy if one person dies their interest in the property automatically goes to the other owner
    • Under tenants in common the person that dies can will their share away to someone else
  • How do you split the profits / benefits if one person has contributed more than the other?
    • This can be a very touchy subject especially if one person has contributed more OR if one person was contributing while the other was out of a job and vice versa
  • What happens if you have an argument?

Friday, 10 August 2012

Donating to Charity - Check the expense ratios

We all want to make sure that the money we donate to charity gets used in the right way and actually gets to the people who need it the most.  However if you do not research how much a charity actually spends on charitable work, a significant portion of your money could be going to administration costs to keep the charities' staff employed.

You should always therefore look at what the expense breakdown of the charity is

Charities will typically provide (somewhere on their website or promotional material) a breakdown of how their funds are spent.  You need to be comfortable with the level of their administration costs because even though they may have the most grand vision, if the money is not getting to the people they want to help then it is not doing any good.

Where can I find the expense breakdown?

There are several sources that you can use to find the expense breakdown
  1. The charity's promotional materials
    • Most charities will quite openly state what their expense breakdown is and what they spend their money on
    • If you cannot find it anywhere on the charities website or in their promotional materials then STAY AWAY.  All honest charities should be providing this publicly.  The last thing you want to be doing is handing your money over to a scam
    • This is probably the best way to check if you know what charity you want to donate to
  2. There are many sites on the Internet which summarises the expense breakdowns
    • The Internet is a great resource for seeing expenditure summaries
    • If you are not sure what charity you want to donate to there are many great websites which summarise what the charity does and what it spends it's money on
      • An example of a good site is for US based charities (this is particularly for searching for a charity based on an area you want to support)
    • Note that I would avoid sites that charge charities for a 'premium listing' but do little to provide the donors with information about the charity - in particular those that do little to describe and evaluate what the charity does and it's openness. 

What should I look out for in the expense breakdown?

There is no bright line when it comes to how much a charity should be spending on certain activities but you should be aware of how your money is being spent.  Areas to keep an eye on include

What is the difference between ESG and Ethical Investing?

This post will deal with the difference between ESG (which stands for Environmental, Social and Governance) and ethical investing.  They are actually very separate ideas although people tend to use them interchangeably.

At a high level the difference comes down to the following
  • ESG is a positive screen for companies which consider the environment, their social obligations and promote good governance
  • Ethical Investing is a negative screen which eliminates investments based on certain criteria (common examples include no gambling, tobacco, mining etc)

What is ESG?

When you invest using ESG you are investing in firms which operate in the 'best possible way'.  It can therefore be though of as a 'positive screen' for those firms and investments which operate in ways which
  • Minimise damage to the Environment
  • Promote Social well being
  • Are proactive about good Governance
Note that every investor that considers ESG will place a different emphasis on ESG considerations.  Further when considering ESG factors one can either look for firms that avoid the bad outcome or promote the good outcome.  For example:
  • Some investors will look for firms which minimise damage to the environment while others will look for firms which actively promote environmental well being
  • Some investors will look for firms that do not cause social harm while others will look for firms which promote social values
  • Some investors will look for companies which do not have any glaring governance issues while others are particularly concerned about good governance
If you are particularly concerned about ESG and are looking for a fund that invests using ESG principles have a look at the language in their documentation to see where on the scale they are.  Some funds are primarily value funds who see the downside for firms not investing in ESG principles while others truly believe that investing in ESG conscious firms will result in higher long run returns. 

What is Ethical Investing?

Ethical investing, quite simply is investing only in those companies which meet a strict criteria for investment.  It is often considered a 'negative screen' because there is a very definite idea of what sort of companies should not be included. 

The type of investments chosen will depend on the criteria used.  There are several common types of ethical funds / approaches including
  • Christian funds which only invest on a biblical basis and excludes investments in things like weapons manufacturers among others
  • Islamic funds which do not invest in companies involved in usury or alcohol among others
  • Environmental funds which do not invest in mining operations etc
There is no real limit to the number of ways that ethical funds can be cut.  In fact most of us probably have some things we would never invest in because we do not feel comfortable doing so and so in our own way we have an ethical criteria for investment

What is the difference between ESG Investing and Ethical Investing?

Thursday, 9 August 2012

The Big Short by Michael Lewis

The Big Short by Michael Lewis, author of Liar’s Poker, is a well researched, although obviously biased, look at sub-prime debt crisis and the factors that led up to it.  The book has been on several best sellers lists and for good reason – it is the best book that I have read on the topic and is interesting even if you do not know anything about CDO’s, subprime debt, the US housing market and all the other factors that led to the crisis.

The Big Short: Inside the Doomsday MachineAlthough the book primarily focuses on the hedge funds (including a fund that was seeded by Joel Greenblatt, author of You Can Be a Stock Market Genius which was been previously reviewed on this site) that saw the crisis coming and made significant money out of it, Lewis also looks at the other players in the market including the buyers of the mortgage backed securities, the buyers of the credit default instruments, the investment banks that were pedalling the goods to everyone and the ratings agencies who were probably the reason that the whole thing came undone.

The strength in The Big Short is on Lewis’ ability to distil quite complex products and topics down to rather simple explanations of how they work and the relative pros and cons of either side of holding the product.  Also I liked how Lewis broadly arranged his books into time periods and then looked at that particular time period from every angle (i.e. pre-crisis when no one realised there was a problem, when people started to realise the issues, when the crisis became public knowledge etc)

As a last point of note, when I read this book I read it from the perspective of an investor (as that is what I do for a living).  However I was chatting about it to investment bankers who really focussed on the failings of their business model and incentives.  Again when chatting about it to those who have nothing to do with the financial industry the focus was on how the system failed.  There are so many different ways to interpret the lessons from this book and it all depends on the perspective you are reading it from.