This article originally published in The Northern Daily Leader on 6 December 2013.

The board of the Reserve Bank of Australia met this week to decide on interest rates, as is usual on the first Tuesday of each month (except for January). It’s no doubt a serious affair, with much discussion of global economics and finance, although I have a standing joke with Graham Archer from 2TM that the biggest decision the board needs to make is whether to have red or white wine with their meal. To be fair though, the board does shoulder a heavy responsibility. The level of interest rates, as targeted by the RBA, generally sets the benchmark for all interest rates throughout the economy. Your mortgage rate, credit card rate, term deposit and savings account rate are all influenced by the RBA board’s interest rate decision. Unfortunately, the actual decision of the board has become somewhat of a media circus. When interest rates increase, the nightly news is filled with images of young families struggling to make ends meet and cover the mortgage. However this picture ignores the reality of housing in Australia. Only around a third of all homes in Australia are owned by households with a mortgage. Another third of homes have been paid off by their owners, while the remaining third are owned by investors. So when the media focuses on the struggling young family, they’re focusing on a relatively small proportion of the population.

The RBA board members probably deserve a good lunch and bottle of wine each month however, given the complex set of economic circumstances they must manage. The analogy I like to use is that of a relay race. The mining sector has been doing all the running for the past few years, but is flagging quickly. The RBA is trying to engineer a smooth handover of the economic growth baton from the mining sector to the rest of the economy. At this stage however, it looks like the track coach forgot to give the rest of the economy the signal to start running. Low interest rates are starting to have an impact, but it may be too slow to get the economy going when the mining sector finally runs out of puff and slaps the baton into the rest of the economy’s out-stretched hand. Fortunately this is a one-horse race, so we can’t lose, but we could spend some time crawling around the track, rather than sprinting like we have become accustomed to. This has implications for jobs, housing and our standard of living. So let’s hope the RBA board members limit themselves to just one glass of wine during lunch; this is not the time to start thinking we’re invincible.

This article originally published in The Northern Daily Leader on 23 November 2013.

It’s the ants that are the problem. I’m sure of it. I know that they’re spending every night silently doing their best to sabotage my plans. I just know it. I’m trying to grow some lawn you see. Rather than a dusty patch of bindiis and weeds, I’m trying to cultivate a lush green carpet. And so for the past few weeks I’ve been making regular trips to Bunnings and coming back with hoses, soakers, spray guns, sprinklers and boxes and boxes of lawn seed mix. If you are a shareholder in Wesfarmers, owner of Bunnings, you may see my contribution in the company’s next set of financial results. Each day I check the five day weather forecast, and if the omens look good, I sprinkle a few boxes of seed over the lawn and wait for the rain. At night however, the ants come out. In their thousands, they diligently scour the yard for my precious grass seeds and carry them back to their ant hole, burying the grass seeds deep underground where they’re of little use.

I thought I could defeat the ants by sheer quantity – each one kilogram box of seed must contain tens of thousands of seeds, surely the ants don’t have the time or antpower to collect all of them? Yet each morning I notice a deep ring of grass seeds surrounding every ant hole, knowing that the ants have been busy all night harvesting the rich seed bounty. And so it’s off to Bunnings again, and another $40 in grass seeds. The problem of course, is that my entire strategy is wrong. I probably need professional help. Preferably a turf company who would come in and simply lay down an entire lawn in just a few hours. The upfront cost will almost certainly be higher, but the lawn would thrive and grow, unlike my current approach of simply throwing box after box of lawn seed in the dirt and hoping for the best.

In some ways unfortunately, my approach to the lawn mimics some people’s approach to investing. Rather than engaging the services of a professional (and yes, almost certainly paying a fair amount for that service), some people try the DIY approach. Newspapers, the 7 pm finance report and a hot tip from a neighbour take the place of grass seeds, fertiliser and hoses. It’s likely that their success at long term wealth creation is not much more impressive than my efforts with the lawn. A few straggly bits of green here and there, but mostly a waste of time and effort and a lot of happy, contented ants.

This article originally published in The Northern Daily Leader on 9 November 2013.

Those of you who are into horses may well have heard of Pat Parelli. For those that haven’t, Pat runs a popular horse training program based on the principles of natural horsemanship. Pat is quite a character, putting on entertaining live shows where he demonstrates his approach to training horses. Quite a few years ago, circumstances led to me attending one of his shows in Melbourne. At the time I was the ‘owner’ of a stock horse called Didgeridoo, who believed he was the boss and I was his servant (he was right). I had planned to take Didgeridoo to one of Pat’s shows, where he would use his training techniques on a select group of attendee’s horses. I had a vain hope that a few hours with one of the world’s best trainers would teach Didgeridoo not to try and physically assault me every time I came within kicking distance. But when I showed Didgeridoo the brochure, he looked pointedly at the bite mark on my arm, shook his head ever so slightly, and I knew I would be going to the show alone.  Nonetheless, the show itself was very interesting, but what stayed with me many years later was a memorable quote from Pat which was ‘Don’t just do something, sit there!’. What he was saying of course, was that too many people jumped on a horse’s back and started fiddling, shifting or moving around. His advice was to just sit there; do too little rather than too much. A bit like toppings on a pizza, sometimes less is more.

In some ways, Pat’s admonition to just ‘sit there’ can be applied to our approach to investing. In many cases, it’s what we don’t do which is more important than what we do ‘do’. It’s the decision not to invest in HIH; not to invest in Babcock and Brown; not to invest in ABC Learning, unlisted property funds, collateralised debt obligations or any other of the many thousands of investments which turn out to be near or complete failures. This is what I see as our central role in managing our client’s money – avoiding bad investment decisions. One or two bad investment decisions can more than offset the benefits of many great investment decisions. Appropriate investment advice should focus first on not losing your money, with a secondary goal of making you money. Even the world’s most successful investor, Warren Buffett, follows this rule, advising investors to follow two rules to successful investing, “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”. Simple rules to investing which we follow and recommend you do too.

This article originally published in The Northern Daily Leader on 26 October 2013.

A long time ago I read a book written by Jerry Seinfeld, which was called ‘Seinlanguage’. It was basically a collection of humorous anecdotes and jokes, all in the style of stand-up comedy. If you have ever watched the TV show ‘Seinfeld’ you will know what to expect.  In one chapter Jerry wrote how studies have shown that for most people their greatest fear was public speaking, with death coming in below that as number two. He remarked how that obviously meant that at a funeral most people would rather be in the casket than delivering the eulogy.

While perhaps most people would rather die than have to speak in public, a more logical and realistic fear which we encounter in our business is the fear of not having enough money during retirement. It sounds like a boring topic, but having sufficient money to fund your retirement may mean the difference between spending your time on a European river cruise, or spending your time paddling a kayak along the Peel River. Not that the Peel doesn’t have its attractions, it’s just that perhaps they don’t quite match up to say, the Danube or Seine. Regardless of your holiday destination of choice, for many people nearing retirement the issue of how much money they need to retire, or will have during retirement, is a major concern. Thanks to the internet there are a multitude of websites which offer fancy calculators to help you in determining your income during retirement, but there is a very simple approach which will give you an idea of your financial situation during retirement. It is a rule of thumb based on a simple 5% sustainable rate of withdrawal. So if you retire with $500,000 in superannuation, the 5% rule implies that your ongoing annual income during retirement should be set somewhere around $25,000 per annum – around $500 per week.

Now $500 per week doesn’t sound like much when you consider you have $500,000 in assets, but the point is that the 5% represents a sustainable withdrawal rate. It implies that you are unlikely to run out of money, no matter how long you live – assuming your money is invested appropriately of course; you can’t put it all into HIH or Babcock and Brown and expect it to last 30 years. It’s a reasonably conservative withdrawal rate, which is exactly how we prefer to approach investing and retirement funding. It works backwards too – if you want an annual income during retirement of $100,000, you probably need to aim for $2 million in assets. It’s a rough guide and we do use more complex modelling when working for clients, but it’s enough to give you an idea and hopefully start planning that European river cruise.

This article originally published in The Northern Daily Leader on 12 October 2013.

One of the most basic, yet little understood notions in investing, is that of risk versus reward. In fact, the concept of risk versus reward forms part of nearly everything we do on a daily basis. When you decide to cross the road away from the pedestrian crossing or traffic lights you’re making a risk versus reward judgement. The reward is saving the 60 seconds it might take to walk to the pedestrian crossing; the risk is that you come off second best in a collision with 1,500 kilograms of steel and rubber moving at high speed. Sometimes the risks and the rewards are obvious, which makes the decision that much easier, but sometimes they’re not. We tend to be far more proficient at assessing the reward rather than the risk. We know the pleasure that we might derive from that extra glass of wine while out for dinner, but fail to correctly consider the risk that there may be an RBT on the way home. We’re even worse at considering those risks which have long term consequences. Smoking, drinking moonshine and eating lard are all activities which have long term implications, but are unlikely to kill you in the short term. Given that the payoff (or payback) occurs so far into the future, we’re happy to indulge now, with little thought of the future consequences.

As we’re better at measuring the reward, rather than the risk, it’s worth making an effort to understand the risks before making a decision, be it to cross the road or invest in BHP. A useful tool we use to assess investment risk is known as Value at Risk, or VaR. VaR is a relatively simple measure that can be used to measure the amount of financial loss that can be suffered by a portfolio of assets for a given probability. For example, an annual 10% VaR of $100,000 implies that there is a 10% chance of your portfolio falling by $100,000 over a twelve month period. VaR can be calculated for any time period and for any probability, which should allow you to correctly assess the level of risk accompanying your current or proposed suite of investments. The problem which can arise is where we let VaR over-ride our common sense. Being able to distil the entire investment risk associated with a portfolio of assets to a single figure is a neat trick, but it doesn’t absolve you further research or appropriate monitoring of your investments. Extensive number-crunching and complex financial models are useful tools to managing your investments, but don’t let the ‘magic’ obscure the truth. If it’s too good to be true, it usually is.

This article originally published in The Northern Daily Leader on 28 September 2013.

One of the most interesting birthday presents I ever received was for my eleventh birthday. My parents bought me a computer – a fancy, new-fangled thing that had just hit the shops. The computer was a ZX Spectrum, which was at the cutting edge of computer technology. It came with 16kb of memory, which is less than you might find in a paper brochure that they hand out today at the Telstra shop. Nonetheless, in its day it was a marvel of engineering. I remember spending three days figuring out how to program the computer to flash the word ‘HELLO!’ across the screen in big letters. I dragged my Dad into the study to show him my amazing achievement, but he was a little less than enthusiastic. He obviously couldn’t see how it was just a small step from that to the internet as we know it.

Fortunately, not long after my birthday, my cousins Clinton and Greg were also given the same computer by their parents. Clearly this was a clever ploy by our respective parents to try and keep us from pursuing more destructive pursuits, like lighting fires, smashing windows and hitting each other. It certainly worked as we spent countless hours playing every computer game we could get our hands on. We were so keen we decided to write and publish our own computer games review magazine. We took a school exercise book and diligently wrote pages and pages of our views on the few computer games we had managed to scrape together. We adopted a professional approach to our work. We had an editorial, a reader’s letters section and even threw in a couple of imaginary advertisements. We soon ran into an insurmountable problem however – printing and distribution. The magazine was handwritten, so we were going to struggle to increase our readership beyond immediate family.

Today however, thanks to advances in technology, publication and distribution is no problem. A website, blog, Facebook or Twitter account allows anyone potential access to billions of followers or viewers. In some ways, it has become too easy to disseminate information via the internet. Too hard to distinguish the ignorant from the informative. And as you may expect, the world of investing has attracted its fair share of crackpots, imbeciles and out-right crooks who seek to use the internet to separate you from your money. Get rich quick schemes, share market hot tips, proven systems to make a million in just six months – the internet brings all of these half-baked and downright dangerous schemes right into your living room. My advice is to act like my Dad – feign some interest if you need to, but move on to something more important as soon as you can.

This article originally published in The Northern Daily Leader on 14 September 2013.

Before the advent of iPads, Playstations, X-Boxes and the myriad of other electronic entertainment devices, board games were the mainstay of family entertainment. Every household had a cupboard filled with classic games like Risk, Monopoly, Squatter, The Game of Life, and Scrabble. Dog-eared and worn, the games would be dragged out during school holidays and on weekends, where the family could spend some quality time together testing their vocabulary or military leadership skills. My personal favourite was Monopoly. I think it was the sheer amount of money that came in the box; all those neat little $100 notes. When you were only ten or eleven years old, it seemed like it was more money than you could ever imagine and I always fancied that surely somewhere there was a toy shop which would accept Monopoly money.

With only an elder sister, my list of potential Monopoly opponents was short and it usually took some convincing to get her to play a game. Usually the game would end acrimoniously after just an hour or so when I would start complaining that she wasn’t taking it seriously enough. It always seemed to happen just as I was building my latest hotel on Park Lane and wondering what to do with my four train stations. I guess her attitude wasn’t too surprising – at an age where boys, clothes and jewellery were just becoming interesting, why would she want to spend five hours playing a board game with her younger brother?

I started thinking about Monopoly after reading that Sydney recorded a record auction clearance rate of 87% over the election weekend. While the property bull market is probably not yet fully underway, there’s no doubt that record low interest rates are starting to have a major impact on property prices, particularly in Sydney and some of the other major cities. The difference between Monopoly and real life however, is that it’s not possible to borrow in Monopoly. There’s no leverage; no 100% loan-to-value ratio home loans; no property spruikers telling you that a $500,000 mortgage is no problem on a $50,000 salary. Many people attending weekend auctions in Sydney and the rest of the country are basing their repayment calculations on unsustainably low interest and mortgage repayment rates. At some point interest rates will rise, and though we aren’t going back to 1980’s-style rates of 20%+, borrowers will be feeling the pain long before then. In NSW the average home loan is now just under $350,000, an increase of nearly $150,000 in ten years. When interest rates rise, the current housing infatuation may well end like my past games of Monopoly with Lauren; in a flurry of bankruptcies, tears and recriminations.

This article originally published in The Northern Daily Leader on 24 August 2013.

Our son Jack is just over two and a half years old, putting him well into the ‘terrible twos’.  In somewhat of a pleasant surprise however, reaching this milestone hasn’t resulted in the deluge of tantrums which we were expecting. There is the occasional tantrum of course, which can usually be dealt with by the appropriate parenting technique. Liz’s approach is to use gentle reasoning and try to remain calm until the storm passes. My tactic is to use chocolate and lollies to bribe him into behaving – I know which approach works the quickest, although I may regret it if I find myself visiting him on weekends at Long Bay Jail in fifteen years’ time.

So no real tantrums then, but his new-found talent is to be confoundingly fickle. For a few months he couldn’t get enough Greek-style natural yoghurt. Breakfast, lunch, dinner…it didn’t matter what meal it was, it had to involve a mug of yoghurt. Then one day he gave the usual mug of yoghurt a sceptical look and pronounced it as ‘pooey’, and from that day onward a drop of yoghurt has never passed his lips. And it’s not just yoghurt. For a week the mania was all about vegemite. Everything had to involve vegemite. If you gave him vegemite on a piece of cardboard he would be back within minutes wanting more. Then one day vegemite was consigned to the dustbin of history, pronounced as ‘pooey’. Porridge, cheese and bananas have all at one stage or another fallen victim to the slur of ‘pooey’ and disappeared from his diet. Strangely chocolate or lollies seem to never be denounced as ‘pooey’, but one can only hope.

Unfortunately, on occasion some investors can be just as fickle as Jack. Should we be in gold? (Just before the gold price peaks at $1,900 per ounce). I hear there’s money to be made in uranium (just as the price of yellowcake plunges 70% during 2009). What about investing in this great internet business? (Just before the dot-com bubble pops with a vengeance). The message in all this is that making money from chasing the latest investment fad involves being incredibly lucky or smarter than 99.99% of the rest of the market participants. And as most of us are neither of these things, it’s an approach that invariably results in a smaller amount of money than you started with. The truth of investing is that there are no shortcuts; no quick and easy trades which are going to net you a 300% gain, at least not on a regular basis. When you’re looking through your investments, or considering making a new one, be realistic and ask yourself – is this a business I want to own, or is it a little bit ‘pooey’?

This article originally published in The Northern Daily Leader on 17 August 2013.

If you’ve been reading this column for a while, you may remember how the imminent arrival of our first baby a few years ago was the catalyst for a search for a new car. The old Landcruiser ute didn’t have the features that made a car ‘baby-friendly’, such as air-conditioning or shock absorbers that actually absorbed shocks. Rather than sell the ute however, I managed to convince Liz that it would come in handy one day when we hopefully ended up on a small hobby farm outside town. Liz relented and the Cruiser was temporarily pensioned off to an empty paddock at my mother-in-law’s property outside Armidale.

A few weeks ago I was up at Armidale, helping cut up and load some firewood lying around the paddock. It was a perfect opportunity to give the ute a little run, so I climbed in through the passenger window (there being a small issue with the driver’s door lock, another character flaw which apparently didn’t help in the ‘baby-friendly’ stakes) and fired her up. As I turned the key in the ignition however, the starter motor made a screeching noise, the chassis shuddered and a big puff of smoke drifted out the front of the bonnet, accompanied by a loud bang. Now I don’t know much about cars, but even I knew that something was wrong. To cut a long story short, the next day a local mechanic arrived to check it out. He peered into the engine bay, tugged on a few cables and turned to me and said “Mate, it looks like there’s a multiple disaggregation breakdown with the holgen-quench geiger tube, probably due to a shortage of hafnium in the short-time dispersion UTA.” At least, that’s what it sounded like to me. I nodded gravely and putting on my best I-know-what-I’m-talking-about voice, replied “Yes well, that’s a common issue with this model, isn’t it?” He wasn’t fooled for a second, he looked me up and down and said “Yeah yeah, she’ll need a new amplitude analyser and BER closed ventilation circuit, and judging by the look of your shoes I’m sure I’m going to be able to squeeze an extra couple hundred dollars out of you somewhere.” I just nodded, handed him my credit card and rang the bank to tell them to double my credit limit.

In some ways the financial advice industry adopts a similar approach to its clients – bamboozle them with buzzwords and technical terms, giving the appearance of knowledge and expertise, then hit them with a big bill. The job of an investment adviser should be to distil the noise and nonsense out there, and present strategies and options in a language which is clear and understandable. If your adviser sounds like a Latin-speaking rocket scientist trying to impress, perhaps it’s time to find one who isn’t.