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Talking Finance

Look at that swing

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 21 May 2016.

There’s no doubt that every job has both its advantages and disadvantages. If you work for an airline in any capacity, you probably get as many cheap flights (good) and small packets of peanuts as you can bear (bad). Work at Bunnings for example, and you probably own a small fortune’s worth of power tools (which is good) that you never use (which is bad). My father’s chosen career was a professional golfer, which had the advantage of ensuring that we were never short of golf clubs to choose from (at one point I remember counting 50 sets of clubs stashed in various spots around the house), but the downside of having a professional golfer in the family was that we spent a lot of time at golf courses. If you liked golf that wasn’t too bad, but if you thought there were better things to be doing than spending 12 hours a day at the course, you were in trouble.

One benefit of hanging around so many golf courses however, was that you got see how differently people played golf, even the professionals. No golf swing is exactly the same, generally a result of the person’s body shape, height and coaching (or lack thereof). Some golf swings are beautiful to watch – smooth, balanced and rhythmical, think Tom Watson or Adam Scott here. Others are decidedly ugly and look like the golfer is trying to bash in a snake’s head with a shovel – I don’t want to be mean, but Jim Furyk and Craig Parry probably fall into this category. The thing is though, you don’t need the most beautiful golf swing to be a successful golfer. Jim Furyk, for example, has won 27 golf tournaments, including the US Open. Craig Parry has won 23 times and both golfers have made a pretty good living from golf (US tour earnings alone of $65 million and $8 million respectively).

Just like a golfer’s swing, in investing there is no one right or wrong approach. Everybody has their own needs, fears, feelings and objectives – there’s no single solution which perfectly covers every situation. For some people the stock market is a risky and dangerous place they need not enter; for others, an ‘investment’ in a fiery thoroughbred race horse is just perfect. The point is, your approach to your finances and the right solution for you is going to be different from everybody else. Just like golf, don’t worry about how it ‘looks’, rather judge your investment approach by its results.

Throw it away

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 7 May 2016.

One of the interesting things I have learnt about children, since becoming a parent, is that they hate throwing anything way. It’s most obvious when I ask one of the kids to throw something in the bin for me. They’ll firstly give me a strange sideways glance, as if they can’t believe what they’ve just heard. Then they’ll walk ever so slowly over to the bin and peer inside, presumably checking to see if they can make out the fires of hell far below. Then the offending rubbish is held over the bin, carefully pinched between thumb and forefinger, before it’s dropped into the darkness, followed by another wary look into the bin, just in case the act of dropping the rubbish had started an inexplicable sequence of events that was going to culminate in a spectacular explosion. This very lengthy process can take a long time when someone has dropped a bag of sultanas on the floor.

Another rubbish related behavioural trait, is an apparent inability to distinguish between what’s rubbish and what’s not. An empty box for example, no matter its origin, is most definitely not rubbish. It’s an impromptu and mobile treasure chest, regardless of whether it initially held beer, nappies, shoes or coffee. Any empty container really, if it’s not shoved into the bin quickly enough, gets claimed by one of the children and pressed into storage duties. Obviously hoarding is a trait which we develop at a young age and which some people never really let go of.

When it comes to investing however, there’s no place for hoarding or for not wanting to throw anything into the trash. No matter how diligent is your investment selection process, at some stage you are going to end up owning some investment garbage. Now if you were a five year old, you’d be tempted to hang on to that garbage for the rest of your life, but as an adult you need to be more discerning. Some companies or investments are simply never going to make it back, from an investment perspective, and need to be let go. It’s not an easy task however, with a substantial body of research showing that investors hate to realise their losses, preferring to hang on in the faint hope of an improvement, an approach which typically leads to lower returns. Just as Jack and Kate don’t need all those empty cereal boxes stashed under their beds, do you need to keep the rubbish in your portfolio?

5 Investment rules

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 23 April 2016.

Recent years have seen a veritable flood of self-help books about making money, whether it’s through property speculation or stock market investing. They tend to have catchy titles like “The Property Gazillionaire: How I went from 1 to 20,000 Properties in Six Months!” or “Get Rich, Stay Rich: The Money-Making Guide for Impatient People”. I’m sure the books make for great reading, however I’m always a little curious as to why you would sell the apparent secret to untold wealth for just $12.99, but perhaps I’m simply being too cynical. Nevertheless, in the spirit of all this wonderful advice-giving, let me give you some free advice; it’s almost all you need to know when it comes to your finances. Here are the rules, in no particular order:

1. If it sounds too good to be true, it really is.

Everyone knows this one, yet it’s probably the most frequently ignored law of investing. When the rest of the world thinks 5% is a good return, how likely is it that someone else has stumbled upon a way to make 25%? With no risk? Exactly.

2. If you can’t understand it, don’t do it.

Or at the very least keep asking questions until you can understand it. Many investment losses can be avoided if you are fully aware of and understand the risks involved. If you don’t know the risks, don’t part with your money.

3. There are no shortcuts (that don’t come with the risk of losing everything).

Making money in a hurry requires a level of luck only experienced by lottery winners. Slow and steady accumulation of wealth may not sound very exciting, but it’s one of the few options open to you if you don’t have rich parents or a knack for picking lottery numbers.

4. Fear of missing out (FOMO) can be hazardous to your wealth.

Everyone wants to invest in gold after the gold price has gone up, buy property as the market reaches its peak or sell their shares just as the stock market bottoms. Falling victim to FOMO results in you joining the herd and unfortunately history has shown that the herd is often wrong.

5. Don’t put all your eggs into one basket.

Again, everyone knows this one, yet it’s sad how many times you hear of a hard-working retiree who lost it all because they had all their money in one investment, be it a managed fund or individual company. “Diversify or despair” should be the motto of every investor.

Not as exciting as building a property empire in 6 months, but these rules actually work (and best of all, they’re free!).

The cooking genius

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 9 April 2016.

As I write this, tonight’s TV fare is another reality television cooking show. It’s the usual format – a bunch of ordinary Australians from across the country, who are handy in the kitchen and dream of making it big in the cooking or restaurant industry. The usual approach to chef stardom, of getting a job as a lowly-paid pot-washer and working your way to head chef over the next thirty years, has made way for the glory of instant celebrity and a published cookbook. Unfortunately it seems as though the competitors each successive year haven’t noticed a nasty trend in reality television – if the first winner of the show, in series one, made it to D-grade celebrity-dom, the current crop of winners are going to struggle to make it out of Z-grade at best. For example, who can remember the winners of Masterchef or Australian Idol from six years ago?

Watching the show, what struck me was the confidence that every contestant had in their own abilities. No shrinking violets here, it’s all ‘We’re gonna smash the competition’ or ‘So and So may be good, but we’ve got the skills to take it home’. Perhaps it’s the editing or maybe it’s only because of encouragement by the producers, but it’s as though each contestant truly believes they are blessed with exceptional cooking skills. The tendency to be over-confident in one’s abilities is not restricted to reality television cooking shows however, unfortunately most of us are prone to over-confidence. One study in the United States found that 88% of Americans thought that they were better than average drivers, clearly an impossible position. In proof that over-confidence was not based on nationality, the same study found that 77% of drivers in Sweden similarly believed they were better than average drivers. Similar studies have found that in almost every endeavour, we tend to think that we are better than we really are.

The perils of over-confidence when it comes to investing are many. Overconfidence often manifests itself in excessive trading – if you truly believe you know what you are doing, you’re likely to (erroneously) want to keep on doing it. Buy, sell, buy, sell and generally lower your overall long term returns. The illusion of control and desire to master the market are also traits born from over-confidence. Again, such an approach is unlikely to result in the long term returns you expect (or hope) to make. Avoiding the trap of overconfidence is difficult, generally experience is the best antidote. But when you’re a good home cook on the fast-track to culinary stardom, taking time to gain experience is as undesirable as mistaking the salt for the sugar in the crème brulee.

What you want to hear

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 26 March 2016.

If you know someone who has a particularly strong political view, you may have noticed how this influences the newspapers or magazines they read and which television channels they watch. It’s a generalisation of course, but if they were somewhat conservative they might prefer to read The Daily Telegraph or The Australian, and get their TV news from Sky News. If their political views leaned to the left however, they probably prefer to watch the ABC and read The Sydney Morning Herald. That’s not to accuse the various media outlets of deliberate bias, it’s simply an acknowledgement of the fact that most news sources tend to attract readers or viewers of a particular political viewpoint.

This propensity of ours to seek out sources of information which corroborate and reinforce our views and opinions has a name – confirmation bias. If we hold a particular view, we feel more comfortable reading articles or watching television shows which broadly support our opinions. It’s as though we draw comfort from the thought that we’re not alone; we’re happy that there are others that feel the same way we do. While it’s arguable whether the presence of confirmation bias is a good or bad thing when it comes to politics, confirmation bias should be avoided when it comes to your investments. The danger with confirmation bias is the selective thinking which clouds your judgement. You may own shares in a company which you believe has great prospects so you decide to do a little research, perhaps reading the company’s marketing material and financial reports, or listening to a recorded interview with the CEO. You might even jump onto an online forum where fellow shareholders discuss the latest news and developments emanating from the company, all heartily agreeing with one another about what a great investment they had purchased.

Can you see the danger? All you’ve done is look for evidence which confirms your already-held view of the company and you’ve made no effort to seek out information which contradicts your views. This is a perfect example of confirmation bias. Proper due diligence should include an active effort to find information which challenges your views and opinions – it helps you to question your own position more forcefully. It doesn’t mean your opinion is wrong; you just want to make sure you have considered every angle. Not that it’s going to help much when it comes to politics, as said by John Kenneth Galbraith, “Politics is the art of choosing between the disastrous and the unpalatable.”

Be Don Chipp

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 12 March 2016.

One of the (admittedly trivial) difficulties in my life is coming up with the 450 words needed for this column each fortnight. 450 words of interesting, snappy and fresh writing, which yet somehow links back to finance and investing. Did Jack say something hilarious after school that I could relate back to the stockmarket? Or is there some event in my school or university years that I haven’t yet somehow translated into a lesson on the dangers of over-trading? Are there any behavioural characteristics, however obscure, that hadn’t yet had a mention? Fortunately, when the well of clever ideas runs dry, there’s always one ready source – the government.

Yes, the government can always be relied upon as a ready source of financial fodder. As Americans like to say, the scariest sentence in the English language is: “We’re from the government, and we’re here to help”. The problem with the government, and in this I mean every government, not just the current majority in parliament, is that they’re alternatively torn between protecting us and stealing from us. Superannuation is a perfect example of this conundrum. The government wants us to save and provide for own retirement, thereby not relying on the government-funded Age Pension to cover our living expenses during retirement. However, every dollar that we save towards our retirement deprives the government of a small amount of immediate tax revenue. Now, seeing as our elected leaders are surely the smartest, most knowledgeable and forward thinking examples of humankind, surely it would be readily apparent to them that foregoing say, five cents in taxation revenue now, but saving a dollar in pension payments in 30 years’ time, is a reasonable compromise? Wouldn’t it? Well sure, on the same basis that Father Christmas does exist, Harold Holt is alive and well in a small village outside Beijing and I really did see Elvis at the self-service checkout at Coles last week.

Unfortunately, for most politicians, especially the new breed of ‘career politicians’, the short-run imperative of getting re-elected tends to outweigh the obvious long-term benefits of wise economic and financial policy. Which is why superannuation, while possessing wonderful taxation benefits (under current legislation, ahem), should be a key plank of your retirement planning, it shouldn’t be the only one. Having money in superannuation is smart; having all your money in superannuation is a risk. In exchange for the tax benefits you have effectively given the government control of your money in superannuation. Which is why, where possible, we have always recommended having assets both inside and outside the superannuation environment. For without Don Chipp around to ‘keep the bastards honest’, you need to do the job yourself.

Do the time, earn a dime

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 27 February 2016.

Another important life milestone was reached recently when our eldest son, Jack, started school this year. Just Kindergarten of course, but still a big step up from lolling around on the lounge floor playing with his wooden train set all day. Uniforms, bells, lessons and set meal-times; the poor kid probably can’t decide whether he’s in the army or in prison. But thinking of the rites of initiation, bullying in the yard, and intimidation by long-term muscle-bound inmates sporting beards and tattoos, prison is probably the best analogy. Those Year 5 kids are much more mature these days than when I was at school. Still, Jack seems to be coping well with the change and it only requires a moderate level of force to drag him out of the car at school drop-off.

The purpose of being at school is to gain an education of course, not to meet girls (or boys) and have a good time, which is what most kids tend to think of school. They’re too young to understand it, but time spent learning is the best indication of how wealthy you’ll be in later life. There is an extensive body of research which clearly links the level of household wealth with the level of education of the primary wage earner. In the United States for example, the average weekly wage of someone who finishes high school but goes no further in their education is $668. If you went to university and completed a university degree your average weekly wage rises to $1,101, and if you decided to do some post-graduate study (a Master’s for example), your average weekly wage rises to $1,326. So if you go no further than high school, your annual salary is probably going to be around $34,000 – push on to complete a Master’s degree and you can expect to earn around $69,000 (on average of course and all in US dollars, although the same relationships would also apply in Australia).

While the accumulation of wealth and money should not be your overriding goal in life, it’s clear that the longer (and harder) you are willing to study, the better off you will be from a financial perspective. Naturally, studying extensively beyond high school comes at a cost, both of your time and your wallet. A Master’s degree could set you back $15,000 or $20,000, or even more. But think of it this way – if you pay for both undergraduate and post-graduate degrees, costing $50,000 in total, your expected increase in annual earnings of around $35,000 (in US dollars), means your studies pay for themselves in less than two years. From then on the extra income is all for you. No wonder it’s said that education is the best investment – even Commonwealth Bank shares can’t match that return.

Selling sand in the Sahara

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 13 February 2016.

A couple of people recently commented to me that they had read the headline of my last article, thought it was interesting, but didn’t get round to actually reading the article. My first thought was that they obviously didn’t scare easily, as the headline read ‘The end is nigh’. But then again, newspaper articles with civilization-ending headlines are hardly new these days, where every newspaper subscription should come with a lifetime supply of Prozac. Reading (or watching) the news is rarely an emotionally uplifting activity, as the news media slavishly follow the old adage of ‘bad news sells’.

My second thought was that I appreciated their honesty – ‘Hey! I liked the look of your article, but only had time to read the headline, sorry’. It’s a bit like ordering food at a restaurant but leaving before it arrives and saying to the chef on the way out – ‘The food sounded great on the menu but I just don’t have time to eat it, but thanks anyway’. But I can’t blame them, I’m just as guilty when it comes to skimming through the newspaper. It’s all the same stories everyday anyway – political crisis? Check. Economic crisis? Check. Murder, murder, murder? Check, check, check. By then you’re onto the sports section which is just stories of bad behaviour and drug cheats. And it’s not like this is a new phenomenon –the front page of the Sydney Morning Herald from the 10th of November 1975 (to choose a date at random) contained vital news regarding a government budget crisis (so no change there), deaths by drowning, deaths from horseback, international espionage and a financial crisis. So 2015 all over again really, bar the fact that we all evidently commuted to work on horseback in the 1970’s.

However, while sticking to just the newspaper headlines is acceptable, don’t make the same mistake when it comes to your money. You’ve got to know the details. Where is your money going? What is it costing you? What are the risks? Can you get at it if you need it? Who’s in charge of it? What’s the worst thing that could happen to it? Asking these questions should be the basics in assessing any potential financial investment. It’s strange how people will drive across town to save a few dollars at a cheaper fuel station, yet will leave their retirement savings in some hopelessly inappropriate investment, all because they didn’t go beyond the glossy front page of the marketing material. And if that’s you, there’s probably a guy with a sand-making factory in the Sahara who would like a chat with you.

The end is nigh

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 30 January 2016.

Outside of a cooking show like Masterchef, or a ‘talent’ show like Australian Idol, there can be few activities that generate as many opinions as finance and investing. If you want it, there is someone who will give their opinion on the future direction of interests rates; where the stock market is going to finish at the end of the year; what the Australian dollar is doing; what the next inflation figure is going to be; what wine the board of the Reserve Bank will drink at its next meeting (ok I made that last one up, but I’ll bet it has been discussed and predicted somewhere). My personal favourite is when the nightly news bulletin crosses to a reporter standing outside the stock exchange building in Sydney, who randomly accosts any passers-by to get their views on the stock market’s performance that day. I’m not sure we’re really going to get any useful information from such an activity, unless Warren Buffet or Peter Lynch happened to be stepping out to grab a sandwich during their lunch hour and foolishly made eye contact with the reporter.

The current stock market volatility has created a mini-boom in the opinion-giving and punditry business. Analysts, fund managers, investors, economists, taxi drivers, my aunt Fiona – everybody seems to have an opinion on the gyrations of the stock market and whether or not it’s merely a correction or the world is headed to hell in a handbasket. The first rule of Punditry 101 is that the more extreme your prediction, the more likely you will be invited back to the television show/magazine/newspaper/journal in the future, where the pressure will be on to amp your prediction into even more stratospheric hyperbole. Like the squeaky wheel gets the grease, the most bearish and gloomy commentator also gets the return invitation.

In the spirit of rampant opinion-giving, I’d like to give you my own (for free!). Are we on the verge of another financial crisis (as has been suggested by many prominent commentators – who have probably shorted the heck out of the stock market and are praying for further falls), or is this just a correction and normal service will resume once the panic and fear-mongering dies down? If you have picked the right investments, your answer should be ‘who cares?’ Put it this way, if you own shares in Commonwealth Bank do you think the bank is going to collapse at any time during this period of volatility? Or Telstra? Or Woolworths? Is this current crisis likely to put the entire population off food for life? Or stop us making phone calls? I don’t think so – and there’s a prediction you can rely on.

Use your brain, you must

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 19 December 2015.

Regular readers of this column will by now (hopefully) be aware of the many and varied behavioural biases which can turn a good investor into a bad one. These behavioural biases are where we let our emotions dictate our investment decisions, instead of being the cool, calm and rational person we all like to think we are. In our minds we’re all like Yoda from Star Wars: unflappable, wise, and all-knowing, but perhaps not green, two-foot tall and with a face like a thousand year-old prune. In reality however, we’re more like a teenager on their first date: your brain has been left behind at the Lost Property office and decisions get made in a hot and sweaty panic.

One of the most damaging biases, in terms of the potential negative effect on your investment decision-making, is recency bias. Recency bias is where we place too much importance on recent events, for the sole reason that whatever happened, happened recently, rather than in the distant past. This makes us believe that whatever is happening now is likely to persist well into the future. For example, in the United States there is a high level of correlation between the price of petrol (or gas as it’s called in the US) and sales of gas-guzzling SUVs. As the petrol price falls, sales of thirsty SUVs rise in almost perfect unison. It’s not hard to see the irrationality in this – because the price of petrol has fallen over the past six months (for example), you rush out and spend $40,000 on a car which you might own for the next five, ten or fifteen years. Is it likely that the oil price, and thus the petrol price, is going to be the same in five, ten or fifteen years, as it is now? Of course not. But everyone who buys an SUV based on falling petrol prices has just made a ten or fifteen year investment based on what has happened in the past few months. A perfect example of letting recent events dictate our decision-making, rather than taking a more long-term view.

Reactions to the volatility in financial markets over the past year are also examples of recency bias. When the oil price reached over $100 in March 2008, investment bank Goldman Sachs confidently predicted it would soon reach $200. It didn’t, peaking at $147 per barrel three months later. In September this year, after the oil price fell from $145 to just $45, Goldman Sachs confidently predicted it would fall to just $20 per barrel. Both of these predictions look like recency bias in action. My advice to Goldman Sachs: sack some of those teenagers you employ, and hire more Yodas.