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Talking Finance

Bracket Creep

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 29 July 2017.

We recently became the proud owners of three kittens. It was one of those situations where the kittens needed a new home as a matter of life or death, so they ended up with us. The kids, of course, are thrilled with the new family members and now spend their days hunting them down and trying to force them to fall asleep on their laps. The kittens, being a little wild, respond with scratches and bites, a tactic which has little effect on the overly-affectionate children. Not wanting to spend an hour de-furring myself prior to work each day, I gave strict instructions that the kittens were to be restricted to the boot room, where all the mess could be easily contained. At least, that was the plan. By day three they had extended their territory to the kitchen, by day four they were making themselves comfortable on the lounge sofa and by the end of the first week I was having to move the kittens off my pillow when I went to bed.

If the kittens were a military operation, it would have been called mission creep. If they had been a software project, it would have been called feature creep and if they were a tax, it would have been called bracket creep. Which is a nice little segue into a quick discussion of bracket creep, which of course is little more than a tax hike by stealth. Governments know that income tax revenue can be counted on to increase over time as workers’ wages simply keep pace with inflation. Left unchecked, eventually the entire populace ends up on the highest marginal tax rate – a disincentive to hard work if there was ever one. That said, making investment decisions solely on the basis of the tax outcome should also be avoided. Aggressive tax minimisation schemes, such as the plantation schemes of last decade, often resulted in people spending $1.50 in order to save $1.00. That is not a strategy which leads to wealth creation. Too often however, we see people making an investment decision based on a desire to pay less tax. There is of course, one foolproof method to paying less tax: make less money! Or even worse, lose all your money. Making sound investment decisions should be your first priority; the tax implications are an important, but secondary consideration.

Naturally, not every decision needs to make sound financial sense. Adopting three kittens comes with paying for three sets of vaccinations and three visits to the vet to prevent our three kittens becoming thirty kittens. Perhaps becoming a veterinarian would have been the soundest financial decision of all.

The Summit

This article, by Michelle Higgerson, was originally published in The Northern Daily Leader on 3 June 2023.

I caved into the pressure of Channel 9 programmers and have found myself watching their program ‘The Summit’. Not just watching it, but thoroughly enjoying it too. For those not in the know, the basic premise of the show is a challenge where 14 people attempt to ascend a mountain within 14 days. If they reach the summit on time, they each share in the prize winnings of $1 million, but if they don’t, they go home empty handed. Along the way not only do they have to complete tasks that are physically and mentally challenging, along with braving the harshest of elements, they must also survive the personalities and scheming of their fellow trekkers. The show is a fascinating study in group dynamics, and the pursuit for fast wealth.

As I watch the trekkers all undertake their climb up the mountain, in the snow, wet from crossing waterways, and sleeping on the bare ground, I often find myself thinking that there are easier ways to make money. Yet funnily enough, the process is not too different to how many people choose to pursue their wealth creation journey, by engaging with a financial adviser or investment professional. This person is similar to the mythical Mountain Keeper character on the show, the person who oversees the progression, knows what it takes to succeed, and provides guidance on how to achieve the end-goal. The checkpoints that the contestants reach, whereby they review their progress, and discuss any changes that need to be made to their strategy, also where they remove the weaker contestants from the group, can be thought of as review meetings with your adviser. This is where a review of your progress towards your stated goal takes place, including potentially a decision to change the line-up of investments you hold (perhaps removing those investments thought to perform weaker moving forward, and hanging onto those that are stronger). Together, these two factors should help you make you way to the summit, or your financial goal. However, the main point of difference between entertainment television and a real-life financial advice relationship is the timeline; in no scenario will you be able to make $1 million in 14 days, or even a large share of it (unless of course you start with $1 million). If your adviser is telling you this is possible, you need to run for another hill. Creating wealth takes a long time, and if you aren’t prepared to play for this amount of time, you need to reassess your goals. That is, of course, unless you’d prefer to climb 2,500 metres upwards, risking your life all while carrying a heavy backpack of essentials. In my opinion, it is more entertaining watching other people do that.

Things I’ve learned

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 15 July 2017.

They say that life is a journey of learning. Even American Civil War general Robert E. Lee rather sternly said that “The education of a man is never completed until he dies.” In that regard, I have learned much in recent years. I have learned that small children, milkshakes and windy back roads are not a good combination. I have learned never to stick my finger in a candyfloss machine again. I have learned that any item of furniture which is cream, bone, white, off-white, ivory or beige, should not be purchased until all your children are at least 20 years old. I have learned that a small fire intended to burn some long weedy grass, can quickly become a much larger fire which can threaten to burn down the entire district (though to be fair, this is really something my wife learned – I warned her that it was going to happen). During the same incident I also learned that, when there is nothing else at hand, a $150 sweater makes a fine tool for beating down rapidly spreading flames. A wet piece of sack cloth may well have been cheaper and more appropriate, but I probably wouldn’t have looked quite as sophisticated as I ran around in a panic, trying to prevent all of Northern NSW from going up in flames.

Over the years I have also learned a lot from managing investments and watching markets. One crucial lesson which I learned a long time ago, is to pay careful attention whenever I hear the words “This time’s it’s different.” It’s usually said in tandem with statements like: “Of course the stock market will keep going up, this time it’s different”. Or it might be “Of course house prices won’t fall, this time it’s different”. Newsflash: none of it is ever different. We’ve seen it all before. The hype, the mania, the greed, the bubbles and the delusions. The belief that this share, or this property, or this commodity, is going to go up indefinitely. That it’s not going to end like it did before. Or the time before that; or the time before the time before that. Don’t believe it. Whatever the hype, fad or mania, it will end. Your job is to ensure you see it for what it is, rather than to blindly follow. It can be difficult of course, to be the naysayer or the one who refuses to be carried away by the promise and the excitement. Don’t worry about that. Like a man wearing an expensive sweater to a bush fire, your time in the sun will come.

The real captives

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 1 July 2017.

We recently took our kids to Taronga Zoo for the day. We were in Sydney for a family function and decided to spend a few days extra and turn it into a little holiday. A day at the zoo was supposed to be the highlight of the trip. As with everything these days, where it seems we’re lucky not to be charged for the air we breathe, the cost of entry for the five of us was enough to keep the average family in food and drink for at least a month. Still, this was a special occasion, so there was nothing to be done but to hand over the credit card and smile. Tickets in hand, feeling both excited about the adventure ahead and also a great deal poorer, we rushed on in. Our first setback occurred almost immediately, when we got lost trying to find the elephant enclosure. Unfortunately, I had been reading the map upside down, which only became obvious when we realised we were walking through the zoo maintenance area and where they kept the 500 tons of rubbish generated by the thousands of visitors each day. After a few family photos in front of the largest skip we had ever seen, we were soon back in the zoo proper, map now safely oriented in the correct direction.

After some time spent gawking at the various animals (some of whom, it must be said, seemed to be living in rather mean and small quarters), we retired to the food hall for lunch. This is where we fell afoul of the unwritten rule of Taronga Zoo – make sure you leave your stomach at home, because you don’t ever want to be in the financially devastating situation of having to buy food there. I had thought that airports were an alternate reality when it came to over-priced food, but the zoo put any airport I had ever been in to shame. A small bottle of water was $4.80. A small cup of hot chips, say 20c worth of sliced potato dipped into hot oil, suddenly became a $6 feast. And on and on it went. As I sat there, eating the most over-priced meal in Australia, it occurred to me that this was a great business to own. A captive market (save for the clever people who brought their own food) and a guaranteed source of new customers every day (who had already shown their willingness to throw money around when buying their zoo entry tickets). From an investment perspective, this was a wonderful business, and that was something I could appreciate (unlike the severe beating suffered by my net wealth).

That new car feeling

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 17 June 2017.

My hunt for a new car has finally come to an end, after I recently handed a local dealer a cheque only slightly smaller than the annual budget of some African nations. To say that I am relieved that the process is over, is a huge understatement. I find the entire car buying experience to be a thoroughly unenjoyable one. There’s that nagging sense that you’re paying way more than you really should. Also, the uncertainty of whether you’re just going to end up the proud owner of a lemon. Worst of all of course, is the feeling that you need to haggle for the best deal, or else you’re simply a fool who deserves to be taken advantage of. I really don’t want the pressure of having to negotiate the best possible deal, always wondering if you could have paid less. That said, on this particular occasion I was determined to drive a hard bargain – I would be merciless in screwing down the salesman on price. No quarter would be asked, and none would be given. I was brutal in my bargaining tactics and had the salesman practically begging for mercy – at which point I made my demands and watched him cave in and give me a free set of floor mats. My feelings of euphoria in such a fine negotiating victory were only slightly marred by the sound of champagne corks popping in the background as I left the dealership.

The problem with buying a car is the issue of asymmetrical information. This occurs where one party to a transaction (the car salesman in this case), has more or better information than the other (me, the ignorant would-be car buyer). Nobel prize-winning economist George Akerlof highlighted this problem in a 2001 research paper which showed that asymmetric information in the used car market drives down the quality of cars on offer, until all that is for sale are lemons. The same problem of asymmetrical information also exists within the stock market, where parties with varying levels of information trade with each other. In some instances, the seller could be a director who knows that the company is struggling and is looking to offload their shares. Technically this is illegal, but let’s not kid ourselves that it doesn’t happen. In such a scenario, you end up paying more than the shares are worth, while the seller makes an outsized gain. Such an outcome pushes up costs and reduces the overall efficiency of the market. Unfortunately, the issue of asymmetrical information can’t be avoided, it can only be managed through extensive research and due diligence. Something I should have done before handing across my over-sized cheque.

DIY trouble

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 3 June 2017.

I spent a significant portion of this weekend assembling some kitchen cabinetry. There were two flat-packed pantry cupboards I had picked up from a large hardware store (I won’t say who the store was, but let’s just say that I have eaten my fair share of sausage sandwiches there in my time). The cupboards were made of that chipboard melamine stuff, which is what seems to pass for real furniture these days. Presumably this was some ancient old growth Tasmanian tree, chopped down and turned into woodchips, shipped to China and eventually found its way back to Australia in a significantly less desirable form. The assembly was straightforward enough, but when I was finished I noticed that both cupboards had a slight lean. Also, the doors didn’t close properly and somehow the cardboard backing of each cupboard poked past the top of the cupboard. Now, while it’s true that I am never going to win a gold medal in the handyman Olympics, it seemed odd to me that both cupboards were so clearly misshapen. Some of the issues may have been my fault (and I accept that I put the backing on the wrong way around – twice) but it wasn’t all my doing.

Fortunately, our house is so full of DIY disasters that a couple more just blend into the background, but in a newer house (say, anything built since the end of World War I) the saggy and unbalanced cupboards would be obvious. In retrospect, I think this was simply a matter of getting what you pay for. Not that I considered $189 per cupboard to be an insignificant sum of money, but it was a fraction of what it would cost to hire a cabinetmaker to build a similar product from scratch. Of course, the quality of a skilled cabinetmaker’s work would have been on an entirely new level. When it comes to managing your finances, the issue of costs and fees is also an important one. While keeping your investment costs low is important, this is one area where you don’t really want to be paying peanuts and getting monkeys. Yes, a small difference in fees will make a significant difference to your financial situation over a long period of time (as the industry super fund advertisements often remind us), but the impact of a few percentages points less in performance, or the mistake of pursuing the wrong financial strategy altogether, is likely to far outweigh the small savings achieved by opting for the lowest-cost investment option. Put it this way, do you want the chipboard version of a retirement plan, or the solid oak variety? I know which one I would prefer.

Goodbye car

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 5 May 2017.

I had a car accident over the weekend. Nothing too serious fortunately and most importantly nobody was injured. It wasn’t your typical car crash really – no high-speed manoeuvres or screeching brakes. I was in a car park looking for a park. Ahead of me a very large 4×4 started backing out of its park, so I stopped to let it finish and move off. To my alarm, it turned toward me and began to accelerate. I mumbled something under my breath along the lines of ‘surely they can see me’, but it continued to pick up speed and back towards me. At the last moment, I tried to both put the car into reverse and lean on the hooter, failing to do either very effectively. With that the 4×4 crashed into the front of my car, almost landing on the front bonnet. To say I was a little surprised that the driver hadn’t seen me was an understatement. You can imagine my surprise however, when it turned out that there was no driver! The details are a little unclear, but it seems that the car may have been left in neutral without the handbrake on, allowing it roll out of its park and pick up speed as it hurtled down the hill.

In some way, it was fortuitous that my car was there to stop the runaway 4×4. There were quite a few pedestrians about, including small children, who would not have even heard the 2 tonnes of metal rolling down the hill, so placing my car in the way could be seen as an act of self-sacrifice. That’s what I told my car anyway, as it was towed away to an uncertain fate. Being involved in a car crash (albeit a minor one), got me to thinking about stock market crashes. There are some similarities: both result in damage, either financial or physical; both are usually accompanied by lots of confusion and noise; and both can be emotionally unsettling (that said, on an individual level, a bad car crash is much worse – money is just money, but life can’t be replaced). The other commonality between the two is that both stock market and car crashes are unpredictable. If they weren’t, they wouldn’t happen. After a stock market crash, a raft of pundits will come out and say they saw it coming, but that’s often either simply untrue or wishful thinking. Nobody rings a bell (or sounds a hooter) at the top of the market. Preparing your finances to survive a crash is one thing, avoiding it altogether is another.

The Black Swan

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 22 April 2017.

In 16th century London, inhabitants used the expression ‘black swan’ to describe something that was impossible. The reasoning behind this was the fact that, up until that time, nobody had ever seen anything but white swans. Black swans were presumed not to exist, so anything that was thought to be impossible was described as a black swan. Then, in 1697, Dutch explorers reached Western Australia and found, to their great surprise, vast numbers of black swans! The impossible really did exist! The expression ‘black swan’ then changed over time to mean an impossibility that was later disproven. For example, the collapse of the Soviet Union seemed an impossibility, until it happened. So, the end of the USSR was a black swan event. The impossible becoming possible.

Black Swan theory was popularised by writer Nassim Nicholas Taleb, who said that black swan events had three defining characteristics: they’re unexpected; they have an extreme impact and finally, we try and rationalise the event after it’s occurrence, as though it was in fact predictable or explainable. In Taleb’s view, events such as the advent of the internet, September 11 and World War 1 were all black swan events. Taleb’s book, ‘Black Swan’, was very popular in finance circles (Taleb himself used to work for investment banks and hedge funds) and forecasting future black swans became a popular pastime for investors and analysts (which sort of defeated the whole point of a black swan event, in that it is entirely unpredictable). Some went so far as advocating investment strategies based on black swans – the aim was to position your investments ahead of a black swan event to either profit from it, or be protected from it. Again, the point was often lost on such advocates, that if you can predict the event in advance, it’s not a black swan event (at least, not in the way it was described by Taleb).

The problem with an investment approach based on predicting the next black swan (such as, putting all your assets into gold, or into cash), is that the black swan you’re waiting for may never arrive. Or a different, but equally unpredictable and severe black swan event may occur, which renders your strategy worthless. For most people, taking all-or-nothing punts on the possibility of a potentially catastrophic outcome, is a bad idea. The idea of a sound and diversified investment approach is not new, but for some people it’s also not exciting enough. When it comes to making (and managing) money however, I’ll take boring over exciting any day.


Make me happy

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 8 April 2017.

For some time now, I have found that I’m less and less inclined to watch the news on television. Most of it can hardly be called news anymore anyway – a murder here; a violent assault there; politicians nit-picking and back-stabbing each other for fun; corruption hearings; prison sentencing…the average television news broadcast these days is less uplifting than the obituary section in the newspaper. It turns out however, that there’s a very valid reason for my growing disinterest in the news – I’m getting old! Researchers have found that as we age, we prefer to avoid experiences and situations that increase our negative stress levels. So, the fact that I’d rather watch Iron Man (a movie largely about explosions) rather than Spotlight (a harrowing account of the exposure of child abuse practices by priests in the Boston area) says more about my age than my lack of taste in movies.

Apparently, as we get older we start to instinctively avoid places, events or situations which make us feel bad. The theory is that subconsciously, we know we are running out of time (literally), so we want to maximise the time we spend feeling good and happy. We ignore or avoid negative things and seek out those things which make us happier. In researcher-language: “This attentional bias is consistent with older adults’ generally better emotional well-being and their tendency to remember negative less well than positive information.” So rather than watch the news, with all its upsetting stories of murder and mayhem, as you get older you prefer to watch Gardening Australia or Better Homes and Gardens. Sounds like a perfectly good night in if you ask me.

A problem arises however, when we start to also avoid information that contradicts our existing opinions, on the basis that you don’t want it to upset you. This is important when it comes to investing, where a failure to keep an open mind can lead to a failure to make appropriate investment decisions. Refusing to consider views different from your own, leaves you at risk of being blindsided by change. In turns out that researchers have even identified exactly when this preference for positive experiences becomes a hindrance to effective decision-making – age 70! From then on, apparently, “…older investors exhibit worse stock selection ability and poor diversification skill. The age-skill relationship has an inverted U-shape and, furthermore, the skill deteriorates sharply around the age of 70”. At that age, your years of experience are seemingly outweighed by your poor decision-making abilities. One of those rare cases where you really are both happier and poorer. Now that’s something to look forward to.

Bad driver

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 25 March 2017.

Late last year we moved house and now live about 40 kilometres away from the office. As far as commutes go, it’s not as bad as it sounds. It’s about half an hour door to door – in Sydney that would be almost like living in the same suburb as your work. It’s also highway driving almost the entire way, which gives me plenty of time each day to observe the other drivers. It has reached the point where I have started categorising drivers into general behavioural types. There’s the Go-slow-Go-fast driver – that’s the one that drives at 80km/h in a 100 zone, but when it drops to 50km/h in a town, just keep their foot glued to the accelerator and blow through at 80km/h. It’s as though they’re only comfortable driving at one speed, regardless of the actual signed limit. Either that or they’re simply not noticing that they’ve entered an urban area, which is even worse.

Another familiar face on the highway is one we all know too well – the Tailgater. Don’t you just love it when you’re stuck behind a 30-tonne truck doing 50km/h in a 100 zone, and the Tailgater roars up your behind and thinks that sitting two feet from your back bumper is somehow going to make the truck in front of you go faster? They’re either just overly helpful or incredibly short-sighted – maybe they just can’t see the truck in front of you, and if you gave them the appropriate hand-signal (the universal one for ‘hello’), they might realise their error and retreat to a safe distance? That’s what I think anyway, but it never seems to work. The other common highway driver is of course the P-plater. I don’t mean to generalise, but I’ve begun to think that the ‘P’ doesn’t stand for ‘Provisional’, but rather it means you’re sharing the road with a ‘Philosophical’ driver. I say this because most P-platers seem to adopt a philosophical approach to speed limits – they are there to be considered, not obeyed. Philosophical drivers interpret speed limits as they see fit, as being up for debate and most oftentimes outright ignored.

So what does this have to do with finance? The commonality is that irrational drivers (like the ones helping you push the B-Double up the hill) are as prevalent as irrational investors. People want to buy when they should be selling; sell when they should be buying; want gold when they should be in oil; and want shares when they should be in cash. Irrational investment choices can be just as damaging for your financial health as a run in with the Tailgater is bad for your rear bumper. Avoid both as much as you can.