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.

This article originally published in The Northern Daily Leader on 3 August 2013.

One of the reasons I enjoy winter is the comatose state of much of our garden through the cold months. It’s nice to be free of the weekly chore of mowing the lawn and maintaining the garden, if only for a short while. It’s not that I dislike gardening; I actually quite enjoy mowing the lawn, but unfortunately so does Jack, and a two-year old and a lawnmower is a recipe for trouble. Mowing the lawn becomes a convoluted affair, involving elaborate diversions to keep Jack from noticing the almighty racket coming from outside as I push the mower around the lawn. As he gets older and wiser, our plans have by necessity become more complex and at this rate may at some stage culminate in Jack having a short stay at a Swiss boarding school.

So you can imagine my consternation when I looked out the window and noticed that the recent rain and unseasonably warm weather had startled the garden into life. To make matters worse, the preceding dry weather had killed off the grass, which meant that the weeds had been the main beneficiaries of the rain. There were areas of the garden where even Bear Grylls would hesitate to venture, for fear of a nasty jab from a bindii thorn or two.

As I contemplated spending the next few weekends tackling the lawn, it occurred to me that looking after your lawn is not that different to looking after your finances. Just as your lawn needs continuous care to keep it in top shape, so should you be paying ongoing attention to your financial situation. That doesn’t mean checking the prices of the shares in your portfolio every five minutes – if anything you should avoid doing this as short-term price changes are unimportant if you have adopted the correct investment approach. What it does mean however, is that you should review your finances at least every six months, and more often if required. This may range from a quick once-over of your superannuation arrangements, debt levels and an assessment of your saving goals, to a more detailed consideration of your overall financial strategy. Just what are you aiming for and how are you going to get there? For most of us the end goal is a comfortable retirement, but it doesn’t happen on its own, you have to make it happen. And even when you get there, you need to be actively protecting your wealth. There are not too many people who relish going back to work once they’ve hung up the tools for good. Don’t wait until your finances resemble a garden where only a solid dose of defoliant will do the trick; a little work now can save a lot more effort later on.

This article originally published in The Northern Daily Leader on 20 July 2013.

Like many Australians, I spent this week watching the first Ashes cricket test against England. Watching Michael Clarke and his teammates take on England at Trent Bridge reminded me of my cricket days, and one glorious day in particular. It was the summer of 1985 and I was playing for the Under 9A team (to be fair we only had one cricket team at each age group, so making the A team usually meant you just had to meet the low qualification of owning a bat and pads). I was picked as a specialist fielder, which really meant I could neither bat nor bowl but was good at making up the numbers so we could field 11 players.

Towards the end of the match, to my utter surprise, the coach put me on to bowl. He had either had too many beers during lunch, or perhaps the match was that far gone that he figured I couldn’t do any real damage. I eagerly seized the ball and went through a few quick warm-ups. Feeling pumped, I ran towards the crease and unleashed my first delivery. Unfortunately some miscommunication between my head and my hand meant that the ball hit the pitch just in front of me and bounced seven or eight times as it slowly made its way down the pitch. Unnerved by such a devastatingly useless delivery, the batsman forgot to make a shot and the ball rolled gently against the stumps. Out! What a start! My second delivery was equally innovative. With the adrenalin flowing, I accidentally ended up throwing the ball with as much force as a Brett Lee thunderbolt. The new batsman had no choice but to dive out of the way to save his life and I had my second wicket. The rest of the over was unremarkable, until the final delivery. Some further head/hand miscommunication meant I launched the ball high into the air like a rocket-ship. It was an old-fashioned donkey drop and again the batsman had to dive out of the way to avoid being hit in the head as the ball plummeted back to earth and hit the wickets. Out! Sensing this was a life or death struggle between my bowling action and the rules of cricket, and cricket was losing, the coach took me off and I retired from bowling forever with the respectable figures of 1 over, 3 wickets, no runs.

Just like my bowling figures, it’s easy for your investing results to mask the real truth of your abilities. It’s possible to put money into something speculative and watch it double overnight. You might pat yourself on the back, thinking how clever you are, when the reality is that it was probably just luck, with very little skill involved. Being realistic about your achievements is an important step to investing wisely.

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

On a recent holiday at the coast, we were pleasantly surprised to find that the holiday home came with a wood-fired heater. An absolute necessity in Tamworth, wood heaters tend to be quite rare at the coast, even though winter night-time temperatures can drop to the low single figures. Not freezing certainly, and nothing like a cold winter morning in Walcha or Armidale, but a bit chilly nonetheless. Anyway, on seeing the wood heater, I popped down to the local petrol station to buy a bag of wood, looking forward to a few warm nights in front of the fire, with the sound of the surf in the background. Eighteen dollars (!) later, I hauled the bag of wood into the car boot and headed home.

I should have known something was wrong as soon as I picked up the bag of wood – it seemed too light and not nearly ‘chunky’ enough. Unfortunately the bag was not made of the usual plastic which you tend to find, but was made of the same material as a chaff bag; you had no way of knowing what was in there until you opened it. A sort of a firewood ‘lucky dip’. On this occasion, I was out of luck, as the entire bag was full of kindling, with no piece of wood any larger than an over-sized toothpick. Clearly the relaxing night in front of the fire would last no longer than an hour, about as long as it would take to burn my expensive bag of kindling.

In many ways my unfortunate experience with the firewood is no different from the experience of many people who seek the services of a financial adviser. They pay a significant amount of money upfront for advice which they won’t be able to determine the value of until long after they get home. In some cases they may have been sold a lemon, as the saying goes. Hopefully however, the advice is clear, comprehensive, accurate and appropriately priced, and the client ends up feeling as though it was money well spent. So when looking for financial advice how do you tell the bag of kindling from the bag of hardwood, so to speak? As with most things, the best way is to ask friends or family who already have an adviser. If they’re happy with the level of service (regular meetings, an appropriate investment strategy and a relatively conservative approach to making money), then you can be reasonably confident in arranging that first meeting. Don’t do as I did however, and grab the first available option without checking first; if you do, a cold night without a fire may be the least of your worries.

This article originally published in The Northern Daily Leader on 22 June 2013.

I am writing this week’s column in my hotel room in Sydney, where I am for a week, visiting clients and having meetings. Actually, most of my time is spent trapped in Sydney’s traffic, with only a small portion of my actual time in Sydney devoted to other activities such as eating, sleeping and meeting with my clients. An hour in Sydney’s traffic is a reminder of why many people choose to live outside Sydney and the other capital cities. If I have to drive anywhere, I try to beat Sydney’s rush hour by leaving the hotel at 6:00 am, only to find that at least two million other drivers have had the same idea, leaving us all sitting in the pre-dawn gloom in endless traffic jams. Trips across town have to be planned with military precision, and a single wrong turn can add ten minutes to your journey. It’s no surprise that for many visitors to Sydney, their most enjoyable drive is the one back home to the country.

Stuck in yet another traffic jam, I began to wonder about the true cost of such an existence. When economists discuss the growth rate of the economy, they do so in terms of the change in gross domestic product, or GDP as it is better known. GDP is essentially the value of all goods and services produced in a country over a given period of time. It’s a dry statistical calculation which keeps a small army of public servants in a job and gives the media something to talk about every three months. The problem with GDP however, is that it may give you an idea of how rich a country is, but it doesn’t tell you much about the quality of life. It’s entirely possible for an economy to be growing strongly, but for its citizens to be depressed and miserable due to factors such as stress, pollution and overwork. Is it better to be rich and miserable, or poorer but happier?

For an answer we can turn to the fourth Dragon King of Bhutan, Jigme Singye Wangchuck, who coined the phrase Gross National Happiness, or GNH. GNH was seen as an alternative to GDP; a subjective measure that attempted to take into account quality of life, not just the level of economic activity. Calculating GNH meant taking into account physical, mental and social wellness, in addition to the usual economic variables. Unfortunately no-one has yet worked out a gross national happiness index for regional Australia as compared to Sydney or the other major cities, but as I sat in the car thinking about the 20 minutes it was going to take me to drive just five kilometres, I was pretty sure what it might say.

This article originally published in The Northern Daily Leader on 1 June 2013.

When I was a young boy, around the age of ten, I was given a magic set as a birthday present from my parents. Most of the ‘magical’ items were relatively straightforward – a marked deck of cards, a few metal hoops that could be joined together if you knew how and some uninteresting rope puzzles. What was in the box which really grabbed my attention however, was a mysterious looking magician’s wand. I knew the rest of the magic set was really just a bunch of cheap tricks, but the wand was different. It was heavy, solid, maybe even felt a little warm and was made of some strange unidentifiable substance (ok, maybe it was just cheap plastic made in China, but I was just ten years old, an age when your imagination was as wild as a Craig Thompson work trip).

I was sure the wand was capable of REAL magic, if I just believed hard enough. I tried a few experiments to see the power of the wand. I doused the dog in fairy dust (also called talcum powder) and hit him on the head with my wand while mumbling something Latin-sounding under my breath. Disappointingly all that happened was that he sneezed a few times and then bit me on the ankle in retaliation. Undeterred, I tried to use some magic on one of my sister’s dolls, hitting it on its back with my wand while chanting more pretend Latin (for some reason I felt the magic would only work with physical contact with the wand). Again the outcome was discouraging, largely because Lauren came into the room mid-trick and in her eyes saw me beating her doll with a short black stick. Tears, a tantrum and a six-month magic ban soon followed.

You may be surprised to hear that many investment fund managers are also keen on magic tricks, only theirs have more serious implications for your wealth. The technical term is ‘survivorship bias’, but it really is just like magic. How it works is that a fund manager might start a whole bunch of managed funds, and run them for a few years, usually with very little money invested in each fund. Each year the funds which perform badly are quietly wound up and removed from the marketing literature, until all that is left is the top performing fund. Hey presto! The fund manager can then point to his or her incredible track record of always beating the market, conveniently ignoring all of the dud funds which never made it that far. They may not use a wand, but when looking at managed fund returns it’s worth keeping an eye out for the magic in there!