This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 4 July 2015.

There’s little doubt that the age of computerisation has radically changed our lives. Laptops, desktops, tablets, smartphones and even smart watches, all devices which have become part of everyday life. Where computers were once the size of large rooms and could only perform a single function at a time, the smartphone in your pocket can literally perform thousands of functions and at blindingly fast speed. The combination of computerisation and communication links like the internet means that we’re more productive and more connected than ever before. I can receive my work emails while sitting on a beach in Coffs Harbour, while a friend eating lunch in New York can unfortunately share a photo of their meal instantly with their entire social circle via Facebook or Snapchat.

As you might expect, computerisation and advances in telecommunications have also radically transformed the world of finance. Did you know that nearly a third of all share transactions on the Australian stock exchange are carried out by computers deciding to buy or sell? There’s no human input beyond setting the parameters by which the software will trade. It’s estimated that in the United States around half of all share trades are executed automatically by computers. Sophisticated algorithmic trading software monitors the market and makes decisions in less than a millisecond. In fact, so advanced has algorithmic trading become, some algorithms are able to predict share price movements 30 to 60 seconds in advance. Speed is crucial too. If you submit a buy order through your online broker, smart computers can see your trade coming and can jump ahead of your order, buying and then selling to you whatever you wanted at a slightly higher price. It might only be a cent or two higher, but done hundreds of thousands of times per day, the cents start to add up. Read ‘Flash Boys’ by Michael Lewis for a fascinating account of the rise of high frequency trading.

What does all this mean for you? Well the computers don’t care what the underlying share is – is it a bank, a supermarket or perhaps a coal miner? They have no sense of the underlying value of the business, treating every share as though it was simply a chip in a casino. This is where humans have an edge over their computerised counterparts. A share is a small stake in a business that actually makes or sells things or provides a service. In reality the value of these businesses does not change by 3% or 4% or 5% per day, regardless if the stock market price says so. So ignore the computer and focus on the underlying business – we are all humans after all.

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 20 June 2015.

In my university days a friend and I decided to take up fishing as our preferred form of recreation. If it was a warm sunny day, rather than driving to campus we’d occasionally throw the rods in the back of the car and head for one of our preferred fishing spots. We’d then spend half the day sitting on the rocks sharing a six-pack of beer and lazily hanging a line in the water. In that peculiar manner of men whenever they congregate, we seldom spoke and when we did it was usually restricted to a discussion over who might be the best five-eighth in world rugby, or who would make up our dream international test cricket team. It’s not that we were even particularly good at fishing, in fact we seldom caught any fish at all. Our friends used to joke that we were really trying to replenish the world’s depleted fish stocks through feeding as much bait to the fish as was possible. In the rare event that a fish managed to foolishly self-impale itself on one of our fishing hooks (probably by swimming with its eyes closed and accidentally bumping into the unbaited hook), we tried our best to shake it off and avoid having to reel it in. Watching us would have made Rex Hunt weep.

Of course, it was never really about the fishing. The fishing was just an excuse to sit in the sun with a mate, swapping tall stories and solving meaningful questions like whether the Chinese Pen-Hold or the Western Shakehold was the best way to hold a table tennis paddle. For us, the act of fishing was much more important than the actual outcome. A lack of fish didn’t preclude having a great day.

In some ways our approach to fishing can be likened to how you might approach your retirement. In financial terms, the journey to retirement is much more important than the destination. You can’t fix your retirement when you eventually pull up stumps and call it a day – by then it’s too late. A comfortable retirement is nurtured over time, it doesn’t suddenly manifest itself on your last day in the office. Unfortunately we live in a society where the emphasis is on the here and now, with little thought given towards thirty, forty or fifty years down the track. If you start planning early enough, achieving a comfortable retirement need be no more work than sitting on the rocks by the sea, feeding fish and drinking beer. How hard is that?

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 6 June 2015.

Imagine you went to the bank to borrow some money. An everyday event and certainly nothing out of the ordinary. Now imagine that when it came time to work out paying the interest on the loan, the bank said it would pay you interest instead? Sounds crazy doesn’t it? Whoever heard of a bank paying you interest on a loan, instead of charging you interest? Welcome to the strange world that passes for modern finance. This story might sound like fiction but it is in fact a true story. Eva Christiansen, a therapist living in Denmark recently took out a loan with Denmark’s biggest bank at an interest rate of -0.0172%. So each month the bank would pay Eva around 7 Danish Krone (just under $1.50) in interest, rather than her having to make any interest payments. A far cry from interest rates of 17% that existed in Australia in the late 1980’s, but also an example of the very unusual and dangerous situation that exists within global financial markets.

In an effort to stimulate economic growth, central banks around the world have pushed interest rates as low as they can go, even below zero, hoping that low rates will assist in jump-starting business investment and consumer spending. The world is full of unintended consequences however, and ultra-low interest rates are starting to distort financial markets. For if the bank is willing to pay you interest on money you borrow, why not go ahead and borrow as much as it will lend you? Then put the money into any type of an asset and wait for the value to increase. It doesn’t cost you anything to wait, you make money while you wait. In fact, the longer you wait the better. The problem is that if everybody is doing the same thing, as is logical, then prices for the assets start to rise as they are bid up by buyers. That’s fine for the people who got in early, but increases the risks for those people who are late to the party. For when interest rates rise, as they one day must, the loans will need to be repaid, funded through the sale of the assets (be they shares, property, collectibles or fine art). Inevitably there will be more sellers than buyers and prices will fall, perhaps severely.

This is the way that all financial cycles play out and this one will be no different. The only difference this time may be that never before has money been so freely and cheaply available. And if the supply of easy money causes a boom of incredible proportions, what might the bust be like once that supply vanishes? Unfortunately one day we will find out.

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 23 May 2015.

For many parents the topic of pocket money is a vexing one. How much to give, if at all? How often? Should it be a handout, or should it be payment for completion of chores? At what age does it start and when should it end? For some unlucky parents of course there never is an end – for you I have no advice and only my commiserations. Some parents may try and use the concept of pocket money to foster an appreciation of money and perhaps learn the lessons of financial discipline. This doesn’t always work, as differing attitudes to money are as common among children as they are among adults. My sister, for example, seemed positively allergic to money, and did everything she could to distance herself from it, usually through spending it on shoes, clothes and makeup. I, on other hand, saved my pocket money carefully, until it got to the point where my sister would approach me for loans. It took some time before I realised, just like my parents, that loans made to immediate family members are loans never repaid.

The most sensible approach to pocket money that I’ve come across came from a financial adviser and columnist based in the US. His approach was based on giving each of his children three different piggy banks, with each separately labelled ‘Giving’, ‘Spending’ and ‘Investing’. Any pocket money given to his children had to be split into thirds, spread over the three piggy banks. The ‘Giving’ piggy bank was money set aside for assisting others less fortunate, primarily through charitable donations. The ‘Investing’ piggy bank was money which had to be spent on long term investments such as shares or savings accounts. The ‘Spending’ piggy bank was money which could be spent by the child on whatever they liked, no matter how wasteful or ridiculous. The intention was to instil in each child the concept of philanthropy and using their good fortune to help others; to cultivate discipline with regards to always making sure to save some of what you earn and finally, to show that money can be fun too and even spent frivolously, as long as such spending is kept under control. While these rules were intended for children, there’s really no reason why adults can’t adopt them too. A financial plan based on giving a third, saving a third and spending a third may sound simple, but it’s probably going to be highly effective too. And remember, there’s no piggy bank labelled ‘Loans repaid by siblings’, because loans like that just don’t exist!

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 9 May 2015.

A long time ago I used to own a horse called Didgeridoo, which was a little odd, given that I knew nothing about horses. Nevertheless, he was mine and he and I would be firm friends as we embarked together on the exciting journey that was me learning to ride. At least that was the theory, but obviously nobody had told Didgeridoo about this happy arrangement. For Psycho (let’s just call him by his nickname, I think it’s more appropriate) had no intention of ever letting me on his back. In fact, even getting close enough to touch him was a minor miracle. I was advised to start with some easy goals – giving him a brush a couple of times a day for example. However every time I started to brush him he would swing his head round and try to bite me. I was sagely advised that the trick was to give him a firm whack in the ribs every time he tried it, which would soon teach him to behave. So one day I cornered him in the yards and started brushing his coat. The first time he tried to bite me I whacked him in the ribs. He gave me a filthy look and waited ten seconds before trying to bite me again. So once more I whacked him in the ribs, again earning myself a filthy look. This little sequence happened for the third time and just as I began to feel comfortable, Psycho whipped round his head, grabbed my shoulder with his teeth, shook me like a doll and threw me to the ground. I dropped the brush and ran screaming back to the house and so ended my dreams of becoming the Man from Snowy River.

Quite simply, when it came to dealing with Psycho I was way out of my depth. And unfortunately this is the same mistake some people make when it comes to dealing with their finances, particularly in investing. The principles of labour specialisation have been around forever: the brain surgeon specialises in brain surgery; the lawyer specialises in law; the builder specialises in building a house. It’s really no different when it comes to investing, yet some people are determined to do it themselves, regardless of (or oblivious to) a lack of knowledge and expertise. That’s not to say you can’t educate yourself to a standard equivalent to a professional, it’s simply that many don’t make the effort to do so. If you’re not sure about what you’re doing, get some help, because a bruised shoulder and ego is nothing compared to the pain of losing your life savings.

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 25 April 2015.

This week my wife and I had to face the reality that our two year-old daughter is smarter than us. And not just smarter, but more cunning too. It happened during an everyday situation – it was breakfast time and we were sitting with the kids, supervising them as they ate breakfast (soft-boiled eggs and toast is the current craze – it’s been that way for nearly two months and will probably be so for a few more until some inexplicable event causes both of them to declare that never again will another soft-boiled egg pass their lips). Kate began hitting the table with her hands, an act which was bound to create a mess, so I gently admonished her and encouraged her to go back to eating breakfast. She obviously interpreted this as an act of weakness on my part, for she started hitting me on the arm instead. Keeping my cool, I said to her “Please don’t hit me Kate, I would much rather you gave me a cuddle”, whereupon she reached her arms out to pull me in for a big hug. As I leant gratefully forward, she wrapped her little arm around my neck, pulled me in tight for a cuddle and with her free hand whacked me on the side of my head with as much force as she could muster. Needless to say, I was a little surprised.

It was one of those moments where as a parent, you try your hardest to appear annoyed, but have trouble fighting back the laughter. Clearly that whole ‘butter wouldn’t melt in my mouth’ look was not to be believed. In some ways, Kate’s behaviour is not unlike the experience some investors have when dealing with the stock market. It’s easy to become swayed by the meaningless superficialities of a potential investment: you may like their flashy website; you may enjoy using their products; you might be influenced by the snappy advertising campaign on TV or you might know somebody who knows somebody who thinks that you can’t go wrong by putting your hard-earned savings into the company. From the outside, everything may wonderful, but really, it’s what goes on inside the company about which you should be most concerned. And unfortunately, short of knowing the CEO’s brother, the only way you are going to find out is by analysing the company’s financial reports. That’s the 200 page document they send you once a year which usually goes straight in the recycling bin. This year, try and avoid the smack on the head by spending some time reading through the report – because when it comes to money, it’s no laughing matter.

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 11 April 2015.

Some time ago a friend sent me an email link to a story about an American ‘life coach’ who claimed to have invented a fool-proof method to increasing your productivity. His message was that you needed to divide every day into 96 fifteen minute intervals and focus on one specific task for that fifteen minutes before moving onto a new task in the next fifteen minutes. He advocated using a timer to mark the start and end of every fifteen minute interval (which made me wonder how much sleep you would get with a timer going off every fifteen minutes during the night, reminding you that your fifteen minutes of sleep was over and it was now time to move on to your next fifteen minutes of sleep). His ‘revolutionary method’ came with a trademark and was of course copyrighted, though it seemed to me to be very similar to the common sense approach of finishing one job before moving on to the next.

Tracking and measuring every minute of your day, even while sleeping, has moved on to a whole new level with the advent of fitness bands, also known as activity trackers. These unobtrusive gadgets provide a wealth of data regarding how far you’ve walked, your heartbeat, calorie consumption and even whether or not you had a good night’s sleep. By downloading the data captured by the fitness band to your phone or computer, it’s possible to scrutinise your movements during the day in minute detail. The principle behind these devices is that awareness of your daily activity levels might be useful tools in the fight against the evils of modern living – processed food, lack of sleep and a sedentary lifestyle.

When it comes to investing however, constant measuring and checking of your investments is not necessarily a good idea. Yes, you should take an interest in how your superannuation is performing; yes, you should give your finances an overall health check at least once a year; but should you check the stock market or the value of your investments every fifteen minutes? Not really. There is a healthy divide between paying too little attention to your financial situation and paying too much attention. In the short term, the daily movements of individual shares and investments are of little import, it’s the longer term trends and movements you need to think about. Too often the real message gets lost in all the noise created by a 24×7 news cycle. In the modern, connected, ‘always on’ world of today, switching off for a while is hard to do, but it may be more productive than finding something different to do every fifteen minutes.

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 28 March 2015.

In the reception area of our office we keep a large bowl of chocolates. Intended mainly for clients who might feel like sneaking a treat prior to a meeting, the chocolates have become a hit with local couriers and deliverymen. They usually wait until they’re half-way down the stairs before sneaking a hand back up through the railing and grabbing a few chocolates. We’ve even had the occasional random person walk in off the street, ask an inane question like ‘Is this where I pay my electricity bill..?’, before walking out and of course helping themselves to a few chocolates on the way past. A certain staff member also likes to dip into the bowl of chocolates on occasion – I don’t want to mention any names or point any fingers, but let’s just say that he rides a bicycle a lot and his name starts with R and ends with Y. So popular are the chocolates with clients, couriers, the general public and the staff member called R_Y, that Coles alerts me via email whenever they’re on sale. There must be a logistics manager somewhere in Sydney scratching his head over the enormous quantities of chocolate being trucked up to Tamworth on a regular basis.

Of course, there’s nothing wrong with occasionally giving in to a little temptation and having a chocolate – life’s too short and unpredictable to forgo any treats or pleasures. When it comes to investing however, giving into temptation can have far more serious ramifications than needing to spend an extra five minutes on the treadmill at the gym. Investment temptation usually arises when you read or hear of a company which doubled or tripled in value almost overnight. Sometimes a friend or neighbour will tell you how he or she invested $5,000 into the company last year and it’s now worth over a hundred thousand dollars. The company generally operates in the mining, energy or internet sectors, or makes products or provides services which are apparently extremely complex and very difficult to understand. There’s nearly always a great deal of hype about how this is ‘the next big thing’.

The reality however, is that for every highly speculative investment with unbelievable returns, there are literally hundreds of other similar investments which are almost guaranteed to lose everything you put into them. And as for all your friends and neighbours who made a fortune, just remember that gamblers generally only ever remember (and share with you) their wins, never their endless stream of losses. Giving into temptation when it comes to investing is a definite no-no – if you’re ever tempted, rather than five minutes extra on the treadmill, think about spending five extra years in your job, trying to make the money back. Not a very pleasant thought is it?

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 14 March 2015.

One of the common questions I get asked in my job is a seemingly straightforward one – should I invest in shares or property? It sounds like a simple decision to make, doesn’t it? In truth however, there is no easy answer to that question. The only way to answer definitively is to know in advance how the property market and the share market are going to perform in the future. And if you know that information, you must have a DeLorean time machine parked in your garage and your name is Emmett Brown. When comparing property with shares it’s easier to highlight their differences, rather than their similarities. For many people, the concept of owning something tangible that they can see and touch is important. Yes, a shareholder in Harvey Norman does technically own a (very) small part of the business, but try settling down with a beer and popcorn in front of one of their display TVs and you’ll soon find out just how far your ownership of the business stretches.

Those who prefer to invest in property will point out the lack of volatility in the value of their investment when compared to the stock market. Unlike the stock market, where the value of your investment in a company can fluctuate literally every second, property investors draw comfort from the fact that prices tend to be stable, at least when compared to the stock market. Unfortunately this perception is not quite true. Imagine you owned an investment property and every time a car drove past the building the driver yelled out a figure that they would be prepared to pay to buy your property. You might get offers of $400,000 or $450,000 or even $350,000 and if the house is on a busy road the yelled-out offers might come every few seconds or so. Of course, you don’t have to accept the offers – you might have a value in mind for the property which is very different from the numbers being yelled out by passing drivers. Unless you needed to sell immediately and you would have to accept the very next offer that came along, even if it was below your own valuation.

Can you see the similarity with the stock market? The changing share prices on the stock market are just like the offers yelled out by the passing drivers – there’s no need to accept them unless you have to sell right there and then. In truth, property prices can be just as volatile as share prices, it’s just that we rarely bother to find out what the property is worth, unlike the stock market where we see it every day on the evening news.

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 28 February 2015.

One of the tricks which every parent soon learns is the art of distraction. It works wonders with small children: “No Jack, you can’t have another bucket of ice cream; here, play with mummy’s iPhone instead” or “No Kate, give me back the chainsaw; here, play with mummy’s reading glasses instead”. Of course the distraction technique has been around forever and it’s not just parents who make use of it, politicians love it too: “No, we can’t do anything about the state of the economy, but here, let’s invade this small peaceful nation next door instead”. Or, “No, we can’t fix the health system, but here, let’s host the Olympic Games instead.” They must think we’re all just a bunch of two year-olds, unable to focus on more than one topic at a time (the really scary thing is that it obviously works or it wouldn’t be used as often as it is).

As you would expect, the distraction technique exists within the finance industry too. Companies like to present their profit results before taking into account the impact of one-off events. As in, “We had a great year; profits grew by 20%!” It sounds wonderful, until you realise that there was also a ‘one-off’ $2 billion write-down of assets, which would have caused profits to fall by 100%. But because it’s a one-off, it doesn’t count (watch where companies focus on ‘underlying’ profitability – that’s distraction in action). Invariably the company seems to have ‘one-off’ events like this occurring every year, which make you question just how rare this type of event really is. The other distraction technique is to focus on an unrelated achievement. The one most companies opt for is in occupational health and safety (OH&S). It’s not to underplay the importance of safety at work, but I’ve lost track of the number of times I’ve read a company’s annual report which begins with a two-page spread trumpeting the fact that there were zero deaths at the workplace that year, and after only that comes the admission that management blew any potential profits on bottles of 1959 Grange and Mont Blanc pens. To make it worse, the business in question would be an accounting or law firm, where the most serious workplace injury is likely to be a nasty paper-cut. Distraction in action.

In a way, the distraction technique is just a small part of the larger world of spin. If you have a tough message to sell, don’t tell the truth, just put a favourable spin on it. After all, we live in a world where unwanted employees are ‘invited to be successful somewhere else’; where broken promises are simply ‘recalibrating expectations’; and where nobody ever fails, it’s just a case of ‘deferred success’.