Welcome to my first post in 2012. I hope to make regular contributions during the year to keep you updated with what is going on with the global economy and how it affects you. My aim is to do this on a basis that makes the financial markets and the politics of the same, easier to understand. So forget the convoluted language of your economists and commentators – here you will get the naked truth as frightening as it may be!
So we pick up in 2012 where we left off – that is, the Eurozone in crisis. In fact, the Eurozone has been the issue for most of 2010, 2011 and now indeed will remain so for the foreseeable future.
How did the Eurozone end up in such a apocalyptic situation? For those of you that haven’t heard, and I am sure there are not many who haven’t, Euro governments have borrowed too much money. This has come about as too many Europeans rely on their government to fund their lifestyle, either via employment (i.e. public servants) or by transfer payments (age pensions, unemployment benefits et al).
So how much can a government borrow? Milton Freidman, a renowned economist once said “Government will borrow whatever they can get away with, and a little bit more”, and I think that pretty much sums it up. The European situation is quite unique because Europe simply has so much history. The Europeans have been at war with each other for all of modern history and everything preceding that. So you have to understand that this constant fighting has left many Europeans pretty tired of confrontation. The 20th century saw two major conflicts WW1 and WW2 which resulted in complete destruction of parts of Europe and decimation of generations (incidentally, the Spanish Flu that spread throughout the world in 1918 killed more people then WW1).
So following WW2 (not withstanding the Cold War) Europe wanted to have closer economic ties to ensure that any future conflict would be decidedly less likely because they would all have too much to lose. So the European Union (EU) was born and then the Eurozone. Not all members of the EU are in the Eurozone (the Eurozone are the nations that have adopted the Eurodollar as their currency) the United Kingdom being a notable exception.
So everything went along grandly for some time. The Greek government was able to borrow money at the same rates as the German Government, the French workers demanded and got a 35 hour week, the Italians were able to continue to avoid paying tax but retire early on government pensions (Southern Italians I am told), the Europeans introduced taxes to make their manufacturing uncompetitive (ETS), so on and so forth. So everyone was happy because the increased government debt allowed more people to be paid more money and this translated into “economic growth” and the party kept going (sounds a bit like a Ponzi Scheme.................).
But then the music stopped. The US Sub Prime crisis blew up, creating a global credit crunch. When a credit crunch occurs everyone decides they don’t trust anyone anymore. People don’t want to lend money to other people and banks don’t want to lend to other banks. This drop in confidence and withdrawal of credit feeds on itself. This is because financial institutions are “highly geared”. They use a small amount of equity to lend a lot of money. If the financial institution suffers losses, this “equity” is quickly wiped out and the banks become insolvent. Insolvent banks require government support. In Iceland the banks simply had too much debt for the country to take over. They collapsed taking Iceland with it. In Ireland, the banks had too much debt as well, the government in Ireland has bailed them out, but this has forced Ireland into technical insolvency. In the UK, banks were bailed out to ensure credit kept flowing.
Credit crunches are very destructive. Banks stop lending to business and also individuals that want to buy houses. This negative feedback loop results in falling property prices, businesses cutting back on investment and job losses. Keynesian economics dictates that government must fill this gap and spend. This is of course what they did and borrow and spend is what they have done (Australia is no exception – Kevin Rudd went from a self proclaimed fiscal conservative to a social democrat in a matter of weeks!)
And now we have the hangover. Europe, the USA, the UK and many other developed countries have simply borrowed too much and the prospect of paying it back seems enormous.
So why is the Eurozone the current problem and not the USA or UK – given the USA and UK have massive amounts of public and private debt? It all comes down to the ability to use all the devices available to them. The USA and UK each control their own Central Bank and therefore currency. The Eurozone does not! The European Central Bank is effectively controlled by 17 different governments, some of which are reasonably healthy and others that are decidedly unhealthy.
What would normally occur in a situation where an economy is in strife is that the currency of that country would depreciate to make it workers and manufacturing more competitive (think Australia during the Asian Financial crisis in 1998 – our currency “plummeted” to 50 cents US and saved us from recession). The Eurozone, which has the Euro dollar, does not have this luxury. The Eurodollar as a currency reacts to the health of all of the 17 countries within it of which some are going OK and others are failing. So yes, the Eurodollar has depreciated, which has been of great benefit to exporting nations such as Germany, but by not nearly enough that would benefit Greece.
So ultimately, the Eurozone economies have a half baked system. They have monetary Union, but they also need Fiscal (government taxation and spending) union as well. Indeed, they probably require Political Union or “The United States of Europe”! They also need unified labour laws. Public servants in Greece are paid 30% more than public servants in Germany. Guess who probably works harder.....and you then realise that the system sure is broke.
On some levels, it shows how the culture of “entitlement” has now riddled the developed countries. By this, I mean that once a government “awards” an entitlement to a constituent, it is very hard to take that away. In Greece, it is high public service salaries or an Government Pension at age 55 , in Australia it is Family Tax benefits for middle class Australia. This is because people begin to establish their lifestyle on that increased entitlement and that allows them to spend more, borrow more, enjoy more. Taking that away is not easy for politicians who have to ensure they are re-elected at the next ballot.
At the other end of the scale, this entitlement culture also dominates board rooms in our listed companies. CEO’s earn multi-million dollar salaries and bonuses based on what is deemed “responsibility”. Even worse, some company boards actually reset performance hurdles when executives look like not achieving them to make the payment of bonuses more likely (see recently Wesfarmers and Bluescope). Not good and not healthy.
So Europe continues to lurch towards their solution. Essentially there is only one solution, and that is the write down of government debt to more sustainable levels. Simply put, Greece will never repay its debt and it will continue to grow in perpetuity unless it is written off. The holders of this debt which is mainly European banks will see a fall in their assets (equity) which will make them insolvent. The governments of each of these countries will then be required to prop up these banks by providing them with Capital (and I would suggest wiping out shareholders in the process) and this will of course require governments to borrow more....yes, I know this is insane – it will actually result in say Germany taking on more debt to effectively forgive Greek debt!
This increased debt load that will be the result of this exercise is unsustainable (as all developed countries have governments that spend too much to fund entitlements) and the final piece to the puzzle will be that the European Central Bank will begin the purchase of government bonds, or the fancy people call it Quantitative Easing – I just call it money printing. This exercise pushes additional money into the banking system to provide more money to buy more government debt. Although this sounds silly (OK, it is silly) it eventually results in inflation. Inflation is the great tool in a governments armoury as it is tax increases by stealth. Although the government does not announce an increase in taxation, taxation revenues increase as inflation makes people earn more in nominal terms but the level of debt stays the same as it is fixed. However, this is not a magic pudding because although peoples income and assets may rise in nominal terms, their “real” after inflation wealth is sure as hell going to decrease. Those with a long enough memory may remember the 1970’s and 1980’s when this similar policy was used......so we have been there before.
Make no mistake, this is going to be ugly. For Europe, it will be a tough decade or two. Investors will need to be highly disciplined and ensure that their portfolios are highly diversified and retain a structure to ensure they rebalance their holdings on a periodic predetermined basis. Remember, successful investors purchase assets when prices are low – not high. Do not be tempted to follow the herd. Also, be particularly wary of the doomsayers as they will provide some very enticing evidence for the end of the world as we know it (The Mayans may seem to be spot on – for Europe anyway!). Ultimately, Australians are extremely lucky that we are geographically located where we are, we sit in a dustbowl and brilliant economic management for the two decades preceding 2007 placed our government fiscal position well ahead of major developed economies. The bounce back in the Australian Share market is likely to be quick and impressive, although the timing of this is beyond my ability to predict!
Humans have an in seemingly intractable ability to adapt in the face of adversity. Assuming the politicians have the aptitude to face this reality, the light at the end of the tunnel may soon appear.
Monday, January 16, 2012
Monday, June 27, 2011
Carbon debacle
As you know, the purpose of the carbon tax puzzles me. Because to reduce carbon emissions. Of course – we have to stop using it.
"The vast majority of Australian households won't pay a cent as a result of the price on carbon," Ms Gillard told ABC Radio on Monday morning (June 27th 2011).
So where are we heading with this? One can only imagine that this is a symbolic move to be seen to be doing something. Others would suggest it is an ideological agenda to redistribute wealth and enlarge government.
The tax will be paid by the big polluters they claim. Yes, sure, I agree with this, and they will simply increase their prices to maintain profits and pass this on to consumers who will have more redistributed wealth so will not make any changes to their behaviour – ho hum and off we go.
Here is Julia Gillards explanation as to why this tax will work on Q & A (March 14th 2011);
“Well, the effect is that in the shops when you come to buy things, products that are made with relatively less carbon pollution will be cheaper than products that are made with more carbon pollution. So you're standing there with your household assistance in your hand. You could still keep buying the high carbon pollution products if you want to or what you're far more likely to do is to buy the cheaper, lower carbon pollution products. That means that the people who make those things will get the consumer signal, gee, we will sell more, we will make more money if we make lower pollution products. That drives the innovation. So I want you to have that household assistance in your hand but I also want you to see price effects which make cleaner, greener things cheaper than high pollution commodities. That's why it works.”
Great explanation! And in a fantasy world of Australian Utopia it could almost work. Problem is, we live in a global economy. So to pick apart the argument the Prime Minister puts forward, the first most glaring omission is that it ignores the rest of the world (i.e. imports). Imports will not have a carbon tax and will therefore most likely be much cheaper – indeed, our manufacturers are already struggling under the pressures of cheap Chinese goods and a high Australian dollar. So given this, the consumer will buy the third option Julia failed to mention – the cheap imported good – made from coal that we exported!
The other glaring omission is that clean green power is still prohibitively expensive and not practical. By putting this price on carbon - $20 a tonne, $30 a tonne – whatever, Clean Green power will still be non economical. Unless Australia embraces a clean green scalable energy source – such as nuclear power, we are just kidding ourselves (by the way, because we have an abundance of cheap coal, Nuclear Power is not viable in Australia without a carbon price of $40 a tonne or higher). As a result – Australians will still buy the good produced with Carbon Dioxide intensity.
Indeed, the major problem of this argument is that government intervention does not “drive innovation”. It never has and never will. Minimal government interference in the movement of capital and investment will promote innovation.
So, what is the point? Australia as a nation should not feel guilty for our abundance of cheap coal. Indeed, we should not think that we are somehow acquitted of this guilt by imposing a carbon (dioxide) tax whilst at the same time exporting our coal to China, Japan and South Korea who will happily consume our folly and return it to us in cheap manufactured goods. For those of you frightened by the prospect of a “world heating dangerously”, take heart in recent data that suggests that “climate change” is simply a permanent feature of our planet and that Carbon Dioxide increases in our atmosphere over the past 10 years has not resulted in any increased warming as predicted by IPCC models.
The current Prime Minister and her Government should indeed stop the “Alarmist” predictions and give the Australian population a little more credit than they have in the past 12 months. Their continued indifference to this may be highly destructive to our economy and future.
"The vast majority of Australian households won't pay a cent as a result of the price on carbon," Ms Gillard told ABC Radio on Monday morning (June 27th 2011).
So where are we heading with this? One can only imagine that this is a symbolic move to be seen to be doing something. Others would suggest it is an ideological agenda to redistribute wealth and enlarge government.
The tax will be paid by the big polluters they claim. Yes, sure, I agree with this, and they will simply increase their prices to maintain profits and pass this on to consumers who will have more redistributed wealth so will not make any changes to their behaviour – ho hum and off we go.
Here is Julia Gillards explanation as to why this tax will work on Q & A (March 14th 2011);
“Well, the effect is that in the shops when you come to buy things, products that are made with relatively less carbon pollution will be cheaper than products that are made with more carbon pollution. So you're standing there with your household assistance in your hand. You could still keep buying the high carbon pollution products if you want to or what you're far more likely to do is to buy the cheaper, lower carbon pollution products. That means that the people who make those things will get the consumer signal, gee, we will sell more, we will make more money if we make lower pollution products. That drives the innovation. So I want you to have that household assistance in your hand but I also want you to see price effects which make cleaner, greener things cheaper than high pollution commodities. That's why it works.”
Great explanation! And in a fantasy world of Australian Utopia it could almost work. Problem is, we live in a global economy. So to pick apart the argument the Prime Minister puts forward, the first most glaring omission is that it ignores the rest of the world (i.e. imports). Imports will not have a carbon tax and will therefore most likely be much cheaper – indeed, our manufacturers are already struggling under the pressures of cheap Chinese goods and a high Australian dollar. So given this, the consumer will buy the third option Julia failed to mention – the cheap imported good – made from coal that we exported!
The other glaring omission is that clean green power is still prohibitively expensive and not practical. By putting this price on carbon - $20 a tonne, $30 a tonne – whatever, Clean Green power will still be non economical. Unless Australia embraces a clean green scalable energy source – such as nuclear power, we are just kidding ourselves (by the way, because we have an abundance of cheap coal, Nuclear Power is not viable in Australia without a carbon price of $40 a tonne or higher). As a result – Australians will still buy the good produced with Carbon Dioxide intensity.
Indeed, the major problem of this argument is that government intervention does not “drive innovation”. It never has and never will. Minimal government interference in the movement of capital and investment will promote innovation.
So, what is the point? Australia as a nation should not feel guilty for our abundance of cheap coal. Indeed, we should not think that we are somehow acquitted of this guilt by imposing a carbon (dioxide) tax whilst at the same time exporting our coal to China, Japan and South Korea who will happily consume our folly and return it to us in cheap manufactured goods. For those of you frightened by the prospect of a “world heating dangerously”, take heart in recent data that suggests that “climate change” is simply a permanent feature of our planet and that Carbon Dioxide increases in our atmosphere over the past 10 years has not resulted in any increased warming as predicted by IPCC models.
The current Prime Minister and her Government should indeed stop the “Alarmist” predictions and give the Australian population a little more credit than they have in the past 12 months. Their continued indifference to this may be highly destructive to our economy and future.
Thursday, October 7, 2010
Go figure!
I am thoroughly convinced that the economic world is simply irreconcilable. Here’s a summary of the week just past.
On Friday morning I was surprised to hear that the stock market in the USA had fallen due to strong jobs growth! Hang on, isn’t the USA relying on stronger employment to buoy the consumer who will spend more, lifting confidence and thereby start paying back their home loans and perhaps spark recovery in the housing market (the core of the current problems). Nope, apparently this was going to reduce the chance of the Federal Reserve printing money and thereby closing an opportunity for easy money and inflation.
But it gets worse. This week in Japan the Central Bank dramatically cut interest rates.....from 0.1% to between 0% and 0.1%. Goodness me, I doubt this will make much of a difference but who am I to argue against their collective wisdom – given that the Japanese economy has deflated for 20 years now – more of the same? Why not?
Also there was an interesting conversation this week about the banks and warnings for them not to lift interest rates outside the normal RBA increases - intimidation? Both sides of politics are guilty of this but would any of them actually take any action? Let’s imagine a “Super Profits” style tax was imposed on our banks. The most likely result of this action would be a flight of foreign capital from our shores resulting in a huge increase in banks funding costs and that would result in...oh dear... higher interest rates.
But hang on, if it’s no good for banks to increase costs to consumers why is it OK for Energy companies to increase costs without any repercussions. From 2005 to 2010 Electricity prices have increased by 61.3% in Sydney. A recent article on Business Spectator by Robert Gottliebsen suggested that power prices may actually quadruple over the next 4 years.
Directly relating to this, the State Government is set to axe its solar energy scheme. In this scheme, people that install solar panels can sell power to the grid for 60 cents per kilowatt hour and then buy it back for a quarter of that. The government is forcing Energy Companies to pay for the difference and all of us who don't have solar panels are thereby paying for this with increased BILLS. The irony is that the greatest demand for household power comes in the evening when the sun don’t shine. As a result, the Coal Fired Power Stations remain at full capacity!
It is also a regressive system as only wealthy people can afford to install the panels and poorer people end up paying for it with higher energy bills. So once again we find a government action with the best intentions being implemented with the worst outcomes. I would suggest you ain’t seen nothing yet!!!
So in conclusion it has been a crazy week. The award for the most unforgiving job in the country goes to all the Economists who predicted a rate rise this week. Forecasting is certainly a mugs game.
Julian McLaren is a Representative of the Shadforth Financial Group (AFS Licence No. 318613) Julian may be contacted on 69317488. This is general advice and readers should seek their own professional advice in regards to their individual circumstances
On Friday morning I was surprised to hear that the stock market in the USA had fallen due to strong jobs growth! Hang on, isn’t the USA relying on stronger employment to buoy the consumer who will spend more, lifting confidence and thereby start paying back their home loans and perhaps spark recovery in the housing market (the core of the current problems). Nope, apparently this was going to reduce the chance of the Federal Reserve printing money and thereby closing an opportunity for easy money and inflation.
But it gets worse. This week in Japan the Central Bank dramatically cut interest rates.....from 0.1% to between 0% and 0.1%. Goodness me, I doubt this will make much of a difference but who am I to argue against their collective wisdom – given that the Japanese economy has deflated for 20 years now – more of the same? Why not?
Also there was an interesting conversation this week about the banks and warnings for them not to lift interest rates outside the normal RBA increases - intimidation? Both sides of politics are guilty of this but would any of them actually take any action? Let’s imagine a “Super Profits” style tax was imposed on our banks. The most likely result of this action would be a flight of foreign capital from our shores resulting in a huge increase in banks funding costs and that would result in...oh dear... higher interest rates.
But hang on, if it’s no good for banks to increase costs to consumers why is it OK for Energy companies to increase costs without any repercussions. From 2005 to 2010 Electricity prices have increased by 61.3% in Sydney. A recent article on Business Spectator by Robert Gottliebsen suggested that power prices may actually quadruple over the next 4 years.
Directly relating to this, the State Government is set to axe its solar energy scheme. In this scheme, people that install solar panels can sell power to the grid for 60 cents per kilowatt hour and then buy it back for a quarter of that. The government is forcing Energy Companies to pay for the difference and all of us who don't have solar panels are thereby paying for this with increased BILLS. The irony is that the greatest demand for household power comes in the evening when the sun don’t shine. As a result, the Coal Fired Power Stations remain at full capacity!
It is also a regressive system as only wealthy people can afford to install the panels and poorer people end up paying for it with higher energy bills. So once again we find a government action with the best intentions being implemented with the worst outcomes. I would suggest you ain’t seen nothing yet!!!
So in conclusion it has been a crazy week. The award for the most unforgiving job in the country goes to all the Economists who predicted a rate rise this week. Forecasting is certainly a mugs game.
Julian McLaren is a Representative of the Shadforth Financial Group (AFS Licence No. 318613) Julian may be contacted on 69317488. This is general advice and readers should seek their own professional advice in regards to their individual circumstances
Wednesday, September 29, 2010
Choice?
Is too much choice simply too much for some people to handle these days?
Interestingly, the more choice we have, the more disappointed we subsequently become. This is actually contrary to most people’s belief that the more choice, the better. Let’s take for example a simple trip to the ice cream shop – there are so many flavours to choose from now. Inevitably you choose something and take the first bite and then wish you had chosen the other flavour. The same applies at the restaurant, and how about choosing the colours to paint your house. How many shades of white are there for goodness sake?
So despite the fact that economic theory suggests that we are rational economic agents who know their own business best, perhaps this is simply not true when investing. This is why the government is implementing MySuper, a low cost and no frills solution for those of you who show high levels of apathy towards their superannuation and retirement.
Guess what, in my experience this is absolutely correct. To this stage I have not been convinced that the majority of Australians would not be advantaged by investing into a MySuper option. The reason for this is that most investors overestimate their ability to choose good investments. Furthermore, they are also prone to making investment decisions based on past performance rather than an intellectual framework. Finally, they also get caught up in the fear and greed cycle resulting in taking less risk when things are bad and taking more risk when things are good which is unfortunately the incorrect course of action (Warren Buffet states "Be fearful when people are greedy, be greedy when people are fearful").
The Dalbar study supports this. In the 20 years to the end of 31 December 2009, the S & P 500 index in the USA averaged 8.2% per annum wherea’s the average investor achieved a return of just only 3.17% over the same time period.
Someone who wants to really make a difference to their long term goals should consider paying for some advice but I must warn you...achieving your long term goals rarely has much to do with picking the right investments - it is more about understanding the key financial levers that affects your long term outcomes including income, expenses and asset allocation.
If you think that by chopping and changing your investments and trying to pick the next winner is your path to financial prosperity, I say good luck!!!!
Julian McLaren is a Representative of the Shadforth Financial Group (AFS Licence No. 318613) Julian may be contacted on 69317488. This is general advice and readers should seek their own professional advice in regards to their individual circumstances
Interestingly, the more choice we have, the more disappointed we subsequently become. This is actually contrary to most people’s belief that the more choice, the better. Let’s take for example a simple trip to the ice cream shop – there are so many flavours to choose from now. Inevitably you choose something and take the first bite and then wish you had chosen the other flavour. The same applies at the restaurant, and how about choosing the colours to paint your house. How many shades of white are there for goodness sake?
So despite the fact that economic theory suggests that we are rational economic agents who know their own business best, perhaps this is simply not true when investing. This is why the government is implementing MySuper, a low cost and no frills solution for those of you who show high levels of apathy towards their superannuation and retirement.
Guess what, in my experience this is absolutely correct. To this stage I have not been convinced that the majority of Australians would not be advantaged by investing into a MySuper option. The reason for this is that most investors overestimate their ability to choose good investments. Furthermore, they are also prone to making investment decisions based on past performance rather than an intellectual framework. Finally, they also get caught up in the fear and greed cycle resulting in taking less risk when things are bad and taking more risk when things are good which is unfortunately the incorrect course of action (Warren Buffet states "Be fearful when people are greedy, be greedy when people are fearful").
The Dalbar study supports this. In the 20 years to the end of 31 December 2009, the S & P 500 index in the USA averaged 8.2% per annum wherea’s the average investor achieved a return of just only 3.17% over the same time period.
Someone who wants to really make a difference to their long term goals should consider paying for some advice but I must warn you...achieving your long term goals rarely has much to do with picking the right investments - it is more about understanding the key financial levers that affects your long term outcomes including income, expenses and asset allocation.
If you think that by chopping and changing your investments and trying to pick the next winner is your path to financial prosperity, I say good luck!!!!
Julian McLaren is a Representative of the Shadforth Financial Group (AFS Licence No. 318613) Julian may be contacted on 69317488. This is general advice and readers should seek their own professional advice in regards to their individual circumstances
Thursday, September 9, 2010
Emotions - your greatest enemy
Here is an interesting thought.
When the price of a good or service goes up, let’s say Banana’s or Petrol, our first inclination is to buy less. Right?
Then why do we not apply the same philosophy to financial assets? If the price of a listed share goes up, why are people more inclined to buy it......and looking at the reverse, if the price falls, they sell it. The same can be said for managed funds. Investors and Financial Planners are more inclined to purchase managed funds that have performed well over the past 12 months.
The problem is, people appear to incorrectly extrapolate past price changes into the future. This is unfortunate for so many reasons, not least the fact that there is overwhelming evidence to suggest that this behaviour destroys wealth. The Dalbar Study in the USA has found that over the 20 year period to 31 December 2009 the US Sharemarket S & P 500 Index had an annual return of 8.2% whereas the average stock fund investor averaged a paltry 3.2% (barely above the rate of inflation).
Investor behaviour is shaped by the false belief that there are market guru’s that can predict the future. This faith is placed in stock brokers, economists, managed fund analysts and Financial Planners. If the truth be known many investors are none the wiser as they do not have the ability to benchmark or “judge” their investment performance with their peers.
Poor asset allocation decisions and market timing nightmares also compound the problem.
Emotion is your greatest enemy. When people are most fearful, future expected returns are actually at their highest. Knowing this, why are people tempted to withdraw money from the share market at this time? Ultimately, investors will only succeed if they have the right plan and discipline in place.
Charles Kindleberger once wrote “There is nothing so disturbing to one’s well being and judgement as to see a friend get rich”. This is a very poignant statement, but should be a lesson to people that we need to constantly battle our emotions and biases and this sometimes needs the help from an expert.
Julian McLaren is a Representative of the Shadforth Financial Group (AFS Licence No. 318613) Julian may be contacted on 69317488. This is general advice and readers should seek their own professional advice in regards to their individual circumstances
When the price of a good or service goes up, let’s say Banana’s or Petrol, our first inclination is to buy less. Right?
Then why do we not apply the same philosophy to financial assets? If the price of a listed share goes up, why are people more inclined to buy it......and looking at the reverse, if the price falls, they sell it. The same can be said for managed funds. Investors and Financial Planners are more inclined to purchase managed funds that have performed well over the past 12 months.
The problem is, people appear to incorrectly extrapolate past price changes into the future. This is unfortunate for so many reasons, not least the fact that there is overwhelming evidence to suggest that this behaviour destroys wealth. The Dalbar Study in the USA has found that over the 20 year period to 31 December 2009 the US Sharemarket S & P 500 Index had an annual return of 8.2% whereas the average stock fund investor averaged a paltry 3.2% (barely above the rate of inflation).
Investor behaviour is shaped by the false belief that there are market guru’s that can predict the future. This faith is placed in stock brokers, economists, managed fund analysts and Financial Planners. If the truth be known many investors are none the wiser as they do not have the ability to benchmark or “judge” their investment performance with their peers.
Poor asset allocation decisions and market timing nightmares also compound the problem.
Emotion is your greatest enemy. When people are most fearful, future expected returns are actually at their highest. Knowing this, why are people tempted to withdraw money from the share market at this time? Ultimately, investors will only succeed if they have the right plan and discipline in place.
Charles Kindleberger once wrote “There is nothing so disturbing to one’s well being and judgement as to see a friend get rich”. This is a very poignant statement, but should be a lesson to people that we need to constantly battle our emotions and biases and this sometimes needs the help from an expert.
Julian McLaren is a Representative of the Shadforth Financial Group (AFS Licence No. 318613) Julian may be contacted on 69317488. This is general advice and readers should seek their own professional advice in regards to their individual circumstances
Wednesday, August 18, 2010
Visionary or White Elephant?
The Federal Labour government are proposing that we spend $43 billion on the National Broadband Network (NBN). It is a being promoted as a Nation Building project that will increase the productivity of Australia and lead us into the 21st Century. Is this fact or fiction?
I pride myself on the fact that I am a bit of a technical Luddite (by the way, the Luddites were a social movement of British textile artisans in the nineteenth century who protested – often by destroying mechanized looms – against the changes produced by the Industrial Revolution, which they felt was leaving them without work and changing their way of life) so I am not really impressed when people start discussing current speeds, data downloads (and uploads for that matter) and fibre optic cable. However, I acknowledge that to retain our status in the real world some areas of our economy require much faster broadband speeds.
But for me to really determine whether the NBN is a good idea or not I would like to see a fully researched Business Plan.
Unfortunately, a Business Plan has not been established for the NBN (well it sort of has but the government won’t let us see it). I assume this is due to a couple of reasons, one being the uncertainty of who will avail themselves of this new technology and also ultimately what it will cost. There is little doubt that when a government (of any political persuasion) is involved in large projects there appears to be cost blow outs due to overarching bureaucracy and the temptation for people involved to simply increase their prices.
New technology is currently being developed at a very rapid pace. A pace that has probably never been seen before. We cannot forget, however, the lessons of the past. New technology always results in over investments (think railway lines is the late 19th century) and wasteful spending. I also acknowledge that people will raise the Snowy Mountains Hydro project of an example of a large infrastructure Nation Building project but the facts show that the cost of the Snowy Hydro Scheme adjusted for inflation was only $6 billion (in 2004).
So I would suggest that we slow down on the project and have an honest and open discussion about the costs, the benefits and threats before we embark on what could be an expensive mistake. Some people have likened the NBN to a 4 lane highway. What we have to remember is that not every house in Australia needs a 4 lane Highway to their front door.
Julian McLaren is a Representative of the Shadforth Financial Group (AFS Licence No. 318613) Julian may be contacted on 69317488. This is general advice and readers should seek their own professional advice in regards to their individual circumstances
I pride myself on the fact that I am a bit of a technical Luddite (by the way, the Luddites were a social movement of British textile artisans in the nineteenth century who protested – often by destroying mechanized looms – against the changes produced by the Industrial Revolution, which they felt was leaving them without work and changing their way of life) so I am not really impressed when people start discussing current speeds, data downloads (and uploads for that matter) and fibre optic cable. However, I acknowledge that to retain our status in the real world some areas of our economy require much faster broadband speeds.
But for me to really determine whether the NBN is a good idea or not I would like to see a fully researched Business Plan.
Unfortunately, a Business Plan has not been established for the NBN (well it sort of has but the government won’t let us see it). I assume this is due to a couple of reasons, one being the uncertainty of who will avail themselves of this new technology and also ultimately what it will cost. There is little doubt that when a government (of any political persuasion) is involved in large projects there appears to be cost blow outs due to overarching bureaucracy and the temptation for people involved to simply increase their prices.
New technology is currently being developed at a very rapid pace. A pace that has probably never been seen before. We cannot forget, however, the lessons of the past. New technology always results in over investments (think railway lines is the late 19th century) and wasteful spending. I also acknowledge that people will raise the Snowy Mountains Hydro project of an example of a large infrastructure Nation Building project but the facts show that the cost of the Snowy Hydro Scheme adjusted for inflation was only $6 billion (in 2004).
So I would suggest that we slow down on the project and have an honest and open discussion about the costs, the benefits and threats before we embark on what could be an expensive mistake. Some people have likened the NBN to a 4 lane highway. What we have to remember is that not every house in Australia needs a 4 lane Highway to their front door.
Julian McLaren is a Representative of the Shadforth Financial Group (AFS Licence No. 318613) Julian may be contacted on 69317488. This is general advice and readers should seek their own professional advice in regards to their individual circumstances
Sunday, August 15, 2010
The Madness of Crowds
Charles McKay’s eloquently stated in his book “Extraordinary Popular Delusions and the madness of crowds” (published in 1841), that “Men, it has been well said, think in herds: it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one”.
You will see, from time to time, this phenomena occur whether it be the Global Financial Crisis, the Swine Flu scare, Tulip mania, the Internet Boom and the list goes on. It is important for the individual to try and recognize these events and consider running against the herd and learning from past mistakes.
In the Late 19th century the world had witnessed a huge increase in the population in urban centres. In the USA the population of cities had increased by 30 million over the preceding 100 years of which half of that growth had occurred in just 20 years.
According to the new book “Super Freakonomics” by Steven Levitt & Stephen Dubner, this rapid population explosion in cities caused a huge “Emission’s” problem from the major mode of transport – Horses! Their Emission’s of course was manure. New York City alone was occupied by 200,000 horses at the turn of the 20th Century. It is said that these horses produced 5 million pounds of dung a day.
This was indeed a problem. Streets were lined with dung and huge mountains of horse manure were built up around the city on vacant blocks. The smell and the hygiene issues had authorities and residents in a state of panic.
Indeed in 1898 New York hosted the first international urban planning conference to try and address the issue facing cities around the world. The conference only completed 3 of the planned 10 days as no solution could be found.
But then, all of a sudden, the problem vanished. Not by imposition of a big new tax, or legislation banning horses, or an uprising of disgruntled citizens. It was solved by the invention of the automobile.
Levitt & Dubner put it down to this….”Humankind has a great capacity for finding technological solutions to seemingly intractable problems……”. And I have no doubt that this will apply to the current catastrophic scenarios that are allegedly facing us today!
Julian McLaren is a Representative of the Shadforth Financial Group (AFS Licence No. 318613) Julian may be contacted on 69317488. This is general advice and readers should seek their own professional advice in regards to their individual circumstances
You will see, from time to time, this phenomena occur whether it be the Global Financial Crisis, the Swine Flu scare, Tulip mania, the Internet Boom and the list goes on. It is important for the individual to try and recognize these events and consider running against the herd and learning from past mistakes.
In the Late 19th century the world had witnessed a huge increase in the population in urban centres. In the USA the population of cities had increased by 30 million over the preceding 100 years of which half of that growth had occurred in just 20 years.
According to the new book “Super Freakonomics” by Steven Levitt & Stephen Dubner, this rapid population explosion in cities caused a huge “Emission’s” problem from the major mode of transport – Horses! Their Emission’s of course was manure. New York City alone was occupied by 200,000 horses at the turn of the 20th Century. It is said that these horses produced 5 million pounds of dung a day.
This was indeed a problem. Streets were lined with dung and huge mountains of horse manure were built up around the city on vacant blocks. The smell and the hygiene issues had authorities and residents in a state of panic.
Indeed in 1898 New York hosted the first international urban planning conference to try and address the issue facing cities around the world. The conference only completed 3 of the planned 10 days as no solution could be found.
But then, all of a sudden, the problem vanished. Not by imposition of a big new tax, or legislation banning horses, or an uprising of disgruntled citizens. It was solved by the invention of the automobile.
Levitt & Dubner put it down to this….”Humankind has a great capacity for finding technological solutions to seemingly intractable problems……”. And I have no doubt that this will apply to the current catastrophic scenarios that are allegedly facing us today!
Julian McLaren is a Representative of the Shadforth Financial Group (AFS Licence No. 318613) Julian may be contacted on 69317488. This is general advice and readers should seek their own professional advice in regards to their individual circumstances
Subscribe to:
Posts (Atom)