by Scott Pape - October 28th 2011
THIS week I had dinner with a super-sharp senior investment banker from the US.
How sharp?
Well, he mentally calculated the value of the entire seven-course meal, including wine and coffee, added a 10 per cent tip, divided it by our party of four, and told us exactly what we each owed – all in the time it took the waiter to smile and put the bill on the table. And he was right, down to the dollar.
Banker: “I have absolutely no idea.”
As we finished our dinner, we discussed three possible outcomes of the impending debt-induced turmoil:
First, governments around the world continue to print money to reduce the cost of their debts, leading to a nasty and prolonged increase in our cost of living.
Second, despite the latest bailout plans, European governments could still make a souvlaki of the Greek default, triggering a run on the weaker European countries’ banks, and causing a financial fall similar to that of 2008.
Third, the world manages to muddle through without tripping off the debt-wire, but we have a decade or so of low economic growth while we continue paying down our debts.
None of these scenarios was the dessert I was hoping for.
But none of them will affect us in Australia …. will they?
Our Debt Delusion
This week I also caught up with a 36-year veteran of the debt collection game.
Roger Mendleson is founder and chief of Prushka, the country’s largest privately owned collections company, which chases debts on behalf of about 43,000 mostly small businesses (like your local plumber or local vet).
“What I’m seeing is a little alarming, and I’m not one to be running around saying the sky is falling”, says Roger.
“You could say we’re the canary in the coalmine – we see what’s happening before it shows up in the official figures.”
Right now his books are showing that the number of clients opting to repay their debts via instalments, rather than the preferred upfront collection, has risen 35 per cent since this time last year.
“That’s a massive jump, and it suggests the household sector is under significant pressure,” he says.
What’s got Roger really scratching his head, though, is that this is happening against a backdrop of low unemployment, relatively low interest rates, and housing prices which (the property pushers are at pains to tell us) have slowed rather than slumped.
What gives?
Fact is, Australia has one of the highest rates of household debt to disposable income in the world, and it’s slowly starting to bite.
Let’s take a look at the two groups that are shovelling a disproportionate amount of their disposable income into debts: low-income earners and first homebuyers.
This week in Canberra, Bill Shorten has been attempting to clean up the loan shark shops, which often charge low-income earners upwards of 1,000 per cent on their loans, and more often than not end up swallowing their Centrelink payments.
These predators are lobbying hard (with business booming, they can afford to). According to research by the NAB, an astounding 2.65 million Aussies – one in seven! – are financially excluded from mainstream banking, and as a result would struggle to raise $3,000 from a bank if needed in an emergency.
Then there are the first homebuyers. According to documents released by the Reserve Bank under freedom of information, the RBA is worried that first homebuyers ‘overstretched’ themselves in the boom years from 2003 to 2007.
Then in 2008, when prices were still at their peak, tens of thousands of them pulled forward their purchasing decisions as a consequence of the Rudd Government’s doubling of the First Home Buyers Grant, and interest rates being at multi-generational lows.
A lot of these people have pushed themselves close to the edge, and you’ve got to wonder what happens to them if things turn really bad?
Preparing for the Storm
None of this doom and gloom has done anything to diminish my desire to be an investor – just the opposite.
In fact, I was talking to a cranky old stockbroker last week who was crying into his beer about the herd mentality of the market: “Most people call me when the share market’s up. But if you want to get rich, you need to get interested when no-one else is.” (Hold the phone – we’re not there … yet.)
While the overall market may struggle along for years, tough times can be a once-in-a-lifetime opportunity to buy truly great businesses at bargain prices.
That’s why right now I’m beginning to compile a share market crash shopping list:
Here are a few companies on my list
Tread Your Own Path!
Photo: http://www.flickr.com/photos/paojus/2718687317/
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9 comments
Interesting comment regarding payday lenders but, alas, incorrect. Annualised Percentage Rate (APR) is mandated and completely not indicative of cost. Under this annualisation, a $100 loan for 1 day for $1 interest is 365% APR. Where’s the sense in that? It just makes industry bashing like shooting fish in a barrel.
There’s something here that I hope your readers don’t miss Scott.
You mentioned you were talking to a “super-sharp senior investment banker” and when asked where the market is heading he said “I have absolutely no idea.”
And it’s true. No one knows where the market is heading so make sure you’re superannuation and investments aren’t in the hands of a fund manager that is buying and selling shares all day who thinks they know what’s happening. The overwhelming evidence is that they are getting it wrong continuously.
Who are these fund managers? I’ll give you a clue: they charge high fees (greater than 0.60%) which means they can afford to advertise on TV, or newspaper or have a box at the footy to entertain their salesman and women. You’d be surprised how many industry super funds have their money in the hands of such…wait for it….chronic gamblers.
Have a read of The Four Pillars of Investing. I’m only in first few chapters and it mentions how almost all stock pickers wont do as well as a standard top 500 fund. He likens them to chimpanzees throwing darts at a board and choosing companies that way. They did an analysis of financial investing newsletters and the like over a number of years, apparently if you follow the opposite you’d have done better.
Investment has such a wide spectrum but it seems people recently only think of the stock market which they have absolutely no control over. The relatives of mine who did well invested in their own businesses, land, livestock, timber, Christmas trees, and other hands on projects. They choose wisely, worked hard, and retired well. The ups and downs of the stock market had no bearing on their success.
It’s been shown (The millionaire Next Door) that the best place to invest is in the things you know and love. Simply because you’ve kicked enough tyres to know when a good deal comes around.
Only if the things you are investing in truly are investments.
Vintage cars: – fantastic things to own but dont gain in value much..also dont lose value much, unless you dont look after them.
Art and sculptures: Buy to enjoy not as an investment. Even Picaso’s fluctuate in price and not always in an upward direction. Big name’s hold their value fairly well but be careful of “popular” art, that is “THE” artist of the moment. Best buy is the painting of a struggling artist that you want on your wall because you like it. If your lucky it will increase in value, if not you have still got a good deal with possibly years of enjoyment for a couple of thousand.
Gold and Silver: if you had bought Gold in 2001 and sat on it for the last 10 years you would have done REALLY well (roughly 600% increase) but if you had bought in 1993, you would have had to wait till 2003 just to break even. Worse yet, if you had bought in 1879 you still wouldn’t have met break-even point in 2011, when you add inflation into the price and it would have taken you till 1933 to sell it for more than you bought it for. Silver has a similar record of ups and downs.
Jewels: Once upon a time, just 150 years ago, Opals were more valuable than diamonds…until someone started a nasty roamer about them being bad luck. Gems go in and out of favour and their value reflects their favour and the speed of mining (it is very closely controlled to insure maximum profits) not their intrinsic value. DO NOT think buying jewelry is a good investment (unless its to get you out of trouble with someone you care about), all jewelry is sold at much more than its intrinsic value, ie what it is worth if broken down to its components and sold.
Property: can be good, can be bad. Many properties cost you more to hold than their increase is worth and you only need a bad tenant to be way behind.
Really the best investment is in anything that will give you long term enjoyment. Anything that is loved and used for long periods (years not weeks) is a good investment and if it is still worth anything at the end, fantastic, if not you have had years of enjoyment which is beyond monetary value…at least in my books.
A senior US Investment banker admitting that they have no idea where global markets are heading. That is refreshing & heartening. Advisor’s that purport they have all the answers generally have no idea at all. Invest in quality, buy in downturns & develop a balanced plan of attack to accumulate wealth at a steady pace. Tread your own path, investment advice to live by.
aah, yes… Roger Mendleson. A man of solid debt collection experience, although 36 years is a bit of a stretch. Mulcahy Mendleson & Round were not actually doing any ‘collecting’ in 1975 but perhaps that is the year that Roger received his Bachelors Degree?
Hi Scott,
I am interested to know why the gold price dropped as people sold gold and move into cash when the greek crisis reared its ugly head. So many people are saying that gold is the best insurance against the looming worldwide financial doom and yet when this doom seemed to be a step closer, the gold price dropped. Is the gold and silver price more of a safe haven from inflation only?
Cheers