Learn To Like The Services Industries

January 21, 2014 Leave a comment

We have become a nation of services industries.

More than 75 per cent of employment in Australia comes from the services sector, according to data from the OECD. In comparison, services account for 81.1 per cent of employment in the US, 79.7 per cent in the UK and 34.6 per cent in China.

I find that when I discuss the economy of a particular country, often the conversation involves how “we don’t manufacture anything, anymore”. But some of those service companies do produce a product, although its not made of wood, cement steel or plastic.

Why do we place such a premium on manufacturing jobs and industries?

Is this “premium” due to historical reasons, ’cause my dad worked at Ford Motor Company and thus it’s noble and good?

Is it because they are “things we can touch”?

Does it make it more believable and trustworthy that it actually exists, if you can “touch” it?

Does having plant and machinery make managers and investors feel better because its a tangible asset on their balance sheet?

Financially speaking, service businesses surely have higher margins, less fixed costs, require a smaller amount to get started and seem to be more flexible, while the manufacturing industry seems to have the opposite attributes.

Unless you wish to live in a socialist economy (whilst lining up for your weekly ration of bread & milk), free market capitalism and its forces determine the most efficient place (source, cost & delivery) where manufacturing takes place.

Has it been that terrible to have lived in those clean, free, safe, progressive, enriching and prosperous high service employment countries that I mentioned earlier?

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Investing doesn’t need reinventing – just remember some rules

January 12, 2014 Leave a comment

Successful investing is a product of joining many variables together. Many of which we can actually control such as the decisions we make, the risk we take and the investment rules and disciplines we follow.

Here are some of my favourite investing quotes that I keep handy and refer to. They are easy to understand but many investors find them a lot harder to stick to or follow.

1. Over the long run, prices revert to their mean and their fundamentals.

2. Don’t follow the herd. The herd applies optimism at the top and pessimism at the bottom.

3. The safest and most profitable investment is to buy when no-one likes it. Patient opportunism (waiting for bargains) is often the best strategy.

4. Time is your friend, impulse is your enemy. Don’t be captivated by the siren song of the market.

5. Buy assets that appear to offer an attractive return for the risk incurred and sell the asset when the return no longer justifies the risk.

6. Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands.

7. Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.

8. I have never heard of a forced buyer.

9. When searching and analysing investment ideas, individual curiosity and intellectual honesty is required.

10. The trick of being a successful investor is to sell when you want to, not when you have to.

11. Do not be fearful or negative too often because bear markets aren’t forever.

And finally

12. Do your homework or hire experts to help you.

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There is little substitute for doing your own homework.

December 26, 2013 Leave a comment

Regular readers of this blog would notice that I like to highlight the idiocy of financial journalism and they continue to make it easier for more of us to not take them seriously.

A dominating observation in 2013 has been how journalists used Twitter and Facebook posts as sources for their information and quotes.

Mainstream journalists have become even lazier when researching a news story that they even don’t bother to call people in order to seek a quote, instead finding a satisfactory version using social media.

Don’t get me wrong, I like the information that I see on social media as I think it’s a terrific aggregator of opinions too. In fairness, I can’t pick on journalists solely because social media’s contributors mainly come from the broader population.

But I wonder…..

Where are these people getting their facts?
Is what they write, actually correct?
If it’s an opinion, what is the basis behind their views?
What are their motivations or biases?

Here lies the opportunity.

Fewer investors are actually doing any or requisite amounts of “work” when researching and analysing investment opportunities.

A couple ways that I try to succeed when investing my money is to search where others aren’t looking and out work the others.

Although we have been taught by elders and peers that you shouldn’t simply believe everything that you read, yet it seems that we continue to believe the typed word without exercising much individual curiousity or intellectual honesty.

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Let Me Buy A Car Online

December 14, 2013 Leave a comment

I want to buy a particular car but the nearest dealership is in Perth, Western Australia. That’s 300 km’s away from where I live.

I know the car, model, colour, interior options, wheels and engine configuration that I want.

I did a lot of things online. I searched for it online, compared it to other cars and I even “built” my preferred vehicle on the manufacturers website.
BUT, I couldn’t buy it online.

Nope, I need to go into a dealership and buy it from them, which in turn means that I pay for their selling margin, sales persons commission, their overheads, dealer delivery costs and my time and fuel to get there and back.

The dealer adds little value, other than allowing me to test drive it. I don’t need you to “listen” to me. I have already researched it, answered my own questions and made a decision, all online.

I could probably organise finance online and have it delivered to me too? (With free floor mats thrown in)

Just like the financial services industry, unless you add value, give advice and perhaps make me some money (unlikely from a car dealers perspective), price is questioned in the absence of value.

You see, I no longer need to go to a record shop and ask the person behind the counter, what is the new hot album. Spotify and others already tell me this.

Tesla currently let’s me one of their cars online. All I have to do is click, “Buy Now”. I only wish they would deliver to Australia.

What other industries could be affected, that may allow me to Buy Now, without dealing with a sales rep?
Real Estate selling and rental agents?

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The sludge is deep out there

December 8, 2013 Leave a comment

Every now and then, I enjoy having a “double-take” at financial news articles and seeing what’s behind the story, while I “try to hear what’s not being said”, or perhaps, not being written.

Many financial news articles are designed to mislead and frighten and some of them are just worryingly funny.

Some of the stuff I have seen in only the past couple days include:

“Australian Dollar falls for the sixth straight week, its longest since 1985”. Holy cow!, makes it sounds like the Aussie has fallen below 55 cents. Another journalist writes, “and it looks set to extend its decline into the seventh week”. How does she know this?

“CEO celebrates their stock price rising 40% on day of IPO”. So either your bankers did a bad job valuing your business, you did a bad job representing your pre-IPO shareholders or you have incentives tied to the performance of the stock’s public price.

Qantas CEO cries foul over uneven playing field compared to Virgin’s ability to raise capital. Seriously! I wonder what Ansett or anyone else who has tried to compete against QF think.

As CEO of Woolworths nears his retirement, the ownership of their “poker-machine business does weigh on his conscience.” OK, Grant. You’ll get by, I’m sure.

If clients only knew of the lack of investing experience and competence possessed by “Chief Investment Officer’s” that are hired at certain brokerage and investment houses

Fund Managers tell the public that they should be investing overseas (outside of Australia) because it’s apparently not practical and too difficult to be a direct share investor in international equities. No, it’s not. I’ve been doing it directly for myself and clients for over 20 years. Amazingly, these comments from a fund manager happens to coincide whenever they launch their first international (product) fund.

For those who only wish to hear what they want to hear, this post is not a gripe nor soured with grapes. It’s meant to alert people to the bullshit they are fed in the financial press.

Filed under Finance & Investment

How To Go From Sinophile to Sinophobia – Ask Australia

November 14, 2013 Leave a comment

A country’s Foreign Affairs  isn’t only about setting policy but you need to understand economics in order to achieve your diplomatic objective.

Having a few politicians who are certified Sinophiles isn’t an automatic pass either.

Unfortunately, politicians and their advisors often aren’t financially literate let alone considered to be business people and because of this, they fail to understand how to deal with other countries over the length of many economic cycles.

In Australia’s case, it was the only large developed economy to survive the 2008 Global Financial Crisis. The fact that it has hasn’t posted a year with negative economic growth for 22 years in another anomaly.

Over the past 10 years, Australia’s economy benefitted from China’s appetite for its commodity resources (see China’s stimulus) and we loved them for it but after a while Aussies weren’t happy with what panned out, as the social and financial divide was then blamed on a “Two-Speed” economy.

When a large trading partner saves your economy, you say “Thank You”.

You don’t;

  1. antagonise them by placing U.S. Marines in Darwin and lie about the real reason they are there.
  2. call them dirty polluters (even though you have been one for a 100 years before them)
  3. revile the fact that their students come to Australia to study and “take away places from Aussie students”.
  4. ban their large telecomm networking company from participating in the construction of your own National Broadband Network
  5. obstruct and oppose their companies from buying assets (farms) from a willing seller in a free market enterprise system &
  6. charge their citizens more tax if they choose to buy property in Australia.

Oh Australia, you just don’t get it.

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How The Economic Machine Works by Ray Dalio

October 8, 2013 Leave a comment

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Asians spend their money on education

October 2, 2013 Leave a comment

It was quite interesting to listen to Michael Milken this week as he hosted his annual Milken Institute event.

To paraphrase, he said;

The top two things Americans spend their money on is Housing (whether it’s renting, acquiring, furnishing, improving) and Transportation;

while the top two expenditures for Asians happens to be Food and Education……

 

Filed under Social Observations

Not snobs – We’re just a bunch of drunks

September 19, 2013 Leave a comment

 

A recent article in The Australian newspaper (see link below) highlighted more than the buying power exhibited by Australia’s dominant supermarkets has over wine producers. It talked about how the supermarket duopoly is selling its own branded wine too.

http://www.theaustralian.com.au/executive-living/fear-and-loathing-in-the-wine-aisles/story-e6frg9zo-1226717170986

A report from Australia’s Bureau of Statistics says that beer consumption amongst Aussies has hit a 66 year low, while wine sales have risen. News agencies have tried to spin their feeble creative minds to develop a story based around our growing sophistication towards finer tastes. Interestingly the report doesn’t tell us at which price point most of the wine was bought at, but I can confidently predict it wasn’t at the middle nor higher end of the price range.The reason that wine sales are growing is because wine is cheap. It is being sold cheaply by the supermarkets who account for 77% of the domestic wine sales. The reason beer sales are falling is because its expensive.

Mainstream consumers are looking for a cheap way to get drunk at the behest of drinking a quality artisan product.

The price of beer has risen over the past 30 or so years, yet we still think you can buy a glass of beer for $1 at the local bowls club.

Some fancy pubs & restaurants charge $9-$10 for a pint of beer and many happily pay for it, because it’s “craft beer”.

Wine producers at the medium to premium end of the market need to continue to focus on improving their brand, the quality of their product & the “love & care” that they put into making their wine. This is their differentiation, just like craft beer makers are doing it.

One benefit of living in “wine country” is that I have friends who are wine makers and mine happen to all be a part of boutique, independent enterprises. They do not try to be volume based manufacturers. They do not create “cookie cutter” batches of wine.

A $9 bottle of wine tastes like a $9 bottle of wine.

If you choose to enter the lower end of the market, you then compete against those who can be the lowest cost producer and have pricing power. This shouldn’t be a surprise.

We drink a $28 bottle of wine because the quality, love & taste shows.

 

 

 

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Price charts don’t tell the whole story

September 17, 2013 3 Comments

Towards the end of calendar year 2007, the stock price of Australian rail & port operator, Asciano (AIO) was trading at $18 per share giving it a market cap of A$4.9 billion and it’s Enterprise Value (market cap plus debt and minus its cash) was A$8.97 billion. They were also near reporting a financial year EBITDA of A$626 million.

Six months earlier, the company had listed on the Australian Stock Exchange and was trading around $25 per share.

Today, the stock price is $5.80 and its market capitalisation is A$5.65 billion and the Enterprise Value is A$8.75 billion. Both figures are near or higher than the values seen at the end of 2007.

Incidentally, its 2013 Financial Year EBITDA was $911 million.

After seeing its stock price fall by more than 70%, how can this company’s worth be higher than its 2007 level?

Asciano now has a float of 975 million shares.

So, we take the 975 million shares and multiply it by $5.80 per share to equal $5.65 billion of Market Capitalisation.

Back in 2007, AIO has 273 million shares on issue which when multiplied by its $18 share price gave it a market cap of A$4.9 billion.

The difference being, Asciano has quadrupled the amount of shares on issue over the past 5 years.

This highlights one example of where you need to do your homework when understanding a company’s value rather than simply looking at a price chart.

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