Naive Investor Chapter 6: "Bricks & Mortar"

Before looking at Cash, the most common investment category for Naive investors we'll look at 'property' or 'the good ol' Bricks 'n Mortar [hok-sput!]' because this is the most common aspirational investment. By aspirational I mean, that almost by default the 'average' person, studies, works, saves and buys a 'house' then spends 40 years paying off the mortgage (present market conditions) or tries to get rich quick through property 'flipping' with or without first blowing money on renovations.
The eagerness generally, combined with social pressure (as Benjamin Graham said 'Much bad advice is offered freely'*) presses me to deal with property first, before looking at what you are more likely to have - cash sitting somewhere.

Earnings

How does property make money? The first (bad) piece of advice you will get from your parents at the kitchen table in Casa De Melton is: 'The house makes money from Capital Gains.' A view so prevelant that we have a highly dangerous and unpredictable financial bubble in the Australian domestic housing market. Forgive me if I go to pains to rectify this error - Capital Gains is a function of an appreciation in Price.

They are called 'Earnings' because they are EARNED.

Properties make money through RENT. Rent is the only way the business of accomodation makes money. It is the only actual income stream.

Properties make money through RENT. It is RENTED accomodation. RENT is the income of property. Properties only INCOME is RENT.

Think of them as a discount form of Hotel accomodation. They are very spacious, penthouse/villa-esque suites, maybe with Garden, crucially in some location. You generally rent the 'suite' for periods of a year, instead of by the day (or in a Japanese love hotel, hour). Because the customer is in principal 'bulk buying' their accomodation and paying off in installments, they get a discount. It may cost you a weeks 'rent' for a house to stay one night in a hotel that is not as spacious or comfortable.

They look different but this analogy will be useful when it comes to talking price. The other thing I will be at pains to point out is:

Even if YOU are planning to OCCUPY the residence YOURSELF, RENT is still the Earnings. You have to treat it as an opportunity cost though, weighing the 'ownership cost' (ie, mortgage repayments) against your next best option (renting a similar property off someone else).

Therefore, if you are an 'Owner Occupier' you must consider your SAVINGS in RENT as your income/earnings.

Price

Okay, just for you the investor - Price is what people are willing to pay for the property. But as an extra treat let's add an observable reality or 'rule of thumb' for the property market:

'A property is worth what a bank is willing to lend for it.' Which is to say that property is highly SPECULATIVE.

You may though have detected some condescention on my part in the introduction to this chapter. Namely ridiculing 'Bricks & Mortar' and also wrapping the word 'house' in quotation brackets. Here's why:

Unfortunately in Australia and most of the world, you don't buy a 'house' so much as a 'House & LAND' package. This is an important distinction, and why I actually prefer a seemingly vauger term like 'property' which I will use instead of 'house' from here on because they are not actually synonymous.

The 'bricks and mortar' are almost irrelevant to price and you need to understand that as an investor. Think of it logically, if you took your money and just bought a whole stack of bricks, what would you expect to happen to the price? The bricks would go down, in part to wear and tear and otherwise just inflation.

Bricks are a depreciating asset, just like a car, lumber, canned foods etc. When arranged into a house nothing changes, you just have to do more maintenance. The 'house' itself is actually a source of ongoing expense, just as a hotel room would need to be maintained cleaned and serviced every day - to some extent so too does a house.

The land determines the value and it is actually far more based on its relationship to the land around it (rather than itself). Namely infrastructure both man made and natural. If it is by the sea it is more useful, if it is near the city it is more useful, if it is near public transport, shops and hospitals it is more useful.

It is the LAND component to the 'House & Land' equation you pay through the nose for. The house will fall down, burn down or worse, be heritage listed, the Land will appreciate in value as the economy grows.

P/E Ratio

Now bear in mind you are an investor (albeit a fairly naive one, but an investor none the less) not a speculator. As such, we are concerned with determining Price as a function of value.

Hence the 'Price/Earnings' Ratio is important. So...

I grabbed a quote on a particular house we may wish to buy today (24-March-2010) in Essendon, its a 3 bedroom house to buy at $780,000.

A 3 bedroom house in the same suburb I obtained a quote for $420pw to rent. (Note I'm not being very thorough, I just wanted some figures to illustrate the example, there could be better prices, better rents, worse rents etc.)

So P/E ratio's are normally denominated in years or 'How many years it will take to earn back the investment/purchase price?' So $420*52= $21,820 pa.

$780,000/21,820 = approx. 35. Given BJG suggests 20 as an acceptable P/E multiplier, this investment is kind of risky, much of the earning value is already accounted for in the price.

Conversely assume a P/E ratio of 20, (Benjamin Graham uses this multiplier as acceptable) the price to buy the property at is $436,400 (it will pay itself off in 20 years, it is WORTH $436,400). But rents grow by a whopping 10% between now and this time next year. Then at the same P/E ratio the property would be WORTH $480,040. Even if rents increase by 10% it still wouldn't be WORTH $780,000 (to an investor). At an acceptable P/E ratio of say 25, rents would have to be $600 a week to pay the asking price, a whopping 40% increase. (I don't even believe that is legal to do in a 12 month period, so it would be IRRATIONAL to anticipate a 40% increase in rents).

Now, before moving on, I want to address the causal chain for a rational expectation that earnings (that is rents) would increase (or decrease).

Risk

Keeping it simple, lets look at the primary risk to an investor - that is we are primarily concerned about our earnings, they are what make the property valuable.

Thus the chief risk faced by a property 'investor' is a lack of tennants, a lack of tennants means no income. Without income your P/E ratio is infinitaly bad. There is a cost (at the very least opportunity cost) of having your money tied up in the property, when you can at least have it sitting in a bank account earning 1% interest.

For the investor a house with no tennants is the same as a company with no customers.

Now the investors emphasis on rents illuminates a causal chain effecting rational pricing decisions.

Tennants can only pay rents they can afford - therefore their wages have to be sufficient that they can sustain their daily needs (food, clothing, transport etc.) and have enough left over to pay rent. So rent will have a maximum, you cannot charge people more rent than they earn.

We have been gifted a nice rule of thumb in determining the rent people can afford called 'housing affordability' that is NO MORE than 30% of a persons take home pay can go to the cost of housing.

Therefore, to be confident of a rent increase you need to first observe a wage increase. The higher (affordable) rents the lower your risk, the higher a price for the same asset you can afford with confidence. Thus for house prices to increase you need to observe an increase in wages, which allows greater earnings via rent.

We generally don't observe this though, house prices have increased faster than rents which in turn have increased faster than income. This makes the speculative risk, quite risky...

Let me introduce what I tentatively call 'popular risk' if you are bitter and vindictive you may call it 'stupidity risk'. It is irrelevant to an investor but not the general public. It follows movements in price around.

Generally a minority of the public is financially literate. I suspect it is a small minority. Thus it is unreasonable to assume that people will act rationally to the system of finance simply because they do not understand the rules.

Furthermore your typical person is 'risk averse' that is they don't want to lose money they want 'easy money' or gains that require no effort or exposure to downside.

Most people learn through observing history. A naive forecasting method where you take what happened yesterday as indicitive of what will happen today.

Enter the problem of inductive knowledge. It is too lengthy to fully illustrate here. But I'll try to be brief:

Suppose you are a turkey. You observe the first day in your new coop that 'the farmer' comes and feeds you grain. You gather from this piece of evidence that the farmer has your best interests at heart. Next day same thing happens, another 'observation' confirming your theory the farmer is looking out for you. 1,000 days = 1,000 pieces of coroborating evidence that the farmer is looking out for you.

On day 1,001 the farmer comes wrings your neck and serves you up for lunch.

That's the problem of inductive knowledge. When you are at your most confident of your safety (1,000 pieces of corroborating evidence) you are actually in the most danger.

The housing market, in general works exactly the same. That is speculators who 'judge the underlying value of an asset by watching movements in price' watch the prices in the housing market. So if house prices increased by 10% last year, they treat this as evidence not that 'house prices have gone up' (which is true) but 'house prices will go up'.

Most people in other words are turkeys. They treat an increase in price as corroborating evidence that houses are valuable and will increase in price, not what should be immediately apparant to an investor that they are actually 'less attractive' because every price increase, increases the P/E ratio and erodes your margin of safety. (when looking to buy in).

Put simply the 'popular risk' is when prices and the market conform to popular (turkey) thinking. The forecast is this 'House prices will increase because they increased' the higher the price the more attractive. People want to buy in 'before it is too late' and we the investor become blind.

Mathematically the price has become a function of the price. It isn't based on anything except itself.

But there must be some limit? There is, people's ability to pay, which is a function of how much they can borrow (and then repay) when we are talking maximums. Hence 'A property is worth as much as Banks are willing to lend.'

Risk Part 2: Bank's Perspective

I feel that looking at property investment from the perspective of a bank is illustrative. Hence this special 'part 2' segment.

Most people buy properties through a type of loan called a 'mortgage' which means that the asset being bought serves as collatoral for the loan. This mitigates the lender (the banks) risk, because if you default on repayments they simply seize the asset and sell it.

Most people are turkeys, and most turkeys are ill served by something they are obsessed with: 'Negative Gearing' this means, they take a loss on the property purchase.

The mortgage repayments exceed the earnings (rent) from the property. They then deduct these losses from their assesable income reducing their tax. They then pat themselves on the back.

From the banks perspective, they earn interest on the loan. Their earnings are interest. If their customers were rational (if naive) investors then the rent repayments would cover the interest expenses. But they are turkeys so they pay ALL their earnings (income/rent) from the property to the bank, which the bank keeps. THEN they dip into their own pocket and pay the balance.

Your rent comes from the tennants productive income. The banks thus get paid part of the tennants income, then they are paid part of YOUR income.

From the perspective of 'earnings' the banks get premium earnings above what the property could attract on its own.

NOW, if you ask an economist (don't) they will be sorely tempted to explain interest rates in terms of 'supply & demand' that is at a high interest rate (say 10%) then banks will want to loan money out (to earn 10% interest) but, people won't want to borrow money (because it costs them 10% interest). If you lower the interest rate a bank will (supposedly) be upset because it isn't earning as much. People will be happy because the cost of borrowing funds is cheaper.

CRUCIALLY though this economic model works on the assumption that PRICES ARE FIXED.

Here is a more realistic model.

1. The interest rate is lowered from 10% to 5%.
2. People are happier to borrow money, demand for funds increases. (so far so good).
3. More people borrowing means more people bidding on property.
4. Demand for property increases. Supply is (relatively) fixed.
5. Property prices increase.
6. Banks lend MORE funds at LOWER interest.
7. The increased amount of funds (to cover the higher property prices) mitigates the lost interest (from lower interest rates) for the bank.
8. House prices HAVE increased thus (from turkey vision) they WILL increase.
9. Banks lend EVEN MORE funds.

And so on. Thus we hit on Peter Schiff's property paradox. To turkeys, 'High house prices make housing affordable'. That is when you expect property to increase 20% pa, you don't really care about taking on larger debt, (because you expect to profit from 'flipping the property').

Now to summarise the risks, for a bank there is 'no' risk they get an EARNINGS PREMIUM by lending more money to more people, and if the person defaults they retain the underlying asset which they can sit on forever. Their only risk comes from a catastrophic number of defaults, which means all their money is tied up in repossessed houses that they can't sell without increasing the supply of housing drastically (resulting in lower prices), but they may be forced to if depositors then try to withdraw their funds. (this is what triggered the GFC).

To you the investor, popular risk makes you blind. The moment prices depart from any rational basis in earnings, then you can't explain why the house price increased last year THUS you cannot explain why they will go on increasing.

You may be tempted emotionally and through social pressure by your turkey friends to buy in under the assumption that 'prices did go up, therefore they will go up.' but I urge you not to, because they will go up right up to the moment they start going down. Then the only bottom to prices is a rational one (where the P/E ratio makes it crazy not to buy).

Popular risk may be summarised by Keynes observation that 'People would rather be wrong in numbers than right alone.' (Benjamin Graham was a student of Keynes I believe).

Bubbles tend to burst at the pinnacle of confidence. But that pinnacle may only be recognisable as the pinnacle for a few moments.

Liquidity

Property is not very liquid, for a number of reasons.

Firstly it is indivisible. You sell the whole property or you sell none. Whereas you may sell some shares but not all, and with cash you can spend it a cent at a time.

Secondly, holding costs are so negligible that land banking is very attractive. The only ongoing expense for an empty block of land are the council rates. Most councils now use what is called 'CIV' rating or 'Capital Improved Valuation' which means if you build a very nice house on the property you will be charged more in council rates. If you let the house fall into disrepair such that nobody but a drug dealer would want to live there, you get a discount on the council rates. If the neighbourhood becomes a major drug trafficking zone then you get a further discount. If you bulldoze the property you get a discount. If somebody graffitis your property they are doing you a favor holding costs wise because you get a discount on your rates.
So you can bulldoze any useful structures on your property and effectively hold onto the property forever. People do do this, particularly developers who drip feed the market new land in order to maintain high prices (similarly to the diamond vaults that keep diamond prices high) but other individuals as well.
This means that the supply of land can be quite high, but the holders of unused land have no real incentive to sell because the longer they hold onto it the more desperate (and irrational) you will become. Thus property doesn't transact as frequently as it should.

The only way you can get more money out of your asset is to refinance it on an 'equity loan' the problem with this is that if you did invest in property (that is buy it at an appropriate P/E multiplier). Then the 'Capital Gains' that you are borrowing against is the equivalent of borrowing money to buy the property at a higher price from yourself. You become the irrational turkey.

Frequency of Payments

Rent is typically paid monthly and is a steady income stream. IF you have tennants. If not, you may be in the lurch. You can't rely on having tennants. This is the primary risk for an investor (who wouldn't buy in right now).

Opportunity Cost

The opportunity cost is two-fold.

If you are an owner-occupier the opportunity cost is the difference between the cost of owning (mortgage repayments) and the cost of renting the same property. Thus if it only costs you $500 to own, but $800 to rent, you are laughing. But if it costs you (more likely) $800 to own, but $500 to rent, you should be crying but are probably laughing because you are a turkey. Your opportunity cost is $300.

The second fold is to look at a relatively safe reliable investment option like a Treasury Bond. Here Peter Schiff puts it best 'How do you know if the price is good? You look at the rents, if the rents aren't getting you 5-7% above the mortgage repayments don't buy it. Nobody invests to break even... a government bond pays 4%'

I'm paraphrasing but in principle think of it like this. Assuming you don't have to borrow funds and your required rate of return is 0% (break even) then over 20 years every $1 in rent you spent $1 to own the property.

If however you borrowed the funds at 7% then for every $1 you get in rent suddenly you paid $1.07 to own it. Thus to overcome the opportunity cost of a treasury bond paying 4% over the same time period (you get $1.04 for every $1 inested) you need to get AT LEAST $1.11 for every $1.07 you paid.

Ethicality

I treat property ownership as fundamentally unethical.

The only exception I would make is in owning your own home/workplace, and that is to say that it is the lesser of two evils. You may as well monopolise the resource you are using rather than let somebody else do it for you.
Straight up and down though, let me be clear: Investment properties are unethical because you can contribute no actual value, yet tax another person for their productive efforts.
That's right rent is unethical. John Stuart Mill alludes to the argument 'private property is theft' and like proving the existence of god, it is much much harder to argue that it isn't than to argue that it is.
Start simply with the question 'what value does a landlord actually provide?' and it all falls apart from there. A landlord can provide value in some circumstances but these circumstances don't crop up with anywhere near the frequency of landlords themselves. I'm not going to go into it here, partly because it's an interesting meditation to have for yourself.

*I am aware that this is ironic, and will also point out I am still a few semesters ,away from being able to offer Financial Advice in any legal capacity, my advice is general in nature.

**Unless they are playing tax trickery.

An Insatiable Drive To Prove How Smart I Am

A scary thing happened to me in Macro 2 last week, the lecturer asked a question and I hoped that he would ask me, because I knew the answer.

This lecturer moves at a break neck speed, thus its actually rare for any student to know what he is talking about. He also 'strongly recommends' on 6-9 hours of self directed study in the subject per week.

I often provide answers in class, but this one was different, I really at some sickening subconscious level just wanted everybody else in the class to know how smart I was. The subject was hard, (not necessarily worthwhile) and it was taught hard (I strongly suspect Macroeconomics makes itself much harder than it needs to be through some variation of the 'blinded by science' logical fallacy.) and I just wanted to prove somehow that I was harder. An image I know I won't be able to keep exerting the effort to maintain.

But most times I'm self conscious of calling out all the answers, but in other lectures, the lecturers have this terrible habit of posing a question to the class and then just standing around for 10 minutes asking 'anyone?... anyone??...ANYONE???'

It's like Water-drop torture when you know the answer, hearing this incessant plea to the greater number for somebody, somebody to provide the answer. The subject matter I think is often not objectively hard - it is mostly a sight less difficult than year 12 maths subjects. And if its true that you only retain about 7% of your highschool learnings, then these kids fresh out of highschool should be doing better than me.

But seriously, quite often nobody, nobody will speak up. I wait for somebody else to take the 'psuedo-glory' of answering the teachers question, but none come and eventually I just have to yell out 'scatter plot' to keep the class moving (or whatever the answer is/was).

But I squarely blame the teachers for putting me in this position. Maybe they come from a cultural background where they are used to classes full of unashamed people desperate to prove how smart they are and are assailed with a chorus of correct answers to their rudimentary questions. But it isn't the case here.

Furthermore, it's like Janice's terrible manner of delegating chores, when she says 'could one of you kids do the dishes' it effectively means 'nobody do the dishes' the dishes have a higher chance of being done when she doesn't ask. If she assigned the chore to somebody then somebody would do it, but in delegation terminology anybody is synonoymous with nobody.

And if they wait around for ten minutes for me to step up to the 'anybody' title, it doesn't exactly prove that the class is following the lesson, it just proves that I follow the lesson. The more I answer questions in fact the less confident she should get in her teaching abilities. Such a concentration of input can't be indicitive that everybody understands the task.

Anyway I have a day off today I intent to use it. It's just sad that University instead of providing me an opportunity to overcome an interpersonal failing seems to be forcing it back upon me. The only lecturer that doesn't teaches a subject as archaic, useless and difficult as Barn Dancing.

A Beguiling Explanation of Beguiling Accents

Almost everyone you ask will be partial to some accet. Often called the accent advantage. You here, and perhpas even partake in stories of people going home with somebody they would otherwise pass over because of their sexy 'foreign accent'.

Now think of the Lottery, people buy lottery tickets all the time, even though they have odds of 'a billion to one' and stuff. Dan Gilbert explains this as our vey human inability to accurately calculate the odds. Namely, the news always shows us newsbites of lottery winners, we hear about lottory winners all the time and almost never about the millions and millions of lottery losers.

As Dan Gilbert points out, if they dedicated the same 30 seconds to each lottory loser as they did the winner for just one weeks lottery, we would have to sit through 11 and a half years of losers in 30 second portions before seeing 1 winner (provided there was a winner last week).

Because winners are disproportionately represented, we have a disproportionate expectation of winning. (apparantly 15% of baby boomers financial plans, involve winning the lottery. And by that I mean, they expect to win the lottory! 15%!).

Now my beguiling yet unresearched theory on why we find accents 'attractive'. Firstly, the proportion of Australians who find the New Zealand accent 'sexy' (rather than the more common 'ridiculous') is on par with foot fetishists. That is it is by and large accidental. So the attractiveness of an accent I'm suggesting is correlated with the 'exoticness' of the culture.

Queenslanders and New Zealanders are not as exotic to an Australian as the French, Italian, Portugese and Japanese people.

Now think of how we predominantly get exposed to these 'exotic' cultures, even one as unexotic as 'American'. That's right - TV and Movies. What is characteristic of TV and Movies? They have casts of stars. Winners. Beautiful people.

Even with foreign movies, advertising campaigns etc. They cast attractive people, generally slightly to much more attractive than the norm. Watch an erotic french movie, and leave that as your only insight into French culture, you are going to think France is a romantic, erotic nation populated by incredible lovers.

Go to France you will be immediately confronted by surprisingly vast samples of what is known regionally as the 'dirty frenchman' and not as in, perverse and kinky. But just plain dirty. Fat, sweaty, run down, smoking prodigiously and whiping there hands on their shirts before asking you for change, or infrequently mugging you.

Because we are far more exposed to sexy attractive people speaking an exotic cultures language, we begin thinking they are representative of their culture. We then make the classic error of mistaking correlation with causation. Correlation is that 'foreign movie actors tend to speak with an accent AND be sexy.' Causation is 'foreign movie actors ARE sexy BECAUSE they tend to speak with a foreign accent.'

Then bingo bango, with this thought in your head you walk into a nightclub and meet an incredibly amazingly average girl or guy with a French accent and due to deeply encrusted associations in your mind think 'wow, what a sexy accent!'

Your eyes switch off, and you see them with your ears, interpreting them as Monica Belluchi or Robert Carlyle or something.

There, that's my beguiling theory. Don't know how scientific it is.

WIL a surprisingly accurate reflection of 'todays increasingly competitive' world.

'In today's increasingly competitive environment' + 'random statement' can pretty much sum up every Universities marketing campaign. At RMIT the random statement is 'WIL compliant' WIL is an acronym for Work Integrated Learning.
It is one of the many learning 'theories' that I find annoying, apparantly 'kids today' are used to getting information off of 'the internet' and thus they apparantly 'process information' 'differently' which you may have noticed if you've picked up a text book, or even any non-fiction book the annoying layout that breaks the ancient covenant that you read a page left to right, top to bottom for
HOW TO KNOW YOU ARE READING A 'MODERN' TEXT BOOK

1. What you were trying to read just got interupted by a 'pop-up' box placed in the middle of a paragraph.
2. Bullet-pointed vaguely humorous summaries.
3. Sarcastic illustrations of some concept the author is ridiculing.

example, the above (relative to the word 'above' and not to the beggining of this sentence (see above) for which 'below' would have been more appropriate.

But I digress, this is about WIL - WIL pretty much translates to 'the assesment will be predominantly group assignment' and sadly having survived 3 years of pretty much nothing but Group Assignments in Marketing, Economics and Finance appear to have become 'WIL compliant'.

The idea being that group assignments somehow better emulate workplace conditions than individual assignments and thus-thuserson-thusly give us some kind of competitive advantage 'in today's increasingly competetive environment'.

What may surprise you is that I think it does, which is surprising for a modern educational theory/philosophy*.

By 'does' though, I mean it does better emulate the workplace, not necessarily that the world is better off by it.

Allow me to explain:

Most organizations are organized into a cluster of departments, there is usually a department assigned to each significant cluster of responsibilities for some process in the value chain. eg. sales department, marketing department, accounting department, logistics department.

Once you take into account sub-departments, most people work day to day closely with a group of people that will consist usually (in a largish organisation) of 4-8 people +a manager or more likely (and disastorously) 3 or 4.

Now it is unlikely that any course will have a group as large as 8 responsible for an assignment, so 4-5 usually builds parity with an actual workplace. However over the course of a Higher education course, the groups are a lot more fluid, plus you will build up a working knowledge. This is a luxury compared to a workplace, where the spead of change in a department is relatively slow, you are only likely to have 1 person change in a team per year, and its usually the ambitious high-performer.

That said, a vast number of students in higher education choose to work with a group of friends, so it inadvertantly emulates an actual workplace since you tend to make friends (whom you may secretly dispise, whatever) with the people in your department, you feel comfortable with them whilst you distrust outsiders.

Now I'm facing the first formative group assignment periods of my new degree, and overall I'm indifferent to whom I work with. I have enough experience from my marketing degree that working with friends or just a randomly selected group of strangers will yeild statistically the same results. Namely:

A) You will have a star-performer on the team that does 80-90% of the work. They are easy to spot, though may differ in quality.
B) You will have a dead-weight that contributes 0% of the work, or worse by promising to do their 'fair share' and then dissappearing for a surprising array of reasons actually sets you back -10 or -20%.
C) You will have the remainder of people that can competently perform spell checks and turn up to meetings only slightly late and will successfully complete the 10-20% of remainding work, provided you as a group haven't made the rookie mistake of delegating any work to the dead-weight above.

Then you write on your assignment cover sheet that everybody contributed 100%, surprisingly often cutting a break even for the dead-weight team member. (often because the dead weight is also your 'friend' that you repeatedly work with).

Now this is ACTUALLY a PRETTY ACCURATE REFLECTION of how work gets done in a professional environment. The only thing lacking is a clear cut 'manager' the lecturer being more of the distant executive that has a clear idea of the performance they actually want but is too distant from the people doing the work most of the time for them to check compliance in any helpful way. So yeah, the 'manager' who takes ultimate responsibility and if they are a good one, takes the step the team cant on their own and fire any dead weight is lacking from the WIL group assignment facsimile.

But I defy you to work into any organisation or corporate environment and find a non-Pareto (basically, where 80% of the work is done by 20% of the staff, and 20% of the work is done by 80% of the staff) distribution of work-effort. One caveat, you have to look at some objective measure of the work being done, like calls answers, orders processed, project completion rate, sales dollars etc. If you ask anybody how much they contribute you will probably get a percentage that adds up to 900%.

Thus let's call it the 'dead-weight' phenomena that is, how incompetent people can survive in groups for a surprisingly long time where individually they would fail, fail hard and fail quickly is present both in the workplace and now in University thanks to WIL. It isn't quite that bad because most courses still have some kind of individual assesment (like an exam) which doesn't happen in a workplace. Universities have taken a step closer to this dismal reality of today (and to be honest, yesterday's) 'increasingly competitive environment'.

Next, let's look at what I call the 'friend trap' that is workplaces (thanks to the 'innovation' and 'scientification' and 'overemphasis') through networking often recruit people not because they are the most qualified, or have an outstanding track record, or will bring something new and unique to the team, but because they know the person doing the hiring, that person feels comfortable with them and that brings them comfort if no actual help. It also makes them quesy about demanding actual performance from them, because it might hurt the friendship. Forgetting that 'friendship might hurt the business' should be your actual priority (in the eyes of the owners and the law). But don't worry, this isn't the case in most organisations or is only reinforced in hindsight after the business has been thoroughly hurt.
From the perspective of somebody with no bankable skills or particular motivation to be assessed on their own merits, WIL now reflects the 'professional' reality of networking, AKA 'It's not what you know it's who you know'.

Thirdly it shows a diseconomy of scale, namely Group assignments I've always said since my Marketing course days were 'work enough for 5 people done by 1 person.' If you truly 'master' the art of 'group assignments' you can have it done by 2 people, but it usually takes time, and you will still be forced to take on the additional 3 near dead-weights. Similarly as to the 'manager' I alluded to above, WIL accurately reflects the modern day concept of the 'Working-manager' or 'Non-Druckerian-manager' perhaps the biggest insult to actual managers everywhere - also the most prevalent type of manager.
In this sense a manager is simply the person who cares most about the results and trusts his/her colleagues the least to deliver, so they step in and do the lions share of work themselves, being afraid to delegate any responsibilities to anyone. Thus the more people you have to 'manage' or the larger the group, the less productive you become because the more you have to look over the shoulder of those blissfully ignorant people who naively offer to 'help' by doing actual work that you don't trust them to do.
Every worker costs you more time in checking that their work complies to the standard you so deeply care about. It allows 2 people to do the work of 1, in the case of a group of 5 it may be fair to say that it takes '6 people to do the work of 5' but it multiplies out to say that 'enough work for 10 people is done by 1' namely the manager, who has no fucking idea how to delegate and trust people. Because it is their mark on the line (in the case of WIL) and their promotion, mortgage, ego on the line in the case of actual work.
Again WIL accurately reflects and prepares a student for the reality of today's increasingly competitive environment.

The problem I have with programs like WIL, is that the reality may be terrible. I will freely admit that networking is a reality (ie. 90% of job vacancies are filled before they are even advertised) but that doesn't make it a 'good' reality. Pareto may be a reality as regards performance, profitability etc, but again it doesn't make it a good reality.

Universities should be the vanguard of business (and other vocation) thought, not the rearguard trying to catch up to the aggregate standard of workplaces.

Not that the working world isn't a breeding ground for innovation - they do have to actually survive in the marketplace (or go cap in hand to the government threatening job losses for otherwise unemployable people unless they are subsidised/bailed out) but established businesses tend to run on a kind of auto-pilot, where the core competency required is to be conservative and avoid glaring mistakes (Coca-Cola for example doesn't have to come up with new-recipes year on year).

The more a business can run on 'auto-pilot' the more incompetent people they can hide away over time. Perhaps there is no better demonstration of this than the State governments of Australia, after almost 2 decades of continuous reign by Labor in every state, we have a bunch of completely incompetent premiers all teetering on the brink of being ousted (perhaps today for SA and TAS) that emerged out of at least 10 years of 'steady as she goes' policy. In fact I attribute it to Steve Bracks highly successful political formula which was perfected by John So - do as little as you possibly can, and people will thank you for it.

Governments are good analogies for the Businesses University is really preparing us for, because they have a secure income stream (like the Big 4 Banks and the big Car Companies (also taxpayer funded)) are riddled with incompetent well meaning people (who would protest at how overworked and understaffed they are, more readily than do any actual work), and 'star-performing' 'working managers' that invest no time in actual team building or even development of individuals, because they are eternally preoccupied doing the work their team was recruited to do themselves and cleaning up after their team's mistakes because they took no time to bring them up to standard.

In this way WIL is good, the constant torrent of Group Assignments may actually leave graduates dissillusioned before they even graduate (as opposed to 3 years afterwards). My one criticism of WIL is that if it is concerned with reflecting workplace realities, people shouldn't be able to choose their groups at all - only managers can choose their teams and even then it is all too rare for them to bother doing so (they leave it to HR) from a graduate perspective you will be assigned to a team in your first workplace consisting of some stars you thank your own stars for and some people you would never have hired if the choice had been yours. WIL could be improved if they just randomly assigned groups, because this is what your first job will look like.

That said, I wish Universities would just say 'beware Networking, Deadweights and "Working" managers, they are real and they are out there, but we don't want to give degrees to such charlatans.' and then focus on hammering students on their individual merits and competencies, pushing them to be skeptical and speak their mind.

I solemnly swear, if I'm ever in the fiscal position to hire a graduate, my interview will consist of handing them a 'dress code' and a pen and watching to see how much they cross out. That's what I want graduates to do, come in and say 'woah, woah, woah you need to shut the fuck up, take off that necktie its ridiculous. Why do you have everybody working 9-5, they could avoid congestion if you made the hours flexible...' and so fourth.

*The most stupid of which is the theory that giving kids computers (or worse laptops) will somehow make them smarter, rather than dumber, less attentive and more dependant.

Mexicasa!

Amingo by Bengus, link via fightersgeneration.com

I was showing my early design work for my endlessly expanding next comic project to a friend whose likeness I want to use for a pretty cool character and he said 'A [japanese comic] style' (as well as an amusing rendition of 'Dreamweaver' even more amusingly directed at a copy I'd done of a Michael Turner picture which seemed fitting).

Which I guess, yeah it is intended to be a parody of Japanese comics, and will be black and white (or possibly grayscale, I'm trying to figure out shortcuts) and I am aiming for 16-20 pages per week! crazy Japanese workaholia style until either the carpal tunnel or whatever gets me.

But curiously if I had to pinpoint the country that is having the most influence on my style it is... Mexico. Who new? But my major influences are Humberto Ramos and Francesco Herrara in developing my style.

I've seen somebody suggest they were influenced by Bengus (CRMK) from Street Fighter II, Darkstalkers and Street Fighter III fame who incidently is Japanese, but A) I'm not sure how authoratative the claim is/was. B) Bengus isn't a japanese comic or animation artist but character designer for Capcom games. C) Japanese comics are most commonly linked to Tezuka 'the beatles' of Japanese comics who in turn was heavily influenced by none other than Walt Disney.

And these Mexican/Mexican American guys seem heavily influenced by the Disney 'cartoony' tradition. Having been to Mexico, it is one of the highlights of my world tour, with the significant disadvantage of being the last country of my world tour after 8 months and 13 countries of physical and mental exhaustion. That's really saying something.

Who can't be influenced by Mexico. Whilst I'm glad I don't have to live in abject poverty servitude to latifunda's, or deal with light skinned politicians stealing all the international aid. The colours, the music, the language, the food! Oh the food! As my good friend the Butcher said 'what you call a taco, is not a taco.' or thereabouts and its true. I live in fear I will never eat the deliciousness of taco again. Not even in the sexual euphemism sense, I mean really give me a 20peso taco in place of a $10 souvlaki everyday, I don't care what they do to the pig.

Mexico doesn't really get enough credit for producing almost pure awesomeness, often to the detriment of its own people. Zombrero's, Charro's, Mariachi, Ponchos, Calevarras, El Santo, Lucho Libre, Mexicas (Aztecs to you), Olmecs and a bunch of other ones. They produced Frida Carlo and Diego Rivera.

I'm just saying, there is so much about Mexico you don't know. But what's more it hasn't been fetishised like Japan. Nor do the locals tote pretentious Euro-trash handbags around in a desperate attempt to prove their own sophistication to themselves. It could happen. Pray I get married and force someone into a honey moon there before it happens.

If you want to see some examples of Mexican comic artist styles I shall be trying (and failing) to emulate check out Humberto Ramos and Francisco Herrera

Naive Investor Chapter 5 Interlude: (My) Ethics, what are they?

There are many types of risk, low risk, high risk, popular risk, systemic risk, calculated risk, inflationary risks etc. There are different ways to calculate and estimate risks Gaussian vs. Mandelbrotian etc.

But this variety pales in comparison to the conflicting views on just what constitutes ethical behaviour. For example there are people in this world that think it is unethical not to fleece an unsuspecting stranger and espouce such timeless sayings as 'grab feathers when gooses fly by.' and 'a fool and his money are often parted.' etc. There are people who think it is unethical to eat an animal, or even use their hands on their teets to extract delicious creamy milk and say things like 'you can judge a society by the way it treets its animals' and 'cheese is rape'.

Thus thusly, I will offer an ethical evaluation of various types of securities along with a breakdown of Price, Earnings, P/E ratios, Risks, Time Payments etc. But lacking an objective consensus standard of ethics I'm just going to use my take which is generally consequentialist (I think) but not absolute, nor at times even ethical (I simply just don't care as is the reason I'm not a vegan, whilst rationally understand it is the ethical approach). Here though are the general thumb like rules I will apply for your understanding:

Opportunity

So generally I want any business activity I invest in to create more opportunities. This shouldn't be too controversial even for current economic theory (Neoclassical) which brought us the wunderkind [sarcasm] of GDP. Basically increasing the amount of choices people have as an output of the business activities. So a wheelchair manufacturer would be highly ethical as it increases the mobility, thus choices of an individual who has great arms but bad legs. Unless the aluminium used in the construction is produced unsustainably of land seized from poor Indian peasents burning brown coal polluting everyones air limiting the choices of future generations of landless impoverished indian children. I want no part of that. Now bamboo wheelchairs...
But on a fundamental level I believe that just putting all your ill-gotten gains away as an investor in cash under the mattress is unethical, because you aren't putting that money, that store of wealth out into the economy to help somebody do something. You have money and do nothing, an artist has no money and can do something. If you give the artist your money he can produce art, you take the risk (it's still your money) you get compensated for taking the risk from the artists proceeds and the artist gets the opportunity to work.

Sustainability

One of the most popular buzzwords of our era, what does it really mean? It depends on the context, an economist will tell you that Sustainable simply means that everything produced gets consumed.
Ethically I mean you take as long a term view as possible, and then you assign a term to the given activity 'are they producing or are they liquidating?'. For example, the resources sector may base its business around extracting ore/coal/oil/gas from the ground to be consummed for goods and services etc. Their concept of efficiency is to extract it as quickly and cheaply as possible and pass the savings onto their customers. This is liquidating in the same sense that an insolvent business has an administrator come in, sell off the boss's house, car (everything not in his wife's name) the artworks in the office, the furniture, the fleet, the plant, the equipment etc to settle the debts as quickly as possible and pocket some change in the process.
Whereas somebody who calculates they can cut down 10% of the bamboo crop a year and it will replenish itself by the next year (without destroying the soil due to overproduction, not replenishing nutrients the plants use etc.) then they are producers, and can produce bamboo wheelchairs.

Basic Human Decency

These are hopefully the easy ones, yet crop up surprisingly often. Things like 'Slavery is wrong' yet did you know the cacao industry (think Chocolate, think Cadbury) was traditionally based on slave labor (and could still be, I'm not up to date). Child exploitation, wage slavery, animal exploitation*, animal cruelty, totalitarian regimes, union busting and plain old criminal activity.
Particularly in an environment when corporations operate internationally these infractions can crop up everywhere. It's much cheaper to deal with a fascist dictatorship than a functional democracy (I'm not going to extrapolate on this, just think about it) so often corporations are obliged to encourage them in order to get better returns for their shareholders. You gotta watch these, but even 'plain old' property ownership can cause these infractions if the system is set up tyrannically.

Rent

They are called 'earnings' because they are 'earned'. Here I mean rent in the absolute economic terms. Rent-seeking-behaviour is basically any business operation that lends itself to pocketing unearned profits or monopoly powers. One example is an Abalone license, which effectively puts a quota on how much Abalone can be fished and subsequently how many people can actually hold those licenses. As such if you pay $1 million for the license you can buy into an uncompetitive market and pocket Bazillions because the government has taken out the competition for you. Which is just the lesser of two evils with Abalone since you can't increase competition the supply is endangered by the outstanding demand.
But it does effect businesses that hassle governments to put a quota on say imported cars, or number of Snake skin purses etc.

Sphere

'The Business of Business is Business' here I would probably depart from the consensus opinion. I follow Drucker (the former quote is from Alfred P Sloan) who says 'The only reason for a business to exist is to create a customer'. Basically I think/feel that this means that if a business needs lobbyists, subsidies, protectionism etc to survive then it's unethical, robbing peter to pay aul, or just plain old fashioned incompetent.
Obviously it doesn't work in isolation, basic human decency has to come in to the picture too. There might be a huge profit in child pornography for example, because you can create a customer for your goods doesn't mean you should do it.
But if you can't make people buy your cars at a premium because they are Australian made and employ Australians at Australian wages then you cant ethically ask the government to intervene and force the customers to pay the difference via tax funded subsidies.
For one it reduces opportunity because these Businesses operating out of the sphere of business eat up a lot of resources, labour and talent that could be used by an actually sustainable, profitable industry. Secondly it costs the taxpayer the next best infrastructure, education, health, etc investment their tax dollars could go to.
But basically I disregard any 'earnings' that are handed to a company (and subsequently shareholders) by a government free of charge, on the grounds they are unethical and I don't want the graft stinking up my pocket.

Diversity

This I take from the principles of Evolution, and as far as anything I have read on ethics, nothing offers a better explanation (at least of how complicated ethics are) as 'The Selfish Gene' by Richard Dawkins, who to us kids is more well known for 'The God Delusion' but honestly there's far more enlightenment in the selfish gene.
Anyway, I like mutations and mutants. Similar to Opportunity, I like diversity for trying to maximise the number of choices people have.
But I also feel it goes to how we spread the opportunity throughout society, and the greater biosphere. So if anything moves towards a monoculture (mono means one, and culture means culture) I don't like it. Whether it is modern farming practices or just that everyone is toting the same Lois Vitton bag. Increasing complexity!
The more baskets our eggs are in, the more chances we have of one of those eggs surviving a meteor shower style super catastrophe and going on to flourish and mutate.
This doesn't necessarily mean though that I would subscribe to diversifying your portfolio as an ethical thing to do, what I mean is that the activity invested in produces diversity, instead of monoculture.

Message

This is just havign a squiz at how the companies promote themselves, or strictly speaking 'communicate their value'. So usually it's looking at their marketing campaign. Some puffery is okay (these shoes make you run faster) but blatent lies (you need to be drunk to have a good time) or destructive negative messages (you are ugly, wear make-up!) shouldn't be invested in, even if everything else is above board and profitable.

In Summary

I want to invest in companies and other ventures that make the world a more interesting place, independently, at an honest profit by providing opportunites and creating genuine value. If they can do this without causing human suffering, making the world a more dull and boring place, with-holding opportunities to consolidate their power base, or only turning a profit because they spend a significant amount lobbying the government to bail them out on an ongoing basis.

A Caveat

Well, two. I'm just starting out at understanding the intimacies of auditing an investment on their ethical nature even by my own standards. Often I may just not know that their Banana powder comes from adding banana flavouring to ground up dried babies. In a world of increasing complexity it becomes harder, not easier.
The second caveat is that owner advocacy I think is a powerful way to change the world for the better. I would not hesitate to buy a company outright that was unethical and either A) shut it down (which if I was doing it with investors money I'm not sure they would be happy about) or B) moving it toward my ethical requirements.
Who knows, maybe one day I'll even turn them vegan. Which thirdly, this is by no means a comprehensive guide on even my take of what constitutes ethical behaviour.

*as above, I'm not exactly jesus on this front.

Naive Investor Chapter 5: The Comparative Language

Before looking at various Investment Classes, let's get familiar with the basic terminology (and concepts) that allow us to conduct if not 'a thorough analysis' at the very least a better analysis than your doing now. We're all new to this.

Earnings

Investments are 'productive' they produce something. That something is called 'earnings' you may hear economists or financial analysts giving the example of widget factories. Think of an olive tree. You buy an olive tree it grows olives. The olives are the earnings. Simple as that. For something to be classed as an investment it has to produce earnings in some capacity. Crucially though, the earnings cannot be simply changes in the sale price of the asset. Better known as 'Capital Appreciation' if the investment is rational then the change in price (see next term) will reflect an underlying change in the earnings potential. Thus Bonds earn interest, paid to the investor in coupons, Cash earns interest (paid by the bank), Companies earn profits (Cash) paid to the owners as dividends, Property earns rent etc.
One can 'invest' in commodities like Gold, Oranges, Wheat, Wool etc. that don't actually earn anything but have a price determined by their utility. I actually don't know much (and have little interest in finding out) about this area but seems to me they are fundamentally speculative to hold because you are watching for changes in price based on 'supply and demand', that is to simply sit and hold the 'asset' doesn't generate any earnings coming your way.

Price

Benjamin Graham has a friend 'Mr. Market' who is characterised by his erratic mood swings, from unbounded optimism to abject pessimism. He comes and knocks on your door every day and gives you a torrent of prices for which he will buy and sell everything you own between you. The aim of investing is not to let Mr. Market infect you with his moods. He is there to be taken advantage of.
Price is simply the going rate that people are trading their ownership stake in any given investment. It is an abstract representation of the current worth of the future benefits (earnings) of an investment. The prices being offered may be at a premium or a discount. Investment being concerned with earnings, you are looking for the discount not the premium. We treat price as a function of earnings, a very simple mathematical function too. Multiplication. If earnings are zero the price is zero. From then on we just multiply earnings by 20 or so.
Price can depart from a relationship with earnings, these are called asset bubbles. Here the whole concept of price gets fuzzy, but you need functionally to know little more than 'the going rate people will sell/buy their stake for'. Keeping that in mind price always has a degree of uncertainty built into it, earnings are never Guarunteed. Your Cash in a bank may have it's interest rates lowered to 0% (as per current popular monetary policy), your property may have no tennants to pay rent, your business may operate at a loss, your olive tree may die.
As Benjamin Graham says if a company was certain to grow its revenues by 8% per year it's value would be infinite and no price too high to pay for it. Curiously and this is a good tidbit to remember speculation and speculative bubbles tend to factor more certainty that earnings will increase indefinitely IN to the price, not OUT of the price.

The Price/Earnings (P/E) Ratio

Remember above how we said in investment price is a function of earnings? Well that's the P/E ratio. Or specifically we can write it as:

P = kE + 0

Where P = Price, E = Earnings, k = Our unknown multiplier and the '0' represents our hypothetical starting value, that is when Earnings are 0, the price should be 0. Of course the P/E ratio is going to give us the value of 'k' the unknown multiplier, hence why investors are fundamentally interested in the Price Earnings ratio.

P/E = k

The higher 'k' is the lower your 'Margin of Safety' and the worse the deal is. Now before moving on I just want to clarify two interesting statements that relate to both price and earnings.

'investors judge the market price by established standards of value, while speculators base [their] standards of value upon the market price.'

If you learn nothing else, it is the importance of this statement. Basically a 'high' price doesn't necessarily mean a good investment. Using the principle of symmetry a 'low' price doesn't necessarily mean a bad investment. More crucially to distinguishing investment from speculation an increasing price doesn't necessarily mean a good investment, nor does a decreasing price mean a bad investment.
Put simply, there is no conclusions to be drawn from looking at movements in price alone. You have to look at the underlying value of the investment, largely its earning potential based on its earning history and then thorough analysis of everything that may change between history and the future. Enter the next important statement.

'There are no good and bad companies, just good and bad prices.'

On superficial examination this statement seems to tell you the investor to indeed watch the prices, not the value of the underlying company (or more generally asset), but it is good advice. It is yet another reminder that price is a function of earnings (for our purposes). A 'bad' price has a P/E ratio that is high (say 40 or more) whether the underlying company is good or bad. A 'good' price is one with a low P/E ratio (say 20 or below).
There are numerous historical examples of companies whose share have traded below their book value. That is to say if the company liquidated (stopped trading and sold off all their assets) you would get more money for your stake in the company than what you paid for the company.
A bad company at a discount price is a better investment than a good company at a premium price. I cant resist the temptation to talk here about property, a fine example is that a sound land monopoly at a 'historically high price' is still a terrible investment, because the property price has already above and beyond incorporated any future earning potential (rent with rent increases).
In summary, if you determine that a company upon thorough analysis is a good one with reasonable long term prospects of earning power and it has a P/E ratio of 600, don't buy it, because the price has already wiped out any gains you can hope to make in earnings over the next decade. Conversely if you find a company that looks like it is going to have to lock its workers out tomorrow and sell off the plant to repay its debt, and it's P/E ratio is 0.5, buy it, because after its debts are paid off you will pocket the change from the sale of its equipment.
Always, Always, ALWAYS treat Price as a Function of Earnings.

Risk

Risk is one of those central concepts of investment and indeed seems to be one of the central concepts of our times whether it is how we pick investments right through to how we raise our children.
Thus while prices and earnings are all well and good we don't invest in something that is heading backwards in time (if that was the case ENRON would be a great investment right now), and thus we must come to terms with an uncertain future.
Risk is the variation either positive or negative from our expected results. Keep in mind that you can make good mistakes and bad mistakes, with your prediction.
All sorts of things can happen, your company may owe its success to one central visionary CEO and her vigorous enforcement of her personal disciplines on the entire company. She slips on a spilt frapacino and falls in front of her morning train becoming CEO jam. Your farm is hit by a tornado carrying your livestock out into the Pacific ocean and your daughter to the magical land of OZ. Many of you would be surprised to learn that a bushfire burning down your house and killing your loved ones will INCREASE the value of the property (given the lowering of its council rates based on Capital Improvements which are no longer existent).
This is risk.
DON'T take it lightly.
That said, if it wasn't for risk there would be no profit to be made, ever. Often called EMT (Efficient Market Theory) it says that no price can be taken advantage of because thousands (probably now millions) of investors like you have been pouring over the exact same data and information as soon as it is disseminated, therefore it is unlikely that you will have a 1 in a million insight that no other professionals did. Which is true if evaluating risk is as simple as plugging numbers into a statistical regression model. But these things are not so great at evaluating managerial talent, public sentiment or even spotting accounting tricks. (ENRON again being a fine example of the latter, Warren Buffett being a fine counter example of the first).

I would point to a cliche that is a cliche because it is empirically true 'taking no risk is the greatest risk of all' putting all your money in cash under the mattress will protect you against any investment losses AS WELL AS any investment profits. Inflation or burglers will no doubt take care of the rest. Just as if you never cross a street you will be simultaneously protected from being hit by a bus and eating in order to survive (discounting home delivery) thus ensuring your untimely demise rather than protecting against it.

My one and only advice as to risk is to always ALWAYS remember that it is always, ALWAYS your call to take it. To illustrate what I mean unambiguously about this look at a regulated, standardised rating of risk: Standard & Poor's securities rating. In this AAA means the highest rating for a security (S&P have determined it has a very low risk of failing/defaulting). Then take two AAA rated (as per 2006) investment options (called 'securities') A US Federal Reserve Bond rated at AAA paying 5% interest and A Collatoralised Debt Obligation (CDO) rated at AAA paying 14% interest.
We have two different interest rates (earnings) rated as the same risk, by a professional risk rating institution. Obviously they are both 'low' risk (by the rating). So do you take the chopped up bits of undocumented homeloan repayments or the lower paying Sovereign Debt from the bank that sets monetary policy, and determines money supply?
Apparantly there is a class action lawsuit against Standard & Poor's for incorrectly assessing the risk of CDO's at AAA (which triggered the financial crisis) I don't know who will win the case, maybe the plaintiffs will have damages awarded. Better yet to not be in the pickle in the first place. So don't just take some expert rating of AAA or 'low' or 'high' risk as having made the decision for you. It is your call.
Stick with the other cliche 'if its too good to be true, it usually is [not true]'. Another useful rule of thumb is 'if it promises more profits it has to be higher risk'. (In the above example you would have thrown out the AAA rating because of the difference in interest payments).

Liquidity

Liquidity is the ease with which you can transfer your investment (generally) into cash. First and foremost is there a market place where you can sell the asset? With a physical asset like Property there's the property market. With a financial asset like a Bond, Option, Share etc. is there a market where you can trade them?
Then it becomes a question of effort - its relatively easy to turn a share into cash compared to a property. You can buy and sell millions of shares in a day with very little effort, it may take you a month (or 6) to sell a property.
Cash is generally deemed the most liquid. Since its already in the bank, you just have to withdraw it. Proceeds from the sale of any other type of asset will be paid in cash, to your bank, overnight at the fastest and then you have to withdraw it the next day.
Liquidity effects risk, because it reduces (or increases) your options depending on how tied up your money is. There are bonds that 'mature' (pay back your principal) in 150 years and so on, which is to say technically your money will be tied up for that time as well (even though it is longer than even record human lifespans) however you can buy and sell bonds on the market and sometimes a company may offer to buy back the bond.
You can also have things like a company suddenly becoming a dud, a well known dud and you own shares in it. Even if you are willing to sell out for 5c in the dollar, it may be the case that the prospects are so bleak and so well known that nobody will buy it off you even at 5c in the dollar. Your money may be tied up into oblivion.
Liquidity is important and can often be overlooked. Divisibility is another issue that effects Liquidity. Ownership in a company may be divided up 100,000 that means they have issued 100,000 ordinary shares. If the company is worth $1,000,000 then each ownership stake is worth $10. $10 is much easier to trade than $1,000,000 given that there's a lot more people who can afford it. Keep in mind that it is much easier to divide and sell an ownership claim in a company than it is with a property, you generally sell all or nothing. You can easily sell half your shares and keep half.

Frequency of Payments

Your bank may pay you your interest every quarter. Your tennants may pay rent every month. Your bond may pay you a coupon every year. Your company may pay dividends every quarter, year or never.
You have to consider the regularity with which your earnings will flow back to you. The cashflows in other words. If you are dependant on those earnings as your primary source of income it becomes very important.
Also remember (particularly with shares) that the owner OWNS the earnings, you can demand a company pay dividends, it is up to the management to satisfy you that they can produce better outcomes by retaining earnings than you could yourself.
Likewise, a bond's cashflows are likely to be fixed and regular, a properties regular so long as you have occupancy, dividends you may go by historical payments as indicative but companies are not obliged to pay them (unless the shareholders collectively demand it) or they simply may have no earnings to pay.

Opportunity Cost

Often silent, opportunity costs are a big nasty one. While it is to say they are silent when making the initial investment they can scream at you in retrospect. When buying don't analyze the investment in isolation. You have to consider it against every other (or more practically, a selection of) investment choices.
A decision to buy Pepsi is a decision not to buy Coke. A decision to buy Property is a decision not to buy Shares (with that money). We tend when purchasing to make one sided decisions, aka we buy property and forget we are thus deciding not to buy everything else. This everything else is the opportunity cost of the purchase.
It is called the 'Opportunity Cost' because up until you make the purchase you have the opportunity to buy anything for the same amount. Once you make the purchase those opportunities dissappear, they were cost you by your decision.
Unfortunately the opportunity cost is noticed at the point that it should be ignored. Namely, after a year you learn that the managed fund you also considered outperformed the one you chose. More frequently, the managed fund you didn't even consider outperformed the one you chose (because it was the top performer last year).
You need to weigh in the opportunity cost to any investment decision if for no other reason than to consciously decide and take responsibilty (in much the same way that risk should ALWAYS be your call).
That way it helps protect yourself against your greedy narcissistic me-too naive emotions. So when something outperforms your investment (which it almost always certainly will) you can say 'Good for them, but I know why I made my decisions (and I considered them at the time.)'
If nothing else it will stop you from endlessly chasing bandwagons and racking up considerable transaction costs and tax obligations in the mean time. If done properly it will give you the courage of your convictions to take informed risks. 'I am foregoing the somewhat hollow promises of 14% to take the more conservative and reliable promise of 8%' and so fourth, it may end up that that decision costs you 6% but you informed yourself of the risks and decided that 8% was enough for you not to risk it.

Conclusion

Obviously a lot more can be said, and a lot more needs to be done before you call it a 'thorough analysis' to meet Benjamin Graham's investor criterion, but these are things to look at as a start. I'll now start analysing the different investment classes under these headings (except for maybe opportunity costs).

Skepticism vs. Cynicism

From www.dictionary.com:

skep·ti·cism   /ˈskɛptəˌsɪzəm/ Show Spelled[skep-tuh-siz-uhm] Show IPA
–noun
1.skeptical attitude or temper; doubt.
2.doubt or unbelief with regard to a religion, esp. Christianity.
3.(initial capital letter) the doctrines or opinions of philosophical Skeptics; universal doubt.
Origin:
1640–50; < NL scepticismus, equiv. to L sceptic(us) skeptic + -ismus -ism

—Related forms
an·ti·skep·ti·cism, noun


—Synonyms
1. questioning, probing, testing. 2. disbelief, atheism, agnosticism.


—Antonyms
2. faith.

cyn·i·cal   /ˈsɪnɪkəl/ Show Spelled[sin-i-kuhl] Show IPA
–adjective
1.like or characteristic of a cynic; distrusting or disparaging the motives of others.
2.showing contempt for accepted standards of honesty or morality by one's actions, esp. by actions that exploit the scruples of others.
3.bitterly or sneeringly distrustful, contemptuous, or pessimistic.
4.(initial capital letter) cynic (def. 5).

Origin:
1580–90; cynic + -a

—Synonyms
1, 3. Cynical, pessimistic, sarcastic, satirical imply holding a low opinion of humanity. Cynical suggests a disbelief in the sincerity of human motives: cynical about honesty. Pessimistic implies a more or less habitual disposition to look on the dark side of things, and to believe that the worst will happen: pessimistic as to the future. Sarcastic refers to sneering or making cutting jibes: sarcastic about a profession of faith. Satirical suggests expressing scorn or ridicule by saying the opposite of what one means: a satirical attack on his political promises.


—Antonyms
1, 3. optimistic.

Fascinating. it perhaps would have been shorter to say that Skepticism is positive doubt, ie. it saves you time, money, face whatever you can profit by it. Cynicism is negative it saves you friends, respect, party invitations, responsibilities. You lose out by it.

In my year 12 validictory speech I said something akin to 'Believe anything wonderful until it asks you for time or money.'
Now I'm sure I've blurred the line between the above positive and negative incarnations of doubt time and time again, but it's because I think skepticism is just plain old healthy.

The most obvious example I can think of is get a group of people and give them a task to perform in 5 minutes. Chances are they will come up with a pretty obvious solution to the task within about 30 seconds then plough into the action with varying degrees of success.
Skepticism is the counter-intuitive yet immensely positive process of suspending your belief that you came up with the best answer first, you would then shelve the first plan and tike away another minute (or 4) trying to come up with better easier solutions. Viola! Positive process.

Cynicism is where somebody in the group says 'I doubt 5 minutes will be enough to complete the task, we may as well give up now.' negative process.

I saw a tv show once that said Yoko Ono once tried every way to sit on a chair, before concluding that planting your arse on the seat and your back resting on the back was indeed the best way to sit on a chair. Does it make her skepticism a waste of time? Absolutely not. That's the creative process.

Talking to a friend last night he mentioned an incidence of telepathy, that is the ability for one brain to transmit a thought directly to another brain. My skeptical mind tried to come up with a more creative alternative to the telepathy scenario than suggesting the obvious answers 'inattention' and 'body language' so I just pointed out that if minds could communicate with each other directly, we wouldn't need nerves running to our hands. Infact our hands wouldn't need to be attached to our bodies.

We could run wireless baby, so why would anyone want to communicate (one-way) with another consciousness. It would be far more practical to communicate with a vending machine. Incidently, telepaths could concievably be immune to spinal injuries.

Creative, although the concept has been explored before with Doctor Octupus in Spiderman. (the comics, not the movie).

If Economists taught Marketing

People are Coolness Maximisers.

That is to say they will rationally act to increase their coolness in any situation.

Coolness is a function of reflectivity.

People are generally attracted to bright and shiny things. We assume that the more reflective or 'Shiny' a person is then their coolness will increase.

Reflectivity is a function of silverness.

Therefore, all factors of Marketing 'Price, Product, Promotion and Placement' should be geared towards increasing the use of silver in each.

The broad objective of Marketers is to:

Maximise silver surfaces.
Create full reflectivity.
Increase growth of silverness.
Manage silver prices.

In the developed world, surfaces are 60% reflective, making our 'standard of Coolness' generally higher, whereas poorer countries have hardly any reflective surfaces at all.

'But why doesn't the government just produce more silver clothing/packaging?' relative to people coolness is limited. If we take shortcuts and produce too much coolness we create 'hyper-dorkification' which means that people become too cool too quickly in too greater numbers. We end up just devaluing silverness. Such that for people to be as cool as they were before all the silver clothing was produced they would have to paint themselves from head to toe in sterling silver body-paint. Even then they would need to be twice as reflective the next day.

This happened in Japan with Burberry and Louis Vitton. To a lesser extent with 'Bape' and 'Yves Saint Lauren' in the latter 'South East Asian Dorkification Crisis'.

We try to answer the key questions of marketing:

'What is cool?'
'Who is cool?'
'Who should we makeover?'

These questions are important because Coolness resources are scarce.

Behold Cooltopia!

Second Guessing

Periodically, I will click on 'edit posts' and find that in my list of posts are a few I just never got around to finishing with some other thought demanding my attention and moving me on.

Yet in the past 3 days I've started and deleted a bunch of posts with great abundence. Eventually I just fell back on writing more chapters of 'the naive investor' (which I stuffed up and will have to write prequels for).

This though is new, not wanting to publish something. Clearly I have very low standards. More exciting though was that today I got hit by a wave of overwhelming desire to just forget everything I'd learned in the past 10 years, putting me somewhere back in year 11.

I don't know why, perhaps I'm just tired. Because in year 11 I was an unapologetic arrogant dickcuntfag. I would chew that kid up (unless it was a cross country event) and spit him out. I'd probably be a lot nicer about it than he would be.

I link it to another curious incident in the middle of the other night, when I woke up and scratched my calf in the middle of the night. For some reason I had the reassuring thought upon feeling my own calf that 'I'm me.' And it was good to be me. It was like waking up and discovering your lover was still there, but not remotely sexual and my lover wasn't there. I just woke up and was reassured that I was my old familiar self.

I can make nothing of it, unless somewhere people have been crawling into a portal into my head, like being John Malcovich. But I can't see why I or they would care.

At any rate, I don't want to remain myself, which I think is starting tocarry over into second guessing, posting some opinionated 'how to live your life' post and thinking 'do I really want to put that out there?' and deleting it, considering it of little value.

Here's the thing, I wright this blog for myself. I guaruntee that you haven't read all my posts, and yet I keep on producing them without your loyal patronage.

To me they are literal reminders I'm jotting down telling me how to live my life. That you can read it just keeps me honest, and allows me to confront my fear that people know just how big an arsehole I am.

I'm pretty sure by now that people generally know just how big an arsehole I am.

I think that's why I choose to take a positive approach to my newfound lack of self assurance. I hope to change, indeed depressingly If I go back to my very first post it will reflect I time when I was full of hope that I could change myself.

Incedently, that period was probably where I changed the most, sort of dropped the ball on being self centered and realised I didn't want to live with myself. Ironically I am perhaps in many ways more alone than ever. But that is to say I'm working less on loving myself and more on making myself somebody I can love.

I think we all have to hope we can change ourselves, otherwise we are recieving a life sentence with a dickcuntfag arsehole for our only roommate.

I don't hate myself, this isn't a cry for help. But after awhile I start to get on my nerves.

Naive Investor Chapter 5: The Problem of Property

I'm going to start with property in my chapters on asset classes because I have looked at it quite a bit over the past couple of years and what I see I don't like (particularly in my home market of Australia).

But before I list my reasons, let me say that property is the headlights to the Naive Investors Deer. It is the most enticing to the default risk profile 'Unlimited Upside exposure, no downside exposure' which isn't even true, but these attributes are thrust upon it more readily than any other type of asset class.

The Positive:

Land is a monopoly it is fixed in supply (or very very risky and expensive to create in the case of Dubai) and every person on Earth needs at least as much to stand and lie down on. Every square inch of livable and ariable land on earth is owned and demand generally outstrips supply. Hence often you can get away with un-utilitarian prices for land.
Or in other words - you can charge a premium for its Net Present Value.

Unless you're a mining company it doesn't tend to degrade in quality. The big plus of course is that you can charge rent, a form of tax on somebody else's productive activity for the priveledge of using your surplus land/property.

It's Unethical:

I don't like property investment because of the 'big plus', and I will say outright that property investment is unethical. The only exception I would make is in owning your own home/workplace, and that is to say that it is the lesser of two evils. You may as well monopolise the resource you are using rather than let somebody else do it for you.
Straight up and down though, let me be clear: Investment properties are unethical because you can contribute no actual value, yet tax another person for their productive efforts.
That's right rent is unethical. John Stuart Mill alludes to the argument 'private property is theft' and like proving the existence of god, it is much much harder to argue that it isn't than to argue that it is.
Start simply with the question 'what value does a landlord actually provide?' and it all falls apart from there. A landlord can provide value in some circumstances but these circumstances don't crop up with anywhere near the frequency of landlords themselves. I'm not going to go into it here, partly because it's an interesting meditation to have for yourself.

Property and the Turkey's That Buy it:

I'm pretty much lifting this straight from 'the Black Swan' but I feel more often than any other example of investor folly, the problem of Inductive Knowledge crops up in property. (though it is not unique to property).

The naive investor wants unlimited upside and no downside. They are cripplingly risk averse. They are most often blind to the positives of a downward moving price. For example if house prices move downwards they are horrified, they do not see this as housing becoming more 'affordable'.

I say they are turkey's because of Bertrand Russell's illustration of the Problem of Inductive Knowledge, covered thoroughly and entertainingly in the Chapter of 'The Black Swan' called '1001 days or how not to be a sucker'.

Suppose you are a turkey, and every day a man comes and feeds you grain. Your observation is that each time the man feeds you, you have a piece of data, or evidence that the man is looking out for your 'best interests'. For 1000 days the process repeats itself, and all your observations confirm the theory that the farmer is on your side. The 1001st day though is Thanks Giving and the farmer comes and rings your neck.
Crucially, the empirical observations aren't just wrong, but have an adverse effect on the turkey, which is to say the Turkey feels safer as it's danger actually increases. It feels safest, thanks to all the evidence it has collected at the point of its maximum danger.

So too with property 'investors' that at least in Australia will be called 'speculators' once their tremendous losses are realised. And while the farmer may know precicely when Thanks-Giving is, Turkey's aren't privy to the calander, just as property speculators aren't aware of their day of reconning. It will be incredibly hard to predict, especially because they will be feeling more and more secure in their investment right up to the day the market corrects.

It all has to do with the crippling risk aversion. Anything that goes down is a 'loser' and anything that goes up is a 'winner'. The crucial risk a naive investor cannot take is that something would change its most recent behaviour.

Thus they will only buy into something once it has already demonstrated its ability to gain. This risk aversion drives property speculators into markets when they have hit 'historical highs', because the evidence that they will continue to grow is at its maximum. In the Australian property market there is now 16 years of data to suggest that property 'goes up'.

This is the turkey empiricism - 'property has gone up, therefore it will go up'. And of course not just limited to property, but any investment will rise in price right up to the moment it falls. It's just that the property market unlike a particular given company tend to crash as a market, in lockstep. A whole army of speculators marching off a cliff.

Bubble Trouble:

One of the more perplexing things about property is that, the unethical monopoly nature of it is fundamentally sound. If you are willing to shelve your morals, then you can monopolise a scarce resource and pocket unearned money taken as 'tribute' from the people who actually do earn it. A localised government of 1.
Sounds harsh but its true, and if its legal you as a citizen are entitled to do it. But you can still overpay for something like that.
Suppose you could purchase the title of 'king of the world'. It entitled you to do whatever you wanted to anyone. If the price was set at $1 trillion dollars I would say ethics aside, take it. But if the price was set at 'all the oxygen in the world' there would be no point, the cost outweighs the benefit.
Similarly people buy into the property market, as sound as the monopoly is at a price where they recieve no benefit from it.

Michael Hudson's answer to the question 'How much is a house (property) worth?' is 'As much as a bank is willing to lend for it.' Sad but true, something that makes Peter Schiff say 'People don't own houses they rent them from the banks.'

Banks control money supply, and in a reciprocal fashion - banks can lend as much money as people are willing to borrow. A bank really facilitates bubbles, because individuals funds are generally limited, especially when compared to their desires.

This in turn is largely because of private property which ensures pretty much all resources are already monopolised by somebody else the moment you were born, you have to buy said resources of them and they won't sell unless its at a premium.

The turkeys that are satisfied though that 'house prices have gone up therefore they will go up!' aka speculators, are willing to borrow more money. The banks will lend them the money and are somewhat turkeys themselves, feeling safe to lend to a lowered standard of speculator because history confirms that they can always repossess the house and sell it at a profit to recover the debt. The one caveat is that Banks actually make money from housing (at current prices) where most property speculators do not.

The turkey problem, creates bubbles because the price will rise (as an investment) to the point where you make $1.01 in rent for every $1 invested on an ongoing basis. But speculation simply pushes it beyond this threshold, because the price has risen thus far to that point. Get enough speculators in the market and you inflate the price beyond it's investment capacity. This inflation of the price creates an asset bubble.

The turkey's look like geniuses right up until the bubble bursts where they are condemmned as speculators, but this doesn't cure their risk profile, the turkeys simply shift their eyes to another promising empirical experiment. Hence you see a property cycle that goes Bust-Boom-Bust-Boom-Bust-Boom. In all those Bust times you get things like Franchise Bubbles, Tech Bubbles, Oil Bubbles etc.

Price of a Monopoly:

Here is the minimum 'thorough analysis' an investor should do. The income property can generate is rent. FORGET CAPITAL GAINS. Just trust me for now. Rent is the only ongoing cash flow property has.
Rent is much easier to estimate than a companies profits because it tends to be fairly stable, its regulated and their are easily obtainable 'going rates' in every neighbourhood. It also often has little to do with the condition of the property, but has a far bigger footing in its location.

Then calculate a price/earnings ratio. Take the reserve price, divide it by the rent. If you were buing shares, you would be looking at a P/E multiplier of about 20. You can also go and use a mortage calculator - if you can obtain 7% from a government bond, then you would want the rental income to be 7% higher than your mortgage repayments at least.

It is safe to say that a slim minority of property owners really bothered looking at the rent when purchasing their home. They just looked at the turkey data.

Incidently the longer the history of price rises, the less likely the rental income will beat your ownership costs by 7%.

There are other factors, but just remember that there are no good or bad properties, just good and bad prices, and good and bad prices are all functions of the income it actually generates.

The Bank Is Laughing At You:

I'll now explain the folly of investing for capital gains. Can you predict the behaviour of turkeys? Or rather, can you predict the weight at which a turkey is fat enough for dinner? Especially just by looking at it. Sure there will be extreme 'easy calls' either way. A turkey that ways 50g is obviously just a chick, just like a house that costs $1 on ebay is not likely to go much lower. A turkey that weighs 50kg should already be dead.

The property market is just the same. If house prices where $1 trillion this year it would be easy to say 'this isn't sustainable' it would probably mean the collapse of the currency yet alone the housing market. But right now it's hard to say whether a house priced at $650,000 in Footscray is getting close to the kill or whether $700,000 is too high.

That call is much harder to make. Especially because if your P/E multiplier is at 60 already, its irrational. There's no rational reason to buy, so why would somebody buy at 61, 62, 70, 80, 800? This was true of the tech stocks as well. Many people were buying companies that made no money at price multipliers of 600 and greater because the price had increased so far.

Once an investment leaves the boundaries of reason, it is speculative, and prediction is impossible from then on. The only thing that is almost certain (but never quite so) is that gravity will take hold at some point.

But why oh why, do banks facilitate this? Also if property is such a great sound investment, why don't the banks just buy property for themselves and then rent it to us?

They do, but they do it by loaning money so people can buy them themselves. It has numerous advantages for a bank.

If a bank bought a property that got $300 of rent a week, they would make $300 of rent a week back on their initial investment. If they convinced some turkey to borrow money to buy that same property with $500 mortgage repayments per week though, they are making an extra 60% of income on that investment. The tennant 'helps' pay off the mortgage with their rent, which comes out of their pocket from their productive earnings, then the turkey flips $200 extra dollars out of his pocket to the bank.

What is in it for the turkey? The hope that some other turkey will buy into (and him out of) this ridiculous arrangement at an even higher price. That is they will contribute $201 or more to the banks rental income rather than $200.

The bank earns all AND MORE of the productive income from 'investment property' that is their carrot to facilitate speculative behaviour. The 'paper wealth' goes to the turkey because it just facilitates more income for the bank.

Property is an Investment when:

Again casting ethics aside, if you the naive investor want to buy property as an investment (and I won't help you do it) when it meets the following criteria:

1) Rental income is cash flow positive.
2) The return on rent is greater than the next best investment opportunity. (something surprisingly easy to fail with property).
3) The Price/Rent (i'm making it easy for you) is in a reasonable neighbourhood of 20-30.

With ALL those criteria filled you may also want to consider Fixing your interest rate. This leans towards the 'margin of safety' so central to Benjamin Graham. If you can fix your interest rate and still satisfy the above 3 criteria, then you are dealing with a known quantity and are making a return on it.

Thus it fits the universal criteria of investment - it increases your purchasing power over time, it also would virtually guaruntee safety of principal as if you buy it at a reasonable price there is a fair chance you can offload it to some turkey at an unreasonable price.

Charity Muggers A Perplexing Decision

If you work, study or walk the streets of the Melbourne CBD you know who I'm talking about. My friend says they even populate the streets of Jakarta, which means the must almost outnumber peruvian pan-pipe bands.

I speak of the Charity Fund Raisers, typically a backpacker trying the job for a day that approaches you in a friendly bubbly manner sometimes even crossing the street to intercept you and makes an innocuous comment about some 'interesting' feature of you 'I like your hair'.

Chances are you've had all the thoughts I've had but I thought I'd put them down here for posterity. Can't you just envision the paid training day 'Look for some characteristic you can comment on, like their hair, then introduce yourself and ask for their name. The funner and bubblier you are the more fun they will have speaking to you!' and so on.

Thought #1: I give more money to homeless people.

Chances are you were stopped 3-5 years ago by an Amnesty person and you actually listened to them because you like Amnesty and are all for freeing and supporting political prisoners. Then they asked you - somebody who fare-dodges even with student concession (which you got for movies) to tithe $30 a month from your non-existent wages.
But it didn't stop you from forking $10 in change a month over to charismatic (or not) homeless people.
You still give the change (occasionally) to homeless people when you are in a generous mood but don't stop ever to talk to a charity worker about donating $30 a month.
Why the fuck don't they get a bi-polar alcoholic to train them: 'Just ask for 80c a dollar no more, you know... spare change. No need to be friendly, just act pitiful and non-threatening. If the snub you move onto the next person you will still make $30 an hour on a good day...'

Thought #2: what happened to the buckets?

It used to be that occasionally some mutely smiling young woman would have a shirt with a red ribbon pinned to it and a bucket labelled 'Aids/HIV find a cure' and you just threw whatever change you could spare into said bucket and move on with your day.
On a busy street corner these must have made like $100 a day. Who gives a fuck about ongoing support and spamming and tithed wages when you just need to send somebody out to hold a labelled bucket. No emotional scars, no annoyance and a big time saving.
I can only see it maybe being an OH&S thing because the bucket may get TOO HEAVY FROM ALL THE DONATIONS. As opposed to the current vogue system which ensures nobody donates any money at all.

Thought #3: The people who can afford the scheme don't have the time.

They are business people, they get a 30 minute lunch break a day, you want half of that.

Thought #4: Everybody loses.

The conversation is never fun, it is awkward and annoying. I don't want to hurt some poor backpackers feelings, but they push me into a corner where I have to extract myself. We both walk away feeling ill-treated.
Furthermore, I used to like Amnesty, Lost Dogs Home, Cancer Council, Red Cross. I bore good will towards them, its why I liked to throw coins in their bucket. Now they seem to have set out to annoy me every hour of every day of my life. I hate these charities now.
Who wins? They can't possibly make a lot of money this way, plus even if somebody DOES signup they aren't exempt from being harassed by the new faces every day. There is no winning.

Thought #5: I Do Concede...

For all the good will and respect these causes have, many people wouldn't actually do jack unless urged to. I wouldn't spontaneously decide to tithe wages to Greenpeace or Amnesty one day unless somebody hassled me, asked me etc. There just seems to be about 100 better ways to do it than this. The bucket for one. The school programs for another (my high school had an Amnesty International club that got new faces involved every year).

I mean, fuck. It's annoying.

Chances Are This is What Your Financial Advisor Believes

Another day another introduction to the world of Finance. Overall it was pretty good, but one thing astounds me in my return to University life - the amount of notetaking.

Sure there's the studies that say if you take notes you retain more, but taking notes isn't listening, and the time to do it is not in a lecture. It's when you review at home. Because if you aren't listening and note taking you are going to lower your defences to the information presented to you and that is going to effect your learning.

In particular it effects your ability to think actively about the assumptions being made that your lesson is based upon. The fundamentals or foundations and they don't come much bigger or fundamental than this slide I saw today:



To my lecturers credit he was saying things like 'Capital, LAND and Labour' as factors of production instead of the official 'Capital and Labour' that lumps natural resources eronneously into 'Capital' like they are privately owned assets.

It's just that this is a finance subject not an economics subject and the above graph builds 'our' decision making framework under some choice assumptions. If you haven't blown up the slides the logic reads:

1. Individuals are utility maximisers
2. Utility is a function of consumption
3. Consumption is a function of wealth
4. Utility maximising individuals wish to maximise their wealth

Unfortunately the key word here is 'Utility' and it doesn't get defined in the slide, but the lecturer described it as 'happiness' or 'satisfaction'.

I numbered these assumptions, so I could clarify some. 1 - I don't have such a problem at this, except to say that people aren't typically good at discriminating between wants and needs, nor weighing up their short term gratification against their long term gratification. It has some applications like - people want Hamburgers, but it doesn't make them good for them, they may also want a long life enjoying a high quality of life, guess which want wins out?

2 - This is the big one that has pretty much fucked up everything. I'm not kidding. Furthermore and more pressingly it has now been repeatedly, clinically proven to be false. A guy did a great rundown of the 'truth and lie' of consumption in a film I thought was 'the corporation' but I can't find it in the Youtube release.
Basically the truth about consumption is that if you are cold, naked and starving in the rain you will be miserable. If somebody then gives you (or sells you) food, warm shelter and dry clothing, you will go quickly from very miserable to very happy.
The lie of consumption is that many have assumed that this would logically mean that if you give somebody twice as much food, shelter and clothing they will become twice as happy. But the fact is that satisfaction or wellbeing driven by consumption has one of the steepest 'learning curves' known to man.

Ricardo Semler calls this concept the 'Da Vinci Constraint' named after Da Vinci's rules of proportion if nothing about his lifestyle. But he calculated (somehow) that in 2007 the most a single individual could actually enjoy was about $12 million. Anything after that is simply beyond an individuals physical and emotional capacity to truly feel the effects of wealth. And it makes sense, think in simpler terms of being somebody really into privacy and quiet solitude.

You buy so much farmland that your property stretches from horizon to horizon on the flat plane of outback Australia or somewhere. Guess how much land you need to meet that criteria? 3 squared miles x 3pi. Apparantly the horizon in miles from a 6foot persons vantage point at sea level (because it's pretty much flat) is 3 miles. That's all. Once you buy more than 3 miles in everydirection from the center point of your house, you wont be able to percieve (at least with your eyes) the additional isolation.
Maybe a bullshit example, but at least it demonstrates in a one dimensional way, our constraint to enjoy something.

3 - makes a lot of sense, provided that your wealth reflects true-cost.
4 - then also makes sense, hence the danger.

The fuck up is in 2, more so than 1. Once 2 is screwed the rest can all make sense and seem rational - but isn't. The foundations or fundamentals are wrong.

Here's an insight into how I evaluate things with very little research (not to say it is right or wrong, its just how I evaluate stuff). I push it to its extreme to see if the rule contradicts itself. By rule 2, we are in effect saying that happiness has a positive relationship with consumption. As consumption increases so does happiness/satisfaction/wellbeing. So give somebody all the wealth (the extreme, using rule 3) this person can then purchase and consume all the worlds oxygen. They consume all the worlds oxygen they kill themselves and everyone else.
The rule contradicts itself, people want to maximise their consumption, but by doing so actually destroy their wellbeing. Either 2, or 3 is wrong.

Because Consumption is a function of wealth, I question the motive, 2. Happiness is not a function of consumption. Or at least it has limits, very definite limits.

Why does it persist? I have never, nor will ever subscribe to 'the man' hypothesis, or piece of crap 'zeitgeist's 'Man behind the curtain' hypothesis. I don't believe there is an evil agent in control. I think it persists because it's simple and helps (some) people avoid headaches. Can you imagine how complicated it would be to run a system that says 'maximise consumption till point x, then from there on practice sustainably' or even run an individual company by the rule 'maximise shareholder wealth at $12M per individual, then buy them out with cash reserves and offer shares to somebody else - repeat.' It would be an administrative nightmare.

But still, I don't actually object to assumption 1. It isn't bad, but the rule is in assumption 2. A firm should try to increase it's value, particularly to its owners. But 'value' I would define in the longest reaching terms possible, like 'lifetime value' which means you don't sell tomorrows sustainable profits for todays opportunistic profits.

I'll have to be careful, because thinking like this could inadvertantly cause me to fail.

By the way, if you think 'The Corporation' is obviously biased (I would recommend it because it actually in a manner places the blame on you - the passive shareholders and/or stakeholders, rather than evil CEO's) then take it from a man who (briefly) lived the capitalist dream:

Day 1 of Macroeconomics

Don't worry this won't turn into a daily series of posts, I just wanted to comment on my initial impression of 'Macroeconomics 2' my first subject of my second degree.

Mark Twain said 'Don't let School get in the way of your Education' and never was a truer word spoken. The knowledge being taught is not useless, or even unscientific... just incomplete.

So we started with a recap on how to calculate Equilibrium Income or in plain english A sutainable level of Income, But 'Income' is equated to GDP (Gross Domestic Product) calculated in the 2 sector model as 'Consumption plus Investment' (or Consumption plus Savings).

What does that mean? It means are sustainable income is based on the assumption that everything produced must be consumed preventing either over consumption or under consumption. So what we don't save is consumed. Or I guess amongst everything produced some is used up immediately (consumed) the rest is saved.

One may instantly have it pointed out that this is pretty much describing what would happen to anything produced it would A) be consumed or B) be not consumed. What use is it?

And that question I feel is an important one, because it puts this wretched science (not my words) in context - straight up, I won't go into the 3 and 4 sector models or the Keynesian 45 degree equilibrium line doodad thingy. Suffice to say Government Taxes and Government expenditure get factored in.

To my so far insufficient understanding - if a high Real GDP (or Equilibrium income) is considered good, taxes already look bad - a bias against big government or socialism. That in turn is underpinned by an assumption that our well-being is underpinned by our ability to consume. Something I am satisfied has been proven to be false.

That's why who'se this for? Who is this useful to? Questions are important and need to be asked. I don't believe states are necessary, and underpinning every human organisation is a 'game' or power struggle. I won't express it as an equation because after deciphering 5 symbols at a time to read Macro equations, my brain is shot for the day. But basically it is finding a balance where you have maximum incentive to seek power balanced by minimum incentive to throw you out of power.

Various states have various games. For Mugabe and Kim Jong Ill it's the juggling act between keeping the people you use to do the oppressing happy enough to oppress the people who are angry enough to act against you (including foreign states). You can screw it up by pissing off your security forces (who are cheap to upkeep compared to a truly participative form of government, hence many democracies actively support their regimes and undermine any attempts at social reforms) or pissing off your people to the point where their anger stops them from caring about the next worst repurcussion.

Democracy is pretty much the same, except with a higher standard of wellbeing for the general population and lower relative wellbeing for the security forces (who generally are not employed against the general population).

The people in power are just making the (incorrect) assumption that GDP = Wellbeing, and as GDP increases so too does the satisfaction of the people with them.

Macro is admittedly, broad, sweeping and large in impact though comprised of millions of billions of details that create the effects. It looks at aggregates and averages, and as such if Mugabe and Kim Jong Ill just got stupendously rich enough their people would look pretty well off.

So I'm angry to feel this mentally exhausted learning about a measure of wellbeing as useless as GDP. But then it's good to know the language of fools so you can understand when fools are planning something foolish.

My experience of marketing was that in the 'real world' people use about 7% of the theory they learn in their degree. Usually the 'fundamentals' eg. 'Benefits sell not features' and 'Cognitive vs. emotional purchase decisions' and the 4P's. I imagine much of the reserve bank just sits around calculating money supply and real GDP rather than thinking deeply about the underpinning assumptions of this economic system. This thought scares me.

I'm not too concerned for myself, because I'm doing this Economics and Finance degree for the 'Finance' more than the 'Economics', but I do hope I can challenge each assumption I spot in my tutorials. The professors should love/hate me.

Grunge from Punk?

If you look up Grunge, or even Alternate-Rock, or the history of pioneering alternative bands like Jane's Addiction, Faith No More, etc. you will find that there origins are linked in with the underground punk-rock scene. Which is surprising because even the 'no effort' ethos of Grunge music has an underlying musicality that defies the central punk dogma (as it appears to me, a non-fan) which is just play hard, play furiously.

When the Sex Pistols came on the scene, there message I can see being important, that in the 60's in order to make a huge peace demonstration at Woodstock you had to be a prodigy on guitars or be blessed with amazing vocals to get up on that stage. Johnny Rotten and crew kind of said 'hey, everyone should have a voice, everyone should have this platform regardless of playing ability'. And thus you had a band that stormed up the charts without knowing any chords, a singer that couldn't hold a note and just generally all around crap band.

But once said, it had been said, the principle was sound but it gave birth to the punk genre, which having heard once I don't see much point to hearing again. Every highschool in the western world has a punk band, that by now you would think has churned out every possible high tempo power chord song in the world and can only be sustained as unique because there are just so many different combinations of english words possible.

There are even the good Punk bands like the Ramones, NOFX and ahhh... you're stretching my knowledge now.

The best punk band in my formative years 7 & 8 of high school was Greenday, with Dookie, but they were like a prize fossil to an evolutionary bioligist, because Greenday achieved their degree of mainstream success thanks mostly to the melodic walking bass lines. Grunge was present when Greenday came out, but when I first heard of them I thought they pretty much had to be the future with their blue and green hair, and well that was pretty much it. They looked like they had hair made by a machine not like the grunge stars that had hair made from years of inactivity.

I had no idea at that age of the 30 year history of punk rock. But I still find it perplexing that Grunge could have emerged from the punk rock scene. In fact there's a new photo book called 'Grunge' that when I picked it up thought 'this will be good' and it is 90% punk rock portraits with the last 3 or so pages featuring 'Pearl Jam' 'Nirvana' and 'Sound Garden' in quick succession.

I just think, maybe it did, maybe all the alt-rock band came from the underground scene of punk rock. But what did punk-rock actually contribute. None of these bands sound vaguely punk rock except in what they don't share with pop rock. Both punk-rock and the (used to be) greater alternate rock scene don't have vocalists that are trained in Gospel Choirs, They both use guitars rather than keyboards, they both have drummers setting the pace. That's about it, so I can concieve of baby Mike Patton's and baby Perry Farrell's and Baby Les Claypools but not baby Lars Ulrich's going out on a friday night in the 70's/ early 80's with their fake ID's and seeing punk rock bands and thinking 'cool, this is not pop music' but at some point they must have gone 'I like the lack of fabrication in punk rock, the lack of packaging and polish, but I want a band that can carry a tune, has some structure to the song that is less predictable than this.'

I can see how the alt-rock scene was derived spiritually from punk, but not literally from punk. Punk always struck me as a devolution from classic rock, you simply dropped the solos, the vocals and just replaced it with rythmic shouting and what not. Alt-rock and grunge seemed to be a return to the R&B genre of the 60's back when it was played by white boys like Cream or a black guy and a bunch of white boys like the Jimi Hendrix Experience. All the guitar magazines of the 90's seemed to merge these two periods as well with nary a mention of the Ramones at all.

So I guess I have to watch that documentary featuring Henry Rollins to understand whether I really should be grateful to punk at all. Even if I don't like it, at least it has provided a consistent counterpoint to Pop for generation after generation of teenagers with little imagination.