Month: February 2020

The Political Practical

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Trends – Political and Social (Part 2)

Those within the Financial Awakening understand two life rules:

  1. Nobody is going to act in your best interest, all of the time.
  2. When you find someone who acts in your best interest most of the time – stick with them.

In sickness and in health, till death do you part.

The same can be said for politics. No politician is going to act in your best interest, all of the time. So it is your job to take an interest in your political environment and understand who the key players are. This includes determining parliamentary members and the political parties which most closely and most often, represent your values.

Regardless of how well you know your local member though, political trends can begin quickly and they won’t always benefit you. Now this might be an acceptable outcome on occasion, as the government may indeed be acting in the interests of others who genuinely need assistance. At other times questions concerning motive, reason and effectiveness of government spending should be asked and the key players held accountable.

Whether these new political trends are good for you or bad – you want to be able to spot and assess them early. Once you complete your assessment – as an ordinary, yet financially savvy individual, you generally have two active options available:

  1. Work within the laws and regulations as best you can, to maximize your financial opportunity; or, limit the financial damage.
  2. Lobby the government to keep the laws and regulations working in your own best-interest.

If it’s worth keeping, fight for it.

Early lobbying may stop bad policy trends immediately. Ineffective lobbying has been known to lead to many an emotionally charged election. For you, the Financial Awakened Political Practical, it is simply another day at the office.

So the following are my 4 tips to help us in our quest to be informed and unemotional Political Practicals.

  1. Stay up to date with political news. Some will be happy reading newspapers, local through to national levels. Me, I can never seem to find the time for this. So my preference is conservative talk-back radio. Turn off the morning music and start listening to the so called ‘shock-jocks’. The good morning hosts have already read the newspapers for you and will invite the key players onto the program to explain their points of view.
  2. Take your time. Not much moves fast in politics. Politics is compromise and compromise takes time. So you have time to do your research, plan your strategy and get to work. A warning though, if a policy looks like it is being pushed unusually quickly, there is a high chance it is not going to benefit you. In these circumstances you may need to lobby fast.
  3. Adjust your finances if needed. With legal and regulatory change being flagged months, sometimes years in advance, an awakened and financially savvy individual is sometimes able to restructure their financial affairs well in advance of the legislative changes coming into effect. Should you determine that the change is inevitable – there should be time plan and execute your restructure.
  4. Seek professional advice – tax agents, accountants, solicitors, investment advisers. Good professional advice should pay for itself threefold at least.

This post should be considered an introduction and theoretical guide to developing a practical approach to politics. Staying informed about your current political, economic and social environment will help you identify the political trends. An understanding of who the key players are will assist you to gauge the strength of the trend and likely outcome. Ultimately it will be your perseverance and practice which will determine the level of success you achieve.

Going forward, it is my plan to report on the specific political trends I am witnessing and hopefully you will share your observations too. Together, we should be able to make the assessment process easier and more accurate – thereby increasing our likelihood of success.

Until then – enjoy your politics.

GOLDSMITH

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Good Money and the Dollar 2

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Part 2 – An introduction to inflation.

Following on from the ‘8 characteristics of good money‘ detailed at Good Money let us continue an examination of the ‘Dollar’ with respect to each. In this post we ask the question – Are dollars a good store of value?

Do your dollars buy you what they used to?

One hundred years ago $US20 dollars could buy you a single, one ounce, gold coin.  Now that same single, one ounce gold coin, would cost you $US1,600 dollars. 

Over the past 100 years gold has managed to retain its value, being its purchasing power.  The $20 in currency however has lost 99% of its purchasing power.

Another way to think about it is like this.  The $20 in cash and a 1 ounce gold coin could buy you the exact same thing in 1920 – let’s say a simple 5 day holiday at the beach for the family. Roll around 2020, the 1 ounce gold coin still buys you your 5 day holiday to the beach. As for the $20, well this is lucky to even buy the family dinner.

Time has clearly demonstrated that dollars are not a good store of value.

This loss in purchasing power for the dollars is called ‘Inflation’. A very important concept in your Financial Awakening.

We will examine inflation in more detail in an upcoming post. In the meantime however, if you have any examples of the inflation you are experiencing year to year. Please share in the comments below.

GOLDSMITH

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The Political Pendulum

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Trends – Political and Social (Part 1)

Three men go for a walk into this forest. One man has $100.  The other two don’t. The other two don’t like this very much. They hold a vote and with their majority elect to split the $100 between the three of them – this is Democracy.

Others join them and quickly realise how unfairly the first person was treated.  In response they elect a single person to supposedly fix the Democratic mistakes – this is a Republic.

Through free markets and property rights the people of the forest prosper for a time. Most people are productive, however, some people are more productive than others.  This is Capitalism.

Community pride is high as citizens foster and share in the culture, customs & traditions born out of their newly found prosperity.  This is Nationalism. 

Over time however it becomes obvious that the owners of capital and risk takers have become very wealthy and have left the working class behind. So these workers gather together to demand higher wages and better working conditions.  This is Unionism.

Due to higher wages, businesses in the forest are now less profitable.  Fortunately for the manufacturers, the people in the nearby river valley work for much less than those in the forest.  So the owners move their factories to the valley and transport the goods to the forest. Everyone rejoices because the goods just became cheaper. This is Globalisation.

However, without a manufacturing industry many workers were left idle and without means of income production. They see this as unfair.  They seek to increase taxes on the wealthy and have it redistributed to themselves. This is Socialism.

To appease this new Socialist movement a larger governing body is formed to facilitate the redistribution of wealth in a fairer manner for all. This new bureaucracy, with their newly found political influence, involve themselves directly in all manner of free-market activity. Quite often with just enough regulation to ensure the continued success of their preferred product and service providers; and, usually at the expense of the competitors.  This is Crony Capitalism.

Realising that the expanding bureaucracy is taking advantage of its size, power and influence, the central government introduces additional levels of bureaucracy to police the old. This is Authoritarianism.

With resources quickly being depleted to fund the massive public workforce, emergency measures are briskly introduced to facilitate the only truly fair allocation of monies, property and resources. The government seizes all and cancels the next election. This is Communism.

Everyone is content for a short time, until finally all the resources have been distributed, the people are left unproductive and the land is barren.  Violence, starvation and death follow. People flee. Including three men who go for a walk into a forest. One man has $100, the other two don’t.

Know which way the pendulum is swinging!

History is littered with civilizations who strayed too far left of center and simply never returned.  If there was a single political lesson for all parents to teach their children it would be – ‘Socialism – has always failed and will always fail.’ As Margaret Thatcher so eloquently stated – ‘The problem is with socialism, you eventually run out of other people’s money to spend.’

Need a modern example of a failing socialist system, look no further than Venezuela.  Twenty years ago it was the crown jewel of South America. Rich in wealth, culture and oil.  Socialism, accompanied by a sustained period of low oil prices, put a swift end to this.

However, as you can see from the prior anecdote, Democracy has its failings too. As soon as you have what over 50% of the population want, they will simply vote to take it from you.  They will try to soften the pain for you of course. They will call it a tax, a duty, a levy or a surcharge. They will also praise you for doing your civic duty. But at the end of the day – they are simply taking something from you and giving it to someone else.

If you are left with only two options – the first being an authoritative socialism on the left, or democratic capitalism to the right – be pushing towards the right all the time. Not only will your standard of living will be higher, you will probably live longer.

Most importantly though – understand the political trends at any particular time. Is there a unionist movement gaining momentum? Are the conservative capitalists likely to win the next election? Accurately predicting where the political trends are leading will create financial opportunities for you. It will also save you a great deal of time and money, by preparing for likely eventualities only.

GOLDSMITH

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Risk-Free Return

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The third foundation block, paramount in your financial awakening is an understanding of the Risk-Free Return. I say paramount, as before you make any investment decision you should know exactly what return you can make, taking zero (or near to zero) investment risk.

Why take on additional risks, when you can reach your destination safely?

When it comes to risk-free returns there are different types, depending on who you are and the country in which your reside. 

In the case of an Australian Citizen, I consider that there are 5 types of risk-free returns… plus… 1 risk-free asset worth an introductory mention.

The first of the risk-free returns is the $US 10 year treasury bond – considered the risk-free investment of choice for bankers and fund managers the world over for 3 generations – currently paying interest of 1.47%pa.

The second, for an Australian, would be an Australian Government Bond – currently paying 0.93%pa.

The third would be a term deposit with a Big 4 Australian Banking institution – currently 1.5%pa

Presently, funds held on account with any Australian financial institution are backed by the Government Guarantee up to $250,000 per entity, per institution.  As such a term deposit with a small Credit Union, has about as much risk of default as an Australian Government Bond. So forth, other term deposits. Currently 1.75%pa.

The fifth risk-free return – is the most important risk-free return of them all. It is generally a tax-free return and its nature is ‘debt reduction’. These ‘debt reduction’ measures might include, assuming no early payout penalties:

  1. Early repayment of a home loan – will currently save you circa 3% pa.
  2. Early repayment of an investment loan – should save you 3-4%pa.
  3. Early repayment of a credit card – save 20% pa.
  4. Holding cash in a 100% loan offset account – save 3-4% pa.

Before you make any investment decision you must at least give consideration to these 5 risk-free return opportunities, as described above and particularly the last. However, please be sure to ask about any early payout penalties on loans and other finance you might been looking to repay.

Over the coming weeks I will provide you with examples on how to apply the risk free-return concept to your financial decision making processes.

Now I mentioned that there was also a single ‘risk-free asset’. Care to take a guess what this might be?

Occasionally it is referred to as a ‘barbaric relic of a bygone era’.

The bankers and the ultra-rich have been telling you it is worthless for 120 years. ‘Just a commodity’ they say. Yet over the past 20 years alone, this risk-free asset has grown in value by approximately 450%. 

In case you haven’t guessed already – this risk-free asset is… GOLD. Yes, GOLD is a ‘risk-free’asset.

It is important to be clear here. GOLD is not risk-free because it provides you with guaranteed income or annual capital growth. Physically held GOLD is risk-free, because it is not a liability of any other party. Meaning there is no risk of default.

Don’t just take my word for it though. On 31 March 2019, GOLD was reclassified as a ‘Tier 1’ asset under the Basel III International Regulatory Accord. Meaning that for the purpose of International Banking Standards, GOLD is now always considered a ‘ZERO risk asset’.

We will be discussing GOLD in much more detail here at the Financial Awakening, over the months and years to come. And with great personal pride and pleasure.

GOLDSMITH

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Good Money and the Dollar

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Part 1

Following on from the ‘8 characteristics of good money‘ detailed at Good Money let us begin an examination of the ‘Dollar’ with respect to each. Taking on an Australian perspective, this post asks the question – Are dollars scarce and difficult to create?

Are dollars scarce and difficult to create?

Few Australians actually understand how our dollars, being our national currency, are created. When they finally learn, they are generally shocked.  

Whilst some of our dollars are created by the Reserve Bank of Australia and the Royal Mint, the vast majority of our currency is created by our banks. That’s right, the private banks of Australia. The banks of Australia essentially have a licence to print money… and that’s exactly what they do.

If you are like me, you might have assumed that our banks only lent out the money that people had deposited with them. There have been times in the past when this was the case – but not anymore. 

Banks create currency every time they lend someone money. If the bank lends you currency to buy a home – they create it out of thin air and give it to you.  Then they charge you interest for the next 20-30 years as you pay off the loan.

Think about credit cards.  The bank again waves its magic wand, creates the money out of thin air and pays it to the shopkeeper when you make a purchase.  And for this convenience, they are happy to charge you 20% per annum.

Wouldn’t this be wonderful? You and I could create money out of thin air, lend it to someone else; and, then charge them interest on it.  The perfect business model really.

By now you are probably thinking – ‘this can’t be right?’  There is no way a government would let banks simply create money.  Well don’t take my word for it, the following extract is from a speech made by the Assistant Governor of the Reserve Bank of Australia, Mr Christopher Kent in September 2018, titled ‘Money – born of credit?’

‘Money can be created, however, when financial intermediaries make loans. Accordingly, the concepts of money and credit are closely linked in a modern economy, albeit not one for one. When a bank extends a loan, it makes money available to the borrower, for example, to buy a car, a house or equipment for a business. The bank may credit the deposit account of the borrower, who withdraws the funds to make their purchase. Alternatively, the bank may directly credit the deposit account of the seller on behalf of the borrower. In either case, the loaned funds will tend to find their way into a deposit somewhere in the banking system. This process adds to the supply of money.’

Oh the irony – the recent Royal Commission into Australian financial sector has generally determined that the behaviour of the Australian Financial Institutions has been ‘inappropriate’ for many years. It concluded that the bankers had been acting in their own best interest, not the best interest of the customers.  And yet it is these same banks and financial institutions, which are permissioned to create money as they see fit.

It would be remiss of me not to acknowledge that there are regulations imposed on the banks which do restrict the amount of currency they can create. We must also acknowledge that when a loan is repaid that the amount of currency in circulation is reduced. Nevertheless, our banking institutions are absolutely enormous.  They are bigger than our mining companies. Bigger than our building and construction companies. Bigger than our infrastructure companies.  

Does anyone really believe our banks would be as big as they are now, if they were not able to simply create money?

As far as the world governments, central banks and the private banks are concerned – this revelation on how currency is created, should not surprise anyone. They are very open with the fact that banks print money. They don’t promote it, but they do little to hide it.  Let’s just say they are ‘quietly honest’.

According to these same people this debt-based, non-asset backed currency system (often referred to as ‘fiat currency’) is the pinnacle of modern economic thought, theory and reason. Regardless of the fact that these debt-based, non-asset backed, fiat currencies, created by banks and governments have been attempted many hundreds of times, by countless cities, nations and civilizations, for the past 2-3 thousand years.  Yet each and every time the paper currency failed. They simply assume it will be different this time.

So in answer to the question, are dollars difficult to create? The answer is ‘No’.

Let’s examine ‘Dollars’ again in respect of the other qualities of ‘Good Money’ soon. In the meantime, you might want to read the Assistant Governor’s speech – just hit the link below.

https://www.rba.gov.au/speeches/2018/sp-ag-2018-09-19.html

We are sure to revisit this speech in future posts.

GOLDSMITH

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Intrinsic Value

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If I were to ask you ‘how much a house was worth?’ – would you know? Or how much a share is worth? A business? A bond? Or an annuity?

Chances are, you don’t know.  Don’t feel bad though – there would be many financial professionals who don’t know either, if this is not their field of expertise.

When it comes to a property valuation, many investors and home makers may be guided by a real estate agent. They might also look at recent sales in the area.  The problem with this method is that they are relying on the opinions of others.

In the case of shares, investors and traders may simply assume that the current market price is the true value. In fact, the ‘Efficient Market Hypothesis’ proposes just this.  That all news and information concerning a stock is reflected in the share price and as such the share will always trade at its true value. If this was true then there would be little or no opportunity for a buyer or seller to profit from market inefficiency.

In the case of a business asset, your accountant might tell you that the business is worth a multiple of EBIT or EBITDA, in accordance with a predetermined industry standard. Again you are relying on the subjective opinions of others to determine the value.

Finally – some might adopt the old adage, an asset is only worth what someone else is willing to pay for it. Once again – relying on the subjective opinions of others, with little to no regard to their personal motivations.

So how much is an asset really worth?

For the individual and putting all emotional attachment aside, an asset’s worth is determined by two factors:

  1. The future net cash flow created by the asset.
  2. The investor’s required rate of return.

Or put more technically – an asset is worth the ‘sum of all its discounted future cash flows’. Otherwise known as its ‘Net Present Value’ or the ‘Intrinsic Value.’

Financial analysis such as cash flow discounting is very much a specialised field.  The basics however are not beyond the average person. The purpose here is to lay the foundation for your Financial Awakening, not to frighten you with a myriad of mathematical equations. 

So I will now give you one simple formula to learn and remember. This formula will arm you in your investment decision making and may even start you down the path of complex asset valuation modelling.  This formula is:

Intrinsic Value = Expected net annual earnings / Required Rate of Return

Expected net annual earnings is the total average annual income expected to be received less expected regularly occurring expenditure; excluding interest and other finance costs.

The Required Rate of Return also referred to as the ‘discount rate’, is a personalised rate which ensures that you will be adequately compensated for taking up the risks associated with asset ownership. 

Let’s look at one quick example, close to the hearts of many.

The Investment Property

If a potential investment property can be let out for a net annual rental return of $25,000 – this annual cash flow has a value.  If I require a 5% per annum return from any real estate investment I make, using the Intrinsic Value formula I can quickly calculate the maximum price I should pay.  

Intrinsic Value = Expected net annual earnings / Required Rate of Return

= $25,000 / 5%

= $500,000

I have now calculated that the property has an intrinsic value of $500,000.  This is the maximum amount I want to pay for the property, understanding that I am targeting a return of 5%pa.

Let’s look at the same investment property, only this time we as potential investors require a rate of return of 7.5% pa.

Intrinsic Value = Expected net annual earnings / Required Rate of Return

= $25,000 / 7.5%

= $333,0333

This example clearly demonstrates that if we want to achieve a higher rate of return, we must pay less for that asset initially. Which brings to mind another adage –

‘A great investment is determined at the time of purchase, not the time of sale’.

At this point some of you might be thinking – what about the capital growth?  Shouldn’t the capital growth be taken into account when calculating the intrinsic value, not just the rental income?

Let’s consider this – why does an asset grow in value? 

Well we now know that an asset’s value is the ‘sum of its total discounted future cash flow’. So the capital growth of an asset must be simply the result of the growth of that expected future cash flow.  

This future increase may be the result of higher than expected demand for rental properties and thereby higher rents. It could also be the result of a property rezoning, which may change the overall income earning potential of the asset.

Alternatively – government and council policy changes, tax changes, property damage and demographic shifts could all in turn impact negatively upon the property’s cash flow and thereby cause a reduction in the value of the property.

So use this formula as your starting point in your decision making process, knowing that there could be good surprises, or unpleasant surprises in the future. The formula is a solid guide to what you should be paying for an investment asset, but it is only the beginning of the research you should be doing.

If you do come across a property which you feel has tremendous income growth potential, model the cashflow and re-calculate the Net Present Value. There are plenty of online guides and calculators to help you do this.

Finally don’t forget to give consideration to imposts such as stamp duty and land taxes, as these will make a difference to your investment returns.

In my next post on Intrinsic Value, we will take a look at home purchases. Buying a new home is a very emotional decision, but if we were to put emotion aside… how much should we really pay?

GOLDSMITH

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The Golden Rule

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There are many financial self-help books which claim to hold the secrets to unimaginable wealth and financial success. They promise that you, no matter who you are, you are just 5 steps away from being the world’s next billionaire.

Well dare I say that not everyone is destined to be a billionaire. However, there is a common theme that runs through these books – this theme I call ‘The Golden Rule.’

Not to be confused with the Golden Rule of the Bible – ‘Do unto others as you would have others do unto you’, this Golden Rule guarantees financial success for all who do obey. 

Mums and Dads, businesses small and large, clubs, co-ops and even governments should all strive to learn the Golden Rule.

The ultra-rich of the world already know the Golden Rule.

And now you do too.

The Golden Rule is –

‘Spend less than you earn!’

Or to be demonstrated mathematically –

EARN > SPEND

This is it!

About all it takes to be wealthy… and perhaps even happy.

‘Spend less than you earn’ or ‘earn more than you spend.’ Whichever way you prefer to say it, success is most definitely guaranteed.

For a household, the rule should mean running a budget with a savings plan… and sticking to it. 

For a business it means running a profit.

For a government it means running a budget surplus.

Adherence to the Golden Rule is wonderful – your wealth will grow and from this new wealth, more wealth will grow. 

The Golden Rule declined

Failing to adhere to the Golden Rule is fraught with danger. 

Spending more than you earn depletes your savings, may force the sale of your assets and may force you into debt. For a time this may be manageable. Understand however, spending more than you earn now, means you are taking an advance on your future earnings.  

In the case of an individual, this advance required you to forgo the use of your future earnings in exchange for a perceived benefit now.

In the case of a business, you will forego future profits to bring forward a benefit.

In the case of a government – they are taking an advance on the future taxes which will be paid by you, by your children and maybe even your grandchildren.

Economics

When it comes to government spending, there is an economic theory which suggests that the more a government spends, the more prosperous that nation will be. The premise being that by spending more than it earns (deficit spending), the country will foster economic growth. This theory is known as Keynesian Economics.

Back in my university days I questioned the validity of this theory, much to the distress of the faculty and staff.  To this day I have seen no practical evidence to support this Keynesian Economic theory. There has certainly been no shortage of national borrowing in the past 20 years and over this period there has been little in the way of real GDP growth. So I stand by what I said back in the late 90’s – ‘a country can never borrow its way into prosperity.’

A Golden Choice

Stick to the Golden Rule – it will not let you down. Strive to increase your wages, salary or business income and be constantly questioning your purchases.

Avoid credit cards and other personal debt. Living within your means now, should improve lifestyle over time.

Don’t be mistaken though, the Golden Rule in no way implies that all debt is bad. Some debt can actually be good. To understand which debt is good however, you must understand Intrinsic Value, our next foundation principle.

GOLDSMITH

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Goldsmith

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As a means of introduction, I am a relatively simple man who desires little more than to feed, shelter and educate my family and leave the world a little better than how I found it.

Unfortunately, I was finding this is easier said than done and getting harder. I found myself asking ‘why’?

Financial Awakening

My background is in accounting and financial services.  Ten years of accounting across several different fields did lay a solid foundation for the past 12 years spent providing holistic financial advice. 

I do not consider myself entrepreneurial and I have a strong level of admiration for those who are. It is the small business owners who drive the prosperity of nations.

Whilst this website will be considered ‘self-help’, I do not consider myself to be a ‘guru’.

I do however have 3 aptitudes which have proven to be highly beneficial to those whom I serve, being:

  1. I am a ‘contrarian’ by nature.
  2. I have a strong tendency to be ‘skeptical’ of the motivations of others.
  3. I have a passion for ‘strategy’.

These aptitudes have also given me cause to observe and reflect upon the financial and political systems across my home country and the West generally.  

Even the most rudimentary examinations of our monetary, taxation and superannuation / pension systems are enough to conclude that the future for the ‘working class’ is looking disconcerting. 

Add to this an ever expanding bureaucracy, regulation, compliance overburden and generally poor government budgeting – then the financial future of the ‘middle-class’ is a matter of concern too. 

Fortunately I am not the only one who is concerned and doing something about it. There are others out there openly critical of the politicians, bankers, advisers and educators who they claim have been perpetuating a financial mistruths for 3 generations. I hope to be able to highlight their arguments here, at this site, over the coming months.

Historically the outcome of poor financial systems is devastating. Homelessness. Hyper-inflation, which could make pension and savings accounts worthless. Starvation. A general inability to trade and conduct any type of business.

Regardless of the above, I believe there is much you can do as an individual to protect your financial position and even opportunities to avail ourselves of.  There is also much we can do together through the advocacy for sound monetary systems, along with sensible and conservative government budgeting.

It all starts however with your financial ‘re-education’. In other words your ‘Financial Awakening.’

I hope that you will join me on this journey.

GOLDSMITH

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