Month: February 2016

Take Responsibility: Don’t Blame the Banks

Property investors are borrowing money from the bank and then blaming the bank for lending them that money

I have just read Banks Are Loaning Too Much to People Who Can’t Pay it Back on News.com.au. Here are some snippets:

An explosive 60 Minutes investigation, which airs on Channel 9 on Sunday, has discovered banks are irresponsibly loaning large amounts of money to people who just can’t pay it back due to a collapse in the property market.

The 24-year-old, who was an ordinary income earner, was loaned $6.5 million by a bank and encouraged to invest in a “highly volatile” market in the little mining town of Moranbah in Queensland — she bought 10 properties.

She has now obtained documents from the bank that loaned her the money, which show they knew there was a medium to high risk of the values collapsing and her homes being left abandoned by potential renters….

“The investors bought their properties during a peak in the market, some were $600,000 or $700,000 for ordinary buildings, but now some are worth just $100,000.”

Mr Coulthart said people with an average income who wanted to buy an investment property had to borrow 10 and 20 times their gross income.

“That is a preposterous amount of lending,” he said. “Property values in Australia are out of control and the level of mortgage debt in Australia is something like 3.8 times the gross domestic product.”

He questioned why people are being encouraged to borrow 10 to 20 times their gross income.

“It’s an unsustainable level of borrowing,” he said.

The 24-year-old featured in the 60 Minutes report doesn’t entirely blame the bank for the millions she borrowed, admitting to being greedy.

But she said while she didn’t look closely enough at her capacity to repay the loan, she believes the banks also had a duty of care.

“What this has taught her is banks are throwing money at people in the good times and now in the bad times banks will blame the borrower and say it’s their fault for borrowing all this money,” Mr Coulthart said.

“To some degree that’s true, but they should have a duty of care to make sure people have the capacity to repay.”

One of the main businesses banks have is lending money to people who want to borrow.

However, I shake my head in disbelief when people willingly borrow money from the bank, put it in a high-risk investment, lose their money, and then turn around and blame the bank for lending them the money in the first place.

Banks don’t want to lose money. They are a business. As such, it makes no sense for them to lend to someone who will not pay them back. They will try their hardest to filter out bad borrowers, but this is an inexact science. You can look at income statements and check creditworthiness, but with so many borrowers on their books, banks can only do so much, and borrowers need to take responsibility for their own actions.

It may be true that banks are “throwing money at people in the good times and now in the bad times banks will blame the borrower and say it’s their fault for borrowing all this money.” However, it works the other way as well. Borrowers fall over each other trying to borrowing as much money as possible during the good times and now in the bad times they will blame the lender and say it’s their fault for lending all this money.

Debt can be useful if you use the borrowed money to make more money. If you borrow at 4 percent and make 10 percent, you’ve made a good 6 percentage point difference. However, in business and investing, things don’t always go to plan. There is such thing as risk.

This is why debt is like a knife. It can be used for good, but if used poorly it is a dangerous instrument.

A knife can be used to cut vegetables. Eating vegetables is good for your health. However, a knife can be used to cut yourself or cut others. Debt is similar. Debt can help you, but used irresponsibly debt can hurt you.

Suppose I were to buy a knife from a shop. Suppose I then take this knife and stab myself. I go to hospital due to heavy bleeding. Then suppose I blamed the shop for selling me the knife. That is no different to those who borrow from banks and then blame the banks for lending them money when investments turn bad.

 

 

Why I’m Bullish on the American Tech Sector

Now is a great time to invest in the American technology sectors, for example, investing in companies like Apple, Google, and Microsoft.

The internet is the next frontier. It is highly disruptive and will grow strongly in the future at the expense of many traditional industries. For example, the rise of the internet has destroyed traditional print news and media.

Are we in a bubble?

The price earnings ratio of the tech sector is very favourable.

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What if there is a crash?

There is a possibility that we are about to face GFC 2. However, there is quantitative easing available for the government to correct for any downturn.

Convention economic theory states that printing money makes no difference for an economy because it is offset by inflation. However, I believe this is not the case.

As the government prints money, it uses printed money to buy up bonds and effectively lower interest rates. As interest rates go down, businesses borrow more, expand, and produce more. This higher output should push prices down.

Even if there is inflation as a result of money printing, this is not necessarily harmful for the economy. Inflation will push up the price of shares, bonds, and property, which will increase wealth.

Higher inflation will also encourage hard work. If the price of food were to double, wouldn’t you work harder just to survive?

How to invest in the American tech sector

Americans can buy shares directly in, say, Apple or Google. There are also ETFs available that invest in the entire sector.

For Australians, buying American shares directly is difficult and costly, so ETFs are the best option. An ETF I use is the Betashares Nasdaq 100 ETF that trades on the ASX under ticker symbol NDX.

Why People Hate Charity Workers

After finishing work today, I went to the gym, spending approximately one hour on cardio and weights. While walking to the train station, I saw a young man smiling at me. He had a World Vision tag around his neck, so he was clearly working for the charity and was asking for money.

This young charity worker was smiling and he was saying friendly things. He noticed I wore a blue shirt, so he made a comment about it.

I smiled at him and walked off. Most people didn’t smile. They ignored the charity worker and pretended he wasn’t there.

On the train, I wonder to myself why charities bother with this method of collecting money. I understand these workers work on commission and only get paid if they raise money, but charity organizations need to understand these hustlers do great damage to the reputation of the charity and the brand. These workers are not genuine. They greet you will false smiles and fake friendliness, and this does not work on a population that is already very cynical, a population desperate for authenticity.

The lesson from all this is to be genuine. Be yourself. Express your true colours. Don’t try to hard to fit the mould. People are not that dumb. They can often detect fakeness. There is so much fakeness in this world now that, owing to scarcity, authenticity is highly valued.

Ambition vs Contentment

According many, you must constantly strive to better yourself. Always be ambitious.

You must increase your income, increase your wealth, increase your muscle mass, burn more fat, date younger and more attractive women.

It doesn’t matter what the goal is. The point is that you must always be better. You must always work at improving yourself.

Then there are those who are happy with what they have. According to them, you must be grateful and content with what you have. Many religions promote this view. For example, the Bible teaches that you are not to grumble. Philippians 2:14 says the following: “Do all things without grumbling or questioning.”

So what should you do?

As with many things in life, the answer is in the middle.

If you are ambitious and if you always try to make more money or buy a bigger house, you may never be satisfied with what you have, and the stress and anxiety of not having enough can damage you.

That being said, if you are completely content, you are idle, and you do nothing. This is the fastest route to depression.

The solution that works for me is to always be working at improving yourself but to work slowly. Take your time and learn to enjoy the work you do.

Even if you retire by age forty, chances are you will discover that sitting by the couch doing nothing is no way to live. You need something to keep you occupied.

The best analogy is driving. There are times when you need to get somewhere by a certain time. You are stressed, you drive quickly. Chances are you scream and become frustrated with slow drivers. Compare this to driving on a weekend, say, to visit a relative. You have all the time in the world. You can relax, drive safety, and enjoy the song on the radio.

That is how life should be. Relax, go slow, and enjoy the journey.