Investing in Knowledge

It's been some time since I've been learning or reading about investing myself, I may have been gone, but I had not forgotten!

One lifestyle change to becoming wealthier, get more knowledge.
This has proven itself for me, having recently been studying for, and sitting exams for industry specific qualifications, for the job that currently brings me the money, I have just got a new job.

Whilst I can't be sure that that particular knowledge sealed the deal, it certainly helped. I thought that this fact was worthwhile pointing out, to enable you to make money in the stock market, or in real estate, you need to have the money in the first place. A good way to increase that potential cash flow, is to be always learning, increase the knowledge you have.

As an investment strategy it has certainly worked for me.

I hope to get back to blogging some more articles about techniques and my progress in the near future, to increate my knowledge in investing, and thus invest in knowledge.

Investing : Dividends - Good or not?

Hello again,

So, if you're investing in a company, are dividends a good thing to search out or not?  Companies giving you money, are you kidding, that's got to be good, hasn't it?

The answer to that question really lies in the answer to another question: How good a return on equity (ROE) is that company producing?

That answer will tell us how much growth you can expect a company to produce for $1 of equity.  So if you multiplied the ROE by the share price that answer would be what you would expect in total returns for your investment.

If the return on equity is good, then dividends are not necessarily the best
thing, because that company might well be capable of giving better returns 
on you investment than you could.  
Unless of course, you're a better investor than they are?

So, how do we know what a good return on investment is?  Well, let's put it a different way, let's look at opportunity cost, the cost of not doing something else.
Let's just imagine (have you got your eyes closed?) that instead of investing in all that stock market stuff, we'll go the safe option and put the money into a saving account, that earns 6% per year.  That's the benchmark.  If our return on equity is less than that safe 6%, then it's clearly not worth bothering with, unless there's something that might indicate that it will grow significantly.

So, in short, dividends are great when a company isn't all that good at growing it's investment, and not so great when the company is good at making money.

That begs the question, why would you ever want to get dividends then?  Well, unfortunately for us poor intelligent few, we have to put up with people looking for income from investments. Management of companies often divide the returns in half, half for dividends, half for re-investment.  

So what's wrong with that?  Well, you get some income, for sure, and put that money in your 6% saving account, or some other shares.  Meantime the other 50% is used by the company to produce a 20% return.  Bugger!

A way of looking at getting income out of an investment that doesn't pay dividends, could be to sell a few shares instead.  If they're appreciating in value, and you really need that money, then that could be a way to go.

There's another downside though, tax.  Bugger - again.  When you take the income, you get taxed, then you re-invest that money.  Now, your money has to make the amount of tax extra on top of the return you wanted before you can get the returns you desire.

So let's say you get a $1 dividend payout per share.  How lucky is that?  Don't get smug just yet!  
Since you're a pretty smart cookie, you also earn a reasonable salary, and 
get taxed at close to 50%.  Now your payout is 50 cents.  Not so smug now, 
are you?  
You now need to make a 100% return on that 50 cents when invested to get 
back to the original $1 dividend payout.  Then, from there, you then need 
to make money on top of that to get a return on that original $1.  That 
return if left to be reinvested would only have to make the good return 
to be successful.

That doesn't make dividends look quite so good now does it?  Well, yes and no.  If you want an income, it's possibly because you've retired, otherwise you'd be looking for growth, would you?  I hope you would anyway!  So if you're after income, you probably also want to reduce your risks too, don't you, so that you can afford to retire, buy a huge yacht, and sail away.  Damned right!  When risks are reduced, so are rewards, so it means by having the income that you're inherently looking for something that will have a lower risk, in which case, as mentioned earlier, you would probably find that you're looking at a company that doesn't have a huge ROE, and in that case, having a dividend payout is good.  Nice!  That worked out well, didn't it!

Technical Analysis - RSI - Relative Strength Index

Hi,

The relative strength index is a value that indicates if a stock has been overbought, or oversold.  This is a good indicator to show if a particular stock has an opportunity to be bought or sold.

Oversold levels are below 30% and overbought levels are over 70%.

Safe as houses - Are they?

Hello!

I occasionally receive communication from companies touting their property investment services.  Pitches regarding the products being "safe as houses", so that got me thinking, as I do believe that property is a good investment if used correctly.

So, what does "safe" mean?  Usually that something is "low risk".  Okay, so we know that people always need places to live, and aside from properties dropping hugely in price which doesn't seem likely, or a natural disaster, or some road infrastructure springing up near your investment, nothing can go wrong, right?  That certainly seems to be the case.  

The big questions are around opportunity cost, liquidity, leverage and partially diversification.

The opportunity cost - well, that's the cost of not doing something else by investing in property.  What I mean by that is, if you invest in a property worth $250,000, and it grows at a rate of 7%, and earns you $250 per week in rent, is that position better than $250,000 in stock that grows at a rate of 15% and earns a 10% dividend?  It's quite difficult to compare one with another, other than averaging past performance.  However, you'd have to compare the best house with the best performing stock to see the difference.  My view is that property is indeed quite good at earning income, albeit slowly in general.  If enough interest, in terms of comments are posted for this item, I will go about finding the averages and try an unbiased comparison of the two investment types.

There's liquidity.  All that means is that it generally takes a large amount of time to convert the asset into cash.  In comparison to going to your local bank and drawing your cash out, properties are not very liquid.  That has it's benefits and drawbacks.  Due to the liquidity, investors are forced into a buy and hold type strategy, which generally returns better than jumping about in the market.  The downside is that if you want to realise your asset quickly, there may be no market, or a poor or slow one and the money may not be available when you need it.

Then there's leverage.  With property it's a bit of a joke, banks will lend you far more than you can possibly hope to pay off, so you have a highly leveraged position.  Does that help you at all?  Too much negative gearing can quite quickly sink your investment ship, the interest payments grow more quickly than you can afford to pay, and your loan to value ratio (LVR) gets higher, and the investment becomes more highly geared, until the bank forecloses on the loan.
On the other hand, if you can afford such a payment, the availability of a such a highly leveraged position seems unthinkable in the stock market.  Where else could you get a loan and not have to put any money down to do so?  My view on such a position is that it is a stupid mistake.  If you have no deposit, the interest is going to really hurt you, as is the mortgage insurance.   So we can see that we can gain access to a highly leveraged fairly low risk investment, so long as the interest rates don't go mad.

Finally diversification.  The investment property is only one asset class, it's all your eggs in one basket, and with the leverage you may have, you're going to have to pay 
a lot toward the investment to keep it in the black.  If on the other hand you are in the stock 
market, you're able to get into different asset classes and spread your risk (and average your 
returns probably too)  So one important thing - is location of property like diversification?  Can 
we rely on the asset class to much that we don't have to diversify?  Perhaps, seems to have 
worked for a large majority of people.

In the stock market there are similar situations, such as Options, or Installment Warrants that allow you to limit risk, whilst gearing your investment and leveraging your position to build wealth.  These products would allow diversification, but are also more liquid than the property investment.  So are these products likely to serve you better, and it is the property investment companies that are selling you something that is likely to be inferior?  I will look further into Options and Installment Warrants, and let you know, if you leave me a comment!

Finally, it seems that if you can get a property with low gearing, in a good area, with good tennants most of the concerns expressed here can be mitigated.  It's all a case of how easily that position comes to you.  Stock market alternatives seem worthy of research, to see which is most likely to give you the best risk / reward profile, and the best returns in the long run.