The Joy of Winning

It’s April 15 1960, episode 28 of the Twilight Zone aired in the US, titled “A Nice Place to Visit”.

We meet a man named Henry Francis “Rocky” Valentine – a shady gambler who is shot by police after robbing a pawn shop. He wakes up to find himself in Heaven where he meets Pip, his angel, who grants Rocky all of his wishes.

Pip takes Rocky to a casino. They take the elevator to the penthouse. Rocky is provided with a wardrobe full of tailor made suits, draws full of luxurious watches, and a suitcase full of cash. Rocky heads downstairs to test his luck as he takes a seat at the blackjack table. He’s dealt blackjack on his first hand – winner! Next hand, blackjack, following hand, blackjack – he can’t believe it! He heads over to the craps table, rolls a winner over and over again. He’s being served alcohol, women are surrounding him, and everyone is cheering him on. He can’t believe his luck, he’s never won so much money in his life.

This continues for the next month. Rocky keeps winning, in fact, he can’t lose. He summons Pip and explains to him that he has become bored with having his desires instantly met. Out of frustration, he tells Pip he’s tired of Heaven and wants to go to “the other place”, to which Pip responds:

“Heaven? Whatever gave you the idea you were in Heaven, Mr. Valentine? This is the other place!”

Horrified, Rocky frantically tries to open the now locked penthouse door as Pip laughs evilly at Rocky’s torture.

What if you could have all the planes, boats, homes, watches, or money your heart desired? How would this make you feel? Would you feel ultimate happiness and joy? Would you feel truly fulfilled? I’m sure you know of millionaires or billionaires who are unhappy, and I’m sure you know of someone who may not be financially wealthy, however they are one of the happiest people you know.

Without spending time to uncover what fulfills you, just like Rocky, you too will realise that money is simply a means to an end, and that you are setting yourself up for failure. Material items do not bring true joy or happiness. If you live for that luxury house, the finest time piece, the overpriced shoes you will probably never wear, or the next piece of technology, you will never have enough, and you will never be truly happy. You’ll be living in a Twilight Zone of your own making.

Tony Robbins sums up what I believe are two of the most important human needs perfectly:

The Need for Growth

If you’re not growing, you’re dying. If a relationship is not growing, if a business is not growing, if you’re not growing, it doesn’t matter how much money you have in the bank, how many friends you have, how many people love you—you’re not going to experience real fulfillment. And the reason we grow, I believe, is so we have something of value to give.

The Needs for Contribution

Corny as it may sound, the secret to living is giving. Life’s not about me; it’s about we. Think about it, what’s the first thing you do when you get good or exciting news? You call somebody you love and share it. Sharing enhances everything you experience.

Life is really about creating meaning. And meaning does not come from what you get, it comes from what you give. Ultimately it’s not what you get that will make you happy long term, but rather who you become and what you contribute will.

Everything we do in life is about how it makes us feel. Whether or not you believe that deep inside you are continuing to grow and push yourself, to do and give more than was comfortable or you even thought possible. The wealthiest person on earth is one who appreciates.

The Tale of an Unsophisticated Millionaire

It was 1909, in a small Illinois farming community, a little girl by the name of Grace Groner was born. Orphaned at the age of 12, and like many people who grew up and lived through the great depression, Grace Groner was quite frugal with her money.

It’s understood she bought her clothes from garage sales, and rather than buying a car, she walked everywhere. Her one bedroom house in Lake Forest was minimalist to say the least. Grace Groner worked at a healthcare company as a secretary for 43 years. Although she was quite frugal during her working days, she traveled widely upon her retirement, volunteered for decades, and occasionally made anonymous donations to those in need.

Grace Groner died in 2010 with an estate worth $7,000,000 which was left to a foundation she established prior to her death. It’s estimated the estate would generate $300,000 pa in income each year. She instructed that the income would be used to benefit the students of Lake Forest College by funding internships, international study, projects, and grants.

During the time of Grace Groner’s death, Richard Fuscone, a former top Wall Street executive declared bankruptcy – fighting to save foreclosure on his 18,471 square foot, eleven bathroom mansion.

“I have been devastated by the financial crisis which came to a head in March 2008, I currently have no income.”

He writes in his bankruptcy filing.

Richard had an MBA from the University of Chicago, and attended Harvard Business School. Fuscone was viewed by company insiders as a “winner”. Upon his retirement, then-CEO (of Merrill Lynch) David Komansky praised him for his “business savvy, leadership skills, sound judgment and personal integrity.”

Money and finance is one of those industries where the humble 100 year old secretary will outperform a Wall Street titan. In no other industry can this happen. The 100 year old humble secretary couldn’t beat Tiger Woods at a game of golf. And would not be better at open hear surgery than a specialist heart surgeon.

The correlation between financial education and financial success is not guaranteed, as we have seen with Groner and Fuscone.

So what was Grace Groner’s secret sauce? She bough $180 worth of shares in the 1930’s. She never sold the shares, reinvested the dividends, and let the magic of compound interest do the work.

Simplicity unfortunately is not sexy, and investors are attracted to complexity. We seem to think that complex problems require complex solutions, when in fact the converse is true.

Investors’ time horizons are getting shorter, patience is being tested, and we seem to have a desire to over-complicate things unnecessarily. It’s as if the more information we have, the better educated we are, the smarter we think we become, the dumber the decisions we make.

The finance industry is living in a world of hype, false complexity, and over-confidence.

I’ll leave you with this great passage from a Walt Disney biography:

Long-term successful investing is simple, but not easy.

The Art of Wu Wei

For 30 years ending 2016, the US stock market returned 10.16% pa. Yet the average investor for this same time frame generated 3.98% pa. This is the behaviour gap folks. A 6.18% pa behaviour gap!

Staying disciplined through the gyrations, and heart-stopping rises and falls of modern markets isn’t always easy, yet it’s crucial for your long-term investment success.

When it comes to investing, we look beyond short-term fads, the panicked reaction, the rumoured sure thing and the ‘my gut feeling is to (whatever)’, and we build investment portfolios based not on intuition, forecast or rumour, rather, on research and evidence.

At Baharian Wealth Management, we don’t purport to our clients or prospective clients that we hold the secret sauce to investment management. That we hold market information that no one else does. That we have the ability to beat the market. At BWM we spend our time and energy ensuring the market doesn’t beat us.

Far too many people and firms focus their energy and efforts into pursuing something that is statistically improbable. Their job is to keep you as their investor/client, amused and entertained. It’s nothing more than dinner theater. President Lincoln once said, “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.”

There are three key over-arching factors that help us bridge the (6.18% pa) behaviour gap:

  1. We think about factors rather than forecasts,
  2. We think about probabilities rather than possibilities, and
  3. We focus on process rather than the outcome.

We focus our energy on aspects of investment management that we can control; human behaviour, diversification, costs, and rebalancing.

If you want to succeed as a long-term investor, take the time to understand the Taoist concept of Wu Wei, which literally translates to “act without effort”. The practice of Wu Wei are fundamental beliefs in Chinese thought and have been mostly emphasized by Taoism. It means natural action, or action that does not involve struggle or excessive effort – it manifests as a result of cultivation.

Be clear on your investment goals, put in place a disciplined process and plan that is going to help you achieve them, and stick to it – avoid over thinking and avoid the panicked over-reactions (fear-sell/greed-buy). Let the process unfold – it takes time.

Several years ago, Charlie Munger was asked by a probing journalist, “If what Berkshire has done is so simple, why haven’t more people copied it?” To which Munger replied, “More investors don’t copy our model because our model is too simple. Most people believe you can’t be an expert if it’s too simple.”

Long-term successful investing is simple, but not easy.

If you want to know more about how we think about investing, click here. We’ve uploaded two documents at the bottom that the page that you may find of interest. Or feel free to get in touch.




2018 Federal Budget: Tax Cuts The Centerpiece

I watched Scott Morrison hand down the 2018 budget live on Twitter last night, it was pretty cool I must admit. I think the viewer count got to around 1,500 people, maybe more, I can’t recall precisely. What even cooler was watching the comments being posted as the budget was being handed down…all on the same screen. Welcome to the future folks.

Here’s my take on Mr Morrison’s third budget, which seems as though it was designed to ensure he has a forth:

1. Tax Cuts

This was the centerpiece for the 2018 budget. A seven year plan to lower, and simplify income tax. From July, those earning up to $37,000 will have their tax reduced by $200. The offset will increase up to a maximum of $530 for those earning $90,000. The benefit gradually decreases to zero at a taxable income of $125,000.

The Government wants to combat bracket creep. The 37% rate won’t kick in until people start earning $90,000, instead of the current $87,000, with the threshold rising to $120,000 in 2022-23. The next year, the 37 percent bracket will be abolished completely. With a top personal tax rate of 45% kicking in after $200,000 from July 2024.

Here’s what the tax rates will look like over the next seven years:

Here’s the debate on Twitter:

I think we can always compare one thing to another, however if we look at what the simplification is designed to do, it should mean that 94% of Australian tax payers will pay no more than 32.5 cents in the dollar. Surely that’s a good thing?

2. Surplus, surplus, surplus

The Government is forecasting a $2.2 billion surplus in 2020FY, which would be the first since the global financial crisis. Some of the assumptions that are being used however, seem to be a little on the optimistic side. Time will tell I guess.

3. Super

Superannuation made it into the budget again, but not in the way it has in the past.

Exit fees on all superannuation funds will be banned. A subtle but bold move. Good one ScoMo.

Account with a balance of less than $6,000 will have a maximum fee cap of 3%. Although I reckon 3% is absolutely ridiculous. It’s a start nonetheless.

You know all that lost super you have. Well, the ATO will be given the powers to track down funds with balances less than $6,000 and reunite them with you active accounts. Hopefully one less headache for you. Thanks ScoMo.

4. Roadworks Ahead

Infrastructure is back on the cards, again. The Government is allocating $24.5 billion for new projects to help ease traffic congestion. This includes the long awaited Melbourne to Tullamarine rail line, which has $5 billion allocated to it.

If you think this is all a done deal, just cast your mind back to December 2015, where the East-West Link cost tax payers $1.1 billion to scrap the project. Most of the big projects require the states to kick in half the money, so not sure how this one’ going to go down.

It kind of reminds me of the 90’s arcade game, Street Fighter.

I’d love to see constant progress with infrastructure, as I truly believe it’s key in allowing Melbourne to compete on so many fronts, as well as help with the housing affordability issue. Anyway, don’t hold your breath on this one (although I am crossing my fingers).

5. Beer will be cheaper

Craft beer that is. From July 1, 2019, concessional draught beer excise rates will apply to smaller kegs typically used by craft brewers, making craft beer cheaper. On ya ScoMo.

Here’s a neat little summary by the ABC, Budget 2018: Winners and losers

If you want to know how the tax changes impact you, here’s the calculator that will work it out for you.

As always, we’ll know more as the details are revealed and clarified. Here’s the budget overview if you’d like to know more.

Here’s What Happens to Stocks When Rates Rise

It’s been worrying investors for the last few years, especially over the last couple of weeks – rising rates. The narrative is simple: rising rates are bad for stocks. When rates rise, sell stocks.

Here’s why investors are worried. US 10-Year Treasury yields are reaching levels we have not seen since 2013.

Source: Thomson Reuters

The data however suggests otherwise. In fact, right up until the 10-Year yield gets up to about 5%, stocks and bonds yields historically have been positively correlated. History tells us that it’s perfectly normal for rates and stocks to rise at the same time.

Here’s a great chart by JP Morgan highlighting the correlation between stocks and interest rates since 1963.

Looking into this even further, here’s LPL’s John Lynch:  “…the chart below shows that out of the most recent 23 periods of higher rates (based on the 10-year Treasury yield), stocks have gained ground 19 of those times. Recent periods have produced even better performance, as stocks have risen during each of the last 11 periods of rising rates (since 1996). Stocks have done well since interest rates began to move higher in September 2017.”

Here’s another vantage point:

History suggests that higher rates may actually be a good thing, and should the 10-year Treasury yield break above the psychologically important 3% level, the equity bull market may garner further support.

Don’t be fooled however. Rising rates from higher levels is a problem for stocks. We’re just not there yet.