Finance and Investment

There are numerous books written ostensibly to guide, advise and enlighten us on how to invest or get wealthy – and yes I am guilty! One Ken Fisher, a practical and rich man who obviously loves simplicity wrote a book called ‘The Only Three Questions That Count: Investing by Knowing What Others Don’t.’

In these uncertain times it may pay you to ask yourself the following, in relation to your investments:

1. What do I believe that is actually false? Note what you believe is probably believed by most people.

2. What can I fathom that others find unfathomable? Here we need a process of inquiry allowing us to contemplate that which most people assume simply cant be contemplated at all. It’s the essence of so-called out-of-the-box thinking.

3. What the heck is my brain doing to mislead and misguide me now? To blindside me? Another way to ask this is, “How can I out-think my brain which normally doesn’t let me think too well about markets?” (This is the realm of behavioural psychology. One of my favourite topics).

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Who’s Counting

House sales are down 30 per cent compared with a year ago, with prices expected to fall 5 per cent this year and remain flat for the next five years.

That's the grim prediction from Westpac's economists who say residential property prices have "screeched to a halt, with essentially zero price movement in the past eight months". Prices stopped dead in April last year, they say, after rising by $8000 a month. Had it not been for New Zealand's strong economy, wage growth and a 21-year unemployment low, house prices would have fallen earlier and more aggressively.

Tony Alexander, the BNZ's chief economist, and Nick Tuffley, chief economist at the ASB, both expect price falls as opposed to the current slowing of growth in house prices.

Alexander says that for the first time in four years he is prepared to predict prices will fall probably about 1 - 2 per cent. He's not expecting anything like the 4 -5 per cent fall in house prices in 1998.

Another significant sign the housing boom is over is a comparison of the average number of days taken to sell a property. Alexander says in June last year that was 30 days and by December 2007 that figure was 39 days.

The big issue in the NZ market is affordability, Tuffley says, with house prices high relative to individual incomes. "The market won't do anything spectacular in the next five years." he says.

"If it was my kid wanting to buy a house, I'd be telling him to hold back for a few months to see what happens."

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Everyday Money

University of Chicago economists Kerwin Kofi Charles and Erik Hurst along with Nikolai Roussanov of the University of Pennsylvania, have challenged common assumptions about luxury. Conspicuous consumption, this research suggests, is not an unambiguous signal of personal affluence. It’s a sign of belonging to a relatively poor group. Visible luxury thus serves less to establish the owner’s positive status as affluent than to fend off the negative perception that the owner is poor. The richer a society or peer group, the less important visible spending becomes. So next time you sue someone flashing bling and feel envious, repeat after me, that is a poor person.

Russ Alan Prince and Lewis Schiff describe a similar pattern in their book, The Middle-Class Millionaire, which analyzes the spending habits of the 8.4million American households whose wealth is self-made and whose net worth, including their home equity, is between $1 million and $10 million. Aside from a penchant for fancy cars, these millionaires devote their luxury dollars mostly to goods and services outsiders can’t see: concierge health care, home renovations, all sorts of personal coaches, and expensive family vacations. They focus less on impressing strangers and more on family- and self-improvement. Even when they invest in traditional luxuries like second homes, jets, or yachts, they prefer fractional ownership. “They’re looking for ownership to be converted into a relationship rather than an asset they have to take care of,” says Schiff. Their primary luxuries are time and attention, as a woman I can relate to that.

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Womenomics

A recent article in the Economist asks is the European Union at heart a female project? Margot Wallstrom, a vice-president and thus the most senior woman in the European Commission, rather thinks so. She points to the EU's fondness for compromise and listening, and its rejection of horrid things like conflict. Ms Wallstrom, who is charged with selling the EU project to the public, suggests that this is a good reason for giving women a bigger share of the union's top jobs.

The underlying problem is that “men choose men” for important jobs (and isn’t that true in all walks of life), and this harms the EU, maintains Ms Wallstrom. Men and women “complement” each other. For example, male leaders traditionally define security in terms of “military investments”. Female leaders focus more on security achieved through access to clean water and education or “keeping children and women safe”. This is not just a woman's way of looking at security, she contends; it is the European way.

Beyond the usual feminist propaganda, Ms Wallstrom is right on one serious point: that it is (at least on the face of it) outrageous that no woman is in the running for any of Europe's leading jobs. It is a sad waste of talent whenever mediocre men fill seats that could go to more capable women.

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Musings and Amusings

You probably didn’t know this (nor did I!) but the world’s top eight economists (including five Nobelists) were asked to prioritise 30 different solutions to ten of the world’s biggest problems. I thought it made fascinating reading given some of media obsessions.

Supplying the micronutrients vitamin A and zinc to 80 percent of the 140 million children who lack them in developing countries is ranked as the highest priority. The cost is $60 million per year, yielding benefits in health and cognitive development of over $1 billion.

Number 2 on the list of Copenhagen Consensus 2008 priorities is to widen free trade by means of the Doha Development Agenda. The benefits from trade are enormous. Success at Doha trade negotiations could boost global income by $3 trillion per year, of which $2.5 trillion would go to the developing countries.

The remaining top ten priorities addressed problems of malnutrition, disease control, and the education of women. For example, the number three Copenhagen Consensus priority is fortifying foods with iron and iodized salt. Two billion people do not have enough iron in their diets which results in energy sapping anemia and cognitive deficits in children and adults. Lack of iodine stunts both physical and intellectual growth. The other seven of the top ten solutions include expanded immunization coverage of children; biofortification; deworming; lowering the price of schooling; increasing girls' schooling; community-based nutrition promotion; and support for women's reproductive roles.

So what proposed solutions are at the bottom of the list? At number 30, the lowest priority is a proposal to mitigate man-made global warming by cutting the emissions of greenhouse gases. Part of the reason for the low ranking is that spending $75 billion on cutting greenhouses gases would achieve almost nothing. In fact, the climate change analysis presented to the panel found that spending $800 billion until 2100 would yield just $685 billion in climate change benefits.

The best defense against climate change in the developing countries is going to be their own development.

Also low on the list of priorities are proposals to reduce outdoor air pollution in developing country cities by installing technologies to cut the emissions of particulates from diesel vehicles. Other low ranked solutions included a tobacco tax, improved stoves to reduce indoor air pollution, and extending microfinance. These are not bad proposals, but other proposals were judged to provide more bang for the 75 billion bucks available in the exercise.

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Why?

I have recently read and enjoyed Kluge (Subtitled 'The Haphazard Construction of the Human Mind') by Gary Marcus. Kluge means ‘a clumsy or inelegant solution to a problem.’ His book explains why, despite the fact that humans have been known to be eaten by bears, sharks and assorted other carnivores, we love to place ourselves at the top of the food chain. And, despite our unwavering conviction that we are smarter than the computers we invented, members of our species still rob banks with their faces wrapped in duct tape and leave copies of their resumes at the scene of the crime. Six percent of sky-diving fatalities occur due to a failure to remember to pull the ripcord, hundreds of millions of dollars are sent abroad in response to shockingly unbelievable e-mails from displaced African royalty and nobody knows what Eliot Spitzer was thinking.

Marcus uses evolutionary psychology to explore the development of that "clumsy, cobbled-together contraption" we call a brain and to answer such puzzling questions as, "Why do half of all Americans believe in ghosts?" and "How can 4 million people believe they were once abducted by aliens?"

According to Marcus, while we once we used our brains simply to stay alive and procreate, the modern world and its technological advances have forced evolution to keep up by adapting ancient skills for modern uses-in effect simply placing our relatively new frontal lobes (the home of memory, language, speech and error recognition) on top of our more ancient hindbrain (in charge of survival, breathing, instinct and emotion.) It is Marcus's hypothesis that evolution has resulted in a series of "good enough" but not ideal adaptations that allow us to be smart enough to invent quantum physics but not clever enough to remember where we put our wallet from one day to the next or to change our minds in the face of overwhelming evidence that our beliefs are wrong.

Marcus's finest example is the contraption used by the Apollo 13 astronauts to get home after their CO2 filters began to fail-using a plastic bag, cardboard box, some duct tape and a sock, they were able to cobble together a new filter and get home safely. Despite the fact that it worked, NASA has never been tempted to incorporate that design into its space projects.

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