Welcome to the Money Maven's Financial Blog

Money Maven Blog by Sheryl Sutherland, Authorised Financial Adviser and Director of The Financial Strategies Group

Recommended Reading

Recommended Reading by Sheryl Sutherland: Girls Just Want to Have Fund$ - Every Women’s Guide to Financial Independence, Money, Money, Money Ain't it Funny - How to Wire your Brain for Wealth, and Smart Money - How to structure your New Zealand business or investments and pay less tax.

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Thursday, 11 October 2007

Finance and investments

Oceans of ink have been used in discussing the current and ongoing dramas surrounding finance companies. Here are some tips for you to consider should you be inclined to invest in these institutions; firstly consider the financial information. Start with key facts and figures-if you are happy with these then you can progress on to examine the company more closely. Ask the following;

- What are the current funds under management? (Size of portfolio)

- What is the reinvestment rate (the percentage of investors who put their money back into the company; this gives you some idea of the level of satisfaction among the current investor

- The current balance of loans.

- The size of average loan.

-The number of loans.

- The average loan to value ratio (usually expressed as LVR, this gives you the value of the loan as opposed to the value of the assets the loan is secured against

Assuming the above is satisfactory; you can then move on to examine the following;

- The loan and deposit growth.

- The companies’ liquidity (this may be expressed in cash and equity)

- The loan and deposit maturity profile (this will inform you that the company can meet its obligations as they fall due.

- The loss/recovery and provisioning as a percentage of loans (even with the best will in the world sometimes loans go into default or “past due”, usually this is a loan which is in arrears greater than 90 days. Has the company made satisfactory provision fort his?)

- Regional and Sector finance portfolios (this will tell you where geographically the loans are made and over what assets. Sectors range from vacant land, to commercial property and residential mortgages, to whiteware or cars. What are you most comfortable with? Provincial for example was over exposed to consumer items like vehicles)

The next consideration is the management and the company’s track record. For example Petricevic, the CEO of Bridgecorp had already been involved in a venture which lost investors millions. Has the management had experience in lending in good and bad markets? Be sure about what you are being offered. An unsecured debenture means that if the company fails you are the last to be repaid-as we know many investors have not had good news on this front. The rates are of course important. The rates however do not always reflect the level of risk a depositor may be taking. Bear in mind also that finance companies do not have to comply with the strict rules which apply to banks.

A sort of cousin to finance company investment is a bond. Bonds are debt instruments issued usually for a period of longer than a year with the purpose of raising capital borrowing from the public (us). Bonds are issued by governments, banks, companies and utility companies.

As with finance companies you must understand the risk and return ratio some companies follow: Returns need to compensate for risk.

Credit ratings can be useful here as a guide but you still need to be wary, Enron was rated investment grade right up until it imploded. A credit rating chart follows thanks to Brent Wheeler- check him out at http://www.brentwheeler.com/

Relying on ratings he says is a fatal delusion-and I agree- you still need to do your homework. Read Brent’s take on the language a prospectus should utilize.

It should be:

- Clear and simple
- Appropriate to the audience
- Direct and personal
- Favouring informal language, when appropriate
- Drawing on common, everyday language

- Accessible to a wide audience
- Explaining technical words in simple language

- Attempts to interest readers and hold their attention
- Rely heavily on simple sentence structures
- Generally avoids passive voice

- Respectful of the reader.

Any attempt to improve regulation has to look at the most important aspects of plain English. This would be simple to do if we could climb down from our awful pomposity and ego preserving traditions of writing in late Dickensian English, confusing volume of text with clarity of communication and strive to write short, sharp, simple truths.

The following terms very likely mean utterly nothing to the average investor and are grossly misleading:

- "1st ranking". First this is simply incorrect. The receivers get their fee long before they get their man or give money back to anyone. Then there is the IRD and employees both of whom commonly feature before debenture holders. Don't use the term.

What I think is meant or ought to be meant is "several people have claims on the cash the company has. It’s like a queue. Your place in the queue is, by law certainly ahead of the owners of the business and some other borrowers but you only get what is left after everyone ahead of you in the queue gets their money. If the company fails or goes into receivership there is a good chance that will be less than what you invested.

- "secured". Another misleading expression. Like a super tanker, if the wharf you are secured to is built on quicksand, the security is worth nothing in a storm.

I think what is meant, or ought to be meant is "If borrowers stop paying off their loans and we start to run out of cash we can sell the borrowers houses or cars or other assets and that should be enough to cover what you have invested so long as their assets are still worth something."

- "liquidity" and all related terms such as "liquidity carried" or "liquidity ratio". This is high jargon which means little.

I think what is, or ought to be meant, is "enough cash in the bank to be able to cover at the very least (1) the companies bills as they become due and (2) to be able to pay back investors as their investments mature, and (3) some left over for the unexpected."

- "equity" and all related terms such as "equity ratio breach", "in excess of the required equity ratio" and so on. More confusion - especially since a number of people think the term "equity" has something to do with "fairness".

I think what is, or ought to be meant is "a spare reserve of cash or assets which can be very quickly sold for cash which we can rely on to protect your investment if borrowers stop paying their loans off".

- "related party transaction". Another hopeless term. In recent cases the real problem has been that money has been invested in things and places which investors did not think it would be. Who is related t
o who simply obscures the fact that people raising money should be truthful about what they are going to do with it, stick to their promise and if they want to change that, go back and ask.

In plain English "We will invest your money in a, b and c. We will not invest it in anything else. In particular we will not invest in x, y, and z. If we want to change these plans we will ask you first and you may say "no" should you wish to."

If this all seems to hard or you want to discuss any aspect of this paper please email me at sheryl@strategies.co.nz, or call me on: 0800 64 MONEY (0800 646 6639)

Tuesday, 9 October 2007


I have just read a disturbing and poorly researched article by Sarah Catherall published in the Dominion and here in the Press on the 2nd of October. There is no denying the statistics she quotes, but as always the figures are historical and as usual can make a case depending on how they are framed (For more on framing read Money, Money, Money..Aint it funny)

The article would have had better balance if she had examined the trends relating to women and investment, or women and purchasing power. Like many other women I am tired of the slew of reports which paint me as brainless and financially illiterate. We are the decision makers for over 80% of consumer purchases. Some examples are: New homes 91%, Holidays 92%, Cars (Yes!) 60%, and, what about the realms of finances, say insurances and money? Women select new bank accounts nearly 90% of the time.

In the States two thirds of working women and over 50% of working wives earn more than half of the families income, write 80% of the cheques, pay 61% of all bills and own 53% of all shares. As at the start of 2000, six out of every ten new web users were women and of those women 83% were primary decision makers in the matters of finance, healthcare and education. It seems unlikely to me that New Zealand women are any different!

Again in the States (finding figures here is well near impossible) women owned businesses accounted for about 3.5 trillion in revenue- the equivalent of the German GDP. In fact one prediction from no less a journal from Private Banker International claims that by 2010- only three years away, half of all wealth is expected to be in the hands of women.

We have of course always worked, but not always been financially rewarded. It appears however that future economic prosperity is increasingly in our hands. A recent article in the Economist suggests that women’s paid work has not only added more to world wide GDP than that of men, but has also enhanced capital investment-Women’s employment over the last decade has added more to global growth than China.

And it is not just our economic clout- our investment skills are better than those of men. Robust studies such as Boys will be Boys (Boys will be boys:Gender, Overconfidence and Common Stock Investment. Brad M. Barber and Terrance Odean) confirm that male overconfidence and churning of portfolios significantly reduces their investment returns. . Financial planners have a distorted perception of women investors and tend to assume that women are risk averse and subsequently advise on that basis . There is some basis to the view that women are risk averse but we tend to think that 80% of women are where as it is more like 20%. Companies are waking up to the fact that women have money to invest- Citigroup, AXA, Wells Fargo,Merrill Lynch, Charles Schwab, Prudential, Wachovia, when will this happen here? As Tom Peters says in Re-imagine! “Id love to be the CEO of a financial services company for 60 months and redirect its strategy by 179.5 degrees..... In the direction of developing products for, marketing to, and distributing them to women... and then there is the composition of the board..........”


Why do we think that globalisation is our invention? Globalisation is a new word to describe a process as old as the human race. It really began according to Nayan Chanda around 60,000 years ago when our ancestors first walked out of Africa. The motives of the early adventurers were generally selfish- to profit, convert, learn or conquer-the overall effect has been to contract our world and draw us down the path to a “global village”. Humankind followed that on foot, donkeys, camels, container ships and cargo planes.

Mr Chanda points out that in 1455 it took 40 days for the Pope to learn that Constantinople had fallen to the Turks- by contrast we watch in horror as the Twin Towers of the World Trade Centre fall-in real time, online and on television.

The Economist suggests that these examples demonstrate the fragility of our close connections. Today’s threats, like Bird Flu or the war on terrorism can go global faster than in the past, but so can our response.

So is globalisation good or evil? I suggest it is good-as we expand lets examine the aspects that will affect our investments in the future.

1 New financial investments are constantly coming onto the market and investment structures previously available only to the wealthy are now available to average investors. Hedge funds are a case in point. In addition to this, new legal structures will appear and taxation laws will continue to alter.

2 Real-time trading is now available, buying and selling online will continue to become more widespread, so for those who invest directly this will create more uncertainty and will exacerbate uncontrolled biases. Online trading, financial advice and research tools and information have transformed the way traditional services were delivered and offer a vast assortment of new services.

3 An interesting development will be in the creation of neural networks – claims have been made that programs now possess the ability to reason and learn from their mistakes. Can artificial intelligence develop biases?

4 Global influences will become even more pronounced – what happens in Venezuela will affect what happens in Moscow. The butterfly effect.

5 The speed and ease of communication will continue to increase and not only will the news from distant countries reach the market faster but news discrimination will impact more quickly.

6 Global consumption will increase as all nations advance technologically and economically. There will be more demand for industrial commodities, agricultural commodities, money, fuel and so on. This will make more opportunities for investors.

Musings and Amusings

'That mans got balls'

I am not a sports fan at all, but I think that I might give croquet a try.

A male streaker running across the croquet lawn gave members of the Takaro Croquet Club in Palmerston North more than they bargained for at their club day on Sunday morning.

Manawatu Croquet Club publicity officer Rex Oliver said the streaker "appeared, completely nude, at one corner and disappeared in the other. No-one was fast enough to catch him."

The naked young man caused quite a stir and may have given the club a selling point. "I don't think any other croquet clubs have had a streaker, it might help attract the lady members," Oliver said.

"It's not the sort of thing you expect at croquet. Perhaps it was a dry run for something later on. Perhaps he wants to get into the business." Streaker disrupts croquet (The Press 25/09/07)

Word of the moment.......

And thanks to Max Aspinall in a letter to the editor; a new word for the English Language: "clarked"- economic massacre by bureaucracy or taxation.

Who's counting?

It’s not so much who is counting as how we are counting.

Ways ignorance about maths and probability can hurt you.

There is a scene in a Simpson’s episode where a psychologist is giving a ‘team talk’. He makes the statement, ‘You are all very good players’. The team members mimic the psychologist, ‘We are all very good players’. Then the psychologist says, ‘You will beat Shelbyville!’. And the team, again in unison, reply, ‘We will beat
Shelbyville!’ By this time the psychologist is raising his voice, and he shouts, ‘You will give 120 per cent!’ But the team, still in unison, reply, ‘But hold on, that’s impossible. No one can give more than 100 per cent. By definition that is the most anyone can give.’

Many of us are not as smart as homer’s team and have problems dealing with maths. Maths anxiety is found in people who find arithmetic stressful and panic about mathematical problems. This can affect people who are perfectly competent – and this can affect many investors. Some of the feelings that prohibit us from feeling comfortable dealing with numbers are quite natural responses to uncertainty, to coincidence, or to misconceptions about the nature and importance of maths.

For example, if we have a bank investment offering us 7 per cent, we still take out tax at 39 per cent, and inflation at 3 per cent. Our real rate of return is … not 7 per cent.

A recent survey to test our level of financial knowledge found specific areas of weakness in mortgages, compound interest and investments:

- 25 per cent of people with home loans did not know that increasing the frequency of repayments from monthly to fortnightly reduced the amount of interest they would pay over the life of the loan.

- Only 30 per cent identified that a range of shares would make more money than fixed interest investments and savings accounts over 18 years.

- When tested on their understanding of compound interest, only 53 per cent correctly identified that they would earn more interest on a one-year term deposit when the interest was paid back quarterly into the term deposit, rather than paid at the end of the term.

-20 per cent thought they could reduce risk by investing only in property.

Compounding: The Eighth Wonder of the World

Imagine you came to work for me. I offer you $1 million for one months work payable on day one of the 30 day period, or $1000 on the first day, doubling everyday.

The first option sounds great but if you took the $1000 and doubled it everyday, at the end of two weeks you would have $8.1 million. At the end of the 30 day period, the figure is in the billions.

Some Lotto Facts

-Ticket purchasers are not interested in small prizes and they purchase at higher levels not worrying about the price hikes which come from larger prizes.

-Charity links mean consumers dont see ticket purchases as gambling

-In the US 25 per cent of the population see the best chance of saving for their retirement is lotteries

What are the odds?

-Being killed by terrorists while traveling: 1 in 650,000

-Royal flush opening hand: 1 in 649,739

-Winning anything on a lotto lucky dip: 1 in 20

-Winning lotto division one on a lucky dip: 1 in 373,838

-Winning on one lotto ticket brought weekly for 5o years: 1 in 150

-That you will keep buying and not win that jackpot after 50 years: 149 in 150 (99.33 per cent)

-Winning Powerball Division One on a power dip: 1 in 3,070,704

-Winning on one Power Dip ticket purchased weekly for 50 years: 1 in 1,250 (99.92 per cent don't win at all in that time)

-Being hit by lightening during your life: 1 in 7500

-Getting cancer sometime in your life: 1 in 9

-Suffering an unprovoked shark attack: 1 in 6,000,000

-Drowning in your bathtub: 1 in 685,000

-Dying in a car crash in New Zealand: 1 in 9000

-Dying from slipping, stumbling or tripping: 1 in 6548

-Dying from fireworks discharge: 1 in 615,488

Obviously the chances of winning lotto are not that high. but people still persist in buying tickets.

Read Money, Money, Money, Ain't it funny...For more information on this.

Finally, a joke

Man: Study here says women talk twice as much as men.

Wife: Of course we do. We have to repeat everything we say

Man: What?

Well it does have some relationship to numbers- women talk twice as much as men....Get it?

Everyday Money

“Bizarre” says Clayton Cozgrove-and that is putting it politely.

Everyday Kiwis buy and sell homes and if you don’t plan to do it yourself, you will use a real estate agent. Now, you've got to wonder what is going on at Agent Central; The Real Estate Institute. A 2003 survey on the REINZ website showed that only 23% of all vendors thought that that agents commissions were reasonable. And its not just the commissions that concern us. In May the agent who was presented with a top industry award omitted to advise the purchasers of a home described as being ‘Out of the hustle And bustle” was next to a site that was earmarked for a large apartment block.

I wonder if any of the 23% of voters were real estate agents. Comedy Central er the REINZ are hearing charges against a hapless Chris Taylor of the Joneses chain, who said that “people are paying too much to sell a house and getting an indifferent service for it”. He charges a flat fee rather than a commission.

The self regulation of the Real Estate industry is a joke. It is to be hoped that the new code of ethics prepared by David Russell will address the issue. My view is that realtors should be registered and aligned to disclosure fully as are other professions.

Update: Mr Taylor was not censured-now there's a surprise.