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Tuesday, February 22, 2011

A lesson in finance from Tulips

If you’ve read all the guff about me in my profile, you’ll know I have a background in literature and history (yeah, small career swerve!). One of my favourite novels is Thomas Hardy’s Far From the Madding Crowd. Great title eh? It was borrowed from a Thomas Gray poem (Elegy in a Country Churchyard).

Given my background, you can imagine how excited I was upon first entering the finance industry, to attend a lecture “Tulip Mania and the Madness of Crowds.” And I wasn’t disappointed. The protagonist of the story was the humble tulip, and I’m still not sure whether the moral of the story was supposed to be the role of supply and demand in economics, or the stupidity of the human race.

In the early 17th century, the Dutch literally went mad for tulips and demand ultimately outstripped supply. If I remember rightly, someone brought (stole?) some back from Turkey and didn’t want to share. Of course we know what happens when someone tells you that you can’t have something – you want it even more right? So began the manic trade of tulips.

There are stories of farmer’s mortgaging their farms just to get hold of a couple of tulip bulbs. Tulip traders made a fortune, and there was even a future’s market for these much sought after flowers!!

Obviously they became waaaaaaaaaaaaaaaaaaaaaay over-priced, and what has to happen then? Yep, you guessed it, a market correction! It started with some astute businessmen deciding that they would sell out and take some profits. This proved to be a prudent move given that new tulip varieties were being introduced, and thereby increasing the supply. Then a few more sold out of their “tulip position”, then a few more, and suddenly people started to panic, and the tulip market went into freefall.

To put things in perspective, tulip prices fell more than 90% in a matter of weeks. It’s impossible to accurately convert this to current monetary value, however popular consensus puts the comparison at something like $80,000 per bulb to less than a dollar per bulb.

You have to wonder at what point it occurred to some people that they had spent their life savings on flowers! OUCH.

More than one historian has linked this tulip phenomenon to the onset of the Great Depression in the Netherlands, not to mention “the madness of crowds”…

If you’ve seen the Wall Street sequel, you’ll recall Gordon Gekko showing Jake a painting and comparing Tulip Mania to the GFC. Not a bad analogy. When it comes to the sharemarket, crowd behaviour is both fascinating and frustrating. And unfortunately sometimes it is just plain mad. Think back to Greece, Portugal, Spain, Ireland, and more recently, Egypt. The way the market reacted was not in proportion to the relative potential market impact. And don’t forget our friend “Fat Fingers” who shook the US market by accidentally entering a trade in billions instead of millions.

I often tell my clients that if we took emotion out of the market, it would be extremely rational. However, it’s risk that drives reward so if there was no emotion there’d be little opportunity to make money. I guess we can’t have our proverbial cake.

The best advice I can give is to make sure you take a leaf out of Hardy’s book (pun intended), and stay far from the madding crowd when it comes to investment decisions. Make your decisions based on fact and fundamentals, and with professional guidance from your Financial Planner.

Talk soon,

Thursday, February 10, 2011

How to think like a DINK

 Remember when a “dink” meant travelling on the back of someone’s bike? Now it’s also an acronym for an ever-increasing demographic – Double Income No Kids.

To all of us that have children (or stepchildren in my case), the idea of two incomes and no kids conjures images of couples swimming in cash, with perpetual smiles on their faces (faces free from worry lines I might add).

Nevertheless, I’m sure my DINK readers will quickly assure us that financial security is just as important to them as to anyone else. They just have different financial needs.

With absolutely no data to support my claim other than personal experience as an adviser, I would hazard a guess that DINKs are the group most likely to seek advice from financial planners because they are often very career oriented and accustomed to delegating resources. This means that they tend to be very comfortable seeking and pay for specialist advice.

At end of the day, the basic fundamentals of long-term financial planning are the same for DINKs as any other group – time-frame, diversification, quality management etc, however there may be a different emphasis on the types of strategies and financial products.

In particular, because we are generally talking about relatively high incomes, personal risk protection (insurances) can form an important part of the strategy.

Overall, the choice of investment products and strategies depends totally upon the individual not a demographic – one size fits all products just don’t exist when it comes to investment planning. What you may find is that often the level of income can mean that DINKs are happy to direct a larger portion of their savings to longer-term strategies. They also may include more aggressive investment choices.

DINKs may not have some of the shorter-term financial expenses that families might have, such as education, endless doctor appointments, clothing that only fit for a few months…, however they often work longer hours, and therefore look for fully serviced products, more expensive holidays than other groups – in other words, different short term goals.

The idea that DINK couples have a higher disposable income is largely a fallacy because people with higher incomes tend to also have higher debt levels, and/or higher spending patterns (but that is not to say that many couldn’t or shouldn’t save more.) This may change later in life once the mortgage is paid off, however they may also have fundamentally more expensive lifestyles that include travel, eating out more often etc.

It’s probably more accurate to say that if you’re a DINK couple, you often have a greater savings potential because you usually have a consistent dual income and don’t have the time away from the workforce or expenses that come with raising children. Therefore DINKs can really benefit from working with a financial planner for assistance and advice on budgeting and long-term planning to maximise their savings capacity.

Often DINK couples can actually have quite a significant focus on saving rather than spending. Because they are often career-oriented, they can also be very goal oriented, and happy to make sacrifices to achieve longer-term ambitions.

And of course with aged care accommodation becoming an expensive issue, this can be critical for couples that decide not to have children – they often need to plan and finance this phase of their lives entirely on their own behalf. Perhaps a good reason to be kind to the nieces and nephews!

Overall, stereotyping any particular group is risky. Financial planning is based on the needs and objectives of individuals rather than specific demographics. I’d love to hear from any DINK readers who may disagree with my points, or can shed some light on other financial issues that are especially important to them. Just add a comment below, or email me on

Talk soon,


Wednesday, February 2, 2011

Let My People Go

  I was folding some washing last week (yes, I lead a very glamorous existence), when my partner Mick said to me “Now this is why I don’t want to travel to Egypt.” Visiting Egypt has been the subject of a fairly lengthy battle between us over the years; as an ex-historian I want to go with a passion but Mick has always maintained it’s dangerous.

So I turned to see what he was talking about, arming myself with my usual arguments, and was greeted with scenes of horrific rioting. Suffice to say I didn’t win any points that day.

Then on Monday morning I was driving to work and one of the radio stations was interviewing an Australian woman who was in Egypt waiting to be evacuated. She had a bird’s eye view of the rioting from her hotel window, and understandably feared for her life. When it was finally safe enough to travel to the airport, rioting began in the terminals amongst sleep-deprived, hungry, and frightened people.

She had been told she would be on a flight Wednesday, but many Australians had no idea when they would be able to leave the country. Ugh! Scary stuff.

I may have been physically safe at home in Australia, but a few swear words escaped my potty mouth on Saturday morning (darn, jeepers, gee willikers) when I learned that the DOW had dropped a 166 points overnight. This was effectively its greatest one day loss in almost 6 months.

I couldn’t help wondering if there were a lot of people out there wondering how the geopolitical instability in Egypt could have such a sizeable impact on the US stockmarket, and of course our own.

Well that’s what I’m here for right? Grab your favourite beverage, get comfy, and let me tell you all about it…

Regular readers will know that the market can behave a little like a skittish horse and spooks easily. Egypt is something like the 40th largest economy in the world, so you could be forgiven for being surprised when it has such an effect on an economic powerhouse like the US, but remember a little country called Ireland a few months ago….

Before I go any further I do need to point out that the US market had been red hot and was just spoiling for a correction.

On top of that, we need to look at Egypt not just as a country in its right, but as part of the Arab region. Suddenly the insurrection takes on a bigger meaning when we acknowledge that tenuous relationships involved, and the overall political impact.

You see there are many that would argue the US needs to take some responsibility because the programs they’ve implemented to improve their own economy, has exacerbated the food price situation, not to mention opened the door to at least a measure of exploitation by investors.

Alan Kohler made a poignant observation in his article The economic roots of revolution yesterday when he stated “A sudden increase in the prices of both food and energy is very bad news for both the world economy and world peace.” Simple but true.

Of course, to suggest Egypt’s troubles are solely food and oil would be a gross over-simplification, but they are definitely providing significant fuel.

Anyway, Hosni Mubarak has announced his “resignation” and the Dow Jones index was up almost 150 points when it closed this morning, and our market ended the day almost 1% higher. Great news, but I’m not sure the cage has stopped rattling just yet. We’ll see eh?

In the meantime, let’s hope Egypt let’s our people go and everyone is home safe and sound soon.

Talk soon,


PS. Thank you to everyone who rang/emailed to tease me about my photo in the local paper. And no, they didn’t need to re-touch the picture – grrrrrrrrrrrrrrrrrrrrrr.