How bad is the credit crisit Part 2

Warren Buffet has come to my aid (how very fitting)

The conclusion he was at in 2002 was that

"derivatives are financial weapons of mass destruction"

I thought the numbers in the last post were big - this just blows them away.The total value of all the derivatives in the market is $500 trillion 
or
500,000 bn
 or

200 times all the tax raised in the US in 2007
or

38 times US GDP

or 

9 times the Global GDP   (55,000bn)

Scary numbers when you start to read what derivatives are and how they work.

There is a good article on wikipeadia on this

Once you understand how they work in practice it starts to look like  great big pyramid scheme. Its a house of cards what it does is amplify any problem massively. The spark that set fire to the trillion dollar crisis was 200 million bad loans and because of all of these derivatives based on these 200 billions can magnify into trillions of dollars in losses. 

I think I now understand how this whole thing has come about and how bad it will be.

The answer to my origonal question 

"How bad is the credit crisis"

• Very bad 
  
• Very high inflation
• Not sure on when it will get really bad though

 I am unsure of how to deal with it. I have holdings in cash and shares (although most of mine were bought after the first large dip and are holding quite well). I also ave other investments and am continuing to contribute to my superannuation (which is currently 100% cash). The question is ...

Now I think I can see the future how do I use this information to assist me in my financial planning over the next 5-10 years?

If anyone has some good ideas I would love to hear from you

Reference

The World and US GDP

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

The value of derivatives

http://www.bis.org/statistics/derstats.htm

Credit Bail Out - How bad is it

I'm no economist but I thought I should look into how big a problem is the credit crisis. I have done a few basic sums. 

TOTALS FOR THE US IN $BILLIONS

Income 

(Total value of all US taxes)  

2600         

This represents 18.8% of GDP since 1930 the highest tax rate has been 20.9 in 2000

Costs 

(Bail out) 850  

(Loans Liability) 2000

(Current US Debt) 10600

(War) 144

TOTAL 13,594 (Thats $48k per person)

US GDP 2007      13,810

So if the US government spends nothing on running the country and everything on paying off the debt they will take about 5 1/2 years to pay off this debt.

This puts the the US at about 1:1 debt to GDP which brings them from the 27th most in debt in 2007 to the 6th in the world now.

Below is a graph of debt to GDP before all this bail out stuff (taken from zfacts )

I've got a few movies here to looking at debt

Below is a movie by the that disputes the official government figures http://www.meetup.com/nyinvestingmeetup/  

(anyone got opinion on this lot - a bit of research seemed to support thier claim that the figures are being modified optimistically.)

This sounds very scary to me.

Could anyone who knows a bit about this give me some explanation behind numbers that will give me some feeling that the US is OK?

Could we have currency devaluation and rampant  inflation? An article here (Argentina Vs US) explains the similarities.

DEFINITIONS

US debt =  All the current debt owed by the US government not to be confused with US deficit which is the yearly shortfall between taxed raised and money spent by the US government each year.

SOURCES

Total Tax raised in the US 

http://en.wikipedia.org/wiki/Federal_tax_revenue_by_state 

US War expenditure

http://en.wikipedia.org/wiki/Financial_cost_of_the_Iraq_War

Total US Government Debt

http://en.wikipedia.org/wiki/United_States_public_debt

http://www.taxpolicycenter.org/briefing-book/background/numbers/revenue.cfm

US GDP 2007 

http://en.wikipedia.org/wiki/US_GDP

US Taxes

http://www.whitehouse.gov/omb/budget/fy2007/pdf/07msr.pdf

Free Stock Screeners

I wondered on the internet and found this rather usefull page - I hope you find it helpfull. I will be looking at the screeners over the next few weeks and I'll let you know how I go

Stock Screeners

Calculating the Intrinsic Value of Toll Holdings

I have just bought shares based on my analysis of Toll holdings (for my own personal portfolio outside my superanuation fund). This is quite exciting for me because this is the first purchase I have made using some of the processes we have been reading about. I am quite sure its a bit crude but would love to hear opinions on my stab at calculation the Intrinsic Value of Toll.

Calculation Spreadsheet

 I also listened to the MD of Toll on the latest asx podcast how gave me an idea of their strategic direction which I was quite Impressed with. They seem like they have had some solid performance with a good idea of where they are going and also a good competitive envioronment - they just recoently bought a msjor competitor in Australia.

I am open to any advice? Things I have missed? Errors I have made? Have I missed the point? What do you think? Anyone? All advice is welcome

Please have a look at my spreadsheet Intrinsic calculations and let me know what you think!

How do you roll out of a DIY Super fund

Roy and I met up yesterday to discuss our progress.

He has quite a bit of stuff to look at to help improve my first stab at analysing a company from a warren buffet point of view. We have also made a few baby steps to actually putting our money in to our new superfund. One thing we weren’t sure about was what happens if or when one of us decides to roll out of the fund? We were seriously discussing whether we should match contributions to make things easier. I called esuperfund today and was advised that basically all the auditing that they do is per fund member so thereby meaning that each individual is treated as a separate account (just the same as a usual fund). I suppose this is a standard approach for a DIY super. So it should actually be a pretty straightforward process

 

I think this is a good time to mention that the guys at esuperfund have been very helpful so far. The documentation we received when setting it up made the whole process much easier and they have been very helpful in answering our questions. It’s refreshing to speak to someone on the phone that actually knows what they are talking about!

Value Investors Club

I have just been looking online and I found the following website.

www.valueinvestorsclub.com/

On the site it states 

"ONLY 250 MEMBERS WILL QUALIFY for acceptance. Membership is free, however, only a select few will be chosen to join based on their investment ability. Applications will be judged by an investment manager with one of the top long-term investment records........ Each member, once admitted, must post a minimum of 2 investment ideas per year ..."

It looks quite interesting the basic idea is that you submit a couple of good quality company reviews of companies that you like every year and then gain access to everyone elses reviews too. That way multiplying your good work by all the members of the club. Sounds like a good idea to me!

I have just been looking at some samples as I think they could be helpfull for us to get together a template so we can hit the main points when we review a company.

Has anyone had any experience with this club? 

If you have I would love to hear your comments.

Value Investment Podcast Recommendations

After my previous blog where (among other things I mentioned a podcast that I was listening to www.thevalueguys.com  ). 

I remembered that I should really also make a note of another podcast that is very good

  http://www.gannononinvesting.com/ . 

There are only 8 podcasts in total in the set but I found them all to be really usefull.

As ever if you have anything to add then please do!

Calculating Intrinsic Value, Research & Filtering

As I said in early blogs that I do not intend to update the blog more than once every month or so. I only intend on blogging when we have something worthwhile to say.

Well we are still in the process of setting up the superfund – not a lot of progress there (mainly slowed by the fact I have been on holiday for the last month). However we have been busy elsewhere. 

Investing outside our superfund

We both have cash that we are looking to invest as well (I do as I recently sold a bunch of shares in Origin Energy (making about 60% (including tax) in about 11 months of ownership.

I created a spreadsheet for this company where I attempted to calculate it's value which isn't quite finnished you can view it by clicking here.

 This was actually quite inconvenient and I did not intend to sell up as quickly as I did. The reason I sold was not to take the profits but because the current share price is based on much higher future earnings because of assumption due to the price of gas and also their better that historical performance and assumptions to the amount of gas they think they will find. And although I think Origin is a good company the value the company is now getting too speculative for me and I have to admit that I don't understand the economics of gas prices, gas exploration and carbon taxing well enough to make an informed model. So I thought this may be a good time to sell and look for some bargains.

Another chap from the club has made a few purchases based on just taking a bunch of recommendations in the   http://www.intelligentinvestor.com.au/. This is not something I will be doing or something we will be doing for our superfund (not at least until we can reliably do our own analysis). However he was getting a little impatient and its probably quite an interesting exercise and once we know what we are doing it may be interesting to compare performance.

Research

I have been listening to “www.thevalueguys.com” podcast which is interesting when they are not arguing with each other.  Basically they go through www.valueline.com before the show and make recommendations based mainly from the numbers on the site. I would definitely recommend having a listen. (You should also examine valueline as well. )

I also listened to another ASX podcast www.asx.com.au

this time from Clime capital. Clime Capital is an investment fund based in Sydney that buys stocks in the warren bufffet style. They also sell a piece of software that calculates value for a given company for you. (This may be interesting once we have worked this out ourselves).

We are also working on another spreadsheet you will be able to download where we attempt to put a value on another company we are going to add some more models to it too. It will probably be available in the next blog. (It may also shed light on error in the origin valuation that will be modified as a result).

Company Filtering

We have had a few different trys at this so far we tried

Step 1 

Creating a checklist and then going through the ASX looking for companies we already knew that seemed to us to be quality companies with a big moat.

Step 2 

Then calculate the numbers to establish which companies are the bargains

This didn't really work as we didn't enough of the companies  and the subjective nature of the criteria made it too difficult. We have binned this approach and are looking at different approaches here are a few we have been looking at.

Alternative X

Get to a few equations together with key financial indicators such as earnings free cash flow etc that could give an estimate of value  and put into a spreadsheet or data base. Then get a weekly feed of share price and then do the calculations and filter by that and then look into the quality of the company (this is how the value guys seem to do it - only they are buy US share and can use www.valueline.com to do the calculations for them).

Alternative Y

Only invest in US stocks and use valueline

Alternative Z

Any ideas?

I hope you have found this informative. If you have any suggestions or comments about anything here then please drop us some comments. Thanks

Setting up our DIY superannuation fund

When you setup up a self managed super fund you have the ability to invest the money how you see fit (within certain guidelines). However you must employ the services of a company to help set up your fund and to audit the fund every year. Below explains the process we went through. First some general information about super funds and then why we selected the company we did.

GENERAL INFORMATION
Firstily we looked at the fido website
http://fido.asic.gov.au/fido/fido.nsf/byheadline/Switching+to+DIY+super?openDocument


Key points
Setup costs around $1000
Yearly auditing costs around $1000-2000

They recommend you do not do it unless you have at least 200,000 in your super

LOOKING AT 2 COMPANIES TO SETUP AND AUDIT OUR FUND
I found a couple of companies that will do the work for a great deal less than the costs on the FIDO site. This is very import for the success of our fund as the costs could have a huge effect on the compounding return of our fund.

Company 1
I rang up this company and this was the result of the conversation

http://www.supereasy.com.au/welcome.asp?pg=admin

· $345 establishment fee
· $1095 per annum yearly fee
· same costs for 1 person or 4 in the fund

Company 2
This was a very good deal

http://www.esuperfund.com.au

$0 establishement fee
$599 p year Auditing fees
There are no costs in leaving or joining the fund - just a rollover form

CONCLUSION
This seems really good! The reason they are so well priced is that all transactions must be conducted through on online trading account with commsec. This means that there job of auditing is much easier and quicker for them. This does mean there are some limitations with what you can invest in at the moment no derivatives can be purchased (that doesn’t bother us) and purchases are limited to Australian companies only.

We decided to apply to set up our fund with them. We are now waiting the forms to arrive in the post.

Has anyone else used E-superfund or anyone have any advice for us along the lines of our choice of DIY auditors?

 I would love to hear anyone thoughts

Why are we setting up our own DIY super fund

In Australia we have a mandatory contribution scheme for or retirement. The fund is managed by one of number of companies who invest the money on your behalf. For this service they receive fees. I have been paying into one of these funds for a number of years.

I (like many other people) have pretty much ignored my superannuation for too long. A couple of months ago I thought it was high time I examined my fund with a fine tooth comb and what I found was pretty worrying.

I found discrepancies on their web site where they contradicted the return for the fund - after my pursuing this I was informed this was copy paste error. Hmm!

I then went through the accounts of my fund and found that the performance of the individual components of my fund (eg Australian shares 15%, International share 20%, cash 10% etc..)didn't seem to add up with what was the stated performance of those components on the superannuation companies website. I rang up and seemingly I am the first person to have asked for a breakdown of this information. After 6 weeks I got an answer t my question.

This I find very concerning not only was the information hard to come by to seems very few people are asking questions. This lack of transparency I find very worrying and I predict some of the superannualtion funds are going to get into trouble because no-one is asking questions. I decided that if a fund was to get into trouble it wasn't going to happen with my money. I presented my findings to the club (we allready had done work on value investment in the past) and this was what persuaded me and the other guys to go for a DIY super managed by value analysis principles.

Has anyone else tried to get information from there superannuation fund? What were your results?

Setting up the site

In these blogs I intend to hold nothing back and explain our whole process we go through to make our decisions. There are a bunch of spreadsheets and other documents we are using currently that I would like to publish. I would also like to publish a comprehensive list of books / podcasts / websites we have used so far and include new sources as we use them. I hope to put all this up on the blog over the next few weeks.

Paul

Background

A few years ago I got to my 30th birthday and I realized at my age I really should be taking my finance a bit more seriously. The problem with finance is that it is so deadly boring. To overcome this inertia I set up a club with some other friends in order to force myself to learn stuff about this wide ranging topic. In the club we have monthly meetings where we present to the group on topics of our choice. Luckily we all enjoy learning new things and it has worked out very well. We have covered a wide veriety of topics such as tax, reducing spending, buying property etc.

More recently investment strategy has become of more interest to us. We are based in Melbourne Australia and in Australia we have a mandatory pension scheme. These schemes are called superannuation funds and involve employee and employer contribution made to a private investment fund. You also have a choice to setup and manage your own fund. In earlier presentations we concluded that we had some deep concerns about managed super funds and have decided to manage our own.
We are currently embarking on setting up a self managed super fund where we are intending manage the investments by applying the principles of value investors such as Warren Buffet and Benjamin Graham.The purpose of this post and (hopefully the supporting podcasts) are to share our journey on this task.

We hope that this may assist other people who are on a similar journey. I also hope that we me benefit from the feedback of others to assist us on our journey.