Paul Wallbank – Brilliant Communications

Category: Australia

  • What happened to the not so nifty fifty?

    What happened to the not so nifty fifty?

    One of the must read investment blogs is John Mauldin’s weekly Thoughts From the Frontline. This week’s post is a particularly compelling guest post from tech investor Andy Kessler.

    Kessler’s post is the forward to George Gilder’s book Knowledge and Power and in describing his investment journey Kessler mentions the 1970s Wall Street view of investing in Nifty Fifty, the fifty biggest stocks on the US market which – because they were perceived as safe investments – traded on substantial price equity ratios.

    Trading cost 75 cents a share, but who cares, there were only 50 stocks that mattered, the Nifty Fifty, and you just bought ’em, never sold.

    Towards the end of 1972, Xerox traded for 49 times earnings, Avon for 65 times earnings, Polaroid for 91 times earnings.

    Numbers like that were unsustainable and those days of safe investing couldn’t last. So what happened to The Nifty Fifty?

    It’s hard to track down today’s figures but an academic paper from 2002 looked at how those stocks performed over the following thirty years. It isn’t pretty.

    nifty-fifty-annualised-returns

    Few of the Nifty Fifty performed well over the subsequent thirty years, which should give pause for those just buying the top stocks like the Dow-Jones, FTSE 100 or ASX 20 – just because they are big doesn’t mean they are safe.

    In fact names like Eastman-Kodak, Polaroid and Digital Equipment Corporation on the Nifty Fifty shows just how risky such assumptions are.

    Kessler also has a good point about today’s index huggers who are the modern equivalent of the 1970s buyers of the Nifty Fifty.

    An index is the market. It’s a carrier, a channel, as defined mathematically by Shannon at Bell Labs in his seminal work on Information Theory. An index can only yield the predictable market return, mostly devoid of the profits of creativity and innovation, which largely come from new companies outside the index.

    Like the Nifty Fifty today’s index funds are safe and predictable – until they’re not – while at the margins, the next great businesses and industries are being built far from the attention of the funds managers.

    For Australians there’s a particular sting in the tail from Kessler’s post as the bulk of compulsory superannuation goes into the local market’s stop stocks. It wouldn’t be too unfair to describe the modern Aussie funds manager’s motto as being “buy the ASX Eight and have lunch with your mate.”

    Forty years ago, an investment in Eastman Kodak would have looked pretty nifty. Today Kodak has gone. We should remember that when we’re looking for ‘safe’ places to put our money.

    Bull Market image by Myles through SXC.HU

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  • Australia’s small business crisis

    Australia’s small business crisis

    The 2013 MGI Australian Family and Private Business Survey is a disturbing document describing a sector that’s aging, pessimistic and struggling with change. It bodes poorly for what should be the powerhouse of the nation’s economy.

    Having been conducted over nineteen years, the MGI survey is a very good snapshot of how the sector has evolved over the last two decades and it’s notable how owners are older and not optimistic about their prospects of selling their businesses.

    Another key aspect is the changed focus of Australian family businesses; in 2003 forty percent were in manufacturing, this year its half that which probably tracks the decline of the nation’s manufacturing industries.

    Most striking though is the aging of the small business community with one in three proprietors being in the 60 to 69 year old bracket, up from one in five just 3 years ago.

    snapshot-of-australian-businessesThat the average age of Australian small business owners is increasing shouldn’t be surprising given the nation’s increasing obsession with property. As home prices become more expensive, it becomes more difficult for younger people to pay off their mortgages or risk their equity on building a business.

    Probably the most heart breaking comment from the report is that over half of Australia’s small business owners don’t see an immediate prospect of retiring and nearly two thirds don’t see any chance of an early exit.

    58% of family business owner-managers see themselves working in the business beyond 65 years of age, with 65% indicating that their businesses are NOT exit or succession ready.

    Part of the reason most Australian family businesses aren’t succession ready is that Generation X and Y buyers crippled by big mortgages simply can’t afford to pay what the older Baby Boomer and Lucky Generation proprietors need to retire upon.

    It’s hard not to think that the grand 1980s corporatist vision of Bob Hawke and Paul Keating – that most Australians will work for one of two big corporations while being members of one of two big trade unions – has largely come true.

    For Australia though this is not a good thing as the wealth of those corporations, along with that of the nation’s households, is largely tied into the domestic property market.

    A discussion on the Macrobusiness website about New Zealand’s property obsession has a graph which illustrates both the Kiwi and Australian economies’ dependence upon house prices.

    Housing-Wealth-to-disposable-incomeHousehold-Financial-Wealth-to-disposable-income

    Those financial assets in the second graph include the value of businesses, and that statistic staying largely flat while housing wealth has gone up fifty percent over the last fifteen years illustrates how dependent the Aussie economy has become upon property speculation.

    Property speculation can be fun, particularly when you’re watching people bash down walls on the latest reality TV home improvement show, but it isn’t the basis for a strong economy.

    That Australia’s small business sector is aging and increasingly shifting to low value adding service industries is something that should be discussed more as the nation considers what its global role will be in the 21st Century.

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  • Australia’s startup challenge

    Australia’s startup challenge

    While I’ve been using CNet’s story on Kansas City’s startup community to compare Google’s Fiber project with the Australian National Broadband Network, the US article touches on something far more fundamental about Australia’s ability to build new businesses and industries.

    The fundamental problem is property prices.

    In Kansas City, local entrepreneurs wanting to set up a startup house can afford to take a chance.

    The house is the pet project of Web designer and Kansas City local Ben Barreth, who did the insane last fall and cashed in his savings and liquidated his retirement account to put a down payment on a $48,000 house in the city’s Startup Village. Why? Barreth, a husband and father of two small children, wanted to be among the first to buy a house in a Google Fiber neighborhood.

    $48,000 for a house is unthinkable in Australia. Even if we disregard Sydney and Melbourne, regional centres are vastly more expensive than their US counterparts. Geelong in Victoria for instance has an average house value of $390,000 while in Wagga Wagga in the New South Wales Riverina district houses sell for a median of over $300,000.

    This pattern is true across almost all of populated Australia – it is very, very difficult to find a property under $250,000 and there are few, if any, regions in the country where a house can be bought for less than five times the average local income.

    Expensive property comes at a price, it discourages people from starting businesses as the risk of being left out of the property market is so high. Leith van Onselen, co-founder of the Macrobusiness blog, made a very good point about this effect on his decision to set up a business.

    Indeed, the main reason why I took the risk of leaving Goldman Sachs to concentrate on MacroBusiness full-time (a start-up business) is that I had all but paid-off my house and was in the fortunate position not to be saddled with onerous mortgage repayments. Had I a large mortgage, like many Australians, there is no way that I would have left a high paying, relatively steady job, to work on a business where pay is much lower and irregular, and where the outcome is unknown.

    Leith was commenting on an article in the Sydney Morning Herald reporting the risks to Australian business should property prices fall.  In this respect, Australia has managed to paint itself into an economic corner.

    The Sydney Morning Herald article illustrates Australia’s predicament – Michael Pascoe (the ‘Pascometer’) reported how Reserve Bank bureaucrat Chris Aylmer had warned of the dangers of falling property prices.

    With most Australian businesses dependent on bank finance guaranteed by their proprietor’s home equity, falling property prices would see a nasty economic spiral as lines of credit were called in, forcing companies to slash expenses, including wages, which in turn would drive further real estate falls.

    Property also makes up the bulk of Australians’ retirement savings, so a fall in property prices would smash consumer confidence.

    It’s no surprise that in the face of a recession or economic shock the first thing Australian governments do is prop up the property market.

    Another damaging effect of high property prices is that it turns the country conservative. This graph from Business Spectator’s Philip Soos does much to explain why Australians turned insular in the late 1990s.

    Soos-graph-australian-property-prices

    Having a population locked into paying their mortgages guarantees a conservative, risk adverse culture and that’s exactly what Australia has achieved over the last fifteen years – much of the opening up from the 1970s through to 1990s has been undone as the country looks inward at protecting its housing prices and bank repayments.

    That safe, insular society has its attractions. However if you want to build an entrepreneurial culture, it’s safe to say you can’t get there from here.

    While it’s not impossible to build a startup nation in a society addicted to property speculation,  it won’t be easy either.

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  • Telling the broadband story – the government makes its case

    Telling the broadband story – the government makes its case

    Further to yesterday’s post about NBNCo’s inability to tell a story, I received a polite message from the long suffering staff at the Minister’s office that pointed me to some of the resources that NBNCo and the Department of  Broadband, Communications and Digital economy have posted.

    Here’s the list of case studies and videos;

    http://www.nbn.gov.au/nbn-advertising/nbn-case-studies/

    http://www.nbnco.com.au/nbn-for-business/case-studies.html

    http://www.nbn.gov.au/case-study/noella-babui-business/

    http://www.nbn.gov.au/case-study/seren-trump-small-home-based-business-owner/

    All of these case studies are nice, but they illustrate the problem – they’re nice, standard government issue media releases. The original CNet story that triggered yesterday’s story tells real stories that are more than just sanitised government PR.

    It also begs the question of where the hell are all these people successfully using the NBN when I ask around about them?

    What’s even more frustrating is the Sydney Morning Herald seems to get spoon fed these type of stories.

    The really irritating thing with stories like yesterday’s SMH piece is that it’s intended to promote the Digital Rural Futures Conference on the future of farming being held by the University of New England.

    Now this is something I’d would have gone to had I known about it and I’d have paid my own fares and accommodation. Yet the first I know about this conference is an article on a Saturday four days out from the event. That’s not what you’d call good PR.

    The poor public relations strategies of the Digital Rural Futures Conference is a symptom of the National Broadband’s Network’s proponents’ inability to get their message out the wider public.

    When we look back at the debacle that was the debate about Australia’s role in the 21st Century, it’s hard not to think the failure to articulate the importance of modernising the nation’s communications systems will be one of the key studies in how we blew it.

    Despite the best efforts of a few switched on people in Senator Conroy’s office, a lot more effort is needed to make the case for a national broadband and national investment in today’s technologies which are going to define the future.

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  • How tech savvy are our corporate CEOs?

    How tech savvy are our corporate CEOs?

    Yesterday I asked are executives out of touch with IT industry trends.

    To figure out the answer to that question, I had a look at the backgrounds of the ASX20‘s CEOs. It’s difficult to draw a conclusion from the results.

    ASX 20  CEO backgrounds
    Company CEO Industry background Degree
    AMP Craig Dunn Financial services BComm
    ANZ Bank Michael Smith Financial services Economist
    BHP Billiton Andrew MacKenzie Mining Phd in Chemistry
    Brambles Tom Gorman Finance Economist
    Commonwealth Bank Ian Narev Consulting Law Degree
    CSL Brian McNamee Medicine surgeon
    Macquarie Group Ltd Nicholas Moore Investment banking lawyer
    National Australia Bank Ltd Cameron Clyne investment banking arts/economics
    Newcrest Mining Ltd Greg Robinson finance BSci Geology
    Origin Energy Grant A. King Energy industry Civil Engineer
    QBE Insurance Group Ltd John Neal finance
    Rio Tinto Ltd Sam Walsh mining BComm
    Santos Ltd David Knox Oil and Gas BEng (mech)
    Suncorp Group Ltd Patrick Snowball Finance industry Law, LLD
    Telstra Corp Ltd David Thodey IT/Telecoms BA (anthropology)
    Wesfarmers Ltd Richard Goyder Diversified industrial BComm
    Westfield Group Peter & Stephen Lowy Investment banking BComm
    Westpac Banking Corp Gail Kelly Financial services BA
    Woodside Petroleum Ltd Peter J Coleman? Oil and Gas BEng
    Woolworths Ltd Grant O’Brien Retail Accountant

    What stands out from the list is the dominance of executives from a financial services and commerce background, although that’s hardly surprising given the weight of the banking sector in the Australian stock market.

    An encouraging trend in the mining sector, the other sector highly represented in the index, is how the industry’s CEOs tend to be from a scientific or Engineering background.

    Coming from a science background would tend to indicate the CEOs are probably more across technology trends than we’d think, although the compositions of the boards would probably tell us a little more about the net saviness of the corprorate sector.

    That might be an exercise for the weekend.

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