28 March 2008

Why I Don't Pay Off HECS Upfront

I have been reading Am I Better Off Paying HECS Upfront? and I will give the reasons why I don't pay any HECS upfront.

What is HECS? Only those in Australia would know. HECS is a student loan provided by the Australian Government. The Government subsidizes certain university degrees and gives students an interest-free loan that needs to be paid off only when the student graduates and gets a job. I know someone who, after graduating from university with a science degree, decided to live in a Catholic monastery, and so she wouldn't need to pay off any HECS.

Students can elect to pay off part of their debt while they study instead of having the debt paid off when they work. If they do this they get a discount.

Because HECS works in the background and only affects my earnings if I get a full-time job, then I choose to ignore it and treat it as if it were an additional tax.

I do not pay off HECS upfront because there is no guarantee I will get a full-time job after I graduate. If I paid my debt upfront and then decide to live in a monastery for the rest of my life or if I decide to live in the wilderness or even if I find it too difficult to get a job, then I will have paid off the debt for nothing.

26 March 2008

Debt Kid: A Geek in Debt

Link: Debt Kid Blog

Above is a link to Debt Kid's blog. When he was 21-23 (approximately my age) he created $250,000 worth of debt through day trading. I don't know exactly what he was trading but it may have been Forex, and he must have borrowed money to invest. Before I read about Debt Kid I thought I was doing poorly.

It's very hard to know how I stand relative to others because the statistics I look at just don't seem to focus on young people. I know from the ABS (Australian Bureau of Statistics) that the average person in Australia has a net worth of about $400,000. However, the average age is 37, so what does that say about the average net worth of someone in his early twenties?

I feel really sorry for Debt Kid. He seems very honest and open. Whether he was like that all along or whether he became that way because of his losses is something I don't know.

For investments I prefer to use mutual funds and ETFs. A lot of investors talk about buying low and selling high, but my secret is that I only buy and I never sell. I also don't try to figure out whether an asset is "low" or "high." I just buy it regardless. The reason why I do this is because I don't know of any way I can know for sure what the intrinsic value of the asset is. Another important concept is diversification. Don't put all your eggs in one basket. Diversify across countries. Put some money in stocks, some in real estate. Give some money to big companies, some to individuals (see Kiva).

At the moment I have no debt. I do not borrow to invest. An argument can be made that borrowing to invest is a good idea. If the asset appreciates in value, borrowing to invest can amplify the gains from your investment. However, I get anxious over the thought of having a lender breathing down my neck as well as the threat of the asset depreciating rapidly and inducing a margin call. I am an economics student and I have heard fellow students talking about CFDs and other new investments. Based on the advice of ASIC I tend to stay away from these complex investments. I tend to be risk averse and I fear disasters, so I take enormous steps to prevent them. I have only been doing this for the last few years. Before then I was reckless and made mistakes. The mistake were mainly academic mistakes, e.g. choosing the wrong subjects. My risk aversion applies not only to my stock investments but to every part of my life. For example, I check the Euro NCAP rating of my car before buying it and I make sure I buy second hand. Even if I were to get married in the future I'd want to study my partner to make sure everything is going to be okay.

What I've realized is that being afraid can hold you back. Driving is dangerous and so risk aversion tells me to retire as quickly as possible and stay home all day so that I eliminate the risk of being in a traffic accident. I can then engage in low-risk leisure activities in my retirement like watching TV or playing chess. This will be preferable to high-risk leisure such as mountain climbing. You have about a 30 per cent chance of dying if you climb K2 (the second tallest mountain in the world).

Of course, if you're too afraid, is this a life worth living? Is it preferable to be reckless to some degree?

24 March 2008

Think You're Worthless?

Here's an apparently true story that will remind people of how valuable they are:
A wealthy man once came up to me and offered me $100 million dollars, and said all I had to do was let him chop off my legs and, once a day, ram a lit blowtorch up my ass.

I said no, realizing for the first time that, while I didn't have $100 million, I did have something worth more than $100 million to me. Specifically, my legs and an unburnt anus. So if I already own something worth more than $100 million it's silly to worry about the bill collector at the door demanding his few thousand. That's a true story, by the way.

Source: http://www.pointlesswasteoftime.com/suicide2.html

19 March 2008

Is a 21st Century Australian Property Crash Near?

I've been reading an article about mortgage stress hitting the rich. I've heard rumors by some that property prices in Australia will crash in 2008. It happened in Japan, the US, the UK, and, as some say, it is Australia's turn. Still the optimists say that in Australia things are different. One of the factors that fuel rising property prices is high immigration, and Australia under the Howard Era and even during the Rudd Era had high levels of immigration. During the last years of the Howard Government, if we look beyond official numbers and count students, net migration rate was about 300,000 per year. Sustained high immigration, the optimists say, will keep house prices high. However, both the US and the UK also have high immigration rates and these countries were not immune from property price crashes.

Some say there there is a shortage of houses in Australia because of laws that try to prevent urban sprawl. This, some say, can keep house prices high. Laws that block higher supply of houses are established and enforced by government who in a democratic country like Australia listen to the demands of the people. Releasing land may provoke an outcry from property investors but the Federal Government and State Government must also listen to buyers who want cheap houses. These opposing interest groups should moderate the supply side. Based on what I have read, buyers seem to be winning because the Victorian State Government will modify laws to supply more land (read More Land, Lower Prices - Guaranteed).

Since I live with my parents, I don't worry about housing affordability. However, if I want to invest in property I would prefer to do it through a mutual fund like the Fortuna Fund.

Annoying Horizontal White Lines in Hotmail

When using Hotmail in Firefox I get annoying horizontal white lines running across my e-mail messages. To get rid of them I have to use my mouse to highly the text. It is annoying because I always have to do this to make the text readable.

I have researched the problem using Google and it seems as if I am not the only one experiencing the problem. The only way I can fix it at the moment is to use Internet Explorer instead. I have both IE and Firefox installed on the my computer.

Bill Gates may be a great humanitarian, but to me Microsoft comes across as highly dishonorable. The first e-mail address I ever got was one from Microsoft's Hotmail. It was good but when Google introduced Gmail, I switched over to Gmail because it had much better features, such as archives. However, I couldn't stop using Hotmail because I had already told so many people that I used my Hotmail account and because Hotmail didn't allow me to automatically forward my e-mail to Gmail. This inability to auto-forward is clearly an attempt by Microsoft to lock customers into their products so they can milk more advertising revenue from us. I am turning into a conspiracy theorists here, but the annoying white horizontal lines may be attempt by Microsoft to keep users using Internet Explorer.

While such behavior may make business sense from a short-term profit-maximizing perspective, it leaves a bad taste in my mouth. Gmail allows anyone to auto-forward their e-mail, and this I think may be a signal of confidence within Google that they believe that their product is so good that customers will not leave even if they have the option to.

17 March 2008

Long Run Growth Rate of Sydney Residential Property

You hear many people talking about how property doubles every seven or ten years. You also hear many people say that property only ever goes up in value. Let's do some calculations.

According to Neil Jenman's article Beware the Selling Machine, average house prices in Sydney in 1890 was $1,446.

According to the SMH article Sydney's Median House Price $505,000, average house prices in Sydney in 2005 was $505,000.

I set up the following equation:


And then I solve for r the annual rate of growth.

It turns out to be 5.22 per cent. You can verify this by plugging in 5.22/100 into the equation above.

An annual growth rate of 5.22 per cent is approximately the inflation rate during that time period, and so in real terms houses didn't increase in value.

Interest rates today are about 7 per cent or thereabouts. If the long-run trend continues and houses continue to appreciate by 5 per cent per year, then borrowing at 7 per cent to buy an asset that appreciates by 5 per cent will see you lose money.

The same results have been found all over the world. Robert Aronen in a Motley Fool article titled The Worst Investment Ever (he's referring to houses), says the following: "Piet Eichholtz studied records on home sales in Amsterdam's premier Herengracht neighborhood from 1628 to 1973 and found an inflation-adjusted return of 0.2%. There were periods of rising prices and periods of falling prices, but not a continuous march upward with spectacular returns."

We see the same thing in America. Here is what I read in a Smart Money article titled Renting Makes More Financial Sense than Homeownership: "Robert Shiller, a Yale economist and author of 'Irrational Exuberance,' which predicted the stock price collapse in 2000, has recently turned his eye to house prices. Between 1890 and 2004 he finds that real house returns would've been zero if not for two brief periods: one immediately following World War II and another since about 2000. (More on them in a moment.) Even if we include these periods houses returned just 0.4% a year, he says." The house prices Shiller referred to comes from his own Case-Shiller Home Price Index, which tracks the prices of US homes.

These results do not mean that getting a house is not a good idea. Houses are important if you want somewhere to live. It is probably a good idea if you live in a house rather than a cardboard box on the streets. The notion I want to dispel here is that residential real-estate is a bullet-proof, safe investment that "always goes up" and "doubles every seven years." This is not true. Over the long run, in real terms, it never goes up and it never doubles. It just stays flat.

These results also don't mean that it is impossible to make money from property. It is possible. Even something with constant inherent value can have volatile nominal value. However, if property has zero growth in the long run then money any person makes cames at the expense of other people's losses. If you purchased a home cheap before the early 2000 boom and then sold it off right before the sub-prime mess, you'll make a lot of money, but the greater fool whom you sold it to will lose a lot. If you are insightful enough to be able to buy low and sell high in property, you are essentially cashing in on the misery of others.

I'll finish off with a lengthy quote from Neil Jenman. Jenman used to be in the real-estate business himself but turned his back on them to expose much of their shady practices. He is not against property as an investment, just what he calls "Selling Machines."
Let's be perfectly clear about one common-sense and constantly over-looked fact. If there really was so much profit to be made in investing in property, then these Selling Machine outfits would not be selling property en-masse, they'd be buying it en-masse.

But the simple fact is that there is more profit in selling property than in buying property - at least for these Selling Machines.

They have a huge infrastructure - big marketing campaigns, which can comprise anything from huge glossy ads in the property investor magazines to trained telemarketing teams.

They have teams of salespeople - known, of course as "property consultants" or "support members".

They have finance contacts, legal contacts, valuation contacts, developer contacts. It's a veritable Selling Machine designed to suck every cent out of inexperienced investors.

16 March 2008

How to Be Thrifty: Lock Up Your Money

I think I'm very good at being thrifty. I invest virtually all the money I earn. I only spend money on bare necessities like car servicing, petrol, and food. It helps that I live with my parents, but I still think I'd do very well if I lived on my own. I want to give some advice to others about how to be thrifty.

Most people love to say that they are thrifty. They tell others that they are thrifty and they tell themselves that they are thrifty. However, they are usually not. One of my friends named Heidi just got married. I was speaking to her about football just for the sake of conversation. She then told me that she didn't take any interest in football because she believes it's a waste of money and that she values her money so much she only wants to spend money on necessities and not spend money on things like football games.

However, Heidi just got married and she planned to have a wedding ceremony soon. I asked her how much she was going to spend on the wedding and she said she was going to spend more than $30,000! I pressed her for details about the wedding and she said that she wanted to release butterflies in the wedding hall to create a nice atmosphere for the guests. I asked her why in the world she would splurge $30,000 on an extravagant wedding ceremony yet refuses to pay $100 for admission to a football stadium. She said, "Some things are important while others are not."

The problem is that the definition of needs and wants can be blurry. Heidi switched from needs versus wants to important stuff versus non-important stuff. The definition of what is important is vague and as such she could easily splurge money on anything and ex-post rationalize by changing in her mind what is important or not important.

If you see a Porsche 911 and buy it on impulse and afterwards say it's a necessity and it's important, then that is clearly a case of your definition of needs and wants being completely useless to the goal of being thrifty.

I save money by locking my money up. In other words, when I earn money, I put it somewhere where I will have difficulty getting it back. In other words, I decrease liquidity. The ultimate way to do this is to put your money into your superannuation account because you cannot touch this money until you are 65. Another way is to have your money automatically put into a savings account and then to destroy any cards you have so that you cannot easily withdraw anything from the ATM, thereby forcing you to go speak to someone in the bank if you want your money back. Another way is to simply put your money into a mutual fund. Withdrawing money from a mutual fund is not extremely difficult but it does require more effort than usual. For example, to withdraw money from my mutual fund I have to print out a form and mail it interstate.

How illiquid you make your money should depend on how much money you're locking away. When I get paid I put about 90 per cent of the money straight into my mutual fund. However, I keep some money in my bank accounts for day-to-day expenses and emergencies. I have two bank accounts. In one I can use a key card to withdraw money from an ATM. I only ever keep $20 in this account because it is highly liquid money that is vulnerable to impulse buying. However, my other bank account doesn't have any card. It is a savings account. I keep about $500 in here. If I run out of money from my main account then I go on the Internet and transfer money from one account to the other. Basically, the more money is in an account, the harder it should be to get.

Once I have withdrawn my money, I follow the same concept with my notes and coins. I keep my notes in my wallet. However, I put my gold coins in my bag and my silver coins in my piggy bank. Using actual cash allows you to see with your own eyes the scarcity of your money. If you had a credit card or a debit card with heaps of money in it, there is a feeling that you are holding infinite wealth in your hands. I like to carry around notes and pay with cash for this reason. I also keep coins in my house for the same reason. I don't usually carry around too many coins because they are heavy.

Mr Wikipedia Jimmy Wales Turns Out To Be a Jerk

I was reading The Age today and have learned about Wikipedia's Jimmy Wales accused of an expense rort. The founder of Wikipedia has for a long time been asking for money, claiming that donations need to keep flooding in so that knowledge can be democratized for all, not just the intellectual elites who lock up their peer-review journals with membership fees. Such idealism turned out too good to be true. Jimmy Wales has been accused of using donated funds to buy extravagant things like expensive wine. Was he idealistic and altruistic to begin with before the money corrupted him or was he just corrupt to begin with?

05 March 2008

Steve Pavlina and Self-Delusion

On the train today I listened to podcasts from Steve Pavlina, a self-development expert. Steve worked as a computer game programmer for 10 years before realizing that his calling was in self-development, so he quit and devoted himself to maintaining a self-developmet website full time. Apparently he makes $9000 per month on advertising revenue, which is pretty good. I make nowhere near that amount. In fact, I make nothing from this blog. I've tried putting ads up but I think it makes the site look very poor. Plus I wasn't earning anything, so I didn't think it was worth it.

What strikes me about Pavlina's advice is that he seems to advocate self-delusion. He believes that it is important to an individual to modify his own model of reality to suit himself. The most unusual example of this behavior is found in his polytheism. In Podcast 13: Beyond Religion, Steve claims that he was raised Catholic and then became an atheist in his late teens and then he became an agnostic. Now he embraces multiple religions, including Buddhism, which he talks about a lot. What is odd is that he switches from one religion to another. For example, he claims that in his business life he is an atheist and when he is in relationships he is Buddhist. This I believe is just crazy. Religion is not a tool. Religion is a system of how you perceive reality. If you change your religion then you change your understanding of truth and reality. If your reality changes from one minute to the next then your thoughts will run the risk of being inconsistent or illogical, which can lead to serious error.

Another problem is that Pavlina assumes that different worlds exist separately and independently. For example, the "business world" is separate from the "relationship world." However, this is not the case. Business is defined as trade between two people. Person A has something of value like an apple and sells it to Person B who gives money in return for the apple. There is an exchange of goods of value, and exchange of apples for currency. A relationship is the same thing. When you buy an apple from the grocery store, you are engaging in a relationship with the seller. When you network to increase business opportunities, you are engaging in relationships. A relationship that a man may have with a woman may also have a trade or business aspect to it. There may be a bilateral exchange of multiple goods and services over a period of time, e.g. sexual services, flowers, cash, and housework. Economist Gary Becker's book A Treatise on the Family explains how relationships in families can be explained using economic theory.

The theme of self-delusion is pervasive in Pavlina's podcasts. In Podcast 8: Overcoming Fear he claims that is something makes you fearful or anxious, simply modify your model of reality so that it does not make you fearful or anxious. He says similar things in Podcast 11: Raising Awareness Through Multiple Perspectives.

With all the self-delusion he prescribes, it is amazing then that in Podcast 16: The True Nature of Reality, Pavlina tells us to simply accept reality no matter how bad it makes you feel.

03 March 2008

William Easterly: Practitioner of Pessimism

Link: Easterly on Growth, Poverty, and Aid

I want to share with people here some comments I made at EconTalk on Russ Robert's interview with former World Bank boss William Easterly. Easterly is a pessimist who believes that foreign aid does not work. You can go to the link I gave above to download an audio file that contains the interview. I listened to this interview on my Mp3 player while I was on the train to university today.

Easterly says initially that aid to Africa does not work. The evidence he gives is that about $60 trillion dollars has poured into Africa in the last 60 years and in those 60 years economic growth has been zero. However, this itself does not prove that the aid did nothing. What if without the aid Africa would have experienced negative growth? That lots of aid comes in and results in little growth does mean that the aid did not affect growth. Perhaps another variable negatively affected growth so much that it masked the impact of aid on economic growth in Africa. This is the problem of correlation versus causation. However, Easterly and Roberts, later in the podcast, talk about this problem of correlation versus causation, and Easterly himself criticizes another economist for confusing correlation and causation!

Easterley also says that he believes in freedom and thinks that countries should decide themselves whether they want freedom. He says that in many countries, such as in Latin American countries and even in Russia, the culture or values just aren't there for free markets. He claims that people there simply don't want their economies to be liberalized and therefore it's best to give people what they want. His evidence comes from the fact that left-leaning leaders tend to be popular. Roberts did say that if the democratic system is flawed (e.g. if it is hijacked by elites or thugs) then it may be difficult to know what the people want since it is assumed that the democratic system of voting and elections will tell us what "the people" want. However, it's not as simple as that. As Sowell says in another podcast, there is no such thing as "society." Arrow's Impossibility Theorem proves mathematically that there cannot be a social preference. It backs up what is obvious from the beginning, and that is there is no society, only individuals. To quote Margaret Thatcher: "There is no such thing as society. There are individual men and women, and there are families." I'd even go so far as to say there is no family since a family too is just multiple individuals. But one step at a time.

Suppose 60% of citizens vote to be slaves and 40% vote to be free. If slavery were imposed on everyone because the majority wanted it, then those 40% who didn't want slavery would still get it. This is the problem.

Easterly is against the idea of forcing freedom upon people because, as he claims, forced freedom is oxymoronic or contradictory. However, I believe forcing freedom upon people is better than forcing slavery upon people and also I believe forcing freedom upon people is better than forcing slavery upon people even if most people wanted slavery. The reason why is because forcing freedom upon people Pareto dominates forcing slavery on people. Suppose 60% of people want freedom while 40% want to be slaves. If slavery is imposed, then everyone who wants slavery gets what they want but those who want freedom don't. However, if freedom is imposed, those who want freedom get what they want but those who want to be slaves have the freedom to reject freedom and privately arrange among themselves to be slaves. Thus nobody is worse off if we force freedom upon citizens.

Ross Gittens: Destroy the Economy to Stop Climate Change

In a Brisbane Times article titled An Inconvenient Truth about Rising Immigration, economics editor says that high immigration in Australia from the Howard and Rudd Governments is leading to a crisis of housing affordability as well as rising climate change. Gittens says the following:
Emissions of greenhouse gases are caused by economic activity, but the bigger your population, the more activity. So the faster your population is growing the faster your emissions grow.

Our immigration program is so big it now accounts for more than half the rate of growth in our population.

It's obvious that one of the quickest and easiest ways to reduce the growth in our emissions - and make our efforts to cut emissions more effective overall - would be to reduce immigration.

Of course, you could argue that, were we to leave more of our immigrants where they were, they'd still be contributing to the emissions of their home country. True. But because people migrate to better their economic circumstances, it's a safe bet they'd be emitting more in prosperous Australia than they were before.
Let's assume that economic activity does spur emissions, as Gittens says. He claims that because immigrants move to better their economic circumstances, they will be emitting more.

However, let's take this idea to the extreme so we can apply reductio ad absurdum. If every morning you travel to the city via car or train, you are an immigrant. You are an immigrant because you move to perform economic activity outside some imaginary line. This imaginary line can be political borders or it can be your household. It doesn't matter where we draw this imaginary line. Suppose you could not leave your house because you were allergic to outside air. Then you cannot move and all trade must be done inside your home. Your economic opportunities would be diminished greatly. However, because you are not trapped in your house, because you can search for opportunities outside your house, you are more prosperous. The same idea applies to immigrations from other countries as it does for those from other households. If Gittens wants to stop immigration among people from different countries then using the exact same logic we must therefore ban movement of all people from their houses since movement of people from their houses to go to work is done to better their economic circumstances, which leads to emissions. So if Government banned trade among households then you will become unemployed, you won't travel to work, and then emissions will drop. That must be what Gittens wants if we are to apply his logic consistently.

02 March 2008

Open Range (2003)

Today I watched Open Range. It was a pretty good movie. Many may not like it because it is a Kevin Costner movie (Costner seems to have many haters), but Costner I think really blew it when he made The Postman, a horrendous movie. Waterworld and Dances with Wolves were not too bad, although not brilliant in my opinion. In Waterworld, I thought the hero's abilities were just too unbelievable. His swimming and fighting ability is so good and the little girl at the end was so sure she was going to be rescued that all suspense was sapped out.

Open Range features a very explosive and action-packed climatic showdown near the end. Guns fire everywhere and bodies literally fly (which according to Mythbusters is not realistic). Before and after this showdown, the film develops the characters and plot. Free-graziers go through a town led by a tyrant whose men manage to kill one of them as well as killing a dog. Two of the free-graziers, played by Costner and Duvall, vow to head into the town and take down the tyrant to avenge the death of their friend and dog. In true Western style, morality is settled by violence. However, in this Western, violence is used against the “state” and against the law, which goes against Biblical principles as well as putting the protagonist's actions into the realm of terrorism. Nevertheless, the American Constitution claims if government is corrupt then the people are to overtake it and that is why citizens bear arms.

To conclude, Open Range is a great movie. It is violent but there is nothing too gory, gruesome, or shocking.

01 March 2008

Criticisms of Thomas Sowell on EconTalk

Link: Sowell on Economic Facts and Fallacies

I have just listened to a podcast featuring Thomas Sowell. The podcast can be downloaded from the link above. The link also has a text summary of what was said.

I think there are a number of problems with what Sowell says. I especially have issues with what he says on the topic of immigration. He makes many logically inconsistent statements.

Sowell says society does not have a say on what CEOs are paid because there is no such thing as a society. There is no person named "society." The CEO is just paid by the person who hires him. Then when Sowell talks about immigration he talks about what is "best for us." When he says "us" he means "society." Society doesn't hire the CEO. Likewise, under a pure Libertarian immigration system society does not hire immigrants. Rather, employers employ them. It is inconsistent for Sowell to criticize the immigrant who works yet praise the CEO.

One moment Sowell says he is against central planning, saying that knowledge is dispersed and that the elites don't know what is best for all. Then when he talks about immigration he talks about how "we" should select "good" citizens? In other words, he wants immigration to be centrally planned. Instead of letting employers and immigrants get together voluntarily for free exchange, he wants the Federal Government to centrally decide who comes in based on a imaginary notion of a "society" or a fantasy idea of "citizenship."

Sowell does a good job arguing against central planning and socialism, yet when the issue is immigration, he turns socialist himself.

If you go to EconTalk website link above you'll see I have put these criticisms in the comments section, so be sure to read that to see how the argument progresses, if it does progress at all.