Successful investing takes time, discipline and patience. No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.
Welcome to our fifth newsletter for 2020, and our fourth newsletter since Covid 19 became big news. It’s interesting to reflect on how much has happened in the last three months, and to think about the way headlines have changed from warnings of thousands of people dying in Australia, to how quickly we can make it back to normality.
As long-term readers know, I am a glass-half-full person, but I have great trouble getting optimistic about the rest of the year. And I’m especially worried about September – this is when Jobkeeper will cease, the rate of payments for Jobseeker will reduce, and everybody who is on some kind of loan repayment holiday, or payroll tax holiday, will find the holiday has ended, and they are back to reality.
This would be fine, if Australia has returned to normal by then, but I reckon that is most unlikely. Think about it – we are going to need social distancing until we find a vaccine, which may well be a year away, or more. And social distancing means reducing the number of customers a business can have at any one time.
Recently, there was an uproar when Jetstar ran a full flight, which meant the plane was packed. Some passengers put this all over social media and Jetstar, and other similar airlines, promised to block out the middle seats in each row for the foreseeable future. That takes one-third of the available seats off the plane. Just last week the boss of Ryanair told the British government that they would lose money if they flew with one-third of their seats unavailable. He said they would rather leave the planes on the ground than fly them just to make a loss.
Every time I talk to small business owners, I tell them about my magic formula to boost profits. If you can increase sales by 10%, and simultaneously reduce costs by 10%, you may well be able to increase your bottom line by over 30%.
But the converse is also true.
I then tell them the story of a large fruit and vegetable shop whose takings were $4.4 million a year with costs of $4 million a year. The owner’s profit was $400,000 a year. He toyed with the idea of giving his customers a 10% discount to boost sales. I told him he would need a big increase in sales to make it work, because that 10% discount would wipe out his profit. I told him a much better way to do it would be to increase the number of items he was selling which would boost his profit enormously.
Most businesses, and especially restaurants and cafés, work on tight margins. I tell them “The proceeds of the cup of coffee pays your rent and your staff – the proceeds from the raisin toast and the salads is where the profit lies.”
Think about a Pilates studio running 45-minute classes at $30 per person. They may have 12 reformers, as well as an instructor. Fixed costs are rent, leasing costs of the reformers, and the salary of the instructor. This gives them a maximum gross income of $360 an hour. When that studio is allowed to re-open, social distancing means will almost certainly allow only six reformers operating. This is a drop of $180 an hour with no reduction in fixed costs.
The reality is that reducing the number of available customers can have a massive effect on the bottom line. And I am concerned that when September comes, many businesses will shut up shop never to open again. It worries me a lot, because small business has always been the backbone of this country. They are the ones who put their homes on the line to make the business work, go the extra mile when the customer needs them, and provide a great training price for anybody to learn the ropes. It would be a very sorry day if we lose them in droves.
Need Help Growing Your Business?
However, if you do have a business it’s better to acquire some additional skills than give up. That’s why I am proud to talk today about a new project my son James is involved in. To help people increase their income, impact, and audience, James – who many of you know – is organising a very special virtual event. It features 50+ of the world’s brightest minds in entrepreneurship, podcasting, and marketing.
I have done a deal with James just for you guys. If you use the promo code below, you will get 20% off whichever ticket you choose. And on top of that, as a gift from the Whittaker family, anybody who registers will receive a free hardcover copy of James’s new book Think and Grow Rich: The Legacy AND a copy of Making Money Made Simple.
Having been in business myself, I know how valuable one idea can be and I would strongly encourage anyone looking to grow their business or diversify their income to attend this event. There is simply no substitute for surrounding yourself with high achievers who can show you the way forward.
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In a recent newsletter I mentioned that promising a “mortgage payment holiday” – in which borrowers can defer their loan repayments for up to six months. One example quoted shows a couple with a loan of $400,000 over 30 years at 3.75% with monthly repayments of $1,834. Making no repayments for six months will put $11,000 in the borrowers’ pockets and may enable them to get by. If that stops some people from losing their home, it’s great – but the interest is simply being added to the loan balance, and compounded, which means paying interest on interest.
After just six months, the loan balance will have increased to almost $411,000 and added three years to the term of the loan, unless the borrowers increase their monthly repayments.
Here is a breakdown of each bank’s policy:
Home loan repayments remain the same as before the pause, but the loan term is extended. CBA will also make a one-time payment intended to offset the interest-on-interest charged to customers receiving a home loan deferral for six months.
Home loan repayments increase after the pause, but the loan term remains the same. Westpac is currently offering a 3-month pause with the option for a further 3 months after review.
Home loan repayments increase after the pause, but the loan term remains the same.
Gives customers the option of keeping the loan term the same or extending it by six months (with a review at three months). Either option is likely to see mortgage repayments increase after the pause.
In my last newsletter, I mentioned the possibility that some banks may reduce or suspend their dividend payments for the first half of this year. And so it is came to pass – NAB has slashed its dividend, while ANZ and Westpac are paying no dividend at all. CBA have a different reporting period, so we won’t know what they are doing until later in the year.
My theory is, given that the remuneration of bank senior executives depends partly on the share price, is that they are over emphasising the bad news right now, to come back with some good news later in the year. Most investors have short memories, and their emotions tend to flow in line with the daily news. Yes, bank shares plunged recently, but it wouldn’t surprise me if there is a strong rebound later in the year. Only time will tell.
Bank Behaving Badly!
One of the best ways for young people to get ahead is to buy a home in a good location, use all their efforts to get the mortgage under control, and then invest any surplus funds in quality share-based investments.
Given the undeniable benefits to the borrowers of increasing their mortgage payments, I was horrified when a Commonwealth Bank client sent me an email they had received which read:
“We’re taking steps to continue providing the financial support our customers need. This is why we’re making a one-off change to your home loan direct debit repayment amount, reducing it to the current minimum required payment.” The bank then clarified that this was an “opt-out” procedure, that is, borrowers who want to continue with higher repayments must go out of their way to do so.
Any marketing consultant will tell you that setting the default to “opt out” is a major tool in getting people to make a change you would like them to. Think about it: most of us suffer from a barrage of paperwork, seldom read the fine print, and even the thought of having to go to somebody’s website and do all the hard work to “opt in” is enough to make us shudder. It is hardly likely to happen.
It is therefore irresponsible of the bank, and it’s hard to escape the conclusion that it’s just a sneaky way for CBA to boost its profits at a time when banks in general are doing it tough. The bank could just as easily have written to their customers along the lines of, “We appreciate these are tough times, but urge you to continue making your payments at the current level to pay off your loan as fast as possible and continue saving interest. However, if you need to reduce your payments, please contact us.” That would make the option available to those who need it, but by making it “opt in” not “opt out” more people would keep making the higher payments that are in their own best interest as long as they can afford them.
Think about a person with a $400,000 loan on which there have been happily making payments of $2,240 a month. If they are CBA customers, the chances are high that they will simply ignore the email, and let the bank reduce their repayments and extend the term by many years, paying thousands of dollars of unnecessary interest.
Thanks to COVID-19, many financial institutions are making a lot of noise about being “here to help you”. Unfortunately, most of their offers come in a poisoned chalice. It’s not just the Commonwealth Bank offering borrowers a chance to reduce their monthly mortgage payments, it’s also the other institutions offering the opportunity to defer six months’ mortgage payments, or three months’ credit card payments while interest and fees continue to accrue. This is just another ploy by lenders to collect interest on interest. Don’t fall for it.
The loan numbers in this article were taken from the free Loan Calculators on my website.
The Washington Post’s “Mensa Invitational” once again asked readers to take any word from the dictionary, alter it by adding, subtracting, or changing only one letter, and supply a new definition. Some of these will put you on the floor! Here are this year’s winners:
1. Cashtration: The art of buying a home and becoming penniless.
2. Ignoranus: A person who is both stupid and an asshole.
3. Intaxication: Euphoria at getting a tax refund, which lasts until you realize it was your money in the first place.
4. Reintarnation: Coming back to life as a hillbilly.
5. Giraffiti: Vandalism spray-painted very, very high.
6. Sarchasm: The gulf between the author of sarcastic wit and the person who doesn’t get it.
7. Inoculatte: To take coffee intravenously when you are running late.
8. Hipatitis: Terminal coolness.
9. Osteopornosis: A degenerate disease. (This one got extra credit.)
10. Karmageddon: It’s like, when everybody is sending off all these really bad vibes, right? And then, like, the Earth explodes and it’s like, a serious bummer.
11. Decafalon (n.): The grueling event of getting through the day consuming only things that are good for you.
12. Glibido: All talk and no action.
13. Dopeler effect: The tendency of stupid ideas to seem smarter when they come at you rapidly.
14. Arachnoleptic fit (n.): The frantic dance performed just after you’ve accidentally walked through a spider web.
15. Beelzebug (n.): Satan in the form of a mosquito that gets into your bedroom at three in the morning and cannot be cast out.
16. Caterpallor (n.): The color you turn after finding half a worm in the fruit you’re eating.
I hope you have enjoyed the latest edition of Noel News.
Thanks for all your kind comments. Please continue to send feedback through; it’s always appreciated and helps us to improve the newsletter.
And don’t forget you’ll get much more regular communications from me if you follow me on twitter – @NoelWhittaker.