Tuesday, 3 April 2018

Beware Of Paper Profits





Hi folks

I hope you all had a pretty good Easter break.  On the last day of the long weekend Mrs HM and I went for a drive through the beautiful farmlands of Clarence Town, Dungog, Chichester Dam and state forest, then back home via Vacy, Paterson and Tocal - an utterly beautiful drive through lush green rolling pastures and cheery old hamlets. I love drives like this as they reset my over-wound brain.

So, what's this business about paper profits? Well, I have been seeing lots of articles and hearing lots of conversations about profits on investments - you know the type of thing .... "Yes, we bought a house last year and had it revalued after we painted and it is now worth X amount"  or  "Well, my shares have doubled in value in the last 5 years" or  "We are knocking down the old place and putting up three flats and we will triple our investment" or the most common one " the rent will cover the mortgage" (eeeek!).  These type of things are paper profits. Theory not reality. On paper only, not in the bank.

Paper profits need to be treated with a grain (or bag) of salt. Often the person pontificating or humble-bragging about the said profits is not factoring in taxes or costs nor are they factoring in labour costs or selling costs or the market or liquidity or, or, or. Often these claims of profitability are just big talk. Profit is never profit until everything is paid and settled and the money is in the bank clear and free.

Houses can be a great investment, but always factor in capital gains tax, renovation costs, advertising costs, stamp duty and fees, non-paying tenants, tenant damage, market fluctuations, buyer availability, seasonal impacts, total asset liquidity issues etc.  Shares can be great investments too, but always factor in capital gains tax, market volatility, fees and charges, trading costs, buyer and seller availability, liquidity, company leadership, market factors, political risk, legislative risk etc.

Being wise and canny about word-of-mouth advice/claims of the profitability of any given venture is a must.  Every investment has costs and risks. Those investments that claim to have no costs or risks are to be viewed skeptically.  Always do your own homework and research. Stay away from the big talkers.

Too many paper profits get talked about, printed in prospectuses, used as sales pitches, used in popular culture, chatted about and unquestionably believed.  You know you are onto a winner when you are getting a balanced list of pros and cons, profits and costs .... and preferably from someone who has already done it and is qualified to comment.


Take care folks and stay nice.

Mr HM.

P.S. The above photo is from the dashboard computer of my Suzuki Swift. Is the fabulous fuel economy on that screen to be believed?


13 comments:

  1. We use MPG here in the UK which equates to 58.4 MPG. Thats a good average. My 2007 1.4 TDCI Fiesta do's 67mpg and the 2017 1.5TDCI do's 59

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    1. Wonderful MPG with your cars too Colin. The next car we get I am keen to try a diesel turbo too

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  2. My twenty-something daughter spotted a paper profit in a sales pitch. It was profit over just one month's time but advertised as a great investment because "look at this fabulous profit!" But it only takes a little digging to find out the time frame listed in an ad, and then the financial picture becomes clearer.

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    1. Dig past the hype. Good on her for having an eye for the detail

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  3. I love drives like this too. Out of the city and along country rural roads. Lovely way to discover little towns and their outskirts. Meg:)

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    1. Oh I know Meg. If ever I am too tightly wound, we will go for a country drive (usually the best part of a day) and soak it in and just chat. It does the trick every time.

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  4. I have always said that I don't 'count' money on paper, only money in hand or in my bank account. Money on paper is not 'real'. I agree with you that most of the time you are not getting the net profit information-only the gross which can mis-leading.

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    1. Yep - and yet this is not normal behaviour. Us frugally ones have it down pat.

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  5. That works out to 4.9L per 100km, not bad!

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    1. Pretty pleasing - and it is a Turbo too!

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  6. Very good. Words and supposed paper profits can't be eaten like cash in the bank ;)

    I think we agree, that share investing should go back to the old days. Make a purchase with the sole purpose of collecting a regular dividend cheque.

    No charts, no formulas, no nonsense. Just buy an asset and collect its income.

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