Tuesday, 3 April 2018
Beware Of Paper Profits
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.
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?