According to the Sydney Morning Herald a big scam has just been revealed in Japan in which about 2,000 people were sold Australian and British sheep as expensive poodles.

The imported sheep were marketed as fashion accessories (!?) and were sold for an equivalent of US$ 1,300.- each! As the price of real poodles in Japan is around the double of that amount, the interest from Japanese dog lovers was guaranteed.

The big swindle was apparently uncovered live on TV when local movie star Maiko Kawamaki went on a popular talk show wondering why her pet poodle does not bark and would not eat its daily servings of dog food .

As the article continues, the scamers’ company, operating under the name Poodles as Pets, took advantage of the fact that sheep are rare animals in Japan and many does not actually know how does it look.

So next time you visit your favourite Japanese restaurant make sure to double check that lamb.

Edit 28 Apr 2007:
And so it appears that despite its renowned source, this story is probably a hoax. For more information read the articles Sheepish discovery and Media flock to report on Japanese poodle scam and make up your own mind.

As a devoted value investor I am also a strong believer in Warren Buffett’s Mr. Market theory. To me it often provides a platform to understand otherwise unexplainable share market movements. In this article I would like to point out two very recent examples of Mr. Market striking again on the Australian Securities Exchange.

I think that in my recent article Investing in Australia? I opt for cash and Another Australian property cycle in full swing I have quite clearly documented my current views about both the property and the share markets in Australia. Careful reader of this blog is therefore aware of my intentions to keep majority of my available cash in one of the online savings accounts for the immediate future.

Yet, every so often, I simply can’t help myself not to peek at the latest share prices and read the latest announcements form my favorite companies. And that is, how I noticed the obscure market behavior I am unable to put down to any other factor than the Mr. Market theory.

Who is Mr. Market?
Mr. Market is an imaginary character, Benjamin Graham’s (Warren Buffett’s teacher and mentor) personification of the stock market. As Buffett mentions in his 1987 Letter to Shareholders (shortened and simplified):

Mr. Market appears daily and names the price at which he will buy your interest or sell you his. Even though [the stock] that you own may have stable economic characteristics, Mr. Market’s quotations will be anything but.

At times he feels euphoric and can see only the favorable factors affecting the business [and therefore] he names very high buy sell price.

At other times he is depressed and can see nothing but trouble for the business and the world. On these occasions he will name a very low price as he is terrified that you will unload [your stock] on him.

For more about the Mr. Market concept read Warren Buffett’s 1987 Letter to Shareholders.

Mr. Market strikes again
Now, once we understand the idea, let’s see if we can spot the traces of this fellow, with incurable emotional problems, sneaking around the ASX.

• Trace 1:
  On 24 April 2007 one of the most outstanding Australian companies Blackmores Ltd. announced its quarterly results posting another of theirs, seemingly never ending, year on year profit increases.

  For the initiated Blackmores Ltd is a business established in 1930 and it is still in big part owned by the founding Blackmores family. In the last 10 years, this company was able to continuously increase its market share as well as its earnings, on average generating over 25% return on equity per annum. For more Blackomres Ltd figures read my January 2007 analysis of this company.

  So while Blackmores Ltd announced its profit after tax totaling to $11.7 million for the nine months ended 31 March 2006 (16.4% increase on the previous corresponding period, more than they made in whole of the 2005 and over 85% of what they made in 2006 with 3 months in the year to spare!), uninterested Mr. Market leaves its stock price pretty much unchanged, casually lowering it by 4c.

  Perhaps the stock price already anticipated such performance or the current valuation (P/E over 23) is already so high, that there is nowhere else to climb?

• Trace 2:
  On 23 April 2007 one of the largest (if not the largest) cotton grower in Australia Namoi Cotton Limited released “Confirms Strong FY 2007 Result” media announcement, in which it reports better than expected result for year ending February 2007.

  The result is slightly below the levels of previous year, however even during the challenging period of water shortages and depressed cotton prices, Namoi makes profit about which most others in the business can only dream.

  This, however, is to no taste of Mr. Market, who is seeing only doom ahead and expects the unfavorable weather and cotton market conditions to last forever. He briskly drops 6c of the company stock price, instantly decreasing its market value by about 9%. With this valuation he effectively offers the business for sale at about 70% value of its tangible assets alone.

  I can understand, that the drought obviously does have horrendous short term impacts in the affected agricultural areas. But as I see it, agriculture, with its dependence on climate conditions, is only another of those cyclical industries where profits and losses come in cycles. If such companies withstand temporary downturns while following strict borrowing policies, they will, no doubt, see the better times stronger than before.

Use Mr. Market to make money
If you watch Mr. Market in action, you will come to realize, that one should be easily able use his behaviour to one’s own benefit. As Mr. Market does not mind to be ignored, if you feel his offer is not quite right, leave him alone. No doubt he will come back tomorrow presenting you with another one.

Warren Buffett in his own words puts it this way (simplified and shortened):

…the more manic-depressive is [Mr. Market’s] behaviour, the better for you. Mr. Market is there to serve you, not to guide you. It is his pocket book, not his wisdom, that you will find useful. If he shows up in particularly foolish mood, you are free to take advantage of him, but do not fall under his influence.

Indeed if you are not certain that you understand and can value [the stock] far better than Mr. Market, you don’t belong in the game.

Therefore, before you invest, make sure, that your valuation is done correctly and than just look around for the foolish offers.

Do you think that the principles of Mr Market theory are still valid today? Or is this idea long obsolete?

In other news:
Banks are offering variety of loans for different purposes. It is very easy to get bank home loan through out the world especially in United States. Competition in the mortgages market is increasing day by day, so a large number of mortgage brokers are available for consultancy. While in case of second mortgage no body want to hire home mortgage consultant. The central mortgage is among the leading ones who are providing quality consultancy.

Make sure not to miss any of the upcoming value analysis on our blog Sound Of Gold and subscribe to our RSS Feed!

It has been a while since the last since Australian investment property attracted as much attention as it does last few weeks. As it seems, with the upcoming changes in economical conditions, investors old and new are once again setting their sights on the property market. And so I thought this may be a good time to refresh our minds about some popular approaches to property investing in Australia.

Negative gearing
Negative gearing means that your property is on the day to day basis actually losing money. The profits are made from the increase in value of the property during the time an investor holds it. Obviously, to realize such profits the property must be sold once/if its value increases to desired level.

Example:
Property purchased for $300,000 with 20% deposit and 7.5% p.a. interest only loan renting for $300 per week.
Yearly rental: $15,500
Less yearly interest: $18,000
Less other expenses (maintenance, body corporate fees, council rates etc.) $3,000
Yearly cash return: - $5,500

This technique works best for investors who can offset their ongoing day to day losses from holding this property against the tax they pay on another income. Higher the tax bracket the investor belongs to based on his other incomes, more can be offset against his property loss.

If all the other incomes put the investor into 40% tax bracket, he will receive $2,200 back to offset the loss on his negatively geared property. This means that his cash position for holding this property after one year will be - $3,300

Making profit:
Say it a fairly average year so the properties in the area increase in value by about 7%. This means that, on the paper, our negatively geared apartment is now valued at $321,000. Therefore if sold:
Proceeds from sale $321,000
Less deposit paid on purchase: $60,000
Less outstanding loan $240,000
Less day to day cash loss $3,300
Gross profit: $17,700

This is a simplified explanation of the negative gearing approach. As you can see the investor needs to meet the ongoing losses from from his own pocket and is effectively placing a bet on rising trend of the property values in order to make the profits.

Positive gearing
Positive gearing is fancy buzzword for a basic investing strategy easily understood by everyone. Positively geared property is producing more cash to the investor than it costs him to run it. Nice and simple, find enough positively geared properties and you may retire the day after. The problem is that this type of property is fairly hard to come by.

Example:
Property purchased for $150,000 with 20% deposit and 7.5% p.a. interest only loan renting for $300 per week.
Yearly rental: $15,500
Less yearly interest: $9,000
Less other expenses (maintenance, body corporate fees, council rates etc.) $3,000
Gross profit: $3,500

This technique will work for anybody lucky or savvy enough to find such an investment. To make money, the property does not need to be sold, the investor only needs a reliable tenant paying the rent in timely manner. If chosen wisely, property like this will not only provide the investor with cash surplus year after year, but it will also continues grow in value providing for additional profits should he decide to sell.

As no loss exists, the cash generated from this investment will need to be taxed at one’s marginal rate, same as any other income.

Positive cashflow
Positive cashflow strategy may be somehow difficult to grasp at first. It can perhaps be thought of as negative gearing (ie. property losing money form it “day to day operations�) which, with the help of some perfectly legal tax deductions, turns positive cash returns.

Important thing to remember - with this strategy few more important factors come in play:

• date of the property was built (properties built after 1987 providing for bigger claims an investor can make to the tax office)
• other depreciable items (additional claims could be made to the tax office for number of various items in the property eg. carpets, aircons, etc.; this is where a document known as Depreciation schedule comes in handy)
• investor’s tax rate (for two different investors, same property can be both cashflow positive for one and cashflow negative for the other depending on their marginal tax rate)

Example:
Property purchased for $220,000 with 20% deposit and 7.5% p.a. interest only loan renting for $300 per week.
Yearly rental: $15,500
Less yearly interest: $13,200
Less other expenses (maintenance, body corporate fees, council rates etc.) $3,000
Gross profit: -$700

So far nothing much different from the negatively geared scenario. As it looks now our investor will need to come up with $2,500 from his own pocket just to make up the difference.

Making profit:
However watch what happens once some smart accounting come in play:
Building built after September 1987 so the cost of its construction can be claimed back from the tax men (ie. depreciated) at the rate of 2.5% over the next 40 years. In our case the investor claims 2.5% of $125,000 ie. $3,125 here and additional depreciable items exist totalling to another $2,375.
 
The depreciable total (while not paid out by the investor) is in Australia legally deductible from other investor’s income hence reducing his total taxable income by $5,500. Because even after such reduction, our investor is still within the 40% marginal tax rate, in effect he is being refunded 40% of the claimable $5,500 giving him additional $2200 in profits from his property.
 
This amount coming back from the tax office than fully covers the day-to-day loss from the property and actually leaves the investor with $1,500 profit.

As you can see this strategy does have its merits, however it may prove rather tricky to execute. Before investing, one must do a thorough research to obtain reasonably accurate estimates of all depreciable items as well as generate substantial other income (higher tax bracket better) allowing for bigger tax refunds on his claims.

Few closing words:
All the items I named gross profits would obviously still need to be taxed depending on the investors tax situation and the investment holding period. Also, I am aware of omitting some significant purchase and sales costs which would play a significant role in each situation. As all the strategies were described in fairly simplistic manner, if you are new to all this, you will need to do some more in-depth research before proceeding with your property investing carrier any further.