The Time Has Come (the Walrus said) Archives

Why SETI is a waste of time – take 2A

A quick clarification about the physics of receivers from take 2:

I pointed out that you have a very low received signal power, and a by comparison a high noise power.

In order to recover the information content, you need a reasonable signal to noise ratio. Mathematically, this is:

R = S / N

Where S = signal power, and N = noise power.

————–
(Aside: we cannot measure S (the signal power) because we only have an imperfect receiver. So the best we can measure is S + N. (The principle of superposition applies to received power – everything is additive).

So, we can measure an approximation to R:

R =approx= (S + N) / N

We can measure N by pointing the antenna somewhere else – not at the signal source, or using other devious tricks like disconnecting the antenna.

Now, when S is about 10 times larger than N, the approximation is a near as damn it to the real ratio.)
—————

In order to demodulate a signal, we need a signal to noise ratio > about 3 – and that will generally do a lousy job. A ratio > 6 and preferably > 10 is much better.

Now, clever modulation systems (as I pointed out in a reply comment) mean you can do clever things with process gain to improve on all this – but you have to know exactly what was transmitted. So these clever modulation systems, by their nature, mean we have damn near buckleys chance of detecting them, so lets forget them.

Using the example in Take 2 for the transmitter 100 light years away, the signal power is MUCH LESS than the noise power.

This means the signal to noise ratio is MUCH less than 1. Seeing as we can only recover information (in other words, demodulate the signal) when the signal to noise ratio is > about 3, it means the chance of meaningful information recovery is impossibly small. The reason is the signal power is extremely small, and it’s massively swamped by plain old thermal noise power.

Oh – and I did not take into account the extra source of noise power – the cosmic background radiation – which also adds to the noise power in your receiver, and just makes the job even more difficult. (Remember – all sources of power are additive – so the wanted signal is added to the thermal noise, is added to the cosmic background radiation…)

It’s still impossible.

*Note for foreign readers: Buckleys chance is an expression meaning no chance at all.

Todays joke

This one arrived the other day:

IN PRISON… you spend the majority of your time in an 8×10 cell.
AT WORK… you spend the majority of your time in a 6×8 cubicle.

IN PRISON… you get three meals a day.
AT WORK… you only get a break for one meal and you pay for it.

IN PRISON… you get time off for good behavior.
AT WORK… you get more work for good behavior.

IN PRISON… the guard locks and unlocks all the doors for you.
AT WORK… you must carry around a security card and open all the doors
for yourself.

IN PRISON… you can watch TV and play games.
AT WORK… you get fired for watching TV and playing games.

IN PRISON… you get your own toilet.
AT WORK… you have to share with some idiot who pees on the seat.

IN PRISON… they allow your family and friends to visit.
AT WORK… you can’t even speak to your family.

IN PRISON… the taxpayers pay all expenses with no work required.
AT WORK… you get to pay all the expenses to go to work and then they deduct taxes from your salary to pay for prisoners.

IN PRISON… you spend most of your life inside bars wanting to get out.
AT WORK… you spend most of your time wanting to get out and go inside bars.

IN PRISON… you must deal with wardens.
AT WORK… they are called managers

Why SETI is a waste of time – take 2

Remember SETI – the Search for Extra-Terrestrial Intelligence?

Here is reason #2 that it is a waste of time (based on physics):

Radio Frequencies and Power and all that

There are 2 basic law of nature – which cannot be changed. These are

1. When you transmit radio frequencies, the received power level falls with distance squared.

2. All technology used to receive radio signals is imperfect, and this manifests (at the very least) as noise.

Taking the first point.

If you transmit a signal with a given power, then when you receive that signal from a distance of 1 metre you will receive a different power. The difference is due to the types of antennas you use, and the distance. Using special antennas helps – but you can’t get out more than you put in (if that were true then perpetual motion machines would also work, really well!).

Lets assume you transmit X, and receive Y, where Y less than X.

Mathematically, Y = c X / (d ^ 2)

Where c = a constant (less than 1), and d = distance (in metres).

Now, increase the distance to 2 metres. You will receive a power less than Y, and it should be about 1/4 as much. Increase to 4 metres, you get 1/16 as much received power and so on.

So… Assume that the little green men are transmitting the sort of powers that we transmit for radio or TV transmissions – maybe a few thousand watts, or a few tens of thousands.

Then take into account the vast distances, it does not take much to work out that the power we COULD receive (if everything worked perfectly) is very very small.

Mathematically, lets assume an alien transmits 10,000 Watts, and that there are no losses, and they are 100 light years away (which is pretty close really).

The most wildly optimistic receive power is 10000 / [( 100 light years, in metres) ^2] Watts (because this does not take into account the frequency dependant effects).

(1 light year = distance for light to travel in a year = 3 x 10^8 [metres/sec] x 365 [hours / day] x 24 [hours / day] x 60 [hours / minute] x 60 [minutes / sec] = 6.46 x 10^15 metres)

So, the best possible receive power is roughly 10000 / (9 x 10^35) = 10^-32 watts.

In engineering speak, that’s -290 dBm.

This is a number so mind bogglingly small that it needs a damn good receiver to pick it up.

Taking the second point

When we build a receiver for a radio signal, it has noise. We have all heard noise – it’s that hissing “static” sound in a radio that’s not tuned on. This is an extreme example.

If we ignore all other sources of noise and concentrate only on Thermal noise (which is often a big contributor anyhow), the amount of thermal noise is given by:

N = kTB (in Watts)

Where:
N = noise power,
k = Boltzmann’s constant, 1.38 x 10^-23
T = temperature in Kelvins
B = Bandwidth in Hertz

The important point about noise is that it is additive – so it is added to the signal we receive, and to detect a signal we need lots of it, so the amount of noise added needs to be small compared to the signal.

If we fix the bandwidth at 1 Hz (which is impossibly small) we have a noise power at room temperature (approx 290 Kelvin) of 4 x 10^-21 Watts (or -174 dBm in engineering speak).

It does not take much to see that if the noise power in a ridiculously small bandwidth is MUCH LARGER than the best possible receive signal power, then we are not going to detect a signal.

We can make things better by reducing the temperature of the receiver. Let’s cool the receiver with something jolly flash, and get temperature down to (say) 20 Kelvins – which is damn cold.

This gives a noise power of 2.76 x 10^-22 watts, or -185 dBm. Still does not cut it. And that is in a 1 Hz bandwidth – still impossibly small.

The only way that we can see the transmissions of the little green men is if they have a DAMN BIG antenna with a DAMN BIG transmitter, POINTED RIGHT AT US.

And even then we would have to be looking at the same frequency, and at the same time.

Those who wish to lecture me about antenna gains and correct my maths with a more exact RF link budget – go right ahead – it will get closer but the point still stands – both sides need antenna gains of > 50 dB to come even remotely close. We can be pretty sure that the little green men will not have a focussed antenna pointing at us, so there won’t be 50 dB of antenna gain on their side. We might have it on ours – maybe even more. Still does not come close.

So… waste of time. It’s trying to break the laws of physics.

Why SETI is a waste of time – take 1

Remember SETI – the Search for Extra-Terrestrial Intelligence?

Here is reason #1 that it is a waste of time (based on logical and reasoning):

Time, Evolution and Development

Our current state of civilisation is such that we have only learned how to use and exploit radio waves (which is what SETI looks for) in the last 150 years.

150 years in cosmological terms is a drop in the ocean.

The assumption is that there is some other civilisation who has reached a similar level of technological development to us. This may be reasonable seeing as the universe is postulated as starting from a very small point in space and has been expanding ever since.

The problem is that given the vast distances involved (many light years), it does not take much to figure out that radio transmissions from any similarly advanced civilisation in some other galaxy are going to take a damn long time to get here.

So, its all based on 2 big assumptions:

1. This other civilisation has reached at about the same time as us, or before, a similar level of technology.

2. The time taken for their version of Neighbours or Happy Days to reach us is immaterial, or small compared to the rate of technological development.

This means there needs to be a very small overlap in time periods (theirs & ours), allowing for time to travel the distance, during which technology is developed, deployed and in use.

For all we know there might be many planets teeming with ants, or gorillas, or iguana, but which have never taken the next step on to develop radio and TV. Maybe that just means they are smarter than us and don’t like shock jocks and soap operas.

In cosmological time, the period in which technology is available to us is infinitesimally small, and the same will apply to any other intelligent life forms. The chance of an overlap is improbably small.

Tax office

Today I received a notice from the tax office.

They are charging me extra Superannuation Surcharge Tax for the 2000/2001 financial year. Goodness knows where they got the salary figure from – it looks about 40% higher than what I earned that year.

But… 5 years late…

What a bunch of tossers.

Material Comforts

The mind is a restless bird; the more it gets, the more it wants, and still remains unsatisfied…

The incessant search for material comforts and their multiplication is such an evil, and I make bold to add that the Europeans themselves will have to remodel their outlook if they are not to perish under the weight of the comforts they are becoming slaves to.”

- Mahatma Gandhi

Wakakirri

Last night we went to Her Majestys Theatre in town to see the school entry in the Australia-wide Wakakirri story festival The oldest son was one of the players.

6 Schools, each having about 10 minutes to tell a story through music, acting and dancing. No singing or speaking! And everything must be done with an emphasis on low cost and use of recycled sets and props.

There are 3 divisions ranging from newcomers to old and experienced. Our school was in the top division (having done well in previous years I suppose).

I had no idea what to expect, and was very pleasantly surprised. 5 out of 6 were really good, and the 6th was OK but the story was so politically correct I wanted to cringe.

Our school told the story of “Around the work in 80 days”, by Jules Verne. I was just astonished – sophisticated but very portable sets, well coordinated set changes (about 4 in less than 10 minutes), good props, great costumes. AND it even told the story well! All with primary school children aged between about 7 and 12. Well done, everybody.

Gluten

In an interesting “Health Report” on radio National the other day, Normal Swan interview a specialist in Coeliac Disease (pronounce it Seely-ac).

It turns out that Gluten causes the bowel to become more permeable:

Norman Swan: And what have you discovered that goes on in the surface of the bowel with coeliac disease? What is it about gluten for example that triggers this problem?

Alessio Fasano: Well gluten is a one of a kind protein. We were not built to deal with gluten, thatís the reality of the story because you know if you -

Norman Swan: Thereís nothing in the natural environment, so gluten is an invention of modern cookery?

Alessio Fasano: Well actually itís an invention of agriculture. Nature didnít plan for it. The nature of grains like maize, ryes they donít have gluten in there. When we develop our agriculture 7000 years ago, then we started to mess around with grains and developed wheat then we created a problem. Because of that gluten has a very peculiar effect on the GI tract making the intestine leakier.

Norman Swan: This is in normal people, I mean you and I when we take gluten it has that effect on us as well?

Alessio Fasano: Everybody. The difference between me and you we donít have coeliac disease and an individual with coeliac disease is that when we are exposed to gluten we have a transient short lived increase of permeability. Very short. While for coeliacs this is a sustained long increase of permeability.

Now reading between the lines and adding a large dose of guesswork:

Perhaps one of the reasons that people on low-carb diets seem (anecdotally) to be generally healthy (and they claim, healthier than before such a diet) is because if the bowel is “leaky” due to gluten being present, surely that means the immune system is working harder.

Reduce the leakiness – the immune system can go an do useful things like fighting off viruses instead of protecting you from the food you have eaten.

Maybe one day some researchers will look at this kind of big-picture idea instead of their narrow specialities, and figure out if there is any credence to this or not. To me it logically stacks up.

Ah Simplicity

I’ve just finished “Timeless Simplicity” by John Lane – a subversive little book.

I think, on reflection, that I’m half way to where I should be to live a simpler life – less cluttered with consumer junk, stress and overwork.

There are many great little lines in this book, things to read two or three times, and stop and think about.

How about this (quoting Michel de Montaigne [1533-1592]):

We are great fools. “He has spent his lifetime in idleness,” we say; “I have done nothing today.” What, have you not lived? That is not only the most fundamental but the most illustrious of your occupations… To compose our character is our duty, not to compose books, and to win, not battles and provinces but order and tranquillity in our conduct. Our great and glorious masterpiece is to live appropriately.

(My emphasis.)

Read this a couple of times… then think about what you do, why you do it, what you spend, and who persuades you to spend it.

Cleaned up the page format

I’ve finally figured out enough about CSS & style sheets to clean up the formatting here a little.

Through a careful hack, the sidebar now has a list of the last 20 posts by title, the layout is a little nicer (not bold – its more readable now), and the spacing is better so that the names of things don’t run into each other.

Cleaning that up only took… oh… about an hour. I suppose that’s not too bad consider I know NO PHP at all, and nothing about style sheets.

Investing and Speculating

Investing and speculating… two highly loaded terms.

“Investing” carries with it a tone of gentrified dignity.

“Speculating” has a feel of the gambler or the spiv.

You will find frequent mention of “investors”, often in the financial pages of the newspapers, and frequently in those large advertisements trying to entice you into paying the ransom of a minor principalilty to go on “a home trading investment course”, with sure-fire rules where nobody loses and everybody makes a motza on the markets. Yawn. Yeah, right.

A speculator does not know much, or care much, about what they tip their money into. In today, out tomorrow, don’t worry what it is, just find a bigger mug. Buy low, sell high ( yeah – like the bottom and top are SOOOOOO obvious).

Every share trader is a speculator. If they try to convince you they are an investor, consider gently correcting them, but walk away.

The investor has a different mind-set. Investors are in for the long haul, thinking carefully, listening, evaluating, and placing their money somewhere with a heart-felt conviction. Investors don’t have stop-loss orders, don’t worry about the price in the markets going up and down. Investors make their decisions, tip in their money, and don’t worry, happy in the knowledge that by doing nothing their wisely chosen purchases will rise in value over a long, long period of time.

A specualtor is a gambler. An investor is a thinker.

Wanna know why so many speculators call themselves investors? Go back to the start… “investor” sounds good. Speculator sounds a bit dodgy…

Opinion makers

Have you ever noticed the occasional references to “Opinion Makers”?

I’ve never found a good definition, but it seems (as far as I can see) that these are people of influence, whose views are accepted by others. I suppose the standard line-up of radio shock-jocks fit the category, but there must be many others.

That got me thinking – why pander to the “opinion makers”?

Easy answer – to get your point of view generally accepted, you need to reach the few with influence and they will peddle the message for you. The dumb guzzling masses then lap this up as some kind of divine pronouncement of a fundamental truth, and job done!

At least that’s how I think the arrangement is supposed to work.

It leaves me feeling as if I (and most others) are being manipulated.

So… new time you hear somebody big and supposedly important rabbiting on about something, stop and think – are THEY an “opinion maker”? Are their views really there own? Whose agenda are they serving?

Am I an “opinion maker” by writing this stuff? Should you ignore me? (Nah – nobody much reads these rants anyway – and those who do are probably smart enough to have this one figured out anyhow.)

Telstra yet again

A really good short article by Stephen Mayne appeared in the Crikey emails this week (no URL to link to, sadly, so I’ve got to quote lumps of it).

After yesterday’s doom and gloom profit warning from Telstra, does anyone really think the government has a hope in hell of getting T3 away at the budgeted price of $5.25 a share? Terry McCrann got it absolutely right in today’s News Ltd tabloids when he wrote: “The core reality of Ė and challenge for Ė Telstra as a business is actually very simple. It’s a fabulous 20th century monopoly living in the 21st century.”

Here’s a table of Telstra’s PSTN (the old fixed-line business) revenue over the past 5 years, including a projection for the current year based on comments made by CFO John Stanhope predicting a 6.8% drop in 2005-06, following the unprecedented 3.4% fall in 2004-05:

2001-02: $7,755m
2002-03: $7,916m
2003-04: $7,984m
2004-05: $7,709m
2005-06: $7,185m (f)

Telstra has long used its fixed-line business for gouging to keep its already fat profit margins high, but those two ACCC-approved increases in monthly line-rental charges now look absolutely disastrous. Customers are leaving in their tens of thousands.

We’ve got 3 fixed lines in the old Crikey bunker which cost us $90 a month in rental fees. We’ve just cancelled one this morning on reading that everyone else is sick of being ripped off and is going without. Why don’t you try the same? Mobiles are so cheap these days that you don’t really need a landline.

Whilst Telstra is enjoying good growth in mobile and broadband revenue, these are subject to intense competitive pressures which don’t allow for the same monopoly profits that flow from the rapidly declining fixed-line business.

At last glance, the telco’s share price was languishing at $4.76, down 9c. Several major analysts have downgraded their outlook on the stock and Merrill Lynch has slapped it with a rare sell recommendation.

Knowing all this, who’s going to pay $5.25 a share for a slice of a declining business? The government will do well to get $4.50 a share which is only $29 billion and then you’ve got the billions that will be diverted to improve services in the bush and the shares that will be put directly into the Future Fund. With Telstra contributing $2 billion-plus to the Federal budget in recent years, Peter Costello is facing a black hole from T3 process.

With so many Australian investors still upset about being dudded on T2 at $7.40 a share, the government and its army of highly-paid advisors will have their work cut out getting T3 away. Even if it does get Senate approval, will the government sell at any price?

Then again, if the regulatory framework is as light-handed as it is in the banking sector, T3 could be a good buy if a fully privatised goes hell for leather slashing costs, withdrawing regional services and jacking up prices where it has market power.

After all, the Howard Government sold a majority stake in the Commonwealth Bank for just over $10 a share in 1996 and then did nothing as it abandoned the bush and gouged the bejeezers out of its customer base. The CBA is now pushing $50, but it’s hard to imagine Telstra shares being sold for $5 and then rising by 500% to $25 over the following 10 years.

Sadly, Telstra’s glory days are behind it and the government is about to attempt selling a flea-blown dog to a sceptical public. Buyer beware if the final sale price begins with a 5.

I’d add that as the same time as this is going on, the government is hell-bent on adding more regulation to Telstra, and deliberately setting out to cripple its business. Some of this is called “accounting transparency” – jargon for telling your competitors exactly what your costs AND MARGINS are so they can undercut easily. Some is plain old pork-barrelling, and some is just pig-headed political ideology.

Mr Howard and Mr Costello: I’ll walk over hot coals barefoot before I buy another Telstra share from thieves the likes of you.

Dear Mr Joyce

I’ve done something I never do. I’ve sent an email to a politician.

Here is what I sent to Barnaby Joyce, the newly elected senator from Queensland.

Hello Senator Joyce

Since your election your profile has been pretty high, and I have heard something refreshing Ė something that has not been heard in politics for a long time. What Iíve heard is that you have been elected by people in Queensland to represent them, and that is what you intend to do. Last I knew, this is what democracy was supposed to be about.

Politics is corrupting, and it is easy to become just another quiet timid voice, a number doing as the party tells you. Please, keep the independent spirit, keep doing what politicians are supposed to do, and represent your people instead of becoming another silent body, just making up the numbers.

On Telstra, I firmly believe that (seeing as we live in a capitalist society), we have some basic principles that need to be followed in this case, just like they apply to other businesses. These are:

1. Commercial businesses should be allowed to be commercial;
2. Social policy should be formulated and administered by Government.

For these reasons, if Telstra is to be sold, the idea of creating a fund to deliver services to regional areas is a good and sound idea.

Put simply, delivery of services where there is limited or no profit is not commercial. Why should a commercial business (Telstra) be forced to operate in an un-business-like manner? Once upon a time, when Telstra was as much about social policy as telephone services, this was appropriate. Now that Telstra is Ĺ sold, and presumably soon to be fully sold, it is not.

Separation of the social obligation from the business obligation is clear, simple, straightforward common sense. Please keep plugging away to ensure a suitable outcome.

Finally, donít let the bastards wear you down. You will be hounded, and subjected to more invective from the ideologues. Stick to your principles. They are simply stated, easily understood, and will earn you support and respect Ė maybe not from Wilson Tuckey and others in the Liberal party, but certainly from many ordinary people who feel Politicians have lost touch.

Now I suspect that Sen. Joyce has been deluged with letter and emails. If he ever sees this it will probably be weeks before he gets to it, and I don’t expect a reply, but hey – it’s worth a try isn’t it?

Would you ever sell a million dollar house?

A reader (thanks Zac) posed a question in the context of a separate post, but I’ll repeat it here, out of context, and then go on to discuss it:

Why sell a million dollar house so you can rent? Especially if you are going to be renting something that is not going to be competitively priced or in good physical condition

So, the question is, would you ever sell a million dollar house? (Let’s ignore the second part of the question).

Answer: It depends.

Let us assume that the current property market prevails, so rental returns are about 2% to 4% (which is crazy but that is what a speculative bubble creates).

Let us assume that we can invest the proceeds of selling the house and get a return of about 10%. This is not unreasonable – there are a number of shares you can buy on the stock exchange which will give a dividend yield of about 5.5% to 6% fully franked. This is an effective equivalent interest rate of 7.7% to 8.4%. By paying attention and buying carefully, a long term capital gain of a further 1.5 to 3% is quite achievable.

So, if I sold my million dollar house, rented it back, and invested the sale proceeds, I would probably pay out (based on the rental yield – lets assume 4%) about $40,000 per year in rent (well… it was a million dollar house!).

My million dollars invested is returning about $77,000 to $84,000 in cash and cash equivalents, and a few more dollars in capital gains.

So, my house when sold generates an income that covers the rent with money left over. And there is another benefit… I don’t get to pay the council rates any more – the landlord does!

Now, assume I don’t want to live in a million dollar house any more, I’m happy with ordinary suburbia, paying (say) $400 a week. That gets me a pretty flashy house in Adelaide… That means I’m paying $20,800 per year in rent and I am even better off.

Now, before you question if this really happens, the answer is a resounding yes.

I know somebody who figured all this out, and sold their house in order to rent for the rest of his life. He was able to get a far higher rate of return by taking the capital value of the house and investing it.

I also know a landlord who bought a house from somebody who was happy to rent, because the capital could be used to generate income.

Next: what if the figures change – what if rents are higher and other investment returns are lower? In that case, the results will be different and it may not be worthwhile. That is why the answer is “it depends”.

The good old days

My father provided the following, which I’m including with minor edits only to protect the names of the innocent. This is a family history I had never heard before, and I’m quite stunned by it.

For reference, Salisbury is about 30 km from the city, and about 15 km from Enfield.


Something on your dump prompted me to recall something your grandfather told me late in his life.

I don’t think he ever told anybody else in them family.

He always had an old camera, a Kodak 616, a very large format which in the end it became impossible to get film for. He had owned this a very long time and always recorded family events on it, 8 shots per film each one about postcard size.

Once when things were very tough in the mid-late 1930’s, I think I would have been a little child, they were living in Salisbury so it would have been about 1936 or even 1937, he could get no work, had no money in the bank and there was absolutely no food in the house to feed 4 hungry and growing children for the coming weekend.

So he took his camera and road on a bicycle [may have borrowed that too] down to the city and pawned the camera. With the little bit of money from the pawn shop, he then rode around to the Central Market and filled a sugar bag with vegetables and fruit and a bit of meat, enough to keep them going until the middle of the following week.

It took an age to redeem the camera but he did.

However, he then swallowed his pride and applied for the dole. At that time it was called ‘going on the rations’. They issued one with a ticket each week which you then took along to a store who gave you food in exchange for the ticket. Rather than get the ticket filled in Salisbury which was a typical little gossipy and bitchy country town, he used to ride his bike down to Enfield each week and get the food from there and ride home to Salisbury and feed us.

He always hated certain shopkeepers in Salisbury and I think I understand the reason.

It’s no wonder that he lived until he was nearly 91 as he was so fit from all the bike riding. He would have been about 38 or 39 when all this was happening.

He got work not long after with my Uncle Colin [my mother's brother] who had borrowed enough money from his rich mother-in-law to import two floor surfacing machines from the USA. Dad used to cart them around from job to job in a huge ‘box’ attached to a gigantic Indian motorcycle and on weekends we used to go around crouched in the box. They are my first memories of family outings.

When war broke out, he got a better paying job with the South Australian Railways working on munitions manufacture at the Islington workshops and this brought in a lot of overtime so we improved rapidly in financial position eventually buying my grandmother’s house in Payneham in 1943.

All this was the struggle to keep alive in the late 1930’s and support a family, so Dad always had this tremendous emphasis on education and improving yourself. Also to get a good job working for the government and stay in it.

So much for John Howard’s harking back to the ‘good old days’. The bugger simply has no idea how hard it was just to hold body and soul together for most of us in an earlier era.

I’m not so sure about the bit about getting a job with the government, because at a later time it is my understanding that my grandfather was summarily dismissed from his job with the government to make a position for a returning soldier from WW2. I believe this was quite a common occurrence, and my aunts are still bitter about it, 60 years later.

Boring, boring, BORING

These days I’m finding that breakfast is one of the MOST BORING times of the day.

Why?

Breakfast cereal is boring, boring, boring.

I’m tired of Muesli and all those other BORING things we are told are good for us (ha ha – mostly they are just the opposite, but that’s another rant for another time).

There must be something that’s quick and easy to do, fills you up until lunch time, is moderately healthy, won’t make you fat, and is NOT BORING. I haven’t found it yet.

Ireland

This weeks BRW magazine has a very good opinion piece by Gerry Van Wyngen.

Unfortunately I can’t link to it because it is only available to BRW subscribers, so I’ll summarise (and quote the occasional sentence or two).

Gerry says that Australia needs a strategy more forward-looking than just living off the sale of non-renewable resources, such as oil, natural gas, and so on. These will run out in about the next 20 years or so.

He goes on to cite the case of Ireland which was a basket case until the 1980’s, but since then has the highest economic growth rate in Europe. This was achieved by the Government, unions, business, primary producers and others agreeing to:

. austerity measures;
. cutting the corporate tax rates to attract business; and
. making the cost of university education practically free.

The result is the creation of a tax incentive for new (and especially knowledge-based) industries, which in turn creates a demand for educated people. Free education provides the supply of those people.

Australia, on the other hand, is going in the opposite direction. Tertiary education is becoming more expensive and elitist. There are few bursaries or government scholarships. (Side note: Back in the 1950’s and 60’s when tertiary education was not free, there were are very large number of government scholarships. Most students at university won their places on merit – by getting a scholarship.)

Australia needs some long-term planning by our political masters, and needs it urgently. Setting Australia up for the post-natural-resources rip-it-out-the-ground-and-sell-it-off economy needs to start now – these things cannot be set up overnight.

To make it easier, there is a template to show how it’s done -Ireland.

So, Liberal Party, Labor Party, business, how about it?

Oh sorry – I forgot. This is Australia, where we don’t plan more than 10 minutes out. Silly me.

Assets and Liabilities

No doubt you have all filled out forms at some time or other (especially when asking for a loan), which require you to list your assets and liabilities.

The standard definition is something like this:

Asset: Something you can sell to raise money.

Liability: Something you owe.

This is very simple, easy to understand, and in my opinion misleading.

Using this definition, a car is an asset, so is a house. A loan is a liability.

I’d like to turn this on its head and present a more business-like definition (accountants and economists, stop reading now before you get annoyed.)

Asset: Something that returns you an income.

Liability: Something that costs money to keep and maintain.

This definition helps to put purchase decisions into perspective.

Here are 3 simple examples:

CAR.

Classic definition: Asset.
My definition: Liability.

Reason: A car costs an up-front amount to purchase, and then you never stop spending. You have to feed it on petrol, service it, get it repaired, and it declines in value over time. With very rare exceptions you can never sell a car for more than you paid for it.

A car does not only cost the up-front purchase price and the ongoing cost. It also has the opportunity cost (the price you pay because you could not use that money for something else).

It is easy to show (in a subsequent post) that the opportunity cost can far exceed your wildest expectations, and make the cost of owning a car something truly horrifying.

In our modern society you probably have no choice in owning a car. So, if it is a necessary evil and you understand the economics, you can make an informed choice.

Buy a car that is:
- sufficient but not luxurious;
- does not cost an arm and a leg to run;
- is going to last you a long time (and better, a long, long, long time).

HOUSE.

Classic definition: Asset.
My definition: Probably an Asset, could be a Liability.

Reason:

Like a car, a house costs an up-front amount to purchase. Unlike a car (which is frequently but not always necessary), everybody needs to live somewhere. Therefore a house is a necessity. However, you have a choice, you could pay “dead money” in rent, or you could buy.

In some cases, you are better off renting, in other cases you should buy.

If your house appreciates in value, you probably have an asset. In general, all houses appreciate given a sufficiently long period of time. However, houses need maintenance to stop them falling apart. They need repairs, painting, cleaning. These all cost. In that sense, they are a liability.

If you can use your house to generate additional income, its status as an asset improves.

For example, if you use equity in your house to buy other income producingassets, then your house is more clearly an asset. But if you use equity in your house to go on a fancy holiday (as many people in Australia are doing), your house is more likely to be a liability.

A house is not clear-cut. It very much depends on where it is, what it’s value will do, and how you handle any borrowings associated with it.

MARKETABLE INVESTMENT.

This category covers shares, bonds, investment property, etc.

Classic definition: Asset.
My definition: Usually an Asset, occasionally a Liability.

Reason:

Mostly these assets pay an income stream (dividends, rent, etc). This makes them an asset. Mostly they are set up with the objective of returning something to their owners.

A share that pays a dividend is an asset – until the company goes bust, then it’s worthless.

A share that pays no dividend is only an asset if the value (and over time, the market price) goes up and up. A company that pays no dividends, and does not grow its value over time is plainly a liability.

If you can sell shares for less than you paid, does that owning those shares a liability? (Probably).

The various financial instruments available are usually assets if they pay an income stream, but even then you need to look carefully. If they pay no income stream, look very very carefully.

If they pay an income stream that depletes your capital over time (due to value lost to inflation and taxes), you may actually have a liability.

Sometimes shares, bonds, or rental property can be liabilities. Look, think and question before accepting conventional wisdom.

Heinlein 2

The three-legged stool of understanding is held up by history, languages, and mathematics. Equipped with these three you can learn anything you want to learn. But if you lack any one of them you are just another ignorant peasant with dung on your boots.

- Robert Heinlein

Going for a walk on a nice day

Scientists have found that Going for a walk on a nice day improves your mood.

And we pay people to go work these things out? Hmm.

Another *#$% birthday

My mischievous parents sent me this birthday card:

And written inside:

Elephants have great memories and great wisdom but even they get older.

Thanks Mum & Dad!

So what do I do with my Financial Freedom Fund?

Invest it!

Sounds easy doesn’t it.

This is where the hard work starts, and where we get controversial.

Remember, you have to beat tax and inflation. If tax takes (say) 50% of the return, and inflation is running at 3% per year, then you need to get a return of at least 6% or you go backwards.

Don’t worry about short term returns – quarter by quarter is meaningless. Year by year is nearly meaningless. You need to look at time periods of 5 to 10 years, and let the magic of compound interest work for you.

(As an aside – assume you can get 10% per year and ignore tax. Then after 10 years, compounding means for every $1 you start with you have 1.1^10 = $2.60. And 10% is a pretty lousy return. Aim higher. A lot higher.)

Real Estate & Houses

Some invest by buying rental property (the devotees of Jan Somers, and others). Personally, I don’t go much on this. It involves maintenance and tenants, and other nasty hands-on things. And over the last few years the capital gains have been good but the rental returns, lousy. The capital gains are likely to have a pause for about the next 5 years.

Those who want to flame me about my attitude to rental housing – don’t bother. If that’s what turns you on, then go for it. But, do your research… house prices cannot rise at faster than inflation forever. It stands to reason that nobody could afford to buy if that happened. Do your research, and you will find that house prices tend to go in cycles – roughly 10 years long, characterised by big rises for 2-3 years, followed by about 5-7 years of being pretty flat.

Personally, I don’t want to spend $200K to $350K a pop to buy houses that could take a long time to offload. And to start you need a lot of equity in your own home, or a lot of savings.

Managed Funds

There are plenty of these about, and more every week.

Watch out! Most managed funds are professionally managed by fund managers. I call them fund damagers because they always make money even when you don’t – most take a percentage of the funds under management, not a percentage of the gain they get you. A nice little earner if you are in the business.

Managed funds generally have a low cost of entry so you can tip your money in when you have only $1000, or maybe $2000 depending on the fund.

Most of them let you tip in regular extra contributions – great for set and forget.

If you put money into a managed fund, you want to aim for a return of at least 15% per annum averaged over a 10 year period. A cash or capital stable fund is secure but gives lousy returns. If you are young, take a few risks.

Most importantly, most managed funds charge an exit fee as well as an entry fee. So having chosen, stick with it. If you always chase the high performers you will lose through the fees you pay. Constantly moving from one fund to another is known as “churn”, and its another nice little earner for the fund managers.

Choose carefully, choose a few different funds, tip in regularly, and don’t worry too much about short term performance.

Never, ever, put all your money in one place or under one manager. There is safety in spreading it around a bit.

(A controversial point here: Diversity is sometimes known as “di-worsity”. The best investors in the world have consistently made superior returns through holding concentrated portfolios. However, these guys do this all day, every day. If you and I can’t manage that, then diversity will deliver worse returns than the best in world, but it also lowers risk. The choice is yours.)

Shares, bonds, and marketable securities

If you want to buy a few shares, make sure you do your research first. If you don’t know where to start, buy some books. Don’t just buy one book, buy 5 or 6. You need many points of view.

Treat trading schemes with suspicion. Treat technical analysis with suspicion. (Technical analysis is the business of looking at historical trends, plotting price charts, and reading the tea leaves).

Be careful of financial advisors, especially those that want to cream off some of your money by cute things like “rebalancing” your portfolio on a regular basis.

You can sign up with an Internet broker for nothing, and buying and selling is cheap. You can start investing with $500 if you want. I’d suggest waiting till you have about $1000 before getting going.

Don’t buy anything just because you know it. Buy because you understand it. Find out what companies do, who there management are, how they treat their employees. Find it their profits are consistent or up and down. Find if they pay a dividend. See if they look expensive of cheap. Think and look before investing. Remember – it’s your money!

If a company looks cheap – see if you can find why. Have they declared a profit warning? Are they in trouble? Maybe they really are overlooked and present a bargain. Maybe not.

If a company looks expensive – see if you can find out why. Are they a good consistent performer, where today’s poor dividend will be nice earner in 5 year? Or are they in the middle of dot-com style speculative lunacy?

Look at the poor performers, and find the names of the senior management. Remember them. See if they keep popping up. There are some companies I will never invest in because of who is in management and on the board. If I post those names here I’ll get sued for defamation – sorry – you will have to do your own research.

Never follow the herd. The herd are often like sheep – sticking together, running in the same direction, and never thinking for themselves.

This sounds hard. It is hard. But the cost of entry is low, and the potential returns are high. You need discipline, patience, confidence and research.

Finally – there is nothing like concentrating the mind by having real money on the line.

Listed Investment Companies

If everything above sounds too hard, or unattractive, look at the Listed Investment Companies.

There are at least two on the ASX that have been going for more than 50 years.

Both of those two have a highly diversified portfolio, pay reasonable dividends (and have been growing dividends for 50 years) and have very low management costs – typically less than 0.1 % of funds under management (no, that is not a misprint – and compare that with many managed funds that take 1% to 2%).

Watch out though – there are a few new generation listed investment companies that charge very large fees- just like managed funds.

For legal reasons I have to be careful giving out names of listed investment companies – it sounds like investment advice – but if you want to know who they are, prowl through some broking advice or (as a last resort) send me an email.

Some of these listed investment companies have been returning an average total return of 11% to 13%, on average, for the last 20 years. Some have returned slightly better.

Not bad for a complete set-and-forget, low-cost, no-thought, do nothing investment!

Obligatory legal disclaimer stuff The author does not have a financial services license and is not legally qualified to give financial advice. Readers should treat everything here as opinion. Readers should get qualified, independant financial advice (and treat it with suspicion).

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