They’re Coming Out of the Woodwork

Hi Scott,

I’ve just read your article entitled “The Horses”. My wife was tricked into buying an almost identical funeral insurance policy from Insuranceline. We estimate we have paid $35,000 in premiums since 2007, with a payout cover of just $6,000 each. My wife and I are now in our seventies, with the age pension as our only income. And, as you know, they keep increasing premiums as we get older. I’m stressed. What can we do?

Ted and Eileen

Hello Ted and Eileen,

I’m used to getting a lot of emails.

Yet I’ve been blown away by the number of people who’ve written to me in a similar situation to you.

Your wife entered into this financial transaction not out of greed but out of kindness and selflessness:

She didn’t want to be a financial burden on her family.

Sadly, too many insurance companies manipulate this emotion for their own gain.

The problem is that, in some cases, if you stop paying the rising premiums you can lose your cover (though you should definitely check the wording in your policy, or call a financial counsellor on 1800 007 007 to help you with it).

Yet if you keep paying you may not be able to afford to travel and see your grandkids. Or do Christmas presents.

The irony is that if you were to speak to your family, you’d find they’d rather you spend the money enjoying yourself than living your final years being stressed out about money.

Besides, a private funeral typically costs around $4,000 for a basic cremation, or up to $15,000 for a more elaborate burial, according to ASIC’s MoneySmart.

I’d encourage you to make a formal complaint to the insurer in writing, and if you don’t get an appropriate outcome take it up with the Australian Financial Complaints Authority (ACFA) on 1800 931 678.

Superhero

A father was walking past his 20-year-old son’s empty room when something caught his eye.

A Post-It note was taped to the middle of his son’s computer screen.

“Turn on the computer”, it read.

It took 30 seconds to boot up his son’s computer ... and 10 seconds to turn his life upside-down.

“If you are reading this, then I am dead”, the letter began.

What follows is the true — and tragic — story of a young American university student named Alexander Kearns.

Like many guys his age, Alexander began share trading during the pandemic.

Also like many guys his age, he kicked things off by downloading the Millennial-friendly trading app Robinhood.

Robinhood is the hottest finance app in the world, with 13 million accounts. It not only offers free trades, you can open an account with just a few bucks, which is a big reason Millennials love it. Yet the real reason it’s so popular is that the app has gamified the trading process:

Digital confetti falls onto the screen after you make your first trade.

And the app sends push notifications to your phone to encourage you to keep trading.

For his part, Alexander began trading highly risky options contracts on Robinhood.

The night before he took his life, Alex logged into his account and got the shock of his life: 

A trade gone wrong. Very wrong. $730,165 wrong!

For a university kid living at home with his parents, it was a mind-boggling amount of money to come up with.

Money he didn’t have.

In a blind panic, he wrote his letter, attached the Post-It note to his screen, and jumped on his bicycle ... never to be seen again. Of course, suicide is rarely caused by just one event, yet stressful experiences can be a trigger.               

Robinhood’s mission is to “democratize finance for all … making investing friendly, approachable, and understandable for newcomers and experts alike”.

Well, this week Australia got its own Millennial-focused trading app, called Superhero.

Like Robinhood, Superhero’s goal is to “make investing accessible and understandable for everyone — no matter if you’re a seasoned trader or buying your first stock”.

Like Robinhood, it offers cheap trading, charging a flat fee of $5 per ASX trade, with minimum investments of $100.

Unlike Robinhood, Superhero doesn’t offer risky options trading.

I spoke to their CEO this week, and he seems like a decent bloke who is aiming to simultaneously attract new and younger investors into the market and bring down the costs of trading.

Still, I am not a fan of apps like these.

Yes they’re cheap, yet they encourage often young and inexperienced users to trade, and that is toxic to their wealth. 

Contrast this approach to Vanguard, the largest fund manager in the world, which is owned by its members.

When they unveiled their ‘personal investor’ offering earlier in the year, they gave me a demo.

They had intentionally added in ‘friction points’ in the buying and selling process to dissuade people from actively trading.

And I absolutely LOVED it.

“Make it more boring!” I cheered.

In fact, I suggested that they didn’t need to build an accompanying app: “Just keep it on the daggy desktop. There’s no need to trade shares when you’re on the toilet.”

(They’re in the process of creating an app.)

Still, my idea of a great investment app is something you set up once: a regular investment into various low-cost index funds. In other words, set-and-forget. And that is a plan that would have worked out well for Alexander, a young man with the world at his feet.

Instead, his father sat at his son’s computer reading his suicide note.

His son was distraught at losing so much money, and admitted in his letter that he had “no clue” about trading.

Tragically, he was right.

Even more tragically, Alexander had actually misread his Robinhood account balance: he hadn’t lost the money at all.

Tread Your Own Path!

Rest In Peace, Alexander Kearns

If you or someone you know needs help, contact Lifeline on 13 11 14 or visit lifeline.org.au.

I’m on Lithium

Hi Scott,

My wife and I received $370,000 from the sale of our house, which I decided to invest into an Australian lithium producer. But over the last six months the share price has halved, leaving me (on paper at least) with a very distressing loss. My question is: do I let this ride until things pick up, or am I in a situation that could get even worse?

James

Hi James,

This could get much worse — especially if you haven’t told your wife about the share price plunge yet.She will likely process your confession as follows: you have taken her security — literally the roof over her head — and gambled it away at the casino.And you know what? She’s right.

Dude! What the hell were you thinking? Are you on lithium?

A quick google shows me that it’s been a wild ride for lithium stocks lately. Two headlines from the same publication, just four months apart, tell the story:

November 2018: “Why I think these lithium miners offer great growth potential for investors.”

March 2019: “Have lithium stocks hit rock bottom?”

I have three (boring) rules when it comes to investing:

First, I don’t like investing in speculative companies that don’t have a track record of making money.

Second, I don’t like investing more than 5% of my portfolio in any one stock.

Third, I would never, ever invest money I thought I might need within the next 10 years (say, to buy another house) into the stock market. While good in the long term, shares are just too risky in the short term.

I’m afraid you’ve broken all three of these rules. And, if you’re tempted to keep playing at the casino, remember that things can always get worse from here.

My advice is to stop listening to investment gurus who can’t predict the future, and start listening to someone who has a real interest in your future: your wife. Sit down and make a plan together. 

Scott

Are Index Funds in a Bubble?

Hi Scott,

The financial guru from the movie The Big Short, Michael Burry, who made a fortune betting against the US housing collapse, is saying that the next big bubble is index funds and exchange traded funds (ETFs), and that things will get really ugly should the share market crash. Aren’t index funds what Barefoot recommends? How do you respond?

Steve

Hi Steve,

After the 1987 crash, governments around the world held at least six inquiries to work out what caused it.

There was no conclusive answer.

My guess is that investors were driven by their emotions:

First, by greed as they watched stocks going up (buy, buy, buy!), and then quickly by fear (sell, sell, sell!).

And, given human emotions don’t change, this behaviour will be what causes the next crash.

Faced with all this erratic decision-making, wouldn’t it be good to have a mechanical, unemotional, by-the-numbers way of investing?

Enter index funds (and Exchange Traded (index) Funds (ETFs).

They are simple to understand: you own, for example, a share in the 300 largest businesses on the ASX.

They have transparent investing rules: twice a year they rebalance the portfolio so it matches with the index (the market).

And, as a result, they have low turnover, low taxes and low fees.

In other words, they are the exact opposite of those actively managed funds that try and pick market swings and roundabouts.

In fact, we know that, over the long term, investors in these actively managed funds will end up with less money than they would if they’d invested in a simple index fund. (And repeated studies show that even those actively managed funds that do well in the short term often do so by luck rather than skill.)

Now, to your question: will things get ugly for index funds if there’s a share market crash?

Yes.

Yet it will be ugly for every investor, whether they’re in index funds or not. However, I still can’t see how owning a collection of the largest stocks on the market would put you at a greater disadvantage than other investors.

Steve, if you’re lying awake at night worrying whether you’ll be able to sell your investments in the event of a once-in-a-lifetime crash — rather than, I don’t know, making love to your wife — you really need to check yourself before you wreck yourself.

Besides, history tells us is that the day a market crashes is the worst time to be selling.

Scott

Is This a Scam?

Dear Scott,

Your Bitcoin scam article prevented me from losing $5,000. Thank you! However, it raises another question: Where can I find out categorically if Oasis Trade is a scam company?

Tegan

Hi Tegan

Yes it is.

Scott

Motivational Misfire

Hi Scott,

I went to a Tony Robbins motivational seminar. What I didn’t know what that prior to the main show, there was a great deal of, let’s say, warm-up speakers, talking about fluff about how to get rich.  One of the guys was selling a share trading program. He had a very impressive style, and was very amiable, very charismatic … but I wasn’t buying it!

Still, I was bored waiting -- so I thought what the hell -- I put my hand up as being interested and went up the back of the room to listen to his spiel. I must admit, what he said got my attention. He said he was selling his share trading system for a good cause: to help build homes for poor people affected by a tsunami.

I watched, I listened, I questioned, I doubted, and then I thought ... I can do this! I can make this work!  (Even though I knew Scott Pape would say “NO!”). But I knew me and I was dog determined to make it work. So I paid him $20,000 for his trading package and got down to it.

I invested extra into a trading account, extra into flying to Sydney to go to live trade events. And I invested copious amounts of time. I’m still up at 1am, still watching the market, still feeling excited. And I am still waiting to see my return. I read your stuff, I read their stuff, I read loads of information. Guess what? I am still down $20k … and you know what, I am grateful for the experience.

Lisa

Why would Lisa say that she’s ‘grateful for the experience’ … of dusting twenty grand?

It almost sounds like she’s been kidnapped into some sort of cult!

Actually, that’s kind of what has happened. Lisa has Stockholm syndrome (definition: “Feelings of trust or affection felt in many cases of kidnapping or hostage-taking by a victim towards a captor”). The guru has worked hard to get Lisa to buy into the reality that she’s going to get rich.

The gold-plated guru says the only thing stopping her living this amazing life is knowledge.

And only he has that knowledge ... yet he’s willing to do her a favour and sell it to her for $20,000.

So if the trading program doesn’t work, it’s the guru’s problem right?

Wrong.

The guru can only do so much, so Lisa needs to work for it, and prove it to herself. And it may be that Lisa requires even more knowledge from the kind guru, in terms of high priced live trading events.

So just for this week everything is upside down:

It’s usually my answers where the learning happens, yet today the lessons come from the questions.

Scott

Prisoner’s Last Chance

Dear Mr Scott Pape,

My name is Peter. I am 59 and I have four years left to serve on a five-year prison term. As a prisoner I do not have access to a phone or the internet, so writing this letter is the only way I can get in contact with you.

I have spent most of my life in institutions, from boys’ homes to jails. I have only got a very low level of education ‒ I think I may have finished Grade 6 (am not sure). I need a lot of help with my reading and writing as well as my spelling. Yet recently I read your book and was able to understand most of it. Now I am hoping you could help me.

I have come into some money (just over six figures) which I want to invest while I am doing time, but I am having problems with my bank, NAB. They will not allow me to do electronic transfers from one bank to another while I am in jail. Yet I am afraid to close the account because if they send me a bank cheque it could go missing (that is not unusual for prisoner property).

I do not have any family or friends outside prison who can help me, either. I would love to invest at least $90,000 for the next four years before I get out of jail. My goal is to have enough money to buy my own home before I die, with no debt and maybe some savings. After all, isn’t that every man’s dream? Please help me and write back.

Peter

Hi Peter,

Good on you for learning about how to manage your money.

Having financial security is one factor that will help you stay on the straight and narrow when you get out (and I’ve donated many copies of my book to prisons across the country for this very reason).

Now, I spoke to NAB on your behalf, and they’ve suggested that you write a letter to NAB’s special service:

NAB Resolve
Reply Paid 2870
Melbourne, Victoria 8060

I’d suggest you transfer your money into a term deposit and time it to mature when you get out, and in the meantime spend the next four years mastering an employable skill.

Good luck!

Scott

Where’s the Beef?

Hi Scott,

I am a proud and very passionate vegan who normally couldn’t give a stuff about investing. (Okay, so your book really helped me, but I have never get my head around investing in businesses that harm the planet for future generations). However, some of my vegan friends have been telling me about an amazing company called Beyond Meat that has perfected plant-based meat, which some food critics weren’t able to tell wasn’t meat. It’s backed by Bill Gates and a host of other smart people. Should I follow their lead, and if so how do I invest?

Bree

Hi Bree

As a farmer, I’ve been watching Beyond Meat for a while.

And I’ve been saving up your question until they had their IPO (initial public offering), so I could tuck into it like a juicy Sunday roast.

Grab your fork, Bree. Let’s chew some investment jerky!

Beyond Meat’s signature product is the Beyond Burger patty, which has 20 grams of protein, and by all accounts smells, tastes and even bleeds like a real burger (because of beetroot juice ... rather than blood). It’s a plant-based product, not meat grown in a lab. Coles actually stock their products at selected supermarkets, and in the US their burgers are sold in thousands of supermarkets and restaurants, like TGI Fridays.

It’s a massive market.

Aussies are some of the biggest meat-eaters in the world, consuming around 100kg per person per year!

(Think about your pipes, people!)

Globally, meat consumption has increased from 70 million tonnes in the 1960s to more than 330 million in 2017, according to the United Nations.

Why?

Because the world population is growing, and this is the wealthiest time in human history … and wealthier people eat more meat.

However, there are environmental impacts -- depending on who you believe, producing 1kg of beef requires somewhere between 550 litre of water (beef lobby group) or 100,000 litres (Greens Party). And then there’s the growing backlash from animal welfare and vegan groups.

So it’s not surprising that food conglomerates have been shovelling millions of dollars into producing a low-cost alternative. Beyond Meat debuted on the NASDAQ this week, and its share price rocketed 163% on the day.

In 2017, insiders were buying in at a reported valuation of million.Today, investors are buying in at a valuation of .6 billion!

Key point: insiders like Bill Gates and Leonardo DiCaprio got in to Beyond Beef at very, very low prices.

Now they’re selling their shares to the general public (via the share market) at very, very high prices.

They’re all eating rib eye … but are investors getting the ‘mystery sausage’?After all, Beyond Beef is still very much in start-up phase and has yet to turn a profit (in fact, last year the company lost million).

So what’s my advice?

Call me old-fashioned, but I personally don’t invest in companies that don’t make money, regardless of how attractive the future looks (and the more attractive the future, the more competitors a company will have).

However, if I were in your shoes, I’d probably have a crack: it’s something you’re passionate about, and if you believe in the company and the change it makes, put your money where your tofu is. You can buy shares through your bank’s online international share broker. The ticker code is BYND.

Scott