Warehouse Sale

This weekend (1st and 2nd November) we’re having a warehouse sale. It’s at 20 Stennett Road Ingleburn NSW. Take the Ingleburn Industrial Estate exit off the M5 and we’re 3 km from there. I’m clearing all the ceramics and lots of books and toys. Mostly below cost. Drop by if you can.

I signed off the local newspaper ads yesterday. We’re running slightly larger than quarter page full-colour ads in two Fairfax community newspapers. The circulation is about 110,000. I’m not too impressed with the placement. Pages 35 and 48 but we’re new at that too. The cost was just under $1,500.00.

I’ll post a copy once I get the colour proof or scan of the actual ad in today’s papers.

I decided to skip the letterbox drop this time. Last year it cost us about $3,000 to letterbox 55,000 homes for a six week warehouse sale.

This year it’s a two-day event. Boy I hope it works. I’d like to do another before Christmas.

Short history of losing a fortune Part 1

In this comment Rob Rooland asked

Anyhow back to your site – I have enjoyed reading through the last two yeaars of your journal but want to know more regarding yourself, your history, brief details of how someone looses a fortune, and what your goals and aspirations are. Do you have a brief autobiography writen?

I’m gathering some notes for a biographical post. Until then here is a short timeline.

1979 I read SMH real estate pages at 14 years old while working a checkout in a convenience store.

1983 Got excited about the floating of the Aussie Dollar and other changes to the Australian economy.

1984 At uni started reading the Fin Review on a daily basis watching Robert Holmes a Court revolutionise Australian Boardrooms (with help from Ron Brierley, Alan Bond, Christopher Skase, John Elliott, Larry Adler, Warren Anderson, Garry Carter, Laurie Connell and Allan Hawkins).

1988 buy my first property with $5,000 life savings. It’s a 1-bedroom strata unit in Kings Cross/Potts Point for $46,000. That was after getting gazumped twice. I eventually have about 10 of these little units.

1989 Add to portfolio with $5,000 of Nella’s life savings. Quit my job as a trainee economist to start property investment and development company. My boss said I was crazy – the worst time for property was right now. I quit anyway. Oh and Nella and I got married.

1990 Grow the portfolio with easy credit and a mountain of debt. Cashflow is tight but maximising rents keeps me afloat.

My Advance Bank manager has my file permanently on his desk, and OK’s a $1.2Million loan in principle over the phone (lots of “subject to’s” but it’s a deal). Hell I’m 25 and don’t have a real job or a car.

I sign a deal for a multi-unit development. Use solicitors funds and an exotic cocktail of financing to make it happen. Cashflow now difficult.

1991 Cashflow significantly negative. Go through worst 3 months of vacancies coupled with about $20,000 in special levies and repairs. 18% first mortgage rates. My bridging finance hits 33%. As rates rose I could fix them only at even higher rates.

1992 Recession we had to have. Bankruptcy. Many friends’ with successful export businesses fail under 18% interest rates with vanished local demand.

While my accountant and lawyer at the time said many clients lost their businesses in that recession, I need to take responsability for my decisions. I bragged to a board of advisors meeting that no federal Labor government would allow first mortgage interest rates to hit 18%, so I bet the farm and lost. That is why I say I “foolishly misplaced” my first fortune.

These days I’m a lot more conservative and always keep an eye on the exit strategy. That has cost me considerable profits over the last five years as I rebuild. But I have children now and am not willing to risk them being evicted by a sherrif. So I chose to grow more slowly and pass deals which look fantastic but don’t have an exit strategy if things go pear-shaped.

It’s Only Money

Money is a medium of exchange. That means it has no intrinsic value beyond what its holder can exchange it for.

There is zen-like power in understanding that. Mastery of my emotions around money leads to mastery over money.

Money becomes merely a score-card. Some days are a winner, other days aren’t so great. My perspective changes and mistakes don’t generate the same level of fear.

Fun starts to creep in.

And values are easier to see.

I can also look at the depressing parts of my life with new insight. Are the succession wars depressing because of their fiscal impact on me? No but the cost makes it harder. Good, then I stop thinking about the costs and start figuring out solutions to the underlying problems. It’s only money and it will cost whatever it will, meantime how do I feel about family Christmas lunch?

Stuff that is depressing or irritating purely due to the financial outcome can be dealt with by quick decisions. That person owes us money? Send it to the debt collector and stop worrying about it.

Delays making or second guessing decisions are soul numbing. I learned that lesson trading the stock market. Once I exited a trade it was finished. For every missed extra profit there was a missed loss, so all that mattered was how much profit this trade made. Quick decisions then move on.

Mooter Search Engine

I saw a link to the beta of a new Australian search engine called Mooter. Be gentle on the server folks. It’s also a bit buggy.

However it is exciting for two reasons.

Firstly it uses a clustering approach to help you narrow down what you are looking for. It actually helps you while you search. Mooter presents the initial results in a mind map. How cool is that?

So mooter aims to deliver the results a user is looking for within three or four clicks. I am a search engine power-user. At IBM I did many of the searches for obscure network bugs on behalf of our team as I could find the information faster than other people. I’m not bragging here, I just think the right way. It’s weird.

The second exciting thing is the enterprise behind the technology. It’s CEO Leisl Capper has experience in fast growth franchised ventures (use mooter to look her up and test it out or google her if you like). I’m not sure fast growth b2c (business to consumer) is a good grounding for search engines, but it can’t be worse than many other backgrounds. I’ve only just found out about them but I want to keep an eye on this company.

Mutual Assured Destruction

I am feeling quite down this evening, as I hear about the various family events my father will avoid because he doesn’t feel comfortable around me. I think the step-mother has finally got her wish and isolated him fully. I don’t understand how that improves the standing of my kid brother at all.

On the one hand Dad’s absence is no skin off my nose, on the other it’s a sad behaviour I saw when my parents divorced. It’s just not right.

So the succession wars at my company are probably almost over. I suspect Mutual Assured Destruction is almost inevitable.

It is probably cheaper to stop fighting the court battles and show faith in the legal structure I put in place early last year. Even if I lose all the court cases there are no assets at risk. But the principal of the dispute sticks in my throat. Not contesting these claims seems like an admission that they are true and not some delusion dreamed up in my father’s and step-mother’s minds.

Lastly I had a distributor quit today. Again he wasn’t the best I had. I didn’t even think he’d come back after the Christmas break, but now I have to find and train a replacement.

I found myself wishing for a business that didn’t rely on distributors. Give me something with multiple locations and staff who show up or are fired. 😉

But I’ll bet there’s a retailer out there who would kill to swap businesses with me.

Actually that reminds me of a discussion I had in a supplier’s showroom with a retailer. He and I got to complaining about the worst aspects of Wholesale/Direct Marketing versus Retail. Everybody thinks the other guy in the supply chain is making more money than them. It passed the time while we were waiting for the invoices to be produced.

Anyway tomorrow is a new day filled with fresh challenges and opportunities. I’m going to wallow tonight and attack the business fresh in the morning. After all it’s only money.

The Right Thing

I had a conversation with a staff member yesterday. We have a supplier who has a big problem with their outsourced warehouse operation, the outsourcers aren’t shipping product. We are awaiting delivery of 1,000 stuffed dogs and owe this supplier about $11,000 due at the end of this month (for product we already have). It was suggested we withhold payment in order to put more pressure on the supplier to dispatch our order. Given the succession wars started over not paying suppliers, I reminded everyone that that’s not how we do business.

Yes not getting the product this month will hurt my business and my revenue. But my values are that I meet my obligations. And we never take an unfair advantage. To some this is a naive approach to business. For me it’s doing the right thing.

Plus I owe them $21,000 in November and that gives us some leverage.

Housing Bubble

There is constant speculation in the media that the Australian Real Estate market is in a bubble. I swore off making economic predictions in 1992 when I retired the word Ecomonist from my CV. So don’t expect a lot of econometric data to support this post.

I don’t think current capital city prices make sense on historical or fundamental grounds. But this could be a shift in basic valuation. I think we need some unidentified factor to confirm any shift in basic valuation. Given many people in Sydney’s eastern suburbs could not afford (in this market) to buy the house they currently own. If they trade the stamp duty is another major obstacle.

Either way I don’t think Sydney in particular, nor Australia as a whole, is looking at massive devaluation in housing prices from current levels. Prices are at their current levels based on a generally robust economy giving stable employment, coupled with historically low interest rates and easy finance from traditional and new mortgage lenders.

The Reserve Bank has expressed concern at the speculative nature of housing price rises. It’s standard and preferred response is to raise interest rates. However interest rate rises place the rest of the domestic economy at risk. Meanwhile the rest of our trading partners look for their own economic recoveries. The Australian Dollar’s increase in value relative to the US Dollar is partly due to the interest rate differential between the US and Australia. While the US has cut rates, Australia has maintained them, increasing demand for our currency among “hot money” in global funds. OK so this means that the Reserve Bank really has little room to move upwards without risking significant destabilisation of the economy. That conclusion is not too rigorous, so don’t rely on it.

I expect a soft landing as interest rates move slowly up. The heat leaves the real estate market. Equities start showing good returns over last year’s low base. Housing price inflation abates as auction clearance rates slow. People who sell will be those who have bought within that market cycle or are forced to sell because of their leverage position. Speculators then unwind their positions, many at a slight loss.

Again remember William Goldman’s wisdom “nobody knows anything”, I certainly don’t. But here is a US site on the US housing bubble that might make you think.

On MBA’s

In MBA’s, DBA’s and all Business degrees from B Bus to D Bus there are two conflicting forces.

1) In a university context there is a academic imperative which favours scholarly research, published papers and the number of PhD’s in the department.

2) Within the client context (students and sponsoring employers) there is a practical imperative which favours take-home value. This requires immediate application of theory and a faculty with brilliant skills.

While many students are interested in management or running their own business, there are many who are interested in the intellectual challenge of research.

Most business people probably favour a faculty heavy with industry experience. They do exist.

I believe Entrepreneurship is best learned by doing. Hire an MBA don’t become an MBA. But there are courses available for subject knowledge deficiencies. e.g. You wouldn’t want to negotiate an earn-out trade sale if you didn’t understand DCF (Discounted Cash Flow).

Casual Leasing – Wrap-up

As I posted earlier Friday sales were a ripper. Saturday sales were 70% of Friday’s and quite good. Sunday was one sale short of being the third best day, so I tasted bitter disappointment.

Daily Sales as a percentage of Total Sales

Monday		  5.1%
Tuesday		13.5%
Wednesday	8.6%
Thursday	10.8%
Friday		   27.1%
Saturday	22.6%
Sunday		 12.3%

Rent was 35.2% of sales, I’d have liked it at 20%-25%. Had we done that sort of number I’d have pulled distributors off the road and put them into shopping centres.

I think we should have handed out flyers to everybody who stopped by. It should have included a phone number, web address and pricelist for this week only. This would have been another sales attempt once the prospect gets the flyer home as well as driving traffic to the phones and web-site. That response rate could then be measured.

As a first try, in school holidays and with a public holiday Monday I am somewhat impressed with the results. We cleared product and made some money.

I describe it as better than I feared and worse than I dared hope. So now we need to try it again somewhere.

Young and Foolish

My friend Sim’ asked

Paul, during your journey to earn a second fortune do you find yourself ever entertaining strategies that are similar to those which caused you to “foolishly misplace” the first?

Are you the type of person who is naturally drawn to “wild schemes” and “flights of fancy”? Or was it more of a “young and foolish” thing which you feel you have grown out of?

I foolishly misplaced the first fortune in 1991/1992. I was attended a meeting with my mentors and outlined an aggressive acquisition strategy. I closed the briefing saying “at first mortgage interest rates of 15% we make money, at 16% we make a bit of money, at 17% we lose a bit and at 18% I go bankrupt. No federal Labor government will allow first mortgage interest rates to hit 18%, so I think I should bet everything on this.”

Nella asked, “what’s the worst that could happen?” I told her we could go bankrupt but we were young and would recover.

The recession we had to have saw rates hit 18%, my bridging finance (with risers, premiums and penalties) hit 33%.

So I remind myself that I don’t have superior insight. That the worst can happen. Therefore I stay nimble and ready to exit if a deal goes against me.

One of the key factors in my first business disaster was not willing to lose $12,000 in 1989 on a deal that went sour while I was on my honeymoon. Had we taken that hit we would never have structured ourselves in a way that allowed our bank to control the sales timetable.