Frank Newman: Rich list and rorts

There are a couple of observations to chat about. The first is the commentary surrounding the publication of the annual Rich List, the second about why property will remain the preferred investment for a very long time.

The Rich List invariably attracts a polarised debate; those celebrating the virtues of enterprise on the one hand and on the other, those promoting the plight of the poor by contrasting the extremes. (The latter is usually a lead in to reasons why those who have accumulated wealth should be taxed more and given to those who - for whatever reason - have accumulated little or nothing.)

This year the debate was even less sensible when the critics claimed even greater unfairness because the rich had apparently gained 20% in wealth while others were hit by recession. They conveniently ignored the fact that the values placed on the net worth of the wealthiest people in New Zealand are at best a wild guess at the value of their assets and without an accurate insight into their liabilities.

When interviewed on National Radio billionaire Owen Glen made the comment that the rich List should be an example to the poor, not an opportunity to condemn. That’s a very different outlook than that promoted by the well-paid guardians of the poor who seem intent on making everyone equal by making the rich poor.

You can spend a life-time trying to figure out why some people are rich and others are poor, but there are a few fundamental traits rich people have: they are goal driven, have a healthy attitude to money, and they save. Most people don’t have these traits, and will therefore under-achieve financially relative to those who do. It’s envy not money that’s the root of all evil.

There will always be a disparity between rich and poor - that’s life, get used to it. In entrepreneurial economies the rich are those who are most skilled at organising people and ideas into a product or service that consumers want. In socialist countries the rich are the ruling elite and their favoured few. Fortunately in New Zealand we sit somewhere closer towards a free market than socialism, although given about 40% of all economic activity is government driven we only score 6 out of 10 on the free market continuum.

We have been told we should be investing more into the “productive” sector, meaning shares, but last week I was reminded why bricks and mortar will remain the preferred investment for most Kiwis for quite some time.

I was asked to review an investor’s portfolio. He had basically handed over $1.5m to a big city sharebroker to manage at their discretion. The brief was to invest for the long-term for dividend purposes. What I saw was something quite different.

Over the year the broker had made over 200 trades, and bought then sold $8.5m worth of shares. In other words, the $1.5m hade been “turned-over” 5.7 times that year (or once every 9.5 weeks). The net result at the end of the year was the investor lost $70,000 and the broker made $150,000 in commission! Most of the trades were for second rate stocks that did not pay a dividend at all.

The investor had been scammed, not by the sort of person pursued down the street by Fair Go, but by a very nice man wearing a well tailored suit. This is why property will remain the most trusted form of investment.

Frank Newman is a director of Smart Business Centre Accountants. He is the author of numerous books on investment matters and the creator of the NZ Investment Game, which is available from www.investmentgame.co.nz.