30 November 2021
Graham Middleton Newsletter — 30 November 2021
Interest Rates are Going Up and House Prices will Fall. The Share Market Cannot Repeat Last Financial Year’s Results and Will Correct. What to Do?
In the 2021 financial year I knew many people whose self-managed superannuation funds achieved a return of well above 20 percent. But the chance of that occurring for them in the current financial year is close to zero. Returns of last year’s magnitude are rare. An investment climate of interest rates falling to the lowest point in our memories propelled house prices and share markets upward, creating an expectation of easy investment winnings. The times heavily favoured investors over savers.
But alas the times are changing, with longer term fixed loan rates from all major banks having risen recently. Long term bond rates have risen, meaning that those holding long dated Treasury Notes have taken a beating since the resale of their bonds can only occur at a significant loss. The Reserve Bank has begun moving away from its previous bold prediction that it would not raise interest rates‚ the rate it lends to banks, before 2024, and it is now expected to occur sooner. The Reserve Bank has also restricted its lending to the banks who are having to borrow more money in wholesale funding markets in order to fund their loan books. These are following similar trends in the USA with Warren Buffett pointing out that it would be particularly unwise to be buying government bonds at the bottom of the interest rate cycle when almost inevitably investors in long term bonds were going to lose capital as interest rates rose. Buffett’s Berkshire Hathaway has become a net seller of shares despite sitting on billions of dollars in cash because he believes that interest rates will rise and share prices will fall. He rarely gets such big calls wrong having been one of the world’s most successful investors for over 50 years.
The housing market has seen huge price increases, particularly in Sydney and Melbourne. The increases have accelerated during a period when interest rates for home borrowers fell to the lowest in memory. Buyers could service bigger loans and bid against each other driving up prices. That party is coming to an end. Banks margins are deteriorating as the average cost of their borrowings is rising faster than the rate at which they are able to increase interest rates on their loans to borrowers. The Melbourne housing market has softened a little and sellers across Australia’s major cities have rushed to get their properties to auction before Christmas, expecting a lower market when the 2022 home selling season restarts in February. APRA, the bank regulator, has ordered the banks to tighten their home lending criteria. The real estate boom is softening.
The share market is well off its post 30 June peak and professional investors are beginning to follow Warren Buffett’s lead and pull back from the market. Various takeovers which seem to occur at around the end of a bull market are evident, but that activity will taper off as the current ones settle. As interest rates rise the financial world will revert to a more cautious approach.
Retirees with SMSFs will be wise to cull out weaker stocks and move more to low yielding but essentially stable bank hybrids whose BBSW base will move in line with interest rates and provide a reasonably low-risk way of protecting capital as well as having an increased cash holding. I am keeping our best long term performed stocks but selling down on the four major banks and have topped up on longer dated bank hybrid securities spread among the four traditional banks and Macquarie Group.
I favour CSL among health stocks because of the many medical conditions to which its products are prescribed whereas I see Ramsay Health Care as being risky because of its large investment in French hospitals.
I strongly favour ARB Corporation over Bapcor because of a history of outstanding management over many years, market leading products and tight control over its distribution via ARB Fitment Centres. I note that the long-serving managing director of Bapcor announced his resignation despite having recently agreed to remain for three years and this unsettled the market.
I retain Wesfarmers because of strong management over a century in which it has grown from a tiny West Australian farmers’ cooperative to a massive business with further growth potential in a number of diverse businesses.
The above is “general advice”. Readers should do their own additional research including seeking professional advice as necessary.
Even the Best Corporate Owners of Dental Practices Have had Some Failures and Made Some Significant Mistakes
Having spent 33 years advising dentists and measuring their practice performance using a benchmarking technique, I concluded that none of the dental corporates who had an existence as a listed public company have been able to perform on a per practice basis to near the standard of the consistently best performed privately operated practices.
Smiles Inclusive Limited was a disaster from inception, never achieving a profit in any year, moving from disaster to disaster and sliding into insolvency with remnants sold on behalf of its creditors. Dental Partners was purchased by New Zealand’s Abano whose shareholders later rebelled because its acquisition of Australian practices was no longer earnings accretive. Abano had dispensed with the services of Mike Timoney who had founded Dental Partners and accompanied its sale in a senior executive position. Abano later sold to a foreign buyer. Its Australian practice Group is now known as “Maven”.
Mike Timoney then founded Smiles Inclusive, a disaster with huge mistakes made during formation and initial business plan. It lost the confidence and respect of its joint venture dental partners and struggled from one disaster to another until ASIC refused it permission to raise more capital as it could not produce a complying set of current audited accounts. Meanwhile National Dental Care, which a couple of years ago announced intent to IPO and float onto the stock market, withdrew after reportedly discovering accounting shortcomings in a group of practices. Recent speculation is that the owners of Maven will buy it.
There have been other stillbirths of attempted dental consolidations, and others have crawled into the arms of private health insurers marrying the inefficiencies of the corporate dental model with the inefficiency of ancillary private health insurance. Despite this, privately owned Australian dental practices have survived and thrived in Australia’s two biggest cities and in many other locations.
The best privately owned and operated dental practices who refuse to become preferred providers to health funds are surviving and offer a far better path to long term financial success than working as a dental contractor for a corporate.
Private “Extras” Health Insurance is a Rip Off
Ancillary health insurance for dental and various allied health services remains a massive rip off for most members, with health insurers making about 30 percent gross margin by rationing claimable treatment items and placing restrictions on providers, mainly dentists. For the record, we have long had private hospital insurance but have never bought ancillary (extras) cover. It is living proof that there is a sucker born every minute.
Attention Dentists: The Best Value For Money Business And Practice Advice You Will Ever Receive
Before you sign up for expensive practice consultants or sign contracts to belong to expensive groups obtain a copy of “Financial Success for Dentists” and read it closely. After doing so you will be better informed about the business of owning and operating an Australian dental practice than virtually all accountants.
Financial Success for Dentists
Financial Success for Dentists: Rules for How to Approach Your Dental Career sets out the key strategies which make dentists successful. It is specifically written for those dentists and dental specialists owning their own practices and for those aspiring to own practices. Among the topics included:
· Understand key practice valuation criteria.
· Learn how some dentists inadvertently reduce the value of their practice by $500,000
· Avoid long term errors when purchasing your practice.
There are many accountants, financial advisers, marketing consultants, web site designers and practice advisers who give advice from their particular disciplinary experience, but very few have the wider breadth of experience to define for their clients the key rules to follow to optimize their practice and their long-term financial outcomes. An otherwise competent financial adviser may have little understanding of what makes one practice much more successful than another. Many accountants have detailed knowledge of the taxation rules but cannot identify if a dental client has broached invisible barriers to practice growth or a threat to practice goodwill value.
I spent 33 years examining dental practice financial outcomes and reviewing the key strategies and decisions which separated successful Australian dental practices and practice owners from the less successful and this led to relevant conclusions and advice to dental practice owners.
A complete and comprehensive career guide for mature and aspiring dentists.
Based on real life situations and a lifetime of dealing with dental practice ownership outcomes this book is worthy of Text Book status for every dental teaching school.
—Merv Saultry, Founder Dental Innovations Network
To Obtain a Copy:
· Go to the Delany Foundation website at http://www.delanyfoundation.org.au
· Click on the Donations tab and make a donation of minimum $60. This is easiest by Mastercard or Visa.
· Email financialsuccessfordentists@gmail.com confirming that your donation has been made, as well as your name and mail address
· A copy of the book will be mailed directly to you
All production costs and mail costs are met by me personally, so all money donated goes to the Delany Foundation which contributes toward the running of schools in Ghana, Kenya and Papua New Guinea. Naturally donations above $60 are welcome.
The donation to obtain this publication will be the most cost-effective practice advice most dentists will ever receive.
Does Privium’s Collapse Signal Troubles for Other Home Builders?
Near the end of every housing boom there are failures of home builders who took on too many builds, ran into supply difficulties and shortage of trades, or who simply underquoted too many contracts and ran into financial difficulties. Most kept going while technically insolvent by juggling resources between projects, slow paying their suppliers and sub-contractors. These measures often delay financial collapse but make it worse when it eventuates. As the current housing boom runs a natural course more collapses of home builders are likely. Anyone contemplating building a new home rather than buying an existing home needs to be diligent in checking the financial standing of their builder. Having a builder bankrupted part way through a project is disastrous for the owner of a partially completed home.
“Demonstrably the Worst Financial Advice”
The Australian, 19/11/2021 reported on the past of Redcliffe Leagues Club chairman Bob Jones as a partner in Jelich Jones, which became a licensed representative of the disgraced Townsville based Storm Financial.
Storm Financial (which has no connection to Melbourne Storm) followed an extreme risk strategy of advising investors to mortgage their homes, then to double gear by leveraging these borrowings through a high-risk margin loan borrowing strategy. The Global Financial Crisis in 2009 left about 3,000 investors with estimated losses of $830 million. Years of legal action followed. One of Bob Jones’s clients wiped out in the Storm Financial debacle later filed a complaint with the Financial Planning Association who described his advice as:
“This is demonstrably the worst financial advice we have been called to review,” one member of the FPA’s Conduct Review Commission said in the report.
The clients, a husband and wife, were unsophisticated investors aged 60 and 57 respectively at the time of seeking advice and had assets of $522,000 including a home. Following the stock market dive in 2008 which triggered margin calls from banks they were left with a mortgage of $300,000. They also owed more than $630,000 to two banks.
A court ruled in 2016 that Storm Financial co-directors Emmanuel and Julie Cassimatis had breached their financial duties. They were each fined $70,000 and banned from managing corporations for seven years.
There were extensive legal actions and significant payments from Storm Financial insurers and bank margin lenders.
Comment re: Margin Loans
Margin loans are dangerous instruments because during stock market corrections the lenders conduct forced sales of the shares at depressed prices resulting in the borrower’s capital being wiped out. If the market fall is precipitous, the borrowers can end up in a negative position because the market falls faster than the margin calls and sales. Where people double borrowed, as was the case with Storm Financial clients, they can be wiped out and end up owing huge amounts to lenders.
By contrast, those who owned parcels of shares bought with a bank loan but with no margin loans were not forced to sell at depressed prices and most experienced a steady recovery in the share market from mid-2009.
Greencross Sale Negotiations
Press reports of 26/11/2021 indicate that private equity buyer EQT made an offer last week but is more eager to buy the veterinary services business but not the retail business which trades under the names of “Petbarn and City Farmers” in Australia and as “Animates” in New Zealand. A break-up would be a case of ‘back to the future’.
EQT prefers the veterinary clinical side of the business because veterinary corporates trade on higher multiples than do retail businesses which face disruption from online suppliers. There are over 160 Greencross clinical practices, including general and specialty practices and emergency centres.
What Potential Buyers of Shares in a Veterinary Corporate Need to Know!
Buyers seem to be unaware of the severe veterinary staffing shortage restraining veterinary practice in Australia. Veterinary practices are labour-intensive businesses and qualified vets cannot be replaced with machines.
Corporates who have been paying huge prices for clinics face increasing problems operating large numbers of practices as vendors—mainly older male vets who worked in their practices full time—complete their work out contracts, some as short as one year, and ride off into retirement.
This is creating wonderful opportunities for younger vets willing to set up practices as near as possible to large corporate practices, work hard and inevitably win clients from the corporate. Veterinary practice is a relationship business which offers a huge advantage to privately conducted practices compared to corporates.
Some years back I wrote in a veterinary newsletter that the best place for vets to start new practices was as close as possible to large corporately owned practices. I am aware of a number of vets who have since followed this strategy successfully. They would never become wealthy working for a corporate, but many vets have built successful and financially rewarding practices.
Do You Know the Most Visible Part of a Dental Practice?
It is actually the square metre of ceiling above the patient’s head when reclining in a dental chair. Dentists should mount a picture of a soothing scene such as a stream bubbling through a green field, a water scene or rain forest scene. These relax the patient. It may require a repositioning of lighting. This is far superior to mounting a video player. Worst of all are discoloured ceiling tiles.
Did You Go to a Large Accounting Firm and Get Passed to a Junior Accountant? The Best Accountants for Practice Owners and Most Small Businesses Are Usually Not in the Largest Firms
The really big accounting firms are geared toward big business auditing as well as consulting to big business and government. Over many years I came across various dental, medical and veterinary practice owners who had become disillusioned with the mega accounting firms who charged premium fees but the accountants doing the work had at best superficial knowledge of their respective practice businesses.
Now Live!
My website of information for dentists and veterinarians is now live. Go to grahammiddleton.com. There is here a growing archive of my newsletters and past articles.
General Advice
I sold my interest in a financial services and accounting group on 30 June 2020 and have no intention of starting another financial services business. I own, via my family superannuation fund and investment portfolio, some of the stocks mentioned in this newsletter. My website is now available at grahammiddleton.com.
Those who find my newsletters of value to them are asked to consider making a donation to the Delany Foundation, a registered charity which assists schools in Papua New Guinea, Ghana and Kenya. Delany Foundation c/- Holy Cross College, 517 Victoria Road Ryde NSW 2112.
Best wishes to all
Graham Middleton
