Categories
Investing

Thoughts On Valuing A Company (For Beginners)

I think that what has helped me improve my ability to value companies the most over the years is thinking about different aspects of valuations, and getting experience with different companies and the situations / people involved – all of which have an effect on valuations.

One of the most difficult things about that is getting the right experiences that lead to the right things to think about, because experience takes time and it’s difficult to know where to start. To that end, I figured an article about doing valuations which focuses on the thinking around valuations might help beginners.

To be clear, the aim of this article is not to teach you how to do a valuation. Rather it’s to get you thinking about how the valuations you do relate to your financial return and your situation.

This isn’t a planned set of thoughts, I’m just going to freewheel it and see what comes out. So let’s dive in!

Valuing A Company That Does Nothing

How much do you suppose a theoretical company is worth that doesn’t do anything, doesn’t have any costs and has $1m in the bank? It could be argued that it’s worth $1m, right?

But then why would you buy an entity that has the same value as money, but is less fungible? For all your efforts, all you could do is get your $1m back if you drained the money our the company’s bank account, then it’d be worth nothing. Perhaps we can say that actually it’s worth $1m, minus the value of your effort to extract the money and do the valuation, minus the profit you require for doing that work?

But what if you got it wrong and it turned out that the company had some hidden debts? Maybe that same company should also have a risk premium removed from it’s value to cover off some percentage change that you didn’t do your due diligence properly?

A Company That’s Earning

How much do you suppose a theoretical company that earns $10k every year is worth? I suppose in part it depends how much percentage of your money you want back each year. Say that company pays all the money out in dividends and you’re getting 5% pa from having your money in the bank, you might want at least 5% pa return from the dividends to match the bank (which we might consider the risk free rate). That would value the company at $200k ($10k / 5 * 100). I suppose you’d probably want to deduct a risk premium, etc. as in the previous example, so actually it’d be worth less than $200k.

What if the company earned $10k pa, but retained those earnings so you could never get them? Would that affect the value? Would it even be worth anything? Perhaps if you can buy the entire company then you can make them pay you out? Perhaps there’s another shareholder with different goals to you and wants to keep putting the money back into the company to try to grow the company? How does that affect the valuation?

A Company That’s Growing

How much do you suppose a theoretical company that earns $10k a year, but grows it’s earnings by 14% pa is worth? It wouldn’t be fair to ascribe the same value as the previous example because in 5 years of compounding return, the company would be returning double the yield. Perhaps it’s worth double? But then in 10 years time it will have doubled again. Perhaps it’s worth quadruple? But then you’re paying the price for a company now that’s actually a future version of itself. Somewhere in between there’s the right price. Maybe this depends on your investment time-frame, how much risk you think there is to future earnings and other opportunities that are available at the time? Here’s a set of graphs I’ve made to try to solve this problem (hint: I use these a LOT).

Summary

Hopefully that’s given you something to think about that you can apply to the logic you use in investing and valuing. What other considerations might impact how you value a company? Leave a comment below and we can continue the conversation and improve our thinking together 🙂

Categories
Investing

Why I Don’t Like DRIPs

What Is A DRIP?

A DRIP is also known as a DRP and stands for Dividend ReInvestment Plan / Programme. It is a way for company’s to offer shareholders a dividend in the form of money, equity or a combination of the two, at the choice of each shareholder.

The Advantages Of DRIPs

Company’s can offer shareholders a dividend or equity. This is a good way to raise capital for the company because the value of the company is set to the market rate (usually a 2% discount), while a capital raise (CR) tends to be at a bigger discount because investors have to be enticed to invest and the increased supply of shares lowers the value of the CR, causing more dilution to existing shareholders.

Why I Don’t Like DRIPs

I don’t like DRIPs because the amount of money raised is uncertain, so it’s not a good way for a company to plan usage of funds, which means the money raised (or rather retained) doesn’t get spent efficiently. If it was determined that capital was needed, it’s better to know how much, then use financial models to determine that the investment will give greater returns than the dilution. If money is perpetually useful to the company for growth, then it would be better to financially model CRs so they can be most efficient in terms of growth vs. dilution and also plan the risk of the investment in appropriate stages of approach.

My other problem with DRIPs is that (unless the company is an investment vehicle such as a managed fund) the company is not an investor. What I mean by that is that it’s the company’s job to run the company and an investors job to be in charge of their own investments. When the dividend is made available, the DRIP might not be the best place to invest at the time, so it’s unreasonable for a company to instate a DRIP to satisfy those shareholders who don’t want a dividend vs those who do. This is because the tax implications are the same and it’s not ideal to forcibly dilute shareholders who have better places to invest their money.

Finally, I don’t like to invest in DRIPs because it removes my ability to choose the best time and place to invest my dividends. Taking the market value at whatever price it might be relies on other investors to determine the price and therefore value of my investment. This is bad because what is a good investment for one investor might be a bad one for another. For example, an investor might pay a higher price for security, while another might not value security as much and find such an investment expensive. This concept is evident by the fact that different stocks find different prices based on different valuation algorithms – otherwise it wouldn’t matter what stock you bought as long as you diversified, which clearly isn’t the case.

The Exception To The Rule

Arguably DRIPs have a place in Exchange Traded Funds (ETFs) as the investor effectively hands off their role as investor and the company they buy into manages that role instead. The ETF would want to offer a dividend so it can be used as a passive income (otherwise hands off investors would need to actively manage their holding to create an income, which doesn’t make sense if you’re buying a managed investment).

The ETF would also want to give people a way to passively reinvest to grow their savings. In this case a DRIP is ideal and there’s also the benefit that as reinvested dividends would increase the value of the fund in a fungible fashion; investors taking the dividend are effectively not diluted because they still own the same amount of value in the fund.

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Business Investing

Interviews And Public Relations

I recently had an interview with the nice folks from Snowball Effect, which is being used as content to write three articles, the first of which came out today.

It’s a well written piece that touches on some of my comments on the difference between investing in listed stock vs private equity, psychology around investing and some other factors of investing.

Learnings For Businesses Doing PR

While the interview was very friendly and both the interviewers and I both had the same goal (to produce helpful information about investing), it was very interesting from my perspective because it was an insight into what it might be like to publicly represent an entity.

This got me thinking about some of the issues businesses might have with public communications. While I have a bit of experience with this subject, I have never been responsible for non written communication (except in a few trade shows and the like). So today I thought I’d write a little about my thoughts on the challenges of PR and being quoted.

Generally speaking the main forms of PR representation that give rise to quotes are written communications, interviews and public speaking (speeches, presentations, etc.). These are very different forms of communication because they each have different levels of interaction (which leads to distractions), control and skill required.

Written Communication

Written communication is by far the easiest of the three because you can fully prepare, take your time and there are no distractions. This means that you have absolute control over what you put out to the public, you can analyze what you wrote before publishing it, which means you can look for ways that people could misinterpret or corrupt the meaning in your words, and generally stop yourself from presenting poorly.

Public Speaking

Public speaking is a little harder than written communication because you have social pressure; people might react to what you say (you might get clapping, booing or heckling). People’s reaction or the possibility of reaction might affect how well you communicate, though you can practice for this with groups like Toast Masters.

Nevertheless, with public speaking you are still in control and you can prepare in the same way as you can with written communication. There is just greater scope for errors. That said, it does have the benefit of being able to show some personality and charm, which is more difficult than with written communication. Also people can see your face, which means that peoples reaction will be different to written comms (think about how differently people treat others in a car vs as a pedestrian).This aspect may make it a more appropriate way to communicate certain types of information – such as apologies or things that require ‘spin’.

Interviews

Interviews are easily the most difficult form of communication. You can walk in prepared, but get misdirected by the interviewer and end up talking about something completely different. You can have thoughts that distract and misdirect you even mid-sentence. Such thoughts could be about the subject matter or social matters (for example, you may be thinking “What does that look on the interviewers face mean?” or “Are they trapping me with this question?”).

There are also issues that as your speech is free, you may not communicate your point well. This gives rise to being quoted in a way that makes you look dumb or doesn’t present your whole opinion. For example, your rhetoric could reference something you previously said, which when quoted makes no sense without the former words.

My takeaway is that when talking in interviews, you should always ensure that you make your point clearly and ensure that whatever the distraction, always finish what you were going to say before discussing the next item.

My Snowball Interview

Fortunately for me the folks at Snowball Effect had no such mal-intentions, but given that I’m not a skilled interviewee, I wanted to take this opportunity to expand on some of the ideas touched on in the article.

“Prior to that, I’d been swimming around in the pool of sharks that is the NZX and ASX, which was great. But SuiteFiles was interesting. As a private equity investor, you’re not quite in the business, but you have to be business-minded. Whereas when you’re investing in listed stocks, you don’t have to be as much.”

Lewis Hurst

This first comment about the pool of sharks was a little jest about trading public listed stocks. It’s actually not too bad, but there are some shady companies out there (I won’t talk about specifics) and it does feel like there’s a bit of stock market manipulation going on sometimes, though that doesn’t bother this investor. I find that NZX listed companies tend to be more honest than those listed on the ASX in terms of the reliability of forecasts, though this is entirely just my opinion and I don’t have anything to back this up. I also believe that there is some insider trading that happens with many of these companies.

I found investing in SuiteFiles interesting because it is a closer nit community of investors and directors, though I would say that this definitely isn’t as much the case with my smaller private equity investments.

My comment about being business-minded with private equity is such a small quote with a lot behind it. When you are involved in a company (especially a closely held company) as an private equity investor, you have to also think like a businessman. This means that you have to be watching out for tricks and be prepared.

A good example of this is when I was looking at investing in a tiny home complex a few year ago. The offer was presented as a business with the security of each investor owning their own part of the complex which was managed by the business. In fact the owners intention was to structure it in such a way that the business would allow her to unfairly allocate revenue through homes she owned before homes owned by other investors.

Interestingly in business actions can be seen as fair or unfair at the same time. It’s necessary to be business-minded to think about what is right and what action to take. An example of this is an entrepreneur that wants to take a large salary from a company you are invested in. This might be fair because a person doing that job might be worth that much, equally it might be unreasonable because the entrepreneur is already motivated by their large stake in the company, so it’s unfair to compare their package to someone who needs a larger salary to remunerate the position.

As a private equity shareholder, like a businessman you will have to consider legal implications of your position. This means that you will have to understand the intentions behind sections in shareholder agreements and company constitutions. Like a businessman you may on occasion have to strongarm people or even take people to court. Fortunately I’ve never had to do the latter.

“With private equity investments, you have to do a bit more research as there’s less published information available. Snowball Effect is great at putting together offers and making that information available. With the NZX there’s a lot more information out there, newspapers digging out information on an investment opportunity and industry commentary – which you don’t necessarily get with private equity investments.”

Lewis Hurst

I think most of the above quote is pretty self explanatory, though it’s worth noting that although Snowball Effect does a good job of putting together offerings, you still need to do your own research because even for retail offers there’s a lot missing.

“Not just for a diversity spread, but also as part of a risk and reward spread. Don’t be put off with private equity, but if you’re nervous, start small.”

Lewis Hurst

Again, I think that’s pretty self explanatory. I’ve talked before about building a strategy, and I believe that private equity can fit into this for many people, especially younger people or people who have already reached their financial goals and are both capable of enjoying the benefits more risk.

“Use your gut to protect you against the negatives, rather than persuade you of the positives. You can convince yourself that something is a good investment and then not put in the leg work that you need to with private equity investments.”

Lewis Hurst

It’s really important to keep your emotions out of investing when decision making. Your gut can tell you something is good, but you need to put the legwork in to prove that it’s a good investment and find all the potential traps and things to be careful of. However if your gut tells you it’s bad, just don’t bother investing. You can do more research, but you might end up convincing yourself to believe the BS your gut is warning you about. It’s possible to be too open minded, sometimes.

“Investing can be complicated. There are so many things to learn, so many mistakes to make and so many ways of viewing things as well. What worries me about new investors is a lot of them haven’t thought about it much. Everyone’s been there. You start off in the stock market and the amount of research you do is looking at the line on the graph and considering whether you like the products being sold by the company or not. You feel pretty confident with yourself and throw some coins at it.”

Lewis Hurst

I suspect that this quote might seem derogatory to some, but it’s really important to realize that there is a lot of work in investing. If you’re doing less than half a day’s work of research, you’ve probably not done enough research.

I see a lot of big ego’s with new investors who think they’re an expert because they bought some stocks that went up, but when they talk about investing it’s clear that they know next to nothing.

I think we can all suffer from egos (especially us men), and ego is the enemy of intelligence. Consider how little scientists of the past knew, but were so certain that they knew everything (leaches could be used to remove demons from the sick, the Earth was flat, etc.). It was only when we accepted that we didn’t know things that we were forced to research and ended up learning things. It’s very easy to stop learning at that point because your ego tells you how great you are, but recognizing that we can never know everything is the only way to keep learning and improving.

Personally, I need to improve my knowledge and experience in matters legal, accounting and business, and everyone can always benefit from working on our people skills.

“Don’t follow some formula that you’ve read about in an investing book. You need to relate the opportunity back to how you’re going to get money out of it and how much return you need that investment to make to fit with your financial goals.”

Lewis Hurst

Reading this again, it comes across as though I meant to say that you shouldn’t invest based on whether the investment opportunity fits the values in a textbook, but instead whether it fits in with your strategy. That’s good advice, but not what I meant.

Additionally, I probably should have said “Don’t just follow some formula”, because books are great.

This quote was actually a reference to performing a valuation that matches your goals rather than how an accountant might perform a valuation. For example, you can apply a risk premium that’s relevant to the risk levels acceptable with your strategy, rather than what’s relevant to the business. This is a complicated subject, so I might circle back to this in a future article.

Lewis believes that Snowball Effect has simplified the process for investors and importantly, saved them time. “When Snowball Effect presents retail offers, they’re presented in a very easy to understand way.”

Snowball Effect & Lewis Hurst

There’s actually a lot in this sentence that was discussed in the interview, but didn’t make it to the page.

It’s a massive amount of work between getting an offer from a company to making that offer investable, and Snowball Effect tidy up the offer so you don’t have to deal with any of the mess.

Based on past experiences investing without Snowball Effect, I have found that accounts aren’t correctly presented, forecasts don’t match reality (this includes incorrect numbers and unrealistic expectations), there are legal documents to create and agree which take a long time and costs thousands, etc. There’s months of time goes by to prepare all that and I notice that I don’t have any such issues when investing in offers presented by Snowball Effect. This also increases the quality of the offerings because I don’t have to deal with time wasters with madcap ideas about valuations, etc.

The downside to this however, is that I don’t get to see the abilities of the entrepreneur. For example, I don’t get to find out if they’re bad with their finances, projections or strategy, because it’s all presented nicely to me. I don’t get to find out if they have good negotiation skills or if they are a difficult person to deal with, either.

Finally it’s worth saying that because Snowball Effect handle all this stuff, they’ve enabled an entire market of investors and businesses that wouldn’t otherwise be able to invest or get funding through smaller investors. This is because for all the work it takes to get an offer ready and do the research, and the cost of the legals (thousands of dollars) it wouldn’t be worthwhile for each investor who is spending less than six figures on the investment. Snowball Effect has effectively made it possible to invest four figure sums in private companies, which otherwise wouldn’t be feasible. That’s pretty cool!

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Investing

Performant Companies Can Sometimes Be Uninvestable

Prior to the censorship of my stock analysis on this website, long-time readers will have often seen me refer to my PE graph which I use to justify higher PEs for growth companies. The idea behind this is that if you’re investing based on an expected 5% ROI, you might be willing to accept a lower ROI in the earlier years of an investment that’s growing in exchange for a higher ROI in later years.

But what if a company has growth that is affecting the share price, but that growth is driven from external sources (such as market forces) or otherwise is not annually repeatable?

I would argue that some types of growth should not be represented by valuations that rely on multiples, such as a straight PE calculation. This is because the growth isn’t due to an underlying, repeatable improvement in the business, such as an increase in the number of stores.

Along that line, I would argue that growth of this type should be added to the overall share price (or tucked into a DCF as a one-off), rather than be multiplied out in a PE or DCF valuation where consistent growth is assumed.

Sometimes the market doesn’t always consider reasons for growth and the same old formulae are used with the new numbers. As a result, companies can be overpriced, even though they are selling at prices on the same metrics. This can only result in a drop of ROI when conditions fall back to normal in future years. This is how performant companies can sometimes become uninvestable (during or directly after a period of one-off growth).

I advise watching out for this when doing valuations, particularly at times like these where we are seeing changes in market forces which may be temporary (such as industries that have benefited from altering consumer patterns during lockdown).

If you do have your heart set on doing a PE valuation of a company that has grown in a manor that is not sustainable growth, perhaps you could consider altering your valuation to match this theoretical company valuation:

Company earnings: $100m.
Typical annual growth 5% (affording a PE of 22, based on expected ROI of 5% in 2 years).
Annual growth in the last year 10% (affording a PE of 24.5, based on expected ROI of 5% in 2 years).
Assuming the next year will follow former years, we multiple $100m by 21 (PE of 22, minus 1), then add $111m (which is a ratio of the higher PE, divided by the lower PE and multiplied by earnings to account for one year of growth at the higher value of 10%), giving a valuation of $2,211m.

If you’re struggling with this logic behind this, consider that this is approximately (but not) the same as considering PE as the number of years you expect to get your money back, but considering one of those years as being at the abnormally higher rate earnings.

That said, you might just consider a PE of 22, then add the value of cash on hand, which will account for the boom year and distributable/reinvestable funds in the company as well. Long-time readers will know that I usually like to add net cash and equivalents to my valuations.

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Investing

Thought Of The Day: The Three Ways To Get Rich

As I see it, there are 3 ways to get rich; These are: by getting lucky, by starting a business or by investing.

Getting Rich By Luck

There’s luck in everything we do, whether it’s in business, investing, or any other part of live. But this way to get rich by luck refers to things like lottery wins or being born rich. This isn’t a valid strategy to make yourself rich, and if it were, it would be mega risky and really fast (assuming you were lucky straight away). Clearly gambling is not a strategy for getting rich that you should consider.

Getting Rich By Creating A Business

This method is more work that getting lucky. In fact, I would say that creating a business is the most work of the three ways to get rich. I would say that it’s medium risk (less risky than gambling, but more risky than investing) because compared to investing, you have all your eggs in one basket (in terms of money and time). The benefit to starting your own business (as a strategy to get rich) is that it’s a faster way to get rich than investing. When you consider that luck isn’t a strategy, I would say that creating a business is the fastest way to get rich.

Getting Rich By Investing

Finally, this is the slowest way to get rich, but it’s also the most reliable and least work (excluding getting lucky, which isn’t really a strategy to get rich). This is good news because anyone with a regular job can become an investor, which means than anyone can become rich with time.

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Investing

How To Become An Angel Investor

Every now and then I get asked about angel investing. Questions such as “What is an angel investor?”, “How do I become an angel investor?” and “What do I need to become an angel investor?” are common and sensible questions.

What Is An Angel Investor?

Let’s start with the most obvious place to start, and easiest question to answer: What is an angel investor? Most simply, an angel investor is a person who invests in companies that are not listed on the stock exchange.

What Is The Difference Between An Angel Investor And A Venture Capitalist?

In a word: size. An angel investor is typically investing 4 to 6 figure sums of money, while a Venture Capitalist (VC) is typically investing 7+ figure sums. Angel investors are typically one person, while VCs are typically a group of people or a company. While angel investors may or may not have things to offer the company above money (mentorship, contacts, etc), VCs typically have more expertise and may even have teams dedicated to assist. Another difference is that an angel investor may not require a position on the board, while a VC almost certainly will want a position. VCs tend to want a larger share of the company and may be more ruthless / pushy to deal with (which can be a good or bad thing).

How Do I Become An Angel Investor?

This is probably the most common question after “What is an angel investor?”. Realistically though, the first question to ask should be “Should I become an angel investor?”.

This is an important question because for most people, angel investing won’t fit in their investing strategy and they won’t have the skills required to be an angel investor.

Angel investing is illiquid, meaning that often it’s extremely difficult to sell your shares. Typically the time-frame for return on your money is very long (5-10 years) and you have little to no control over your investment. For example, if the controlling shareholders decide they will never return money to shareholders because they want to keep growing the company, it’s difficult to do anything about that; hence angel investing doesn’t fit in most people’s investment portfolios. Typically you need a lot more money than you’re investing so that you have the option to partake in future capital raises (so you aren’t unfairly diluted) or sue the directors if things turn bad.

Angel investing also requires a lot of skills, experience and effort beyond other types of investing. Not only do you have to be able to calculate value in a company, understand basic accounting and have an eye for picking companies (researching industries, headwinds, tailwinds, etc.) as with normal investing, you also have to be knowledgeable in legal matters; dealing with people; identifying risks, conflicts and darn right traps; and have business experience way beyond what’s required of a normal investor. Here’s a quick checklist for angel investors that I put together, which might give a clue about some of the requirements to be an angel investor.

If you’re still interested in becoming an angel investor, you might also research the differences between a wholesale investor and a retail investor. It is not the requirements to be a wholesale investor that are of interest, rather the lack of protection and expectation of knowledge that are worth exploring, because this gives a clue about the sort of things one must consider as an angel investor.

If I haven’t scared you off and you’re confident that you have the skills and finances to be an angel investor, and such an endeavor is an appropriate form of investing for your strategy, then I probably don’t need to tell you how to be an angel investor; you probably just need pointed in the right direction to start hunting down investment opportunities. In which case, I refer you to Snowball Effect, which is where I bought my first angel investment. Snowball Effect have a selection of well put together offers for retail and wholesale investors that take out a lot of the effort and (massive amount of ) time in getting the opportunity correctly prepared (business cases, swot analysis, business plans, checking the strategy, use of finances, legals, valuations, etc.), though ultimately it’s important to remember that even if you’re only a retail investor, the responsibility still lies on you, not Snowball Effect. So you have to know what you’re doing.

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Investing

So Long And Thanks For All The Fish

Following the new financial advice law that took effect in March 2021, I will no longer be sharing my stock market research publicly on this website.

I would like to take this opportunity to thank my readers and subscribers for all the warm regards and kind words I have received as a result of sharing my research. It’s been really nice to hear how useful this website has been to everyone.

I may continue to share general matters of discussion regarding this subject, but will not discuss specific stocks, funds or other financial instruments so as to avoid falling foul of the new law.

To anyone who knows me personally and wants access to my research, drop me a message and I’ll give you access.

I wish you all the best of luck with your investing endeavors.

Lewis Hurst
Categories
Investing

How Will US Inflation Affect NZ Companies?

Inflation seems to be kicking off in the USA, according to the news. I expect that this will cause the Fed to increase interest rates, which will cause the USD to increase in value as currency traders flock to benefit. This could be good for companies selling to the USA and converting their currency back to NZDs, and other companies that benefit from a strong USD.

Of course that’s not to say that any company that trades in USDs will automatically be a good investment or that it will be correctly priced for a purchase.

Can you think of any companies on the ASX or NZX that could benefit from a strong USD? Please mention them in the comments below.

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Uncategorized

Good News For Vehicle Sales

It seems that registrations of new vehicles has increased by 7.1% this year, compared to the first few months of 2020. This is good news for vehicle retail stocks on the NZX, but not exciting enough for me to be buying. Anyone looking to buy such stocks would probably want to do the research to confirm that such success isn’t already priced into the share price.

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Investing

Inflation Risk In NZ

As I approach retirement, inflation (which was formerly my friend) is becoming my foe. While saving for retirement I’ve used cheap debt (mortgages) to fund various investments which have returned higher rates than the cost of the debt. Essentially I’ve leveraged the bank’s money to profit, rather than my own (comparatively pitiful) savings. This has had a two-fold benefit over the years. Firstly it has enabled me to get rich from someone else’s money, and secondly inflation has made the cost of my debt lower as time goes by. For example, a $240k mortgage to buy a $300k house 10 years ago isn’t much when the house is now worth $1m and my salary is double what it was.

Unfortunately inflation is the enemy of the retired. The value of the savings a retiree has are eroded by inflation. So as a “young” retiree (I’ll be nearly 40 when I retire next year) my retirement strategy will have to consider inflation. Whilst my strategy does consider inflation (I plan to have a component of my income to cover my costs and another component to grow), recently proposed political policies have made me concerned. Specifically I’m concerned that inflation may not be evenly spread across all asset classes, which creates risk to business (and therefore potentially my investments) and risk to my future living costs / lifestyle choices. I’m also concerned that inflation may be greater than the growth on my income.

It’s important to be aware of inflation whether you’re retired, planning retirement or currently investing because it will probably affect your strategy / opportunities.

Lewis Hurst

Let’s look at the inflation risks that are present in the current economic and political environment (existing policies put in place by the current government are in darker text, while policies proposed in the recent Climate Change Report are accented in a lighter colour. As I’m an opinionated fellow, I couldn’t help adding my opinion of the policy, but I’ve put this in italic so you’re free to ignore the italic text if you wish):

  • Increased minimum wage. This should cause general inflation as people have more money to spend, which creates increased demand and an ability to pay more for any particular goods or services. It has been hypothesized by economists that distributing more money amongst the poorest of the populace is the best way to spur an economy as all the extra money gets spent, vs. more affluent people who may save some of the additional money.
    At the time I thought this was a bad policy because the inflation would cancel the some of the gains, and therefore there are better ways to achieve what the policy set out to achieve. Additionally the policy was risky because it could put many businesses out of business. The policy also came at a really bad time with COVID19. However, after the policy was implemented, most businesses seemed to be able to handle the new costs, so it was probably the right thing to do (although I think there was a lot of luck in the success of this policy).
  • Quantitative Easing (QE, AKA Printing Money). There is currently a massive amount of QE going on in NZ and around the world. Both QE and increasing the minimum wage are policies that create general inflation.
    I believe that Western countries around the world have been using QE in a battle to reduce the value of their currency, in order to make themselves more competitive exporters and at the same time deflating their debt with the inflation that goes along with QE.
  • Banning oil exploration. This policy is inflationary because it reduces supply of oil, which therefore pushes the price up.
    I believe that this is another of Labour’s policies that does the opposite of what was intended because it doesn’t reduce demand, so demand will just be fulfilled from oil imports – which will create more strain on the environment as extra fuel is used to import the fuel. The argument for the policy was to create strain on the market to produce motors that use alternative fuel sources, but as NZ has no such motor industry, will import the fuel anyway, and is too small to influence foreign motor industries, I believe that no such technology will emerge from this change. Again, there are better ways to achieve what this policy set out to achieve.
  • KiwiBuild. This policy is inflationary because builders were attracted away from the NZ private sector (who would have otherwise been building houses) to build houses for the government. This inflates the price of builders as it creates extra demand, while at the same time not increasing supply as those builders would have otherwise been fulfilling private demand for housing. Increasing the cost of builders makes new housing more expensive.
    Additionally the government bought houses from the private sector for political reasons, so they could tout the success of the failing build rate of the KiwiBuild policy. This temporarily inflates the price of housing because it creates temporary extra demand as the private sector bids for housing against the government.
    Another Labour policy that did the opposite of what it was intended to do, whilst at the same time adding inefficiency into the market in terms of admin cost, and in the case of houses that were built as part of the KiwiBuild policy, placing houses where people didn’t want them – further increasing house prices due to an effective reduction of supply due to lack of housing in areas that required it.
  • Reducing the amount of dairy cows to reduce methane emissions. This will reduce the supply of meat, which will inflate the price.
    I imagine it would be better to put restrictions on the thing they are trying to regulate (the emissions) rather than the thing creating the emissions. That way the free market can find the best way to reduce emissions, leaving the reduction of herds as a last resort.
    There is talk suggesting that NZ dairy farms have lower emissions than foreign farms. If this is true, this will be another Labour policy that does the opposite of what it intends, because demand for dairy will not decrease, so foreign supply will fill the gap, resulting in an over all increase in emissions.
  • Phasing out natural gas. This will decrease the supply of energy, increasing the demand on other sources such as green electricity. Probably a good thing, but this will cause inflation in the price of alternative sources as supply decreases.
  • Ban the importing of cars with combustion engines. Again, reducing supply increases prices.

Regardless of political views, these policies are inflationary. Having a quick look at the list, it seems that existing policies are generally inflationary, with a leaning towards inflating transport and housing; while proposed policies could cause inflation in food, energy and transport.

To summarize my position, as I intend to get part of my income from rental income, NZX.SUM, NZX.SCL and gentailers, I only have transport costs to worry about. Still, with all this additional inflation, I may need to ensure that the growth rate of my income is more heavily weighted. This means that I may need more money to be able to retire safely. As usual, I’ll be playing it by ear, and evolving my strategy to my situation as it changes.

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