Has anyone else noticed the similarity.....

[Sunfish]

between the Storm Financial modus operandi and that of the Somers' doctrine?

I have been close to Storm ie I have attended their introductory seminars, watched the Cassimatis' "castle-on-the-hill" being built
http://www.townsvillebulletin.com.au/article/2009/01/28/35411_hpnews.html
and driven past their, ever more grand (each year), headquarters. Did I mention that friends of mine are among the hundreds of "victims" selling their houses with absolutely nothing to look forward to but personal bankruptcy? I do not consider them stupid or greedy, just victims.

Bear with me: I will only have one shot at this post and if I miss I will be vilified again so I must be careful, even if more verbose than I would normally chose to be.

What are the similarities I talk about?

You start with the equity in whatever capital asset you own and borrow against it (nearly always the house you live in) and invest in an asset "which never goes down". ( The "doubles every seven years" thing isn't copyright!)
Whatever improvement in your circumstances, be that via cap gain or salary increase, you leverage that up 90% and borrow more.
Almost overnight you are rich!
After a few years you can lick the lolly. Storm clients had a "group-fest" tour of Europe. Individually you might buy a Beemer.
You can tell your mates the year you will retire, with an eerie degree of accuracy, how much you will have in your hip-kick and do so with a superior smile.
Regardless of the chaos around you, you have studied the funnymentals. You'll be right.... OK!
Making money is easy. Why do they make it sound difficult?

Maybe it is difficult. In the above scenario, if whatever index your investment was part of, was at 100 when you bought in and rose over "X (above 5)" years to 500, you would be showing nearly X10 profits (not X5). Now should it fall back to 100 you would be square, wouldn't you? Hell no! $1 "in" becomes a little less than $10 at peak but an 80% fall brings your bank back to $2. This is the tough bit: You increased your loan on the way up by many thousands. It means nowt whether the asset was shares or not, leverage works with the same indifference on the way as the way down.

So where are we now?

We are at the point when our bank realises that we own a house of cards, that there isn't a "greater fool" willing to pay 10% more for our asset than they would last year.
Our "excellent" cushy job has limits on how much good money we can throw after bad.
The wife says "The Beemer is mine, solve your problems, just don't bring me into it."*
You draw down on an LOC to meet a margin call.
Sme again next week.
How much buffer do you have anyway?
Have you ever had to sell to meet calls? I have. My major holding was only afforded a 40% LVR so I had to sell heaps to meet the call. "Safe" ain't what it seems..

This is the point when you realise that you have virtually nothing under your feet. You owe your soul to the company store! You all know the lyrics, and you are so far past that. Ya reckon! If you owe millions you are a slave of the banks as surely as the fourty-niners of old were to their creditors. Think about it. You are not borrowing, via the bank, your old auntie's savings. The Illuminati are your creditors. Your well-being is not their consideration. OK You don't believe in conspiracy theories and the Illuminati but my "spiel chucker" does!

What's the saying?: "Just because you are not paranoid doesn't mean your not being followed."

Feel free to disagree with the conspiracy theory, by all means, but if you have an open mind with a weekend to spare: Google it! It could change your life.

So Mannie Cassimatis had a great PPT presentation which "proved" you could not lose in stocks "in the long term". Stock, like property, never go down, for long! The weakness, of course was that he used the post depression years as the base. He assumed that the depression would never repeat. It is not a given that we are re-visiting the Great Depression but the devotees have already been blown out of the water. Clearly his computer models were no better than those of Bear Stearns. I hope no-one reading uses the the last 10 years' property prices as the trendline to base their investment strategies on!
In 10....20 years this will be little more than a "correction" in the charts, we are told. Maybe. Maybe not. While chartists and statisticians can ponder "corrections" you 'n' me can go broke.

So what's the point of this post? A bottle of red has passed on to wherever ordinary bottles go so I must regather my thoughts:

The gut-wrenching, heart-breaking stories from Storm are repeatable, and, in far greater numbers among those who chose to get rich with OPM in property. Only the needle has been changed to protect the record!

This is a simple post, not a doctoral thesis. ie it is not subject to endless edits. Let me know what you think about the basic phylosophy but please don't nit-pick.

* I have great respect for women. I speak of a "scenario" only

 

[topcropper]

The storm model was based on the stockmarket, and was always going to crash and burn given the drops that have happened.

The SS model is based on residential houses, a much safer and less volatile asset class, [or so we hope].

The SS model will crash and burn too if houses drop as much as shares, but since I think that is unlikely, especially in the cheaper end, that is the major difference. If plain vanila residential houses drop as much as shares have, the world will be in a deep depression. There will be more important things to worry about than how much money one has lost.



The verdict will be in, in a couple of years when we find out how much Australian housing prices drop.

See ya's.

 

[Peter Parker]

The storm model was based on the stockmarket, and was always going to crash and burn given the drops that have happened.

The SS model is based on residential houses, a much safer and less volatile asset class, [or so we hope].

The SS model will crash and burn too if houses drop as much as shares, but since I think that is unlikely, especially in the cheaper end, that is the major difference.

I agree with this, unless half the population leaves, commits suicide or go back to living in caves! We can all do without shares, but we can't do without somewhere to live.

If banks were to call in their loans, who would be the higher risk; the first home buyer who can only just meet their mortgage payments, or the investor whose rental income on the property is sufficient to service the loan?

For all the talk of real estate appreciation, there are still areas where houses can be got for less than land value+construction cost. While derided as having 'no scarcity value' by some, provided they're in a suburb that's liveable (ie sufficient nearby services) these sorts of houses should be OK given population growth.

 

[keithj]

Belief

We can all choose what we believe in - investing, or ponzi schemes or conspiracy theories.

We mostly choose to believe in IP - we're happy with that. Some choose to believe in other investments...

What investment can we believe in ?
Shares ? Racehorses ? Artworks ? Gold ? Taxi Plates ?

We believe in IP - there's 6B people in the world who need it & can afford to pay for it - we believe it's lower risk than the above alternatives.

If we're going to continue to have inflation & wage increases, then we should continue to expect the genetic make up of Australians to mean they will continue to want a better house than the Jones.

Of course if houses lose their cachet as a status symbol we're stuffed...
or if wages stop rising as fast as inflation & we can't afford them we're stuffed...
or if population stops growing and demand falls we're stuffed...
or if lots of desirable land is released to increase supply we're stuffed...
or the banks stop believing it...

We believe different things..... who knows what the future holds ?

 

[ziggy2214]

Has anyone else noticed the similarity..... between the Storm Financial modus operandi and that of the Somers' doctrine?

Despite their similarity they are very different products and with loan repayments soon to be lower than paying rent, it will be very hard for demand for housing to fall further.

I expect demand for property to increase and if finance remains easy to get
then investors will come back to the market.

It will be interesting to see what investors will do with their money now that returns from term deposits are falling to very low levels

 

[Rolf Latham]

Hiya

Id say one can draw some parallels, to call these "similarities" is a bit close to home.

I have no idea what sort of RE Equity and then margin exposure Storm recommended to their mix of clients...........and to assume might be dangerous. I would hope that people with different risk assessments and investment horizons were treated very differently.

However it is evidently clear to me

1. Those equity and margin levels were excessive , back when they were formulated, when the slide started , and obviously today with 20/20 hindsight

2. The base logic applied By Storms people appears no different than applied by other advisers................ I know of a mortgage broker who sold 2 million NETT in properyy and placed it into the whims of the market with a 50 % margin..........and the adviser was a "conservative" old school planner. Storms undoing would appear to be just way too aggressive borrowings.......but this is a guess in my part.


3. The over reliance on ONE lender to fund not just the margin lend, but also the RE equity pull seems badly managed at best, or just plain stupid.

4. A 90 % utilised lend over time........... I dont believe any Somers advocate would recommend that even in property unless one has a strong source of consistent cashflow. Obviously, today at least, property prices and valautions arent yet matched to the secured debt on a daily basis............

5. Amongst some people, to belong to an adviser and use strategies such as Storm's were regarded as a fashion statement in some circles. Many a "normal" mortgage broker lost business to the "all in one planner", because the lil broker couldnt gear the debt to the same levels. To gove creedendce to planners, Debt recycling strategies were being promoted by lenders directly, and while these are ok if run with the "correct" debt to equity ratio, as seen, if over geared, they can cause serious problems.

6. One cant sit on one hands with investments and finances. There are risks, there will always be risks. There is the risk of deliberately doing something with your assets, and there is the risk of instinctively doing nothing. Victims ? yes I would agree......but just like Storm cant blame the CBA for the mess, Storms clients en masse cant walk away from their involvement either. The client has a contribution to the problems as well. At a simplistic level, the margin lend documentation and the memoranda of mortgage are pretty plain and obvious if one reads them, regardless of the assurances and "gloss over" of the planner.

Whats the answer........... more regulation and use of regulated super funds ? I doubt it !

We live in interesting times

Ta
rolf

PS,,, Sun, have you read and digetsetd all or any of the Somers books ??

 

[see_change]

Thommo

I think you're being harsh on the Somers . At no point do they talk about getting rich quick and I certainly don't recall them advocating drawing down on property equity and putting it in the share market , which to my understanding is what happen with Storm and was responsible for much of the damage.

There have been people advocating this approach on the forum , but certainly none have been endorsed by the Somers who from my understanding have a very conservative approach to investing.

Cliff

 

[Petal]

Hiya

4. A 90 % utilised lend over time........... I dont believe any Somers advocate would recommend that even in property unless one has a strong source of consistent cashflow. Obviously, today at least, property prices and valautions arent yet matched to the secured debt on a daily basis............

Hi Rolf - To educate me (and probably others) could you please explain what a 90% utilised lend over time means??

Thanks!

 

[chilliaa]

Actually i think Sunfish is partially correct relating to the mentality in Somersoft prior to 2008.
I noticed a worrying trend in Somersoft in 2007 where a number of posters were talking about living off equity using the assumption that property prices increase at X% a year, hence you can safely draw on capital of Y% (being the estimated future capital growth less a buffer).

Thankfully for many the GFC has happened and many aspiring to this way of thinking has seen the risk of such a strategy.

However i think the original 'Somersoft' strategy presented by Jan Sommers is still the structuraly best strategy that has proven the most important of all factors: the test of time. ie
*buy when you can afford to.
*buy medium priced property in an area of high population without reliance on a narrow range of industries.
*Let time grow the equity base and use it to acquire more property.
*When you are want to retire sell off part of the portfolio to eliminate debt and live off the rents.

Its such an easy strategy for the creation of wealth, its risk is very small, however it has one major down fall: its a get rich slowly strategy, and most people are looking for an angle to get rich quick.

Since the offering of this original strategy, some members of Somersoft have adapted the orignial model to suit their own objectives. The most common being to use blend shares into the model. This has the propensity to increase long term returns but it also increases the investment risk profile. Hence its suitability will essentially depend on the ability of the person to adequately control the increased risk.

 

[Sunfish]

Thommo

I think you're being harsh on the Somers . At no point do they talk about getting rich quick and I certainly don't recall them advocating drawing down on property equity and putting it in the share market , which to my understanding is what happen with Storm and was responsible for much of the damage.

There have been people advocating this approach on the forum , but certainly none have been endorsed by the Somers who from my understanding have a very conservative approach to investing.

Cliff

Hi Seech. In the original post I said: You start with the equity in whatever capital asset you own and borrow against it (nearly always the house you live in) and invest in an asset "which never goes down". ( The "doubles every seven years" thing isn't copyright!)

This is the core of the similarity I see. I stress: "borrowing against an asset....... and investing in an asset". This is generic. The Storm approach draws down on share gains to reinvest in shares, the Standard Property Model (I should not talk of the Somers' model. sorry) draws down gains on property to reinvest in more property. It is the "compounding of debt" which occurs as you borrow against all gains that is the common factor.

The storm model was based on the stockmarket, and was always going to crash and burn given the drops that have happened.

The SS model is based on residential houses, a much safer and less volatile asset class, [or so we hope].

The Storm presentation took a "conservative" view about corrections in the markets and had plans designed to weather them. Their error must have been to use all data since the '30s, not including. If you look at a chart of the All Ords for the last 70 years, a compelling case can be made that "in the long term" it is a safe investment. Even '87 looks just a blip which could be managed.

I will differ here though: a much safer and less volatile asset class,. It is certainly less volatile, especially in the short term but it is illiquid and generally higher geared by investors using it as a wealth creation method. I'd say that property investment is less likely to run off the rails than equities, but the train-wreck will be much worse if it does, because of the higher gearing used. For example, my share investment plan went wrong last year, but I'm still in the game, still have some gold shares (gold is up 40% in a year, measured in A$ and is at an all-time high). I do seem to be more concerned about "magnitude" of risk than others though.

Ziggy,

I expect demand for property to increase and if finance remains easy to get
then investors will come back to the market.

This is short term. Remember that the Storm plan worked beautifully for years turning hundreds of investors into millionaires. Finance will become easy/hard and rates up/down over your investment life. Do not assume anything "will always be thus".

Spider,

I agree with this, unless half the population leaves, commits suicide or go back to living in caves! We can all do without shares, but we can't do without somewhere to live.

I'm not sure how you would get along without the goods and services, and jobs that listed companies provide. The share market is absolutely vital for the maintenance of our standard of living.

 

[willair]

This is a simple post, not a doctoral thesis. ie it is not subject to endless edits. Let me know what you think about the basic phylosophy but please don't nit-pick.

* I have great respect for women. I speak of a "scenario" only

Sunfish,it comes down to one word "Intergrity"and longterm and in my opinion MR-MRS-Somers have that, and they has been tested with time,btw i never read any of their books till 2001 but i have read all their books,wish i did back in the early 1990,s but after reading those books what we did in property investing was much the same only the numbers are different anyone going into property now in 20 years time they also will be able to do what ever they want with their life,property investing is not that hard just have a good wife have a plan and try and hold it all together what happens inbetween is called experience..

Now for "STORM" when you look at the private jet-the top end lifestyle- the hill top mansions-and i have been along to enough soap box speakersto listen about the dream they sell and that's all it is a dream goes well when the ASX IS PUMPING OUT 20% plus each year but when it hits the brick wall at 200klm's an hour everything is finished,i find it hard to understand that Storm and all their sidekicks now want to blame the CBA AND ANYONE ELSE THEY CAN THINK OF,all i hope is that ASIC has the passports of these people and the private jet is not full of fuel and artwork
and us dollars,btw i'm told that several high end cane farmers from INGHAM have lost a lot on money with this mob,just hope they understand they way the black hand works in the cane growing mafia..
''willair..
BTW, what have you been drinking might try a box of that gear and make a new plan..olo..ASX BELOW 2500.IMHO.

 

[Sunfish]

Actually i think Sunfish is partially correct relating to the mentality in Somersoft prior to 2008.
I noticed a worrying trend in Somersoft in 2007 where a number of posters were talking about living off equity using the assumption that property prices increase at X% a year, hence you can safely draw on capital of Y% (being the estimated future capital growth less a buffer).

Thanks for that and you are correct about past attitudes.

I have been here for many years, (originally as Thommo) and the total disregard for risk shocked me. I have constantly tried to make people aware of risks and have suffered many slings and arrows as a consequence.

I hope you're right about a new, safer approach.

 

[Sunfish]

btw i'm told that several high end cane farmers from INGHAM have lost a lot on money with this mob,just hope they understand they way the black hand works in the cane growing mafia..
''willair..

Every Italian I've ever met will say "I'm not Mafia, but it will only take a phone call to find one."

There are varying estimates of 400 to 800 homes being put on the market in Townsville from this. A widow I know will lose hers, and so will both her daughters. They can't even help each other out.

This is terrible and I'm aware of the personal suffering. That's why I started this thread. You can make of it what you will. I don't know anyone here but I would still hate to see similar events happen but I believe it has a high degree of probability.

I must apologise to the Somers. It is the over-enthusiastic attitude of many posters I disagree with.

 

[chilliaa]

Thanks for that and you are correct about past attitudes.

I have been here for many years, (originally as Thommo) and the total disregard for risk shocked me. I have constantly tried to make people aware of risks and have suffered many slings and arrows as a consequence.

I hope you're right about a new, safer approach.

Yes you can see it quite clearly in the posts from 2008. Debates have moved from relying on capital gains to support finance short falls, to financing interest repayments from rent (a much more sustainable approach).

Because of our focus on residential property, Somersofters can sometimes have insular thinking. But if one steps back for a moment, BnB Alloco finance etc were all building models that relied on capital growth or capital recycling to finance interest expense. This is the same (except on a much larger scheme) as using capital growth to net interest repayment shortfalls on a residential property portfolio.

 

[Peter Parker]

Spider, I'm not sure how you would get along without the goods and services, and jobs that listed companies provide. The share market is absolutely vital for the maintenance of our standard of living.

I only partially agree with this.

Business and industry is what makes our standard of living, not their ownership structure.

The share market is only one form of ownership structure and factories/businesses will keep going no matter whether it's owned by a public company or private equity. The sharemarket provides a way to raise capital (equity instead of borrowing) and a convenient mechanism to trade portions of companies. Hence a sharemarket is desirable but not necessary for industry and capitalism to operate.

The other thing is management. A comany can have perfectly good plant (and/or provide a service everyone wants - eg childcare) but it can still be mismanaged and go broke.

The shareholders of a particular company might lose out but someone somewhere will still provide the service or make the product if it's in demand. And so the creative destruction and reconstruction inherent in capitalism, the dynamism cited by Karl Marx, goes on...

 

[see_change]

It is the over-enthusiastic attitude of many posters I disagree with.

That's where I agree. Jan and Ian have never ( from my understanding ) have never been in this catagory , while many on the forum have been.

There are many posters who did over extend or bought when it was failry obvious that the cycle was coming to an end, inparticular redrawing to buy shares / managed funds and have been burnt.

Our last IP purchase untill the last couple of months was back in 2003 in Townsville and we sold this probably just prior to Storm breaking.

I have various rules of thumb .

One of them could be refined to " if someone has to spend time explaining their stratagy and , it's not bloody obvious why and how it works , fairly quicky " I'll avoid it. I'm not a dumb person ( conservative maybe - though maybe not , there arn't too many people buying inner Sydney at the moment ) but if someone has problems convincing me their stratagey is correct...

Cliff

 

[BayView]

between the Storm Financial modus operandi and that of the Somers' doctrine?

I have been close to Storm ie I have attended their introductory seminars, watched the Cassimatis' "castle-on-the-hill" being built
http://www.townsvillebulletin.com.au/article/2009/01/28/35411_hpnews.html
and driven past their, ever more grand (each year), headquarters. Did I mention that friends of mine are among the hundreds of "victims" selling their houses with absolutely nothing to look forward to but personal bankruptcy? I do not consider them stupid or greedy, just victims.

Bear with me: I will only have one shot at this post and if I miss I will be vilified again so I must be careful, even if more verbose than I would normally chose to be.

What are the similarities I talk about?

You start with the equity in whatever capital asset you own and borrow against it (nearly always the house you live in) and invest in an asset "which never goes down". ( The "doubles every seven years" thing isn't copyright!)
Whatever improvement in your circumstances, be that via cap gain or salary increase, you leverage that up 90% and borrow more.
Almost overnight you are rich!
After a few years you can lick the lolly. Storm clients had a "group-fest" tour of Europe. Individually you might buy a Beemer.
You can tell your mates the year you will retire, with an eerie degree of accuracy, how much you will have in your hip-kick and do so with a superior smile.
Regardless of the chaos around you, you have studied the funnymentals. You'll be right.... OK!
Making money is easy. Why do they make it sound difficult?

Maybe it is difficult. In the above scenario, if whatever index your investment was part of, was at 100 when you bought in and rose over "X (above 5)" years to 500, you would be showing nearly X10 profits (not X5). Now should it fall back to 100 you would be square, wouldn't you? Hell no! $1 "in" becomes a little less than $10 at peak but an 80% fall brings your bank back to $2. This is the tough bit: You increased your loan on the way up by many thousands. It means nowt whether the asset was shares or not, leverage works with the same indifference on the way as the way down.

So where are we now?

We are at the point when our bank realises that we own a house of cards, that there isn't a "greater fool" willing to pay 10% more for our asset than they would last year.
Our "excellent" cushy job has limits on how much good money we can throw after bad.
The wife says "The Beemer is mine, solve your problems, just don't bring me into it."*
You draw down on an LOC to meet a margin call.
Sme again next week.
How much buffer do you have anyway?
Have you ever had to sell to meet calls? I have. My major holding was only afforded a 40% LVR so I had to sell heaps to meet the call. "Safe" ain't what it seems..

This is the point when you realise that you have virtually nothing under your feet. You owe your soul to the company store! You all know the lyrics, and you are so far past that. Ya reckon! If you owe millions you are a slave of the banks as surely as the fourty-niners of old were to their creditors. Think about it. You are not borrowing, via the bank, your old auntie's savings. The Illuminati are your creditors. Your well-being is not their consideration. OK You don't believe in conspiracy theories and the Illuminati but my "spiel chucker" does!

What's the saying?: "Just because you are not paranoid doesn't mean your not being followed."

Feel free to disagree with the conspiracy theory, by all means, but if you have an open mind with a weekend to spare: Google it! It could change your life.

So Mannie Cassimatis had a great PPT presentation which "proved" you could not lose in stocks "in the long term". Stock, like property, never go down, for long! The weakness, of course was that he used the post depression years as the base. He assumed that the depression would never repeat. It is not a given that we are re-visiting the Great Depression but the devotees have already been blown out of the water. Clearly his computer models were no better than those of Bear Stearns. I hope no-one reading uses the the last 10 years' property prices as the trendline to base their investment strategies on!
In 10....20 years this will be little more than a "correction" in the charts, we are told. Maybe. Maybe not. While chartists and statisticians can ponder "corrections" you 'n' me can go broke.

So what's the point of this post? A bottle of red has passed on to wherever ordinary bottles go so I must regather my thoughts:

The gut-wrenching, heart-breaking stories from Storm are repeatable, and, in far greater numbers among those who chose to get rich with OPM in property. Only the needle has been changed to protect the record!

This is a simple post, not a doctoral thesis. ie it is not subject to endless edits. Let me know what you think about the basic phylosophy but please don't nit-pick.

* I have great respect for women. I speak of a "scenario" only

All sounds very gloomy SF.

For me, a lot of this is irrelevant as I owe no money for shares; only property and business.

For the Storm companies of the world, they will always occur, as often these companies are run by people who take their eyes off the cashflow ball, and only see the companie's profits as theirs to spend on doodads, tke on too much debt and generally waste a lot fo cash. Simple formula, but happens even at the muti-billion dollar level unfortunately.

Whether the (real estate) market goes up or down is not of great concern to me. The investments I have made are based on the cashflows and numbers at the time of purchase. If the value goes up then it's an extra win. If the rents go up it is an extra win. The interest rate fluctuations have been factored in; if they go down, I win.

If it the market values goes down, I know it is short term and I have allowed for the cashflow and numbers to support the investment anyway.

This is fundamentally the difference between the share investor who gets the phone call, the Enron or Storm, the day trader, the real estae investor on 95% LVR's and 4% yields etc, and the investor who has a solid financial position with a good buffer and good cashflows and tax advantages.

It's not about the economic climate, or the investment vehicle; it's ultimately about the investor, and how he/she manages their financial position.

Me; I always expect and prepare for the world to end, so there are no surprises. This maybe the mindset of someone a little older (I'm nearly 48), but I'm far from negative - just a lot more careful and aware of danger than many of our younger colleagues here at SS who haven't seen a really bad cycle yet.

I'm all for leveraging off equity to get ahead, but it needs to be done with utmost safety with the worst-case scenario always in mind.

 

[BayView]

It will be interesting to see what investors will do with their money now that returns from term deposits are falling to very low levels

Um.....invest in property.

 

[steveadl]

Um.....invest in property.

Or shares.

 

[chrispy]

Thanks Thommo for getting this debate going.

I have worried for some time about the constant reference to living off equity as if property never goes down and yet both you and I being the older generation know it does. It usually comes back but it can be years before that happens, the same as shares, yes they go down but eventually they will rise.

It is good to put the warning out there to be prepared.

Chris