The Cupcake is a phenomenal example of how marketing can lure us into buying or investing in something that we would normally never touch.
The simple sponge cake was one of the first things I learnt to bake as a child; 4:4:4: and 2 eggs results in a bland and inoffensive cake. Of course the fun was not in the eating but in the mixing, spoon licking and decoration.
Given the choice as adults we wouldn’t touch them with a barge pole, they are pretty tasteless and very fattening. Strangely though in recent times they they have been adapted by marketing companies as the new wannabe gift, a symbol of love, the accompaniment for champagne and a delight to the eye. ‘The perfect little treat’! But Why?
The secret of course is in the presentation, its not the sponge cake we are attracted to but the decoration and sparkles on top, frosty icing, glittering balls, hand-piped messages and decorative cases. Pop 4 in a hand folded box and the deal is nailed. Serve with ice cool champagne for a fiver and we are hooked. Does cupcake and champagne even go together?
Like it or not the cupcake is selling, it’s everywhere.
The relevance to our investment choices is startling, only yesterday I was contacted by a land management company, they were selling plots of green belt land which were without planning permission. It’s a risky propossition with the potential for high return if planning permission is granted at a later stage.
Being a curious sort of person I asked for the brochure. The proposition the sponge, the brochure and presentation a decorative cupcake. An alluring piece of marketing that made it look like they were selling a to die for product when if fact it was just sponge.
Of course, there is a chance that you could buy a cupcake that actually tastes nice; that after all is the expectation. However, consider the reality. The right ingredients have to be measured, mixed and baked. The cake has to be fresh, soft, light and the flavour superb.
Let’s face it when you have recovered from the appeal of its appearance most cupcakes taste pretty dull and ordinary. Come on its just a sponge.
The fact that pretty ordinary deals are wrapped expertly in glittering packages is a phenomena investors have to think about carefully.
What you should be doing is stripping off the icing and then decide if you would still buy the cake.
You could argue that the icing adds an intrinsic value to the product which could facilitate an emotional response but, well worth a couple of £’s, this argument wouldn’t hold much water though if you were shelling out 10′s of £000′s on a piece of land.
The message, beware the marketeer he is a clever and often devious character and is the reason that the following saying was coined. ‘If it looks too good to be true it probably is’.
Good News
Many Buy to Let investors who have traditionally geared their investments heavily, sometimes at the 80% + LTV level, have been left have been out in the cold by lenders until now. Today 10th may 2010 has seen the return to market of Mortgages for Investors in The Buy to Let arena, at the 80% LTV level.
Many Buy to Let Landlords enter the market on fixed deals as this is a way of securing repayments from 2-10 years. After this period investors revert to the Lender’s Standard Variable Rate (SVR). The disadvantage of a SVR is that it need bare no relation to the Bank’s Base Rate (BBR); effectively you are at the mercy of Lender’s internal decision making.
While interest rates are low SVR‘s have remained relatively stable however adhoc interest rate rises are not uncommon. The latest lender to increase its SVR was Marsden Building Society, which increased its SVR by 0.46% to 5.95% on January 1st this year. According to Moneyfacts, 8 Lenders have increased their SVR while the Bank Base Rate remained at 0.5%.
A prudent Investor would try to fix their rates again as it buys security going forward. The downside of re-mortgaging is that it costs a plenty, costs which should happily and logically be viewed as the risk premium for security.
Post election warning bells are sounding, a hung parliament could be the literal hanging of many investors if they don’t build the security factor into their investment model.
For many Buy to Let Investors the 80% LTV level may not go far enough however, it’s arguably the best news some may get this year.
Uncertainty - Labyrinth Stairs By Rhinaldi
As investors we understand the concept of Risk and Return, the two are inextricably linked; the more Risk we are prepared to take, the greater will be our Return.
Investors’ by their very nature are the Risk Takers.
Lenders on the other hand are Risk Averse. This doesn’t mean to say they avoid Risk altogether; they prefer however, to minimise their Risk, and have strategies in place to make sure the Investor shoulders most of it.
A far cry you might say from the behaviour exhibited by Lenders’ in recent years, leaving them with bucket loads of worthless sub prime investments. Fear not! for Lenders have learnt from their mistakes , mistakes derived from the poorly understood relationship between Uncertainty and Risk.
So, what’s the difference?
Statisticians can calculate the probability of events occurring. They are able to do it because hundreds of thousands of observations have been made over time, recorded and extrapolated. The Stock Exchange is a great example of this happening on a minute by minute basis. Similar facts are collated by the Investment Property Databank (IPD), Meteorologists & Scientists to name but a few groups; and, where data is collated it brings with it predictive power.
We know for example that to toss a fair dice gives us a 1:6 chance of shaking a 6 and consequently we could decide what those odds are worth in terms of Risk and Return.
Uncertainty, on the other hand is represented by ‘the intangibles’; human reaction, freak weather or fraud for example. Unexpected occurrences, create unexpected reaction and, before long have affected the predictions so carefully planned for.
We have seen the effects of such events on many occasions, for example ‘The run on Northern Rock, The Dot Com Bubble & The bombing of the Twin Towers. Heisenberg describes this as ‘the uncertainty principle’.
Normally, we can insure against the Uncertainty of weather, flood, fire & theft however, when it comes to Economic disturbances like sudden fluctuation in Exchange Rates, Interest Rates, Inflation or the availability of Funding it is often too late to save investments from failing.
The press, our vehicle to those ‘in the know’, put out such an array of mixed messages that our logical understanding of the investment market becomes like the stylised illusions of Escher. What we are led to believe; that stairs go up and water flows down, become skewed by visual and audible signals. Even Politicians, Solicitors and Bankers betray our belief systems by becoming ensconced in scandal, deceit and unprofessional conduct.
For many Investors’ it’s too late to reflect, and promise to do better at assessing Risk next time, there simply won’t be a next time. However, for new investors’ let them learn from the lessons of inevitable Uncertainty. Imagine and prepare for the worse and be pleasantly surprised.
How, then does this philosophy relate to the Investment proposition? The answer; Investors’ educate themselves to be more Risk Averse, take on board Less debt, provide adequate reserves as a contingency and above all be honest. Anything’s possible you just have to want it enough.
Helen Clover- Edinburgh, UK
