ASX Share trading game 2 for 2021 open!

Hi all! I am entered into the Australian Stock Exchange Share Trading Game 2 for 2021. Entries are open until 8 October 2021, but the game has already started so for best chances to win join now. You will be given a hypothetical portfolio of $50,000 to trade with, and choose between over 200 stocks and ETFs listed on the Australian Stock Exchange. There are even cash prizes and it is a great way to learn about how to invest in stocks, how to research different companies, and how things like brokerage costs affect your total returns.

There are two separate competitions depending on you age: one for high school students (I believe you need your teacher to enrol you in the game) and one for people aged 18 and over.

Join me today and lets follow each others’ progress!

Where to join: https://www2.asx.com.au/investors/investment-tools-and-resources/play-the-sharemarket-game

To join my league and compete with or against me in the game please follow these instructions:

You are invited to join my ASX Sharemarket Game league

To join:

1) Go to the new ASX portal – https://www2.asx.com.au

2) Select Login

3) If you are new to the Game and not previously signed up to MyASX, select “Join Now.”

4) If you are a previous MyASX user, login with your MyASX username and password and you will be prompted to update your password.

5) Once you have logged into the portal, select the ASX Sharemarket Game and register for the Game.

6) To join the league

Under the “Game play” menu, select “Leagues” and then “Join leagues”.

Enter in the details below:

League ID: 34343

Password: ChaiTime1

You will be joining the league: EconomicsWithCoffee

6) And that’s it… success

You have now successfully joined the league.

How are term deposit and credit card interest calculated? Simple vs Compound Interest

Simple interest is the most basic type of interest.  Simple interest is just the interest rate percentage times the original capital (see diagram below).  Some term deposit accounts are calculated using simple interest. In term deposit accounts the interest is usually calculated at the end of each year.

62776339-A852-4CF8-8228-772D0B3F8494Under a simple interest loan, if I borrow $1 and the interest rate is 10% p.a. then I will need to repay $1.10 after 1 year.

Total repayment = Principle + Interest

=  $1 + ($1 x 10%)

= $1.10

 

Some term deposit interest rates are instead calculated using compound interest. This also goes for credit card interest, personal and home loan interest or even the interest you get on most regular savings bank accounts. The interest on these types of loans and savings is calculated using compound interest. That is interest that is compounded. With compound interest, you pay interest on not just the principle but on interest you haven’t paid off yet from the previous times interest was calculated.

Another way of saying compounded is two things added together or something made bigger. This means that when compounded the interest is made bigger.

Compound interest is calculated more often than simple interest, sometimes daily. In principle it could be calculated every second! A compounded interest rate will generally be higher than the equivalent quoted interest rate using simple interest. Sometimes a lot higher. Banks usually quote the base interest rate and not the total compounded rate which you actually pay.

I am going to use “powers” in this definition. A power is simply when a number is multiplied by itself by the number of times specified in the power. For example 2 to the power of 3, which can be written as 2 x 2 x 2 (= 8) or in short hand as 2^3, which is the same as 2 x 2 = 4 and then that answer, 4 x 2 = 8. Technically this shorthand is only used in software packages like Microsoft Excel, the formal way to write a power is by writing a small superscript of the “power” to the top right hand side of the the number you are taking to the power, as you can see in the figure drawn below.  When powers are used numbers can get big pretty fast – so when interest is calculated this way it can have quite an effect on the amount you end up paying on your debt or receiving on your savings.

If I borrow $1, and the interest rate is 10% p.a. but this time compounded daily. In the formula for compound interest (see diagram bellow), the interest rate, r = 10% or 0.1, the number of times compounded in the year or period, n = 365 days, the years or period, m = 1 year.

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In the formula, n and m can refer to days, years, months, quarters, half-years or really any break down of a year. Interest rate, r is always a percentage.

At the end of one year I now have to pay $1.105.

Total repayment = ( 1 + 0.1/365 ) ^ (365 x 1)

= 1.00027397 ^ (365 x 1)

= $ 1.105

By compounding every day, the 10% interest rate is actually higher than 10% after 1 year. I am actually paying 10.5% interest.

This means the effective annual interest rate of 10% p.a compounded daily, is 10.5%.

If you have a bank account that pays interest, you want it calculated an paid as often as possible to get the highest possible interest on your savings. So you can earn interest on the interest you receive.

Most credit card interest is calculated daily. Interest is often also added to the account balance daily so you are quickly charged interest on your interest. This is why credit card debt can get so big so quickly.

I really wouldn’t recommend getting a credit card unless it’s a low-to-zero annual fee and low interest card. It’s much better to save up for what you need, that way you don’t pay any interest and best of all the bank actually pays you interest on your savings (if you are lucky enough to live in a country where interest rates are not zero that is!). Of course everyone’s circumstances are different, that’s just my own personal preference. Unfortunately sometimes it is difficult to pay for large cost items without a credit card because some retailers don’t like to accept large cash payments or a prevented by law from accepting such payments. For those types of purchases I do use a low interest rate, low fee credit card and pay the money back onto my credit card balance almost right away out of my savings so that I am not in any debt and do not owe large amounts of interest (if any).

What is Competitive Advantage?

So if we are not using Tariffs to artificially boost our competitiveness, how are we meant to make money with international trade?

Competitive advantage is the principle that a country will produce something it better at producing than anyone else. It could be a pricing advantage. Maybe the country has low wages and can make goods cheaply. It could be a technological advantage. The country could have advanced technologies that other countries do not know how to use as well.

In the Perfect Capital Market, a place with no taxes, government and free trade (think  Capitalist), countries produce what they have a competitive advantage in. The country will sell some of those goods as exports to other countries. The other countries will trade goods that they have a competitive advantage in.

For example, imagine a world of only two countries. They are called the United States and Australia. The United States is really good at making computers. The United States makes the best, most advanced computers in the world. Far better than what Australia can make. The United States has a competitive advantage in computers. Australia has a competitive advantage in solar panels. Australia’s solar panels are the most efficient in the world.

Australia produces solar panels at a cost of $10 and exports them to the United States. The solar Panels are sold to the United States for $20. The United States uses those solar panels to make it’s computers at a cost of $10. The United States exports it’s computers to Australia who buys them for $20. Australia in turn designs even better solar panels. Both countries are trading where they have a competitive advantage. Both countries benefit. In this case they benefit equally. Each country makes $10 profit.

What if there was a third good? Wheat. Both the United States and Australia are good at producing wheat. Australia is really efficient at producing wheat. The United States wants to trade it’s wheat with Australia instead of computers. Australia has cheap wheat because it is so efficient at producing wheat. Wheat costs $5 to produce in Australia and is sold for $10 in Australian shops. Australia will only pay the United States $10 for it’s wheat.

Wheat in the United States costs $6 to produce. The United States will only make $4 profit in Australia but Australia will make $5 profit. Australia has a competitive advantage for wheat. But it is small. The United States can try to sell it’s wheat to Australia, but it will never make as much money selling wheat as Australia. Eventually Australia will be ahead as all those dollars start to add up.

What would the United States be better off producing to make the most possible profit? Computers. Because that’s where the United States has a competitive advantage.

So what is a Tariff anyway?

There is a lot of talk about the US and China and other countries raising Tariffs against each other. So what is a Tariff anyway?

A tariff is a kind of tax placed on imports, sometimes from all countries and sometimes just from one country.  Usually trade arrangements are made between two countries so the tariffs will be at a country level.

In the past most countries had a lot of tariffs, sometimes really high ones.  These taxes encouraged people to buy goods made in their home country rather than imports with expensive taxes on them.  In Australia this system propped up the Textiles, Clothing and Footware industry until reforms were made and the tariffs reduced to almost zero, and in some cases zero.

Tariffs fall under an economic strategy called trade-barriers or protectionism. Protectionism aims to protect the home countries industries, even if they are not competitive and would not survive without the taxes on their competitors.

While tariffs are perhaps good for companies that are in protected industries, and they can continue to employ people, protectionism is bad for consumers and often forces them to pay more for the things they want to buy. In the 1980’s the cost of a T-shirt was much more expensive than the cost of a T-Shirt today.  Wages of factory workers in Australia were and still are much higher than wages in China and other manufacturing competitors, and so consumers in Australia were forced to pay more for their T-Shirts.

If you only have $100 to spend and a T-Shirt is $50 it only leaves you with $50 to spend on other things.  If there are no Tariffs and the T-Shirt is now $40 you have $60 left to spend on other things you want.  Basically you can’t buy as much under protectionism.  In Australia the price of a T-Shirt got much cheaper than $40, because eventually the foreign goods were so much cheaper and more competitive than the local goods. This soon put most of the Textiles, Clothing and Footware industry out of business.  That isn’t necessarily a bad thing,  it’s bad for a while for the people who loose their jobs, the factory owners and their investors. But remember, those factory workers were also having to buy a $50 T-shirt under protectionism, and now they don’t have to spend as much either.  The businesses were not competitive and were being propped up by an artificial advantage.  Generally the standard of living of people increases as protectionism is removed.

However like all things, it’s not black and white and not all people benefit equally from removal of trade barriers. Governments role in this type of situation where there is a massive restructure of the workforce due to change of government policy is to help affected workers find new jobs.  A task government doesn’t always get right.  It is also the responsibility of Industry to be open to employ people from declining industries and to the workers themselves to retrain or gain new skills.

These kinds of changes are worse when they are implemented too quickly, without time for people to adjust and find new work.  Another thing that can exacerbate the situation is when protectionism is removed when there is no other work around.  This can turn structural unemployment, as it is called, into long term unemployment.  This makes life very difficult for workers in affected industries. They may never find employment again. Due to unemployment they do not benefit as much from the rising living standards as people who remain in work gain from removing tariffs.

Portfolio diversification: Starcraft analogy

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My 11 year old is a big fan of Starcraft II, a strategy computer game. If you know the game, you will be aware there are two resources in the game, Vespene Gas and Minerals.  Units in the game can collect these resources and use them as commodities to build new items, or as currency to finance acquisitions, for example fighting or healing units in one of the three armies, Zerg (Alien insects), Protoss (A highly advanced alien race) or Terrans (Humans).  The resources Vespene Gas and Minerals are valuable and necessary for any successful Starcraft II army.  Especially if you want to have success in the game or annihilate your enemy’s bases.  Successful armies require Vespene Gas and Minerals so there is always a market for these resources.

If I was an investor in the Starcraft universe, I would have two possible resources to invest in, Vespene Gas or Minerals.  If I bought only Vespene Gas, my investment portfolio would contain one thing: Vespene Gas.  Say I invested only in a Zerg Vespene Gas field I would have only the risk attached to owning a Zerg Vespene Gas field.

If one day the Protoss came along and blew it up, and blew up all my harvesting units, I would loose all of my investment.  I would have nothing and be all of a sudden very poor.  If I  had instead put only half my assets into the Zerg Vespene Gas field and the other half into a Terran Minerals deposit I would have reduced my risk.  My portfolio would be half Minerals and half Vespene Gas. I would still have my investment in the Minerals even if the gas field was destroyed. I would only loose half of my investment.

By investing in both resources I am spreading my risk and hopefully by doing so reducing my total investment risk. This is why it is so important to build a diverse portfolio and why people say “not to put all your eggs in one basket”.  That is why it is unwise to only invest in Vespene Gas.

 

*Note: This is a very simple example of portfolio diversification for demonstration purposes only. It should not be taken as investment advice. At the time of writing I do not and have not previously held stocks in Blizzard Activision (or Vespene Gas for that matter!)