risk onc vs fincorp

From Eureka Report.
(as you know Kholer suggested ONC).

Kohler's Law

So here is Kohler’s Law of Risk and Return: if you are risking total loss, the real return should be at least 100% in five years (which means 15% above the inflation rate), preferably with the potential for blue sky as well. Not that it’s guaranteed, or promised, but that it’s at least a possibility.

The risk of investing in Fincorp, in my view, was about the same as the risk of investing in Oncard, that little Australian/Chinese smart card company that I wrote up a few weeks ago.

Unlike most companies in the ASX/S&P 200 index, there’s a chance this company will go broke and all shareholders’ money will be lost. But those invested in Oncard on the day I wrote about it in Eureka Report have already seen their investment double, and while I would never recommend it for retirees, there’s a good chance the stock will rise much more; it is a potential 10-bagger, as they say.

That’s what I call a decent return for risk. It’s not 15% plus CPI, and you would never put all of your money in something like Oncard, or even most of it, but a small allocation of money you can afford to lose can add some sparkle to a portfolio.

Fincorp was a similar-sized business to Oncard, except that its managers were living the high life and, according to an article in this morning’s Sydney Morning Herald, appear to have also been shysters: selling valuable land to relatives for $3. Oncard management are working hard with a steely-eyed Peter Scanlon looking over their shoulders so there are no shenanigans. Like Fincorp, they are managing hundreds of millions of dollars of other people’s money.

Maybe Oncard is even safer, but in any case Fincorp investors only got a few percentage points above the bank term deposit rate for risking the loss of their money.

As my colleague James Kirby, editor of Eureka Report, wrote in his weekly Sunday Age column on the weekend: “There's a feeling around that many Fincorp investors paid a suitably high price for the high returns they were chasing. Nonsense. The worst thing about this affair is that Fincorp investors – average age 60 – need not have taken big risks for a 10% return.”

There was a similar feeling around with Westpoint last year, that those had lost their money deserved it because they had been “greedy”. In fact they hadn’t been greedy enough: they were risking the loss of their money for little more than 10% in interest a year.

Ten percent is a good return if the investment is genuinely secure; that is, backed by a mortgage or another sort of guarantee. It’s a lousy return if the investment is unsecured. It’s black or white; secure or unsecured.

No security? Then in my view you are looking for 15% plus CPI … and then some.