On my way into work this morning I saw a billboard for the latest beer sales campaign. It was a competition being run by Tooheys Extra Dry to win either $75k to blow in a week now, or collect $100k in a year’s time. The winner decides which they do.
As a finance man, this got me thinking. What could the company possibly invest $75k in over the next year to end up with $100k if the winner chooses the smart option and collects then?
Put it on the nose of a $1.33 favourite at Flemington? Speculate on which third of the table Burswood’s roulette wheel will wind up on? Or maybe spin a slot machine somewhere in Sydney to garner a 33% return?
Unfortunately none of these options will do because the initial investment is more likely to be lost than the required return won. That’s gambling.
But maybe there’s a window to earn the $25k return in some more responsible options...
Last year Australian shares had their best year since 2009 with the All Ordinaries stacking on a ripper 18.8% despite turmoil abounding abroad. Compared to cash returns of about 3.7% this was a sparkling result, but even if repeated the index wouldn’t conjure up the $25k the company will need to find.
Some choice investments in individual stocks, on the other hand, would do the job if they were to repeat their performance in 2013.
Of Australia’s biggest listed companies in the ASX 200, oil and gas producer and explorer Maverick Drilling and Exploration was the best performer, surging 227% over 2012, while biotech stock Sirtex Medical put on 193% and home wares maker Breville soared 144%.
The problem is that picking the next Maverick is a very tall order.
And even bringing the target back to a 33% gain, the likes of stellar 2012 stock Telstra wouldn’t have managed the required return on price gains alone, rising 31% last year. They would need to count on dividends to get over the line, plus have the conviction to buy the stock in the first place.
On the back of these results, Toohey’s would have to get very lucky on the share market to get their $25k return, which from my experience, is definitely not something to bank on.
What about chasing the Australian dream in search of an extra $25k?
Unfortunately, as you probably expected, property won’t do the job either. It doesn’t have nearly a short enough fuse to explode 33% in a year.
My mate at Commsec, Craig James, expects there will be some improvement in home building and sales over the next year, but only enough to improve home prices to the tune of 3%. And I agree with him there.
A less familiar path to wander down with the $75k could be commodities. Iron ore has put on around 70% over the course of four short months, while corn has gained about 30% over the past year and traded much higher during 2012 too.
The problem is that for each of these commodities there were others that hit the skids, with crude oil futures down by 10% over the year and rice off by about 5%.
Very few forecasters have picked the direction of these movements, let alone the extent of them, so commodities, like shares, are a long way away from an odds on bet for the 33% needed.
Pay Off Debt
What about if we changed the terms a little and had a hypothetical debt we could pay off, would that do the job?
I’m afraid not. If the money was used to pay off a bursting credit card balance of $75k the savings would still fall short of the $25k required.
Even at a top end interest rate of 21% compounded monthly, savings would still come up more than $7600 off the mark.
Without getting into the tricks of derivatives or opining on offshore markets, those are the company’s speculative options exhausted. And even the more complicated options are not likely to stack up to a 33% return over the course of 12 months.
For the winner it’s just the other side of the same story, making it an absolute no brainer to take the $100k in a year’s time over splashing the smaller sum now.
Now you can understand my concern when I jumped on the competition website at work to find that 22% of entrants say they’ll take the $75k now and blow it in a week.
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