Book Review by David Lee
Personal Investor, October 2000
Have debt, make money
Have debt, make money
N E Renton, Negative Gearing: A Plain English Guide
to Leverage for Share and Property Investors (second edition, revised)
Wrightbooks PP: 246 plus index RRP: $27.95 (including GST)
Nick Renton is one of Australia's most experienced investment advisers (and an occasional contributor to Personal Investor). A consulting actuary, he has enjoyed an outstanding business career, as well as being a prolific author and speaker. His latest book, Negative Gearing, would be a valuable addition to the library of any Australian investor.
"Negative" gearing is, of course, never really negative - borrowings are always a positive amount of total assets - but negative income can result from gearing an investment.
The introductory chapters to this book cover the basics of wealth creation and investment risk. The book provides useful examples of the effect that borrowing can have on net income and investment returns. It provides details on types of borrower and sources of finance. The typical conditions for different types of borrowing are discussed, including typical debt covenants. Budgetary considerations provide examples of modelling cashflows. Renton takes care to expound both positive and negative dimensions of this subject, with the aim of making sure investors can make good decisions. He succeeds admirably.
The book's title is deceptive, because it's about much more than a narrow interpretation of negative gearing. It really is more like a comprehensive assessment of investment strategy and the use of debt as part of that investment strategy. It includes a chapter on the income tax aspects of negative gearing, which deserve careful study. There's a detailed explanation of negative gearing and its impact on taxable income. In a subsequent chapter, Renton even asks what the implications would be for investors if the tax rules were to change. You cannot rule out this possibility, though its introduction would be a major political step.
Renton then discusses the use of leverage on the stock exchange. Various kinds of levered instruments such as contributing shares, instalment receipts, company options, exchange traded options and warrants are examined. Margin lending is explained in detail. Futures are also considered. The book includes a discussion on fundamental analysis analysing company balance sheets and debt service ratios. Other topics include modelling the impact of negatively geared investment strategies, and using equity in the home to boost wealth creation. Legal alternatives for the ownership of assets are considered in detail, as are the social security aspects of negative gearing.
Renton then turns to the question of whether to use superannuation or negative gearing (or some combination of the two) as a long term wealth creation strategy. Although the book doesn't offer a complete guide to super, there's much useful discussion and Renton provides a quite compelling example to suggest that gearing and investment is a viable alternative to superannuation. Renton is no big fan of superannuation and argues that the stringent conditions attached to superannuation impose a significant intangible cost.
This cost includes the fact that borrowing is not permitted at all - so negative gearing is forbidden. But many conventional investments made by superannuation funds are levered, including most ordinary shares. Investors also need to consider the risk/return trade-off, given that most investors would normally require superannuation assets to have a high degree of safety. Not without good reason, many investors are becoming wary of what might be termed an "excessive investment" in superannuation. Two chapters seem a little out of place: one dealing with negative gearing and the national economy; the other with the GST. But they're interesting, nevertheless.
This is an extremely useful book, which deserves close study by all Australian investors.