A Lesson In Entrepreneurship

I hadn’t heard of Graham Mulholland or his company, epm:technology, before last Thursday. If I had passed him in the street I doubt I would have given him a second glance. A quiet, unassuming figure, slight of build and modest in dress, Graham doesn’t come across as a person of great power.

Until you start to listen to his story. Because Graham is one of the finest examples I’ve ever come across of a true entrepreneur.

I was at Simon Bozeat’s Midlands Leadership Experience Money Debate listening to a group of successful local business people talking about how they did it and what they’ve learned. Gold dust to someone like me.

I’m always interested in the characteristics of successful business people, and how they got to where they are. There are some common features that are evident across this group, and Graham exhibited many of them. Features such as;

Vision. Graham told how he had realised that his business needed to grow, and that meant a new building. He described his vision of a factory purpose built for his business, a shining example of a modern icon for the high-tech field he operates in, with room to grow in line with his plans. The resulting construction (so new it doesn’t yet appear on Google) is clearly a product of Graham’s imagination and vision and he’s obviously very proud of it.

epm technology building

Single-mindedness. Graham negotiated government funding for the building project, tapping into an allocation of money available to businesses in the Derby area. When the auditors charged with approving the grant checked Graham’s books, they questioned why he was writing off a sizeable value of machinery to purchase new equipment at the same time as moving to the new premises. Graham pointed out that the project was designed to future-proof the business and relying on ageing plant, despite it still having life left in it, wasn’t part of the plan.

The auditors prevaricated. Graham dug in. If he couldn’t build the project as he’d envisaged it, he told them, let’s call the whole thing off.

I believed he would have done, too. They obviously believed him as well, because he got the money, got the new machinery, and created the platform for his business that he’d set out to achieve.

Problem-solving. As an engineer at the leading edge of technology, Graham is obviously used to solving problems. But what was so impressive about his approach was that he doesn’t just solve problems – he blows them apart. Like a true entrepreneur, his mind set is to view problems as a challenge to be solved, and if you can’t go round it, or over it, or under it, then just go straight through it. Very inspiring.

Courage. Graham described the process of acquiring other businesses along the road, and how he was doing deals with companies at a time when his own business wasn’t in the best of financial shape. Yet he knew that the acquisition was the right thing to do, and he made it happen.

Self-reliance. Whilst Graham clearly understands how to build a great team of people, he also realised that in making the decisions he needed to make he wasn’t going to get support from some key players, especially the banks. His willingness to look for other options meant that, instead of being in hock to them he was a few steps ahead, meaning he could dictate terms when it mattered.

There were other qualities I could highlight, but you get the picture. The point is, if you want to get things done then find someone like Graham in your life or your business who will show you that you don’t have to take no for an answer, and that if your vision is clear enough you really can change the world.

Thanks Graham, and the other speakers at the event, for sharing your story. I for one appreciated it.

If you’re interested in meeting people like Graham, the Midlands Leadership Experience is a great way to do it. You can register for more information on their website.


Borrowing to Invest

Often the ideas in a blog post spring out of a conversation with a client or colleague, and this one is no different. So James, this one is for you.

Debt is expensive, and your lender needs to make a return on their money so they aren’t going to give you interest on cash you deposit with them of more than they’re taking off you in loan interest or they’ll soon be broke.

So why borrow at all?

Reason one is to enable you to buy something now and pay later. Your house is the obvious example.

The second reason is to invest. If you can make a return on the borrowed cash of more than the cost of the loan, you’re in profit.

The problem is that generating a return of more than your loan interest rate can only usually be done by accepting more risk. The scale of this risk will determine your willingness to borrow.

If the money is going in to your own business you might think the risk is worth taking. If you can borrow £x and turn it into £10x or £100x that sounds like good business.

You could put the money into shares or similar investments. The returns should be better, but there’s no guarantee, and the value of your borrowed investment can fluctuate wildly.

If you’re using mainstream investments borrowing to invest might still be an attractive strategy. The return on a well-managed mixed portfolio (shares, bonds, etc) has averaged several percent a year more than the average mortgage rate for decades, so profits should be forthcoming.

By far the most popular form of borrowing to invest is to purchase investment property. Whilst the returns aren’t spectacular, the income you’ll receive from renting out your house or building is reasonably predictable. You’ll be able to work out the return for yourself.

Investing in property has some other important features. Firstly, it’s easier to get someone to lend you the money in the first place. Lenders are happy to take property as security for your loan, and if you can’t keep up the repayments they could grab it back and sell it to get their money back.

Secondly, interest payments on property investments can usually be set against the rent for tax, reducing the true cost of borrowing significantly, especially if you pay tax at the higher rate.

The third reason is one of psychology. People view property investments as long term so they tend to worry less about swings in the price of houses or buildings. They will ride through economic downturns and tough times to get the benefit of long term growth.

There are very few lenders, on the other hand, who would accept your share and bond portfolio as security, so you’re restricted to either borrowing lesser amounts in the form of a personal loan, or using a property that you own as the security the bank will require. I’m not sure there’s a lot of sense in this rule, but that’s how it is.

Your share portfolio will probably require tougher nerves, too. The sheer visibility of share prices is a big reason why many people don’t stay the course. They are much more likely to cash in when times are bad instead of riding through the ups and downs to get the returns that come through over time.

So is it worth it? Let’s put some numbers on the table to show what’s possible.

Let’s say you borrow £100,000, in the form of a mortgage on your existing property, at a loan interest rate of 5% a year. Here are the figures:

At start 5years 10 years 15 years 20 years 25 years
Amount borrowed £100,000 £100,000 £100,000 £100,000 £100,000 £100,000
Total loan plus interest cost at 5% £100,000 £125,000 £150,000 £175,000 £200,000 £225,000
Total loan interest cost at 5% with 40% tax relief £100,000 £115,000 £130,000 £145,000 £160,000 £175,000
Amount invested at 3% compound growth £100,000 £115,927 £134,392 £155,797 £180,611 £209,378
Amount invested at 5% compound growth £100,000 £127,628 £162,889 £207,893 £265,330 £338,635
Amount invested at 7% compound growth £100,000 £140,255 £196,715 £275,903 £386,968 £542,743
Amount invested at 9% compound growth £100,000 £153,862 £236,736 £364,248 £560,441 £862,308

Or, to show it another way:


Interestingly, even where the loan interest and the return achieved are similar (as shown by the 5% less tax relief and 3% growth lines) the investment return still outstrips the loan interest cost over time. This is because of the compounding effect of the investment, whereby interest is earned on interest.

What this says is that if you could get a return of, say 7% a year whilst paying interest of 5%, over 25 years you would have made a profit of £317,743 in total, and if you could get a 9% return you’d be ahead by £637,308.

Of course it also shows that if your return is only 3% a year you’d be £15,622 worse off in total, although you would still have £109,378 left over if you paid off the outstanding loan at that point, because you’ve paid the loan interest along the way.

So should you follow this plan to get rich? As always, the answer is – it depends. There are a few questions you’ll need to ask yourself before you start. Here are some of them;

  1. Are you able to borrow the money in the first place? If the amount you want to raise is substantial you’ll probably need something to offer as security and you’ll need to show how you propose to make the repayments.
  2. Can you afford the repayments? Do you know how much they will be and how to calculate them?
  3. What will happen to your plan if the loan interest rate changes? Could you afford the extra commitment if the loan cost doubled, say? There was a period in the 1990’s when interest rates reached 15%. If that happened again, how would you cope? (everyone taking out a mortgage should consider this question, by the way).
  4. Do you know what the likely return on your investment will be?
  5. Do you understand how secure your invested capital will be? What’s the risk of losing some or all of it? Do you really understand what you’re getting into?
  6. Are you prepared for the inevitable swings in market prices and investment values? For example, an investment in shares would have returned around 9% a year over the last 20 years or so, but there were some years when values were down to almost half their previous level. Do you have the stomach for that kind of ride?
  7. Will you need to borrow for any other reason? If you’ve used up all of your credit line you’re going to have to sell something or do some tough negotiating to free up cash in the future.
  8. Are there restrictions or time penalties involved in either loan or investment terms? If your lender decides they want you to repay the loan immediately and you’ve put the cash into something that won’t pay out for five years you have what we call ‘a problem’.
  9. Is it worth it? Does the extra money you’ll make justify going through all of this work?
  10. Do you have the necessary skills to get the required returns for yourself? Or if you are giving the money to someone else to invest for you, have you carried out thorough (and I mean thorough) due diligence on them? Even the most plausible of people and finest of institutions can go pop or get their sums badly wrong, witness Lehman Brothers, RBS, Equitable Life, Tesco, etc., etc., etc.,…….). If in doubt pay for really good professional advice.
  11. If you’re dealing with an adviser; Do you understand the difference between sound advice and a sales story? Be especially careful of advisers who try to educate you. Here’s a quote from the Dalbar Report (dalbar.com); “Investor education….. has been used as the vehicle to transfer responsibility from the expert to the unwitting neophyte. By providing education, the investor is expected to make prudent decisions that relieve the expert of any responsibility. This use of education as a litigation defence may be effective in arbitration, in the courts and with regulators but it does nothing to protect the investor from making bad decisions.” I couldn’t have said it better myself.
  12. What does your partner or spouse make of your plan? Trust only goes so far. Full communication is better.
  13. What is there about your plan that is so obvious that you’ve overlooked it?

Having tried to scare you with what could go wrong, don’t forget that you don’t get to win the trophy by sitting in the changing room twiddling your thumbs. If you’ve answered these questions carefully you should be prepared and be able to avoid the worst mistakes. Having decided, stick with your plan! Persistence is one of the keys to successful investing.

Good luck!



Sitting on a Train

Sitting on a train to Derby, maybe our transport system isn’t so bad after all. Ninety minutes ago I didn’t know if I would get home today at all.

It’s over a year since Diane Weitz, the very capable Chair of the Cotswolds Branch of the Institute of Financial Planning, asked me to speak to their members. I had a notion of making the trip on my motorcycle, but a fairly dismal weather forecast made me think again. I hadn’t realized how dismal until my train was five minutes out from Birmingham New Street on a direct line to Cheltenham.

“Due to severe weather conditions I regret to inform you that this train will terminate at Birmingham. There are currently no services running to ….Cheltenham due to flooding on the line.”

The advice was to return home. I was due at the meeting at 1pm, and it was now 11.30. What to do?

I could only think of two options. Either follow the advice, or find another way. And I’m not a quitter.

I queued for information. Chaos seemed to have descended on the system. No-one was going anywhere fast. Time to make an exit.

           Waiting for news

That’s how I found myself in a taxi travelling down the M5 in the pouring rain. The driver helped put things in perspective.
He had worked, he told me, for a mobile phone company in his native Pakistan, and was now living on the outskirts of Birmingham. He didn’t really enjoy driving a taxi, but jobs were hard to come by and he had a young family to support. He’d had a job selling energy contracts to homeowners for NPower, but they had cut back and he was made redundant.

And yet, driving down a crowded motorway on a miserable, cold, wet November day, life here was still far better than it had been four years before in Pakistan. The corruption, lack of security and political instability – suicide bombers were a genuine risk – together with the ever present threat from neighbouring Iran were all effective disincentives to return. And the standard of living here in Birmingham, despite the difficulties, the hard work and the long hours, was still a lot better than before.

We turned off the motorway and I commented that we were near the Vale of Evesham, fruit growing country. Yes, he knew many people who had worked as fruit pickers. A bus had collected them at 4 am to drive them out to the fields where they worked until 8 pm for no more than the minimum wage. I can’t imagine that even the delightful Cotswolds scenery could make up for that punishing regime for most of the rest of us.

We got to the capacious office block that is The Grange in Bishop’s Cleeve, the venue for our meeting, with plenty of time to spare and one of us £70 richer. I said goodbye to my driver and wished him well.

My talk seemed to be well received. It’s heartening to know that there is a new generation of well-qualified and highly motivated financial planners coming through the ranks, and they seemed to appreciate my ideas to help them on their journey.
Diane very kindly drove me back to Cheltenham Station. I was ready for news of cancellations and the prospect of a night in the local Travelodge, but the train back to New Street was just leaving. So here I am, back on schedule.

The carriage is crowded with disrupted travellers trying to get to who-knows-where in the face of a blitz of scheduling changes. Some of them are vocally disgruntled. I understand their frustration and annoyance, but I also know that, in the midst of the chaos, there are many, many people in the world who would very willingly exchange their difficulties for ours. Things could be better, but they could also be a whole lot worse.

Andy Jervis

Postscript: Derby Station announcement; “We regret to inform you that the …service to Newcastle has been cancelled due to flooding. We apologize…etc, etc.”

That’s a helluva long taxi ride.