Wednesday, December 31, 2008

Countdown to the New Year

From an investment point of view, most of us say good riddance to 2008. The economy for 2009 is shaping up to have a rocky start, but I’m optimistic that stocks will rebound at some point. Don’t take that as a prediction, though. I don’t want to be just another commentator whose predictions are wrong half the time.

Tuesday, December 30, 2008

The Snowball – Warren Buffett Biography

For anyone fascinated by Warren Buffett and his extraordinary investing career, Alice Schroeder’s The Snowball: Warren Buffett and the Business of Life is a must read. At over 800 pages, it adds much detail to the scattering of facts that most people have about Buffett’s life.

Any attempt to summarize this book in a few paragraphs would be hopelessly superficial: he was young, then middle aged, and then old. So, I’ll focus on one aspect: the perception that he is a simple folksy person who doesn’t know much about newfangled things like computers and the internet.

In some ways this perception is accurate. He does tend to live simply, except for flying around in private jets to meet the rich and famous. He also has the ability to explain things simply and briefly. However, the work he puts into his investing is neither simple nor brief.

He has spent most of his life consuming and analyzing financial data. He is well-known for avoiding technology stocks. He explains that he doesn’t understand them and has to stay within his circle of competence. I think that many people misunderstand this explanation.

Given the time that Buffett puts into his investing work, it is inconceivable that he hasn’t examined technology companies. It may not be a big fraction of his time, but the total amount of analysis would be considered high for other people. It’s not so much that Buffett can’t understand what these companies do; it’s more that he can’t understand why any of these companies have any durable competitive advantage.

Maybe the reason he can’t understand this is because none of these companies really has a durable competitive advantage. It seems very likely that Coke will continue to earn profits for the next 20 years. But how confident can we be that the same will be true of Microsoft, Intel, IBM, Google, or any other technology company?

I’m not saying that technology companies are necessarily bad investments. They just don’t fit Buffett’s search for a margin of safety. Although Buffett’s public remarks contribute to the impression that he is a simple guy who doesn’t understand technology, the truth is more subtle.

Monday, December 29, 2008

Mutual Funds Paint over the Rust

At the close of financial markets for 2008, mutual funds must take a snapshot of themselves and disclose it publicly. Here is a short list of the main information that they will disclose:

1. 2008 return (or loss in most cases).
2. Main investments held.
3. Comparison to a benchmark.

You might not think that there is much that mutual funds could do to paint a rosier picture, but as Jason Zweig explains in a Wall Street Journal article, mutual funds have a few ways to paint over the rust.

1. Painting the tape.

Mutual funds inflate returns by buying more shares of stocks they already own at the end of the last day of trading. The extra demand drives up the price that gets reported for the end of the year. The price usually drops back down on the first trading day of the new year so that the fund actually loses some money doing this, but it has the desired effect; the reported 2008 returns will be slightly higher.

2. Window Dressing

Who wants to find out that their mutual fund bought a bunch of bad investments? Some mutual funds sell their losing investments and buy others that performed better during 2008. This would be fine if the fund manager believes that the new investments will do better than the old ones in 2009, but that’s not the goal here. The manager wants to list investments that performed well during 2008 in the public disclosures.

3. Benchmark Hopping

The great thing about benchmarks is that there are so many to choose from. There are benchmarks of small companies, big companies, value stocks, growth stocks, bonds, and blends of all these things. The best way to make a mutual fund’s dismal return look a little better is to compare it to the worst-performing benchmark. Mutual funds are supposed to compare themselves to benchmarks that match their investing style, but as Zweig explains, a “study by finance scholar Berk Sensoy shows that 31% of U.S. stock funds pick a benchmark that doesn't closely reflect what they own.” I can’t break the world record for pole vault, but I could probably pole vault over the record high jump bar.

Not all mutual funds do these things, but many have in the past. It’s hard to understand why anyone would knowingly invest in funds that use these tactics.

Friday, December 26, 2008

Short Takes: Real Estate, Ponzi Schemes, and Geniuses

The blogs were fairly quiet this week, but there were a few interesting posts:

1. Million Dollar Journey had a guest post by Julie Broad busting myths about investing in real estate. This is one of the more sensible articles about real estate investing that I’ve read.

2. Larry MacDonald examined Bernard Madoff’s $50 billion Ponzi scheme and noted that given how little information Warren Buffett gave his early investing partners, they could not have known whether he was running a Ponzi scheme. It seems that judging a money manager’s honesty is as important as judging his competence.

3. Canadian Financial DIY found a web site that tries to measure the reading level required to understand a given blog. He had mixed feelings about his blog being judged to require a genius reading level. My blog got the same rating, and I have the same mixed feelings. I’d like to think that my readers are all geniuses, but I doubt that you have to be a genius to understand what I have to say.

Thursday, December 25, 2008

Profiting From the Rapture

If you have a sense of humour about religion, you might want to check out Armageddon Cable News by the authors of the book How to Profit from the Coming Rapture. Apparently it’s possible to plan for being left behind at the rapture.

Merry Christmas!

Wednesday, December 24, 2008

Scott Adams Talks Finance

I’ve been a fan of Scott Adams’ Dilbert cartoons for many years. I spent most of my career in a small cubicle lined with cloth, and his cartoons captured the essence of my work-related frustrations and fears with humour. Many of his cartoon-based comments on financial crises over the years have been right on the mark. However, Adams’ latest blog post misses the mark by a wide margin.

To be fair, Adams doesn’t always believe the things he says on his blog. He likes to throw out half-baked ideas and stir the pot. Consider my pot to be stirred.

Here is the essence of Adams’ argument about stocks:

1. People aren’t smart enough to pick their own stocks.

2. People should be limited to investing in indexes or special regulated funds run by experts. He also wants stock prices to be set by “some sort of regulating board.”

To borrow from a well-known quote about democracy, capitalism is the worst way to run an economy except for all the other ways. One of the core benefits of democracy and capitalism is the lack of concentration of power. Capitalism works well until one market participant begins to dominate and has to be regulated. Unfortunately, Adams is suggesting that we round up much of the spread out power of our capitalist system and concentrate it in official funds and regulating boards. This is a bad idea. Power corrupts.

I agree with Adams that most people would be better off investing in index funds rather than buying individual stocks. But, I think it is crucial that people retain the choice to invest as they please.

One sign of a reasonable person who argues fairly is that he considers arguments against his position. Adams definitely passes this test by raising the Warren Buffett argument. Buffett has been a spectacularly successful investor, and wouldn’t it be unfair to prevent the next Buffett who comes along from succeeding in the same way?

Adams counters this argument with two points:

1. “Warren Buffett buys companies, not stocks.”

2. “If every investor picked stocks entirely randomly, you would still produce a good number of Warren Buffetts entirely by chance.”

Adams is wrong on both points. Buffet’s most successful investing years happened early on before he had enough capital to buy entire businesses. He bought stocks.

If we stopped Buffett’s career early on, we could reasonably say that a few investors would be expected to have results as good as his by chance. However, Buffett continued to outperform for decades. The probability that any one person would succeed as Buffett has by random chance is far less than one in a billion. Buffett has proven that he is the real deal and not some monkey throwing darts at a stock page.

Tuesday, December 23, 2008

Bell Comes Through

I haven’t had much luck with Bell’s customer service until recently. I’ve had some crazy battles with Bell including being made to pay the same bill twice many years ago and a more recent running battle to get their internet service to work. A problem with my telephone sent me back to Bell’s customer service.

It all started Friday when I started getting calls where the caller would hang up after one ring. My first thought that some kid was just having fun proved wrong when a friend sent an email asking what was wrong with my phone. It turned out that callers got one ring followed by static. My strategy at this point was to “hope the problem goes away.” By Sunday, it was clear that I would have to try another solution.

Ever since Bell “gave” every customer the wiring inside their homes, we have to pay for any repairs. I had visions of having a Bell technician in to mess with the wiring for $100 and not fix the problem. This is what happened the last time a Bell technician came to “fix” my internet connection.

After some Google searches, I learnt that there is a demarcation point on the side of my house that separates the Bell side from my side. I decided that I wanted to know whether the problem was mine or Bell’s before calling them.

I cut open one of my many spare phone wires, did a little soldering, and added some alligator clips to rig up a phone that could be attached to bare wires. Then I disconnected the Bell cable coming to the demarcation point and connected my rigged up phone directly to the Bell cable. At this point, my whole house was disconnected from Bell.

I then phoned my home number from a cell phone and the call went to static after one ring. So it was clear that the problem was on the Bell side and not in my house. Whew.

Next was the dreaded call to Bell’s customer service. I was prepared for a long wait, but was connected to an actual human in less than 15 minutes. Maybe my expectations were too low, but this was better than I had hoped.

A friendly guy with an Indian accent took the information from me including the details of my test at the demarcation point. I certainly wasn’t expecting the person answering the phone to understand anything technical, but he seemed quite knowledgeable.

An hour or so later (on a Sunday!) an actual technician called to say he was coming over. He trudged through the snow to the demarcation point and quickly established that there was a problem with the Bell cable coming to my house.

After an hour or so of trudging around to my neighbours’ houses and driving back and forth to the other end of the cables for our area, he found a spare line that we could use until things get sorted out in the spring. Now I have a cable running across the snow between houses, and my telephone line has never been this clear. I’m guessing that the old cable has had problems since the day I bought my house 15 years ago.

So, thank you to Bell and in particular to technician Todd who worked bare handed while it snowed at 15 degrees below freezing. I’m sure he appreciated the hot pack I gave him to hold while he explained the work he had done before running off to his next job.

Monday, December 22, 2008

New Credit Card Issuer Rules in the US

The US Office of Thrift Supervision has developed new rules to put a stop to some nasty practices of credit card issuers. The fact sheet they put out describes the major changes. This is good news not only for consumers but also for the credit card issuers who were already following these rules because their competition will be forced to play on a more level playing field.

Most of the new rules are self-explanatory. Interest rate increases must take place at defined times with adequate notice for card holders. Consumers must be given at least 21 days to make a payment.

A fairly substantial change is the rule ending double-cycle billing where the average balance over two months is used to calculate interest. This practice causes interest to continue for another month after you pay your bill in full. Now interest will be based on just the current month.

The last new rule places restrictions on predatory high-fee subprime cards. These are high-fee, low-limit credit cards given to people who are poor credit risks. In some cases the fees chew up most of the consumer’s borrowing limit right away. The new rule says that if fees exceed 25% of the available credit limit, then they have to be spread out over at least 6 months.

Friday, December 19, 2008

Short Takes: TSX Glitch, Newlyweds, and Mutual Fund Redemptions

1. A technical glitch kept the TSX closed on Wednesday. This is a big deal for those who make money from stock trading, but it shouldn’t matter much to investors who aren’t hyperactive. I’d be happy if stock markets were only open one day per week.

2. Larry MacDonald takes the Canadian Real Estate Association and the media that reports their figures to task for misleading the public about movements in house prices.

3. Moneygardener has a newlywed guest writer figuring out how to merge finances with a new spouse.

4. Million Dollar Journey turns the advice to spend less than you earn on its head and suggests that you could try to earn more than you spend.

5. The Big Cajun Man wonders whether assets under management in mutual funds have dropped more due to investor redemptions or dropping stock prices.

Thursday, December 18, 2008

DIY Isn’t All or Nothing

There are many times when you have to choose whether to “do it yourself” (DIY) or hire someone to do a job. This choice comes up with house repairs, investing, landscaping, to name a few instances. We tend to think of the choice as binary: either DIY or hire someone. However, there is a middle ground.

Let me use an example to illustrate my middle ground approach. I have a large natural gas pool heater that became flaky after about two years. I have no training with these heaters and had little choice but to call a repair person.

It turns out that fixing natural gas heaters is specialized work and calling in the repair person wasn’t cheap. I always had to pay for some minimum time plus the cost of some expensive part that had to be replaced. The repair person would get the heater working, but the flakiness never went away.

During the fourth service call in two years I did my usual thing of watching the repair guy and asking questions. This guy happened to mention that the controls on my model of heater had a tendency to get corroded. In addition to charging me for some part that didn’t really need replacing, the repair guy jiggled some connectors. The heater worked fine for two years after that.

So, I paid over $1000 in repair bills before I finally learnt that the problem had been flaky connections the whole time. Ever since then I routinely undo a few screws, pull off the connectors and reconnect them. All the flakiness is gone.

What has all this got to do with a middle ground between DIY and hiring an expert? Even when you pay an expert, you should learn something about the work being done. This will make you a more informed user of the expert’s service and may allow you to do it yourself the next time if you choose.

Experts I hire differ in how they deal with having me pepper them with questions. Some like it and some don’t, but I do it anyway. I prefer to learn a little. I don’t like to be the one paying experts for something I can easily handle myself. When it’s not so easy to do myself, I keep hiring the experts.

Wednesday, December 17, 2008

Buffett’s Market Timing

Alice Schroeder’s fascinating biography The Snowball: Warren Buffet and the Business of Life makes it clear that Buffett engages in market timing in the sense that he varies his allocation to stocks over time. If he does it, why shouldn’t we?

Of course, Buffett’s market timing is different from the investor who makes short-term bets on whether stocks will go up or down. Buffett looks for attractively-priced stocks, and during some time periods he finds them and sometimes he doesn’t. This is still a form of market timing, though.

It’s easy to show that market timers as a whole must make less money than buy-and-hold investors, on average. It’s simple mathematics that the extra trading costs along with investing in inferior asset classes like cash and bonds must hurt the average market timer’s returns. This doesn’t mean that all of them lose to the market averages, though. Buffett is a remarkable example of someone who has beaten the odds so convincingly that he must have talent that almost all of the rest of us lack.

In some ways the situation is similar to playing poker. Because the house takes a slice of every pot, it is simple mathematics that the average poker player must lose money. But, this doesn’t mean that all poker players lose money. The big poker stars seem to win reliably enough that they have skills that most of us don’t have.

So, if you’re going to play poker or try to beat the stock market averages through some form of market timing, you should convince yourself that you’re not just above average, but well above average. But be warned that the majority of people who convince themselves that they are well above average will be wrong.

Tuesday, December 16, 2008

Rogers Cable Makes Me an Offer

My family uses Rogers Cable for TV and internet, but we still use Bell for our telephone. Both companies work hard to get us to bundle all three services together. I’ve discussed the offers from Bell here and here, and now it’s Rogers’ turn.

The mailing we received from Rogers isn’t just a generic mailing; it is addressed to us and contains specific details of which services we already pay for. Apparently, we can bundle Rogers telephone service in with everything else for $149/month, “all monthly service fees included.”

This is only $5.27/month more than we pay right now which makes it seem like a great deal. There must be a catch, right? After reading further it turns out that there is more than one catch.

I’m guessing that the $149 figure doesn’t include sales taxes. This makes the added cost of phone service close to $20/month. The list of services we currently have seems to be missing a service that costs close to $20, and so we’re up to about $40/month extra for the phone service. This is still a savings over what we’re paying Bell, but I have little confidence that $40 is actually the final figure.

Maybe if I spent the time to check on all these details, I’d find that I really can save some money switching to Rogers phone service. And maybe if I chase rainbows, I’d find a pot of gold. If anyone has investigated these offers more carefully, I’m interested in hearing about it.

Monday, December 15, 2008

BCE Share Buyback

With the BCE takeover officially dead, BCE has announced that they will resume their dividend and start buying back shares. Just about everyone knows what a dividend is, but many investors may not understand what it means to buy back shares. After all, what sense does it make for a company to buy itself?

For the uninitiated, it may be disturbing to learn that the number of shares in a company does not remain constant. Many companies issue new shares over time, and this dilutes each shareholder’s ownership in the company.

There are many reasons why a company would issue new shares and they all have to do with paying for something. Stock options, when exercised, usually cause the company to issue new shares. A company might choose to raise money by making a secondary offering of new shares to the public. Corporate takeovers of other companies are often financed by issuing new shares.

All of these things dilute the ownership of existing shareholders. Is this a bad thing? Well, that depends on what the company gets in return for the shares. If they get more value than they give up, then this dilution actually helps shareholders. Otherwise, it hurts them.

It’s also possible for the number of outstanding shares to shrink. When a company thinks that its shares are undervalued, it can help its shareholders by buying its own shares on the open market and retiring them. So, if BCE buys back 5% of its outstanding shares, shareholders who hold on to their shares will see their fraction of ownership of BCE rise by about 5%.

Is this a good thing? Again the answer comes down to whether the company gives up more than it gets. If the shares truly are undervalued, then this helps the shareholders who keep their shares. Otherwise, it hurts them.

Let’s illustrate this with the traditional lemonade stand example. Suppose that there are 100 shares in a lemonade stand that has $500 in cash and expects $1500 in future profits. Then each share is worth $20. Suppose that some shareholders are pessimistic about future earnings and are willing to part with their shares for $10.

If the lemonade stand uses the $500 cash to buy back 50 shares and retire them, then there will be only 50 shares remaining to divide up the $1500 in future earnings. So, shareholders who don’t sell get to watch their shares rise in value from $20 to $30 each.

But what if the weather is about to turn bad and future earning are destined to be only $100? Before buying back shares, the business had $500 plus $100 in future earnings, or $6 per share. After the buyback there are only 50 shares to divide up the $100 of future earnings, or $2 per share. So, we see that whether a stock buyback is good or bad depends on whether the stock is under- or over-valued.

Friday, December 12, 2008

Short Takes: Corruption, House Prices, and Tax Evasion

1. The state of Illinois will stop doing business with the Bank of America. Governor Blagojevich is upset that the bank received $25 billion of taxpayer money in a bailout, but refuses to restore credit to a Chicago business. Is it possible that this type of political interference had something to do with the bad loans that caused the credit crisis? Amusingly, a couple of days later Blagojevich was arrested for a “political corruption crime spree” that included trying to sell Obama’s recently vacated Senate seat. Then he decided to ignore Obama’s call for his resignation. Sounds like a soap opera.

2. Larry MacDonald kicks the tires on a new way to measure house prices that promises to be more accurate than the old method of just averaging recent sale prices.

3. Million Dollar Journey discusses an important lesson in real frugality. For items you need for the long-term it’s important to focus on dollars per unit of time rather than just one-time cost.

4. MoneyGardener has some interesting graphs that show a strong correlation between oil prices and the value of the Canadian dollar.

5. Jonathan Chevreau reports that electronic sales suppression software is available for sale (the web page with this article has disappeared since the time of writing). This software helps businesses cheat on their taxes by eliminating records of a fraction of point-of-sale transactions. CRA’s strategy to catch those who sell this software seems to be to get honest businesses that are approached to contact law enforcement.

6. The Big Cajun Man discusses the perfect storm of snowfall and a transit strike causing major traffic snarls. He’s happy that at least gas prices are low, but that contributes to the traffic problem.

Thursday, December 11, 2008

The Stock Market and the Economy Aren’t the Same Thing

It may seem obvious when you think about it, but the stock market and the economy aren’t exactly the same thing. Some commentators seem to confuse the two. There is no doubt that they are related to each other, but they don’t always move in the same direction.

The stock market reflects the going price for businesses that are at least partially owned by the public. The economy includes these businesses plus privately-owned businesses, bond markets, currency markets, governments, jobs, etc.

Stock prices are a consensus view of the expected future profitability of public businesses. This makes the stock market forward-looking. Sometimes the crystal ball is cloudy and stock market participants get it wrong, but stock price movements tend to precede changes in the economy.

We have seen this lately in media stories. As stock prices dropped, we heard story after story of gloom and doom about the stock market. This has largely given way now to gloom and doom about the economy. Apparently we’re all going to lose our jobs and have to start flipping burgers for a meagre living. Unfortunately, this really will happen to some of us.

If past patterns repeat, we can expect stock prices to rise before we pull out of recession. But don’t take this as a prediction from me. Short-term stock market movements have a way of surprising us.

Wednesday, December 10, 2008

Joint or Separate Bank Accounts?

My wife and I have always maintained separate bank accounts. It never really occurred to us to do all of our banking with joint accounts. I’ve often wondered what it says about a couple when they make one choice or the other.

It’s not that I have my money and my wife has hers. Since we were married it’s all been our money. If I happen to be short on cash, she’ll just give me $100 from her wallet without keeping track. If her bank account gets low for some reason, I’ll just write her a cheque.

Sharing a bank account feels sort of like sharing a toothbrush to me. It can be done, but you’d have to be in quite a romantic mood to think that sharing a toothbrush is a good idea. It just seems like a pointless hassle to balance a chequebook when two people are making withdrawals. Misunderstandings with joint accounts must lead to the occasional bounced cheque.

It’s possible that having separate accounts but not really keeping our money separate is only possible because we both tend to be frugal. Maybe other couples have to keep track of each other’s spending. A joint account might help with monitoring each other. Alternatively, having “her money” and “his money” is probably more easily done with separate accounts.

Perhaps getting a joint bank account shortly after getting married is a symbolic gesture of commitment like wedding rings. If you’re not sure what to do and you want to be like other people, a joint bank account seems like the right choice.

There are probably some good reasons to have joint accounts. My wife and I actually have one joint account for a technical reason to do with transferring money years ago, but I think of it as hers and never touch it. Does anyone have any thoughts in support of joint accounts?

Tuesday, December 9, 2008

Lifecycle Investing vs. Going for Broke

Experts differ on which is the best approach to investing throughout your life. Some say to maintain a fixed percentage allocation in stocks, bonds, and cash regardless of your age. Others advise a lifecycle approach where you invest heavily in stocks while you’re young and shift to bonds and cash as you get older.

Larry MacDonald reported on a recent study by researchers Basu, Byrne, and Drew titled Dynamic Lifecycle Strategies for Target Date Retirement Funds (full text of the study is available free). The title hints at a market-timing strategy which piqued my interest.

The study compares fixed allocation strategies, lifecycle approaches, and a dynamic strategy the researchers devised. It turns out that the dynamic strategy doesn’t really involve market timing in the sense of trying to anticipate bull and bear markets. The dynamic strategy begins with a target yearly compound return expectation of 10% and makes the following choice each year:

- If your compound average lifetime return so far is less than 10%, then invest 100% in stocks.

- If your lifetime return exceeds 10% per year, then use the allocation dictated by a lifecycle strategy (more stocks if young and less if old).

So, this dynamic strategy has a built-in sense of how much the investor needs at retirement. The strategy gets conservative when returns are on track, and goes for broke with all money in stocks when lifetime returns are under par.

One finding from the study is that this dynamic strategy tends to beat the lifecycle strategy. This is hardly surprising because, on average, the dynamic strategy will have more money invested in stocks over the years, and we know that stocks tend to beat bonds and cash over the long run.

One aspect of the dynamic strategy that concerns me is that if the portfolio gets behind on its target return, it stays 100% in stocks right into retirement. This tendency to go for broke assumes that if you miss your target retirement dollar figure, it doesn’t matter how much you miss it by. However, if you were hoping for $2 million, you’re still better off with $1.5 million than just $1 million.

Apart from this problem with the dynamic strategy, there is a lot to like here. For investors who are behind in the amount they have saved, it makes sense to invest more in stocks to catch up. For those whose savings are well on track to give them as much as they need, it makes sense to get more conservative, sacrificing excess returns for greater safety.

In the never-ending search for the best investment approach, I suspect that including some amount of this dynamic strategy is better than just sticking with a pure fixed allocation or a pure lifecycle strategy.

Monday, December 8, 2008

Attitudes Toward Experts

Listening to financial experts can be both good and bad. Most of what I know about money has come from one financial expert or another. On the other hand, we need to be initially skeptical of anything new some supposed expert says. Evaluate new information before accepting it.

For example, recent research suggests a link between poverty and brain function in children. The researchers believe that poverty is causing brain impairments. My first thought is that maybe some people have brain impairments which prevent them from making much money, and they pass these impairments along to their children genetically. I may be wrong about this, but I won’t accept the researchers’ theory until I see evidence, and I don’t care enough to pay $10 to see the full text of the study.

I extend this way of thinking to all experts. Some people take anything their doctor says as gospel. My thinking is that like any other field, doctors have wildly-varying skill levels, and it pays to be skeptical of their advice. This doesn’t mean that all advice should be rejected. It means that you should seek second opinions, especially when treatments don’t seem to work.

I like to tell people that “50% of all doctors finished in the bottom half of their class.” This way of thinking pushes me to find the best expert and not just any expert. Three areas where I think I’ve done particularly well are my doctor, car mechanic, and athletic therapist. In other areas, I’m still searching.

Clearly some people don’t see the world of experts as I do. A recent experience illustrates this. A friend I’ll call Jim had a nagging sports injury and wanted advice. I directed him to my athletic therapist explaining that I had seen about 15 different athletic therapists and physiotherapists over the years, and this guy was clearly the best.

I saw Jim a couple of weeks later still complaining about his injury. He said he had gone to a physiotherapist (not the guy I recommended), but it seemed to make things worse. In Jim’s mind, he had followed my advice. From my point of view, Jim ignored my advice. Jim seems to think that all therapists are interchangeable.

People who keep going back to experts who fail them seem to be showing the same attitude as Jim did. If your car needs fixing, you have to take it to some mechanic. If all mechanics are the same, then you might as well go back to the same one who messed up your car last time. But, if you believe that mechanics differ in their skills and honesty, then you’ll keep trying new mechanics until you find one you like.

Whether you’re looking for a financial advisor, or some other type of expert, it pays to put in some effort to be knowledgeable yourself and to seek multiple opinions.

Friday, December 5, 2008

Short Takes: Investing Time Horizon, Tax-Loss Selling, and Leverage

1. Some algorithm at Google thinks this blog might be spam. This is silly of course, but it’s hard to argue with binary code. By contesting this, I’m now in a penalty box where to make a post I have to solve a CAPTCHA (one of those twisted up words you type into a box to prove you’re a person). I’m on some list to be checked out by an actual person at Google. If this blog ever disappears completely, you’ll know that something went completely wrong.

2. Canadian Capitalist has an excellent guest post from ABCs of Investing explaining investment time horizon. I tend to be less conservative about my asset allocation, but the basic idea that how you invest money is determined by how long until you need it is absolutely right.

3. BluntMoney observes that it’s harder to spend money you’ve saved up. This is quite true. Found money often gets wasted quickly.

4. I had some plumbing problems this week and so did the Big Cajun Man. Fixing leaks yourself only saves money if you don’t end up calling a plumber anyway.

5. Now is the time of year to think about your capital gains and losses. FrugalTrader explains tax-loss selling.

6. A carnivals this week: Investing Carnival

Thursday, December 4, 2008

Is Half-Price Meat Safe?

My wife is quite frugal and often comes home from grocery shopping with a cut of meat sold at half price that has to be cooked within a day. We don’t seem to have had any problems eating these cuts of meat, but they leave me a little uneasy.

I presume that the reason for the price discount is that these cuts are older than the full-price cuts. Presumably this means that the odds of getting sick from eating discounted meat are higher. I’m wondering how much higher.

I’d like to say that we’ve never had a problem eating discounted meat, but it’s hard to know for sure. We don’t seem to have had any serious incidents of food poisoning, but minor bouts of stomach upset are common and hard to attribute to any particular cause.

Most likely the risk from eating discounted meat pales in comparison to the risk of driving a car. I’ll probably continue to have a flicker of uneasiness when I’m told that dinner includes half-price meat, but only a flicker, and then I’ll dive in.

Wednesday, December 3, 2008

Enbridge TAPS Program Mishap

My natural gas supplier, Enbridge, has a program in place called TAPS where they give away some hot-water pipe insulation and efficient showerheads and kitchen and bathroom faucet aerators. My savings each year are supposed to be $45 on natural gas and $113 on water. But, plumbing often doesn’t work out very well for me.

I started with the kitchen faucet. Swapping an aerator is easy, right? Unfortunately, our house is 19 years old and the parts were nicely fused. I got them apart, but a piece of the faucet broke. A consult with a plumbing expert confirmed the bad news: we needed a new faucet. Am I saving any money yet?

Two more trips to the store for another consult and more parts plus a couple of hours on my back under the sink solved the problem. I think it will take a while to recover the total cost of $115.72 with my savings on natural gas and water. I’m afraid to try to install the other parts.

This experience reminds me of the time my father-in-law got serious about saving on heating his house. He had an array of pamphlets with energy-saving ideas and he tried almost all of them. After adding up all of the savings he was supposed to get, the total exceeded his heating costs! He liked to joke that he expected to make money heating his house.

Tuesday, December 2, 2008

Root Cause of Emergency Room Wait Times

My personal experience with trips to hospital emergency rooms is that wait times have increased over the last 25 years. Numerous newspaper articles on the subject seem to indicate that the trend to longer waits exists across Canada.

My latest data point came when my son broke a finger playing basketball. He made a nice play stealing a pass and drawing a foul and was rewarded with a finger not quite pointing in the right direction. My wife and I took a deep breath at the thought of a long wait at the hospital, but we had little choice. At least only one of us would have to wait with our son. Sadly, I couldn’t find my two-headed coin when we were deciding who would stay.

The wait to see a doctor was less than I feared at just over 5 hours. However, I can recall trips to the hospital for my own injuries decades ago when I waited less than an hour to see a doctor. What has changed?

In thinking about the root cause, I see the problem at ultimately coming from government debt. The Canadian government ran deficits through the 70s, 80s, and into the 90s. Turning this around in the mid-90s required cuts in government spending.

While there may be individual people, organizations, and political parties to blame for particular aspects of our current health care problems, once the debt had been built, funding pressure on our health care system was inevitable.

Monday, December 1, 2008

Stocks Cause Psychological Pain

How bad have stocks been lately? Regardless of what the numbers say, what matters to people is how they feel about stocks. Two people can feel very differently about the same events. Here we have a couple disagreeing about stocks:

Sue: “After all this excitement in the stock market, the last two weeks have been good.”

Andy: “Are you nuts? Stocks have been brutal lately. Worrying about our savings is keeping me awake at night.”

Sue: “But I’m talking about just the last two weeks. Look at this chart.”



Andy: “That proves my point. The TSX went down below 8000. At this rate, we’ll never be able to retire.”

Sue: “But we’re up 2.4% in these two weeks. That’s good for such a short period of time.”

Andy’s reaction is more typical than Sue’s. The pink region in the chart measures Andy’s psychological pain of watching stock prices sit well below where he hoped they would be. It’s like watching your favourite sports team when they’re way down. Even if they close the gap somewhat, fans suffer psychologically while their team trails badly.

Andy isn’t wrong. After all, he knows his own feelings. But, the way he perceives the stock market may cause him to make choices that hurt his long-term returns, such as selling at a low point. The truth is that the past two weeks have been good for investors’ returns (as long as they didn’t sell), even if it made many of them ill.

Sue’s temperament is better suited to investing success. She ignores the pattern of prices during a period where she didn’t trade stocks. In a month, she won’t care what prices are like today.

Although individual stocks can fall to zero permanently, you’ll have much bigger things to worry about than money if the entire stock market goes to zero. Sue remained calm and trusted that stock prices would rebound eventually. Stocks may drop again in the short term, but it won’t be permanent.