Wednesday, August 31, 2011

Are High Gas Prices Changing Behaviour?

During my morning commute I passed a gas station advertising a price of $1.30 per litre. This may not be the peak in my area, but it is quite high. You'd think that this would drive more people to take the bus or to carpool.

Looking around I saw little difference in the density of cars, vans, trucks, and SUVs clogging the roads. In a minute of scanning, I didn't see any vehicles holding more than one person. This brings up the question, are high gas prices changing the way people drive?

I hear no shortage of complaints, but my small sample indicates that people are just paying the extra money and going about their business as usual (with some extra complaining).

If gas prices continue their climb there will have to be noticeable changes in how much people drive, but for now I'm not seeing it.

Monday, August 29, 2011

Financial Savvy Test for Politicians

BC’s vote to scrap the HST brings up the question of what happens to the $1.6 billion the federal government gave BC to implement the HST. It seems natural that the money has to be returned, but apparently the NDP disagree. This willingness to hand out money so freely makes me wonder if politicians should have to pass some sort of financial savvy test.

You might point out that politicians understand financial matters just fine and they act out of self-interest. This is likely true much of the time, but I wonder if sometimes politicians genuinely don’t understand basic financial facts.

Here is a simple essay question that intelligent adults should be able to answer correctly to have any hope of running a government:

Explain why having the government give every Canadian ten million dollars wouldn’t make us all rich.

If that one proves too difficult, maybe the following question is a little easier:

Suppose that ten people are adrift on a life boat. The only food they have is ten cookies. Explain why making a rule that each person is entitled to three cookies won’t help.

Any other ideas for good financial test questions?

Friday, August 26, 2011

Short Takes: Screwing the Rich by Indexing, BMO Offers U.S. Dollar Registered Accounts, and more

Scott Adams has a funny article on financial conspiracies that ends with "If you want to screw the rich, buy stocks in the broad market indexes and just hold them forever. They hate that."

Canadian Capitalist reports that BMO Investorline is now offering U.S. dollar registered accounts. The pressure is mounting on the remaining Canadian discount brokerages not offering this service to shape up.

My Own Advisor says that online RRSP calculators freak him out because they give scary answers. He includes some screen shots of his own calculations.

Preet Banerjee says that the primary consideration for whether you get a gym membership or buy your own exercise equipment should be your likelihood of sticking with your workout plan rather than the cost of each alternative. I agree, but I would add that you need to beware of initial bursts of enthusiasm. We need enthusiasm to get us started, but it can also lead to buying expensive equipment and clothing that gets little use. Channel enthusiasm into planning workouts rather than buying things. Once you prove to yourself that you'll stick with a plan, it makes sense to start acquiring the things you need to make the workouts better.

Retire Happy Blog has a story of an advisor who abused Deferred Sales Charges (DSCs) to the detriment of his clients.

Money Smarts describes his experiences with getting discounts on price scanning errors from businesses that have adopted the scanner price accuracy code.

Big Cajun Man says it's possible for gasoline prices to drop back down to 50 cents per litre. It's also possible for gasoline prices to continue their uneven climb faster than other commodities due to the increasing scarcity of oil.

Larry MacDonald thinks that predictions of doom in Canadian housing are overblown.

Canadian Couch Potato finds Vanguard's new ETFs for Canadians to be mostly a yawn.

Million Dollar Journey explains futures contracts. I wasn't aware that the shift in value of a futures contract was transferred in cash each day.

Thursday, August 25, 2011

Don't Pay for One Year

Years ago I was buying a piece of furniture and was offered a "don't pay for one year" deal. I innocently asked whether I could get a discount if I paid right away. The answer was a firm no and my attempts to continue negotiating failed to lower the price. It wasn't until years later that I learned why.

If you fail to pay the full amount on time, you get hit with high retroactive interest back to your purchase date. If enough people fail to pay on time, the zero interest for a year deal can actually be profitable for the finance company.

To make things a little more concrete, I looked up a major retailer's don't pay for a year deal. At this store, if you pay on time, there is no interest and no extra fees of any kind for a year. If you are short one penny when the year is up, you pay 12 months of 2.4% interest (32.9% for the year after compounding) on the entire purchase.

If the retailer just offered regular financing, let's say that the interest rate would have to be 8% per year to cover the retailer's overhead plus the expected default rate. This is only about one-quarter of the 32.9% rate that you would have to pay if you get hit with retroactive interest in the don't pay for a year deal. So if more than about one-quarter of people are unable to pay after a year, the financing deal is profitable on its own.

Another possible concern for the retailer is that offering a discount in lieu of the zero percent financing deal undermines the advertising claim that the financing is really at zero percent. However, car companies seem able to walk this line without difficulty.

Wednesday, August 24, 2011

The Problem with Currency Hedging

Vanguard announced yesterday that they will open 6 Canadian-domiciled ETFs. Two of these ETFs cover indexes of U.S. and international stocks. Unfortunately, they also incorporate currency hedging back to Canadian dollars. This takes away the risk protection that I’m looking for, as I’ll explain.

Here are the 6 ETFs Vanguard announced:

– Vanguard MSCI Canada Index ETF
– Vanguard Canadian Aggregate Bond Index ETF
– Vanguard Canadian Short-Term Bond Index ETF
– Vanguard MSCI U.S. Broad Market Index ETF (CAD-hedged)
– Vanguard MSCI EAFE Index ETF (CAD-hedged)
– Vanguard MSCI Emerging Markets Index ETF

One of the risks we face as Canadians is that the Canadian economy will falter and fall behind the rest of the world. As a proud and confident Canadian, I don’t think this will happen. But when I think through the many possibilities, a faltering Canadian economy would cause us big financial trouble.

Imagine that at some point in the near future the world stops buying our oil and our economy takes a big hit. Government debt grows and we face 30% inflation for a decade. The Canadian dollar drops to 10 U.S. cents. All our imports cost 10 times what they used to cost when measured in Canadian dollars.

If I hold international stocks without currency hedging over this tough period, I get a 900% boost in returns (measured in Canadian dollars) to help me deal with expensive imports. If I use currency hedging, I get only a modest return on my international investments and can’t afford to buy imports.

The argument in favour of currency hedging is that Canada may do fine and some other countries may falter. However, this is what diversification is for. I can handle it if 5% of my holdings take a beating. What I can’t handle is having everything I own take a beating if Canada falters. I’m a proud Canadian, but I’d rather have my future depend on the world’s economy as a whole rather than just Canada’s.

Tuesday, August 23, 2011

Losing Sight of the Purpose of Insurance

I have a family full of students whose student fees include a health insurance plan. You might think that the school would see to it that students are offered a sensible plan at a reasonable cost. The plan description I got to see didn’t look very sensible to me.

Flipping open the cover to the first two pages, my eyes were drawn to the giant dismemberments table. The funniest entry (if discussing dismemberment can be funny) is the loss of “One or More Entire Toes” for $50. In what possible way can $50 compensate for a lost toe?

The purpose of insurance is to cover large costs of low probability events. Losing a toe has low probability, but $50? The top end of the table is $25,000 for losing any two of six things: your eyes, hands, and feet. Again, $25,000 is very low compensation for such devastating losses.

The rest of the document is a long string of caps of $100, $1000, $2000, etc. on various mishaps. Real insurance would make you pay the first $100 and cover all of the rest. I can understand why an insurance company prefers to cover only small costs with low caps, but I don’t see why this is any good for students.

Monday, August 22, 2011

$10,000 Gold

Jonathan Chevreau says that Nick Barisheff is about to publish a book titled $10,000 Gold: Will it happen sooner than you think? (see the middle of the article). The article also included an opinion about gold being overvalued, which creates some balance, but I’d prefer to stay away from these predictions altogether.

My first reaction to seeing “$10,000 gold” was to remember the 1999 book DOW 36,000 by authors who would rather remain nameless. Apparently, everyone had to pile into stocks or miss the 3-5 year ride on the DOW from around 11,000 in 1999 to 36,000. It’s now 12 years later and the DOW is still at around 11,000.

The only reason a book like DOW 36,000 made it to print with some likelihood of success is that in 1999 stocks had been on a terrific tear, and people wanted to believe that the party would continue. The same is true for a book today about gold reaching $10,000.

Apparently, Barisheff believes that a $10,000 gold price “could be justified.” I have little doubt that gold will eventually reach this price, if for no other reason than inflation. It’s also possible that the gold party will actually continue driving the price to $10,000 in a few years, but don’t count on it. Another possibility is that gold prices plummet as they did in 1980.

Another scary possibility for owners of gold is that the world starts to value gold for its practical and cosmetic uses rather than just having an irrational desire to own it. Gold owners rarely actually do anything with the yellow metal. The same could be said of stocks, but at least stocks are part ownership of a business that actually does things to make money. Gold just sits there.

Friday, August 19, 2011

Short Takes: Stop Coddling the Super-Rich, U.S. Debt Rating Downgrade a Mistake, and more

Warren Buffett wrote an excellent piece for the New York Times calling for higher tax rates on the super-rich like him. He pays only 17.4% tax on his income, but average Americans pay a much higher percentage.

Tom Bradley at Steadyhand brings us an explanation of why Standard & Poor’s downgrade of U.S. government debt was incorrect.

Canadian Couch Potato gives an ETF investor’s portfolio a makeover. One caution for readers is that when CCP says “Canadian stocks are best held in a non-registered account,” this only applies to people who have both registered and non-registered accounts and are deciding which investments to put into each one. For the majority of people who don’t use all of their RRSP and TFSA room and have no non-registered accounts, there is nothing wrong with holding stocks in your RRSP or TFSA.

Potato describes a market-linked GIC that claims “No cap on returns, no fees, participate in 100% of return.” If you’re suspicious that’s good because you should be. The fine print reveals details at odds with the marketing claim.

My Own Advisor reviews the book Investment Zoo. One good quote: “Taxation has never been fair, since government can only take from those who have money.”

Preet Banerjee explains that statements like “there were more sellers than buyers on the market today” are complete nonsense. He also gives an excellent explanation of what drives equity prices up and down.

The Blunt Bean Counter has seen people make mistakes in naming executors for their estates and has some detailed advice.

Million Dollar Journey explains how to create a stock watch-list with Google spreadsheets. I’ve gone a step further to automatically calculate where new money should be invested and raise a flag when I should rebalance my ETF holdings.

Canadian Financial DIY reports that the Ontario government is making changes to the probate system that will add more bureaucracy and slow down the distribution of estate assets.

Money Smarts takes the novice investor through all the detailed steps of how to sell stock with a Canadian discount brokerage.

Retire Happy Blog takes a calm, analytic view of market volatility.

Big Cajun Man says that a bank acquisition may lead to a merger with his credit cards.

Larry MacDonald (this web page has disappeared) reports that a bill before the U.S. Congress may prop up the flagging housing market.

Canadian Capitalist reports on scathing criticism of the mutual fund industry.

Gail Vaz-Oxlade says that banks can withdraw your overdraft protection at any time.

Scott Adams supports the call by the CEO of Starbucks, Howard Schultz, to stop donating to any political party while government functions so poorly.

Thursday, August 18, 2011

HST Double Charging

Reader R.M. is having trouble being double-charged HST for work done on a property. The following is a lightly-edited version of his situation.
I have an agent managing a house for me. That means that they deal with various suppliers for maintenance and repairs. Suppliers issue invoices to my manager (not me) for work done. For example:

$10,000 labour, material, etc.
$ 1,300 HST
$11,300 Total manager pays supplier

Then the manager invoices me as follows

$11,300 supplier services
$ 1,469 HST
$12,769 Total

I am paying $2,769 HST on the $10,000. This appears to be double payment of HST by me. The original supplier has collected the HST and will remit that amount. But the manager has done nothing more than pay the supplier bill, which included the HST and should pass on to me nothing more than the 11,300. (Management fees are charged separately to me.)

Is my reasoning correct? When the manager pays a bill for me which included HST, then is it incorrect to be billing me in the above manner? If I am wrong, then how do I solve the problem and pay only the $1,300 HST?
I'm no tax expert and nobody should rely on my analysis, but based on my (limited) understanding of HST rules, it looks like the manager is making money by simply passing along the larger bill. It is the manager who can get back the extra HST that R.M. is paying.

The manager begins by paying $11,300 and collecting $12,769, leaving $1469 in his pocket. But then he has to file his HST return. He will owe $1469 less the input credit of $1300 leaving a tax bill of $169. In the end the manager gets to keep $1300 (less any income taxes he would have to pay on this income). It’s possible that the manager simply doesn’t understand HST input credits and it’s the government that is pocketing the extra HST.

I’d like some thoughts from readers. Is my analysis correct? What is the best way for R.M. to correct this situation?

Wednesday, August 17, 2011

Mesmerized by the Market

With the high stock market volatility lately, I haven’t been able to keep myself from checking the big swings in my portfolio value from day to day. I know I should focus on other things, but it’s hard not to check how many weeks of pay I’ve gained or lost each day.

Of course, these swings tend to balance out somewhat over time. A week of volatility is less than 5 times a day’s volatility, and things balance out more over longer periods of time. But still, with these big daily swings, it’s hard to believe that tiny little MERs could make any difference. Consider the following example.

Suppose that at the start of the day yesterday you owned $250,000 worth of large cap Canadian stocks in the form of the exchange-traded fund XIU. By the end of the day you would have lost $2477. The portion of this loss that is due to XIU’s MER is $1.70 (based on 250 trading days per year and XIU’s MER of 0.17%). If the MER had been 2.5%, the day’s MER cost would have been $25.

It’s hard to imagine that a $25 cost matters much when you’re making or losing $2477. But as I said, the market swings tend to partially balance out over time. The difference with MERs is that they always point in the same direction: down. It’s like a runner bolting back and forth on a train that is moving at one-tenth of walking speed. At any given time the train’s movement seems irrelevant, but over time the train manages to make a difference and the runner has just gone back and forth.

I’ll probably keep checking my portfolio daily even though I’d be better off reading a novel. Hopefully, I won’t get any bright ideas about how to juice my returns with some sort of trading. Maybe you can guess what’s going to happen tomorrow based on whether the market was up or down on that last two trading days ...

Tuesday, August 16, 2011

Strategy for Paying for Cars

Jonathan Chevreau asked his readers whether he should keep his old car running or buying a new one, and the reader response was solidly in favour of keeping the old car. I tend to agree that it makes sense to keep a car as long as possible. However, the day must come when we have to let go and replace our cars. The question then is how to pay for the new car.

I think the answer is preparation. If you’ve got a good old car that is running well and not costing you too much money to keep in working order, then you should be able to save a couple of hundred dollars each month toward a new car. If you can’t afford to do this, then you really can’t afford your car.

The best way to pay for a car is in cash. For one thing, you’ll think twice about buying an expensive car if you’ve had to save up the money. When you do buy your car, you can immediately start saving for the next car. This will save thousands in interest payments.

For the majority of people who have fallen off this particular wagon, having an old car with no payments left on it gives them the opportunity to put the amount of the payments into a savings account that will later reduce the debt on the next car. For many people I’ve known, the single best thing they could do for their finances is get their car spending under control.

Monday, August 15, 2011

Useful Employment

In an op-ed piece for the New York Times, Paul Krugman makes the case that current unemployment levels in the U.S. are a bigger concern than government debt, despite the recent focus on deficits. I’ve heard these arguments before, but I’ve always wanted to hear more discussion of the types of employment.

It makes sense to me that pulling out of economic problems requires having as many people work as possible. However, it must matter what kind of work they are doing. If we subsidize clothing it will create more jobs in the clothing industry and will allow compulsive shoppers to buy even more tops and shoes they’ll never wear, but I fail to see how this will help the economy in the long run.

It’s unlikely that we would all agree on what types of work benefit society and what doesn’t, but it seems to me that if the government plans to inject money to spark the economy, it makes sense to give some thought to the type of job growth that the stimulus will create.

I have no great answers here, but I’d like to know if quality of employment is even a consideration. By “quality” here, I mean the type of work that will benefit society in the long run rather than how the individual would define quality (e.g., pay level, security, benefits, etc.). Surely building windmills is better than selling cute shoes.

Friday, August 12, 2011

Short Takes: Personal Incomes Tax Errors, Overconfidence, and more

The Blunt Bean Counter runs through some common personal income tax errors. Some of these are pretty subtle, but potentially expensive.

Canadian Capitalist found a recent study showing that most people think they are above-average drivers. Overconfidence seems to be everywhere.

Squawkfox mocks collectors but gets caught collecting questionable things herself.

Big Cajun Man isn't happy with some advice for how a 17-year old should handle a credit card.

Support Spy lists the things to look for in a sales pitch that should send you running.

Preet Banerjee finds that a healthier diet cuts his food bill too.

Retire Happy Blog takes a calm view of recent market volatility and says it's time to rebalance.

Money Smarts says don't sell.

Million Dollar Jorney lists the top 5 pension myths.

How to Invest Online sees the recent market volatility as a summer sale on stocks.

Cartoonist Scott Adams and Warren Buffett agree that the U.S. government is a good credit risk.

Thursday, August 11, 2011

Rebalancing Gives No Instant Gratification

Part of the theory behind maintaining a fixed percentage allocation of your portfolio to different asset classes, like stocks and bonds, is that when markets are volatile, you can increase returns by rebalancing.  Unfortunately, there is no immediate return from rebalancing.

To show that rebalancing has created a profit, you need to take into account not just your most recent rebalancing trade, but also the last time you rebalanced in the other direction.  If you do the calculation, it will show whether the second to last rebalancing trade produced a profit, but the most recent one won't show a profit until the next time you rebalance in the other direction.

This situation creates a problem of a delay from effort to reward.  We're much better at doing things that give immediate gratification. 



Wednesday, August 10, 2011

The Quest for Alpha

In the investing world, alpha refers to the ability to beat the market. In his book The Quest for Alpha, Larry Swedroe argues strongly that persistent alpha is exceedingly rare and we shouldn’t bother to look for it. He says that investors should use index investing to get market returns with minimum cost. In this way we will actually outperform those who try to beat the market.

Swedroe is big on evidence. He looks at the numbers for mutual funds, pension plans, hedge funds, individual investors, and behavioural finance, and concludes that positive alpha is rare over long periods of time.

For investors who think they can beat the market because they are smart, Swedroe has the amusing example of a Mensa investing club that had lost to the market returns by 13% per year for 15 years. “One investor described their strategy as buy low, sell lower.”

David Swensen is quoted as saying “Individuals who attempt to compete with resource-rich money management organizations simply provide fodder for large institutional cannon.” Decades ago, the percentage of trades performed by institutional investors was low, but in recent years it has risen to 80% or 90%. Active individual investors have stiff competition.

In an interesting study of individual investors’ brokerage accounts, the investors overestimated their own performance by 11.6% per year! Most people lost to the market return but had no idea this was true. It seems that investors would rather protect their egos than their money.

Swedroe accuses both Wall Street and the media of knowing that individual investors can’t beat the market, but brokers make money from helping investors try to beat the market, and media stories about index investing are too boring to bring in readers.

Swedroe offers 30 “prudent rules of investing”. Here are three of them:

“Before acting on seemingly valuable information, ask yourself why you believe that information is not already incorporated into prices.”

“Never work with a commission-based advisor.”

“Keep a diary of your predictions about the market. After a while, you will conclude that you should not act on your ‘insights.’”

When asked about Warren Buffett, Swedroe says that if you see Buffett when you look in the mirror, “go ahead and seek the Holy Grail of alpha.” If not he says you should “play the winner’s game,” meaning low-cost indexing.

The final quote of the book is from Buffett who says that “the stock market serves as a relocation center at which money is moved from the active to the passive.”

Investors who seek alpha for their own investments should read this book and either give up the quest or explain to themselves why Swedroe’s arguments don’t apply to them.

Tuesday, August 9, 2011

Saving Money by Shipping Overseas

A while back I wrote briefly about being given a gift certificate for Amazon in the UK rather than Canada. My wife made her first purchase on the certificate and, amazingly, the total cost was less than if we had ordered the items in Canada.

My wife bought some school books, clothing, and a runner’s water bottle for a total of £208.33, which the Bank of Canada currency converter says is equivalent to $336.93. This includes shipping (£18.36) and import fees (£19.36), but we didn’t have to pay the UK’s value-added tax (VAT).

The same order in Canada would have been $368.21, which includes GST on the books and the full HST on the other items, but no shipping charge for such a large order. In total, we saved about 8.5% by ordering from the UK instead of Canada.

This is definitely a case of YMMV, but the next time you place an order with Amazon it might pay to see what the order would cost if placed with Amazon (or some other company) in another country.

Monday, August 8, 2011

Looking for Market Conditions that Favour Active Investing

According to some pundits, we are in a sideways market, which means that stock prices are neither going up nor down. Others say we are in secular bear market, which the Wikipedia entry for market trend defines as “a long-term trend that lasts 5 to 25 years ... [that] consists of smaller bull markets and larger bear markets.”

Implicit in these claims is the prediction that these conditions will continue for the near future. Obviously, index investors can’t make money on their stocks in the near term if stock prices stay flat or tend to drop. A common follow up claim is that these markets are for stock-pickers or other types of active investors.

The problem, of course, is that to beat the market you need to take advantage of those who lose money to the market. To be a market-beating smart investor you have to be able to exploit dumb investors. When the market performs poorly, the only way to get good returns is to beat the market, but that doesn’t mean that it will be easy to do so. Similarly, when gambling and losing, just because the only way to get even quickly is to make a huge bet doesn’t mean that the roulette wheel will land on your lucky number.

The type of market that is best for active investors has little to do with the market trends; it has to do with whether there are many exploitable dumb investors who use active strategies. I see no reason to believe that there are more dumb investors picking stocks when markets perform poorly. In fact, I recall during the dot-com era of explosive stock prices that just about everyone I worked with traded stocks actively.

I don’t believe that anyone really knows what type of market we will have in the near future. But even if they did know that market will perform poorly, I don’t see why one type of market would favour active investing. Even market timers who plan to sell out completely have to match up with someone buying into the market. If this weren’t true, then prices would already have fallen due to too many sellers and too few buyers.

Friday, August 5, 2011

Short Takes: Study Says Pension Funds Beat the Market, Bailouts Using Bond Fund Assets, and more

Larry MacDonald found an academic study showing that pension funds outperform indexes. I asked Larry Swedroe about this study and his first reaction was that the results can be explained by momentum effects. We'll see if he expands on his thinking in an upcoming entry on his Wise Investing blog.

Jason Zweig reports that some bond fund assets are used to bail out borrowers.

Money Smarts explains that portfolio rebalancing is for controlling volatility rather than maximizing returns.

Canadian Capitalist and Canadian Couch Potato defended index investing against some criticism. Balance Junkie replied, and The Blunt Bean Counter took a 1000-foot view of the whole debate.

Retire Happy Blog tries to tackle the difficult issue of what returns you can expect from the stock market when planning for retirement.

Preet Banerjee says he can’t forecast the future price of gold, but he is sure that you shouldn’t mail you gold to someone who might pay you less than half of what it’s worth.

Big Cajun Man says that his staycation isn’t as cheap as he’d like.

Million Dollar Journey surveys the top U.S. dollar credit cards in Canada.

How to Invest Online takes a look at various ways of expressing the damage that costs can do to your portfolio.

Thursday, August 4, 2011

Potential Future of Gold

I’m not in the business of making short-term price forecasts for stocks, bonds, or anything else, including gold. Gold has had quite a run over the last decade. I thought it would be a good idea to take a look at a gold chart from the last time gold had a great run (1970 to 1980). The chart below shows that decade plus a couple of extra years.


Now this might look like I’m predicting that gold is going to crash soon. In fact, I just want to point out that this is a possibility. This shouldn’t be a great concern for those who have a small slice of their portfolios in gold. But for those who are piling into gold with the bulk of their portfolios because of government debt fears, inflation fears, or just bullishness on gold, such a crash is one of the many future possibilities. Diversification is a good thing even when it comes to gold.

Wednesday, August 3, 2011

Working for a Negative Wage

Recent defenses of couch potato investing by Canadian Couch Potato and Canadian Capitalist left me wondering why so many people believe in active investing strategies. I think it may be partly due to the feeling that you will be successful if you work hard.

It may take some work to pick a passive investing strategy, but once started this approach is quite easy to maintain (which is why we call it “couch potato” investing). On the other hand, active investors work to try to beat the others who play the same game. Active stock pickers pore over company reports and calculate company valuations. For them investing is usually hard work.

The thing that goes contrary to our expectations about hard work is that active investors, on average, get lower returns than the market averages. It’s not that they don’t get enough benefit to justify the work they do; it’s that they actually make a negative wage for the hours they put in. At least this is true of the average person who invests his or her own money actively. Professional money managers get paid whether they perform well or not.

Tuesday, August 2, 2011

Math for Grownups

Being a math guy I couldn’t resist an offer to review Math for Grownups by Laura Laing. The main focus of the book is showing how to use basic mathematics in everyday situations. It is primarily aimed at adults who are not comfortable with math.

A healthy chunk of the book deals with financial matters such as mortgage payments and debt to income ratios, but it also covers many other areas like hanging curtains, shrinking or expanding recipes in the kitchen, counting calories, and more.

On the whole, Laing does good job of explaining how to do calculations in real-world situations for people who don’t already know how. However, the book contains a disappointingly large number of errors.

One example of an error is the calculation of how much one would pay to finance a car. If the car costs $15,000 financed at 6% for 4 years, Laing says that the total financing cost is $15,000 x 1.06 x 1.06 x 1.06 x 1.06. This would only be true if you let the interest build without making any payments for the full 4 years.

In the section on mortgages, Canadians should be careful because we usually use semi-annual compounding rather than the monthly compounding that is common in the U.S. The discussion of when buying points on a mortgage makes sense ignores the time value of money and therefore gives incorrect results.

When leasing a car, Laing suggests that leasing may be a better option that buying for a hypothetical car buyer. I tend to disagree; leasing a car is rarely a good idea. A possible exception is when the payments can be written off on taxes.

In an extended discussion of recipe calculations, 23/12 somehow turned into 2+1/12, and then turned back into 25/12. In a discussion of credit cards, the book claims that minimum payments can be as little as “1% of the interest”. Perhaps the author meant 1% of the balance plus the interest.

The author suggests that for retirement planning, you should save $15 or $20 for every dollar of income you need from your savings. This corresponds to a withdrawal rate of 5% to 6.7%. This seems a little high to me, particularly for anyone who retires young.

In a section on weight loss, Laing does an excellent job of explaining how many calories are in a pound of body fat and how long it necessarily takes to lose weight. Trying to lose weight is a marathon and not a sprint.

When giving metric conversion figures, the author shows little understanding of significant figures. Apparently, one pound is 453.59 grams, and one gram is 0.002 of a pound. In a round trip calculation, you lose nearly 10% with these figures. Perhaps 454 and 0.0022 would be better.

In a discussion of gambling, the author says that “with a little strategy, you might come out on top at the craps table.” I’m not sure what the author means here, but to be clear, nothing you can do (within the rules) at a craps table will tip the odds in your favour. With the right strategy, you can minimize the odds against you so that coming out ahead over a single session isn’t too unlikely. But, over the long run, you will lose money.

When discussing odds, the book has a simple error where a $4 bet with a 15:1 payoff is said to pay out $75. The answer is actually $64. The book treated the situation as a $15 bet with a 4:1 payoff.

In the formulas at the back of the book, the surface area of a cylinder has an equals sign where there should be a plus sign. In the glossary, the example of a least common multiple says that the LCM of 3 and 6 is 12. It’s actually 6. In the definition of whole number, zero is treated as positive; it’s actually neither positive nor negative.

Despite the fact that I’ve focused heaving on the errors, this book would likely help the less mathematically inclined learn how to handle some simple numerical situations in real life. The challenge is to get these people to read a book like this.