Friday, October 30, 2015

The Consequences of Keeping Bad Employees

Most people do their jobs well, but there are some who can’t or won’t do their jobs adequately. The most obvious consequence of keeping bad employees is that paying them is a waste. But there are follow on effects that are much more serious. In the private sector, these problems tend to take care of themselves, but not so in the public sector.

There are many problems that come from allowing bad employees to stay in an organization:

1. They cost money but don’t produce their share of output.

2. They take up the time of other employees.

3. Some talented employees will become disgusted with having to work with incompetent employees and will leave.

4. Over time some bad employees will move up in management where they can cause more damage with poor leadership and bad hiring decisions.

5. An organization that goes too long without culling bad employees will eventually lose its ability to distinguish between weak and strong performers.

Of all these problems, only the first one (not producing enough output) has much of a hope of ever being measured. But the other four problems have a significant multiplying effect that is very difficult to measure.

Most companies in the private sector do a reasonable job of culling bad employees. The ones that fail at this important task increase their risk of failing entirely. So, one way or another, the problem of bad employees tends to be kept under control. It’s not that the private sector employees are all star performer, but the proportion of poor employees tends to stay under control.

It’s worth noting that a person is rarely inherently a bad employee. It matters a great deal what job they’re expected to do. There are some jobs I’m terrible at, and others I’m good at. The process of culling poor employees is in some sense a force that shuffles people out of jobs not suitable for them and into jobs they’re better at.

This reshuffling of people to different jobs sometimes happens within an organization and sometimes it involves getting fired and looking for a new job. It’s tempting to eliminate firing altogether and say that companies should always find a better fit for each employee. However, without the threat of getting fired, some employees will see no reason to ever really try. Some bad employees can’t do their jobs, but others just won’t do their jobs without the threat of being fired for poor performance.

In the public sector, firing employees is much less common than it is in the private sector. This leads to some very simple logic. Some hiring decisions are mistakes. If you don’t get rid of poor employees, they accumulate. This leads to the five problems listed earlier.

According to Statistic Canada, in 2011 there were 3.6 million public sector employees paid a total of $194 billion. If we conservatively estimate that 10% of these wages are wasted on bad employees, that’s $19 billion per year wasted. Of course, bad employees pay taxes, so let’s call the net waste $12 billion per year.

According to CRA, in 2012 the 9.5 million Canadians earning less than $20,000 per year paid a total of $1 billion in federal and provincial income taxes. So, cutting public sector waste would allow us to stop taxing people with incomes under $20,000 and we’d still have $11 billion left over. Just think of how much we could shorten wait times for medical scans and procedures.

Some readers will take this article as an attack on public employees and the services they perform for Canadians. This is not an attack on Canada’s public service. Our public service is vital. We need safe food and medical care just to pick two important functions. We need the millions of public servants who do their jobs well. What we don’t need is to pay the ones who can’t or won’t do their jobs. Many strong public servants would be thrilled to see their useless coworkers leave.

Don’t be fooled into treating public sector employees as a uniform group. There are good teachers and bad teachers. The good teachers are worth every penny we pay them and the bad teachers do damage to our pocketbooks and our children’s future. It’s not realistic to expect to eliminate all bad employees, but it would be great to deal with the most obvious cases of poor performance.

Friday, October 23, 2015

Short Takes: A New Father’s Financial Advice, Taking CPP Early, and more

Here are my posts for the past two weeks:

Credit Card Bill

Typical Spending vs. Average Spending

Contest Winners – Let’s Get Blunt about Your Financial Affairs

How Dividends Affect Stock Prices

Here are some short takes and some weekend reading:

Morgan Housel writes a brilliant piece offering financial advice for his new son. The high quality of his 10 points is in sharp contrast to the embedded ad made to seem like part of the article at the bottom.

Preet Banerjee explains how taking CPP early or late affects your monthly payments.

Rob Carrick gives us one of his short videos explaining the Liberals’ tax plans. He hits the high points clearly, but I’m not sure why he refers to “high net worth earners.” I think he just means “high earners” because you get hit with this extra tax on high incomes whether you’re a millionaire or you owe a million. The most amusing part of this video was the preceding ad touting active management in investing. Apparently, the “power of active management” “can protect capital long term,” “can tap global insights,” and “can seek to outperform.” Envious passive investors should rest assured that they can protect their capital long-term as well, that tapping global insights is highly overrated, and that seeking to outperform almost always ends in long-term underperformance.

Million Dollar Journey explains the virtues of the new Tangerine credit card. I’m normally not at all excited about credit cards, but Tangerine’s new card looks quite good.

Big Cajun Man tells the cautionary tale of how his mother became unable to get insurance on her home.

The Blunt Bean Counter explains the tax implications when Canadians sell U.S. real estate.

My Own Advisor asks Frugal Trader at Million Dollar Journey about his approach to dividend investing. Frugal Trader is one of the rare stock pickers who actually reads company annual reports. I have my doubts about his or anyone else’s ability to beat the market, but I have little doubt he’ll roughly match the market’s return over the long term. I have more doubts about the ability of other investors to match his approach.

Boomer and Echo tell us where first-time home-buyers are getting their down payments.

Monday, October 19, 2015

How Dividends Affect Stock Prices

A few times now I’ve seen dividend investors claim that paying dividends doesn’t make stock prices drop. The claim is that investors know the dividends are coming and they are already built into the price of the stock. This isn’t true, but perhaps the reason isn’t obvious. After all, this type of reasoning does make sense with other types of news about stocks.

This is best explained with an example. Consider two companies:

Company A
– will be paying a $1 per share dividend tomorrow

Company B
– won’t be paying a dividend
– will be paying a fine tomorrow that works out to $1 per share

In both cases, we assume that investors have known about these facts for a long time. In company B’s case, when tomorrow comes and they have to pay the fine, their stock price changes no more than usual because investors have known about the fine for a long time and have already factored it into company B’s share price.

So, the question then is why doesn’t this logic apply to company A? After all, their situations look quite similar. But, when company A’s shares trade ex-dividend (meaning that the share buyer won’t get the dividend), the share price drops by $1. Why the difference?

The answer comes from examining exactly what investors are buying today versus tomorrow. In company B’s case, if I buy today and hold until tomorrow I’ll have the same thing as if I wait until tomorrow to buy. In both cases I’ll have shares of a slightly poorer company B.

In company A’s case, if I buy now and hold until tomorrow I’ll have the slightly poorer company A plus a dollar per share. If I wait until tomorrow to buy company A’s shares, I won’t get the dollar per share. So, company A’s shares are more valuable to me today than they will be after the dividend gets paid.

A factor that makes this difference less obvious is that dividends amounts are usually small compared to stock prices. The natural volatility of stock prices masks the share drop caused by paying the dividend.

Another factor masking this effect is that most dividend-paying companies have enough earnings to justify their dividends. So their profits make their shares more valuable over time. This means that share prices tend to build up through each quarter as profits are earned.

If we could remove the market’s volatility, we’d see a saw tooth pattern with share prices rising steadily for 3 months and then dropping suddenly when the dividend is paid. But market volatility and investor behaviour mask this pattern.

Don’t get caught up in magical thinking. You can’t take money out of a piggy bank and expect it to still hold the same amount.

Friday, October 16, 2015

Contest Winners – Let’s Get Blunt about Your Financial Affairs

The winners of the draw for copies of Mark Goodfield’s book, Let’s Get Blunt about Your Financial Affairs (using a pseudo-random number generator of my own design) are

Murray D. and
David R.

Congratulations to both winners who I have already contacted by email. The interest in this book was high judging by the large number of entries. Thanks to all who entered and for the kind words many included with their entries.

Thursday, October 15, 2015

Typical Spending vs. Average Spending

The gap between your typical monthly spending and your average monthly spending is what gets many people into financial trouble. I collected my family’s monthly spending since 2010 to illustrate how it’s human nature to get into financial trouble if you’re not wary.

My family’s monthly spending is shown in the chart below. I’ve omitted the grid-lines for privacy reasons and because the absolute dollar numbers aren’t important to the points I’m making. (You may wonder about that very low month near the middle of the chart. In cases where I made a purchase and was reimbursed, I treated the reimbursement as a negative amount spent. That month my employer reimbursed me for travel expenses I had in the previous couple of months.)


The main thing to see with this chart is the amount of variation from month to month. My family’s spending variation may be greater than most, but everybody’s spending varies somewhat. Some people are dedicated to using equal billing plans and paying for cars and other large items with loans. Even these people have unexpected big expenses from time to time.

The next chart shows the average and median spending amounts for my family. “Average” here means adding up all the amounts and dividing by the number of months. “Median” means the amount where half the months are above and half are below. I’ve expanded the chart and cut off the big months to better see the average and median.


The main thing to see with this chart is how much higher the average is than the median. This happens because there are many months with a little below average spending, but a few months with much higher than average spending.

Over a long period of time, you need to earn enough money to cover your average expenses. But over short periods of time, an income that covers your typical month’s expenses can seem to work. This means that inattentive spenders who let their lifestyles rise to cover their incomes will float along okay for a while, but will get hit hard by big infrequent expenses.

In some ways, those who try to smooth out their monthly costs as much as possible with equal billing plans and car loans or leases are even more vulnerable. These people can go several months with almost exactly the same monthly expenses before they’re hit with a big unexpected cost.

The remedy for this problem is to have some sort of savings buffer or emergency fund. Just having an emergency fund isn’t enough, though. You also have to carve out a periodic amount from your income to fill the emergency fund back up after you’ve had to dip in.

Some people prefer to have access to a line of credit instead of having emergency savings. But this only works if you have enough slack in your budget to cover the line of credit payments. And if you have this slack available, why not build up some emergency savings now instead of going into debt later? The truth is that too many people who rely on lines of credit for emergencies end up just continually building their debts.

When I think about how much money my family needs monthly, I look at our actual spending, but that’s just a start. Then I look at big, infrequent items, like a new roof, a new car, etc. Then I take those items out of our actual spending, and add back an average figure.

So, for example, if I’ve looked at our spending for one year, and we installed new flooring that year, then the results are skewed because we won’t be fixing the flooring again next year. So, I take the floor costs out of the spending and add back in an average monthly figure. So, if I expect to spend $15,000 every 25 years, that’s $600 per year, or $50 per month. Then I add in monthly costs for all the other infrequent items I’ve identified. The final result is my family’s estimated monthly cash needs.

If you go through this same exercise, it will give you an idea of how your income compares to your true long-term average spending. The scary scenario is where your estimated average spending exceeds your income. Too many people are in this situation and don’t know it.

Wednesday, October 14, 2015

Credit Card Bill

Credit card companies seem to be losing their patience with some of their less profitable customers:
THE ESTIMATED TIME TO REPAY THE CURRENT STATEMENT BALANCE IS 0 YEAR(S) AND 0 MONTH(S) AND 6 DAY(S) BECAUSE YOU’RE ONE OF THOSE JERKS WHO PAYS THEIR BILLS IN FULL EVERY MONTH.

Friday, October 9, 2015

Short Takes: Don’t Know and Don’t Care about Stocks, Unrewarding Credit Cards, and more

Here are my posts for the past two weeks:

Irrationally Yours

Giveaway – Let’s Get Blunt about Your Financial Affairs

Here are some short takes and some weekend reading:

Jason Zweig brilliantly explains why it is important for investors to stop caring about the future of stocks. One good quote: “One functional definition of a bear market is that it is simply a period that separates the people who don’t care from those who merely say they don’t.”

Preet Banerjee uses one of his great Drawing Conclusions videos to explain when credit card reward programs aren’t rewarding.

Frugal Trader at Million Dollar Journey shares his letter to his wife explaining how the family finances are organized in case he dies and his wife has to take over. Having seen some family members who handled their family’s finances pass away over the years, I can certainly see the value in leaving behind detailed explanations of how the family money works.

Big Cajun Man came to the realization that his biggest purchase in life was not his house.

The Blunt Bean Counter has a guest expert explaining the top reasons why people and corporations get audited by CRA related to GST and HST.

Boomer and Echo explains why he dumped his dividend stocks in favour of a simple indexed portfolio. His investing path mirrors mine quite closely except that it took me 12 years to figure out that I shouldn’t be picking stocks instead of only 5 years.

My Own Advisor is encouraged by analyses saying we may not need as much savings as some experts say to retire comfortably, but gets stuck on the requirement to work until age 65. That sounds tough for me too.

Thursday, October 8, 2015

Giveaway – Let’s Get Blunt about Your Financial Affairs

Mark Goodfield, known as The Blunt Bean Counter, is an accountant who knows his stuff and can explain things clearly. He’s written a book, Let’s Get Blunt about Your Financial Affairs, that collects some of his best writing together into a range of areas that matter to Canadians. I’m giving away two physical copies of his book (see below for details of the giveaway).

Some of the topics Goodfield covers are executors, wills, audits, taxes, RRSPs, RRIFs, retirement, and cottages. Goodfield draws from his extensive experience working with his clients to give insights about human nature to go along with solid accounting information.

The book’s style is very conversational, which makes it much easier to read than you’d expect from an accountant. It’s tempting to say it could use more editing. One of the more amusing parts talks of the tail wagging the “dodge” instead of “dog”. However, the meaning remains clear, and these little things give a feeling of authenticity.

My favourite section covers investment talk and how most people exaggerate their investing success. We lie to others and also to ourselves. Becoming honest with myself is what stopped me from picking my own stocks and switching to indexing.

One of the sections that is heavy on the human nature side of things is where he discusses the personality types among children in line for an inheritance. He labels them loving children, waiters, and hoverers. He sees examples of people at their best, but in one case of an adult child impatient to get access to money he says, “I just felt sick to my stomach.”

In one very practical section, Goodfield gives step-by-step instructions for how to go about tax-loss selling to minimize your capital gains taxes. Many writers tell us we should do this, but this book gives a detailed procedure to follow.

Goodfield’s experience has been that “people consider their RRSPs holy and try their best to never withdraw from them.” However, he observes that this seems to be at odds with Jamie Golombeck’s assertion that “80% of all RSP withdrawals are made by individuals under the age of 60.” I don’t see a contradiction here because most withdrawals come after the RRSP is turned into a RRIF. The majority of RRSP money comes out during retirement, but it is technically not from an RRSP but from a RRIF.

One chapter’s title is a good example of Goodfield’s personality: “Retirement: How to Avoid Eating Alpo.” This chapter contains a 6-part series on trying to figure out how much money you need to retire. In an otherwise great series, at one point he assumes “your returns are at least market after accounting for your management fees.” He includes the prediction that “Michael James is flipping” with this assumption. I’m not exactly flipping, but it got my attention. We can’t all be above average. If some of us beat the average by 2% to make up for fees of 2%, somebody has to lose to the market average or else the market average won’t really be average.

Overall, I think almost all readers will find useful tidbits in this book that they can only get from someone with experience as extensive as Good field’s.

To enter the book giveaway:

Just send an email with the following things:
– Subject: Book Giveaway
– Answer to the following skill-testing question: (6 x 9) + 7 – 4
– Use the email address listed at the “Contact” link (For those who are reading my feed, you’ll have to click through to my web site to get the email address.)
– I will follow up with winners to get a postal address for shipping. This will be limited to Canadian addresses because the book’s contents are specific to Canadians.

Another benefit of going to my site when reading a post is to see the comments other readers leave on that post. All entries received before noon Eastern Time on Thursday, October 15th will be considered for the draw. I will make a random draw without favouring any particular entries. I reserve the right to eliminate entries that I judge to be outside the spirit of the contest. Good luck!