Friday, April 27, 2018

Short Takes: Delaying CPP, Credit Card Mix-up, and more

I wrote only one post in the past two weeks, but I think it’s important:


Here are some short takes and some weekend reading:

Fred Vettese explains why delaying taking CPP until age 70 is the right choice for most people. I’m able to spend more in early retirement today because of my plan to delay taking CPP and OAS until I’m 70. But I’ve had little success explaining this to others.

Big Cajun Man found a way to get his daughter to pay off his credit card. He tells the story a little differently.

Preet Banerjee interviews Melissa Agnes about company crisis management.

Robb Engen at Boomer and Echo explains his mortgage renewal strategy.

Tuesday, April 17, 2018


The technology used to create Bitcoin comes from the field I used to work in professionally. I’ve followed Bitcoin from its obscure beginnings to its recent bubble-like rise. After fielding so many questions about cryptocurrencies, it’s about time I organized my thoughts about Bitcoin as an investment and as a currency.

To understand Bitcoin, you don’t have to understand the technology behind it. The big problem anyone can see with digital money is that after you spend it you still have a copy of it, so you can spend it again. Much of the effort in creating digital money centers on preventing this double-spending. Bitcoin does this with some clever cryptography and computer protocols called blockchain.

Another feature of Bitcoin is that more money gets created over time. Those who do enough calculation with their computers get more Bitcoins. This is called mining, and is intended to roughly mimic mining for gold.

Bitcoin as an investment

Before Bitcoin’s meteoric rise, the few people who’d heard of Bitcoin understood that it is a currency, and is intended to be used like money. Now most people have heard of Bitcoin, and they tend to think of it as an investment. Some in the financial world suggest that cryptocurrencies should be considered an asset class. This is nuts.

It makes no more sense to invest in Bitcoins than it does to invest in Somali shillings, Indian rupees, or British pounds. The typical person should think of these things as currencies, not investments. The fact that the Bitcoin exchange rate is so volatile should make us stay away, not dive in.

Bitcoin as a currency

The digital and cryptographic nature of Bitcoin sets it apart from more familiar currencies like dollars. But this doesn’t really capture the important difference. After all, most transfers of dollars are digital and use cryptography.

Bitcoin isn’t backed by any particular government. No such backing is necessary. The U.S. government backs U.S. dollars, and it can impose rules about how dollars are used. If a bank doesn’t play by the rules, the U.S. government could cut that bank out of the dollar system. There is no easy way for the U.S. government or any government to regulate Bitcoin.

One thing governments do with their currencies is demand that electronic transfers not be anonymous. A certain amount of anonymous transfer is possible with physical cash, but this is limited. For the most part, if governments want to trace large money flows, they can do so.

Bill Gates recently said that cryptocurrencies are being used for illegal activities and that governments’ “ability to find money laundering and tax evasion and terrorist funding is a good thing.”

I agree with Gates as long as governments are stable and serve their populations reasonably well. However, Bitcoin could play a role in limiting the power of a government out of control. For example, if all electronic transfers get heavily taxed, Bitcoin is a workaround for the people. So, one use for Bitcoin is as a safety valve if a government stops serving the people. Each of us can decide for ourselves whether we think this is likely enough to justify owning some Bitcoins or other cryptocurrencies.

Other cryptocurrencies

There are some technical objections to Bitcoin. The main one is that it’s gobbling up computer processing power and electrical power. Other cryptocurrencies were created to solve some of Bitcoin’s problems. There is no consensus on which cryptocurrency is best. Even if some other cryptocurrency comes into widespread use, there’s no guarantee that is has even been created yet. This makes speculating in cryptocurrency challenging at best.

Many organizations are creating their own cryptocurrencies. However, these currencies are designed with an important difference. The organizations are maintaining control over their cryptocurrencies. So, they may seem similar to Bitcoin, but they’re not. They’re more like travel miles or loyalty points. Expect the controlling organizations to devalue these cryptocurrencies whenever it’s profitable to do so.

Abbreviating “Cryptocurrency”

For some reason, “cryptocurrency” is often abbreviated as “crypto”. I don’t expect this to stop any time soon, but it makes little sense. Just about everything we do online involves cryptography, including online transfers of dollars. The “crypto” abbreviation makes about as much sense as shortening “blueberries” to “blue”.


Cryptocurrencies are not an asset class you have to pay any attention to. For now, few of us have any real need to use Bitcoin as a currency, and that’s likely to stay true unless our governments run amok.

Friday, April 13, 2018

Short Takes: Wealth Expo, Large Insurance Payouts, and more

Here are my posts for the past two weeks:

The Power of Saving More

Informed Financial Choices

The Couple Who Made Millions Beating Lotteries

Updated Currency Exchange Method at BMO InvestorLine

Here are some short takes and some weekend reading:

Kerry Taylor went to a wealth expo so you don’t have to. Her description and comments on the event are hilarious.

Darryl Singer says “when an insurance company receives a claim, their first reaction is to reject it. They may reject it a second and a third time, too.” He paints a picture of an industry doing battle with its customers whenever they made a substantial claim. Singer is a personal injury lawyer, so he comes at this from a certain point of view, but I’ve never hear any other point of view on this subject. I’d like to know what fraction of claims get denied and how this varies with claim size and insurance company. Without this type of information, it’s impossible to know if you’re really covered if you get sued over a car accident or if your house burns down.

Andrew Coyne shares some clear thinking on carbon taxes.

John Robertson makes an excellent point about a benefit of Vanguard Canada’s new all-in-one ETFs. He also compares them to other investment approaches based on cost and hassle-freeness.

Big Cajun Man discusses the downside of refinancing. It seems like a good idea to reduce the interest rate on your debt, but serial refinancers just run their credit cards up again.

Robb Engen at Boomer and Echo describes how he would handle his portfolio in retirement. It resembles the approach I’m taking right now. A key feature is the mechanical approach that minimizes acting on hunches about the best time to sell stocks.

The Blunt Bean Counter looks at some of the problems that can result from duplicating investments, including inadequate diversification and tax inefficiency.

Wednesday, April 11, 2018

Updated Currency Exchange Method at BMO InvestorLine

There is now a more recent update of the method I use for exchanging currency at BMO OnvestorLine.

I recently changed the procedure I use to convert large sums between Canadian and U.S. dollars at BMO InvestorLine. The method I use saves a lot of money compared to using the InvestorLine foreign exchange system. The latest change I made eliminated an annoying interest charge that I had to ask to be reversed.

Most people don’t realize how expensive it can be to exchange currency. The extra charge banks and brokerages add gets hidden in the exchange rate. To see this extra charge, start by taking a sum in Canadian dollars, say C$10,000, and finding out how many U.S. dollars you can get. Then see what this U.S. amount would get going back to Canadian dollars.

Many people might guess they’d get their original C$10,000 back, but they’d be wrong. In a recent test I did at BMO InvestorLine, I’d get back C$9754, for a loss of C$246 in two currency exchanges. That’s $123 per exchange. Starting with C$100,000, the cost worked out to $464 per exchange. I use a method called “Norbert’s Gambit” to reduce these costs to about C$25 and C$50, respectively.

Norbert’s Gambit begins with finding a stock that trades with low spread in both Canada and the U.S. One such stock is Royal Bank (ticker: RY in both countries). To go from Canadian dollars to U.S. dollars, I start by buying RY in Canada with the Canadian dollars. Then I sell the RY in the U.S. to get U.S. dollars. Two days later when the trades settle, I’ve completed my currency exchange. To go from U.S. dollars to Canadian dollars, I do the reverse: buy RY in the U.S., and then sell RY in Canada.

As always, there are details that can trip you up. One detail is that even though I never sell stock I don’t own, InvestorLine doesn’t record it this way. If I’m going from Canadian to U.S. dollars, I end up with a positive number of RY shares in the Canadian side of my account and a negative number of RY shares in the U.S. side.

InvestorLine automatically “flattens” my account to get rid of the positive and negative numbers of RY shares, but always one business day late. Then they charge me interest on the phantom short sale. I’ve done this a dozen or more times, and I get charged 21% annualized for the day (or 3 days if it runs over a weekend). For a C$100,000 exchange, this is about US$40 interest per day. InvestorLine has reversed this interest charge every time after I ask them to, but having to ask is annoying.

Some people report that they don’t see these interest charges. I can think of two explanations. One is that InvestorLine doesn’t charge less than $5 interest per month in margin and cash accounts. So, smaller exchanges might not generate more than $5 interest. Another possibility is that these people manage to get InvestorLine to flatten their accounts on the correct day.

I used to send messages to InvestorLine on their internal message system asking them to flatten my account on settlement day, but this never worked. Now, I call them on settlement day and ask them to flatten my account. This seems to work.

Below is the detailed set of steps I follow going from a Canadian to U.S. dollars. Just substitute “U.S.” for “Canada” and vice-versa for how I convert currency in the other direction. I offer no guarantee that my method will work for you, because your accounts may be set up differently from mine and InvestorLine changes their systems periodically.

WARNING: You might want to avoid trading on days with high stock price volatility.

1. Check that the next two trading days are the same in the U.S. and Canada. It takes two days for trades to settle. If a holiday closes stock markets in only one country during that time, my trades would settle on different days. I don’t proceed further unless all settlement will all happen on the same day. If the settlement date is different in the U.S. and Canada, this can cause a short position and lead to an interest charge that I can’t get reversed.

2. Buy RY stock in Canada. If the Canadian dollars are coming from the sale of some Canadian ETF, I make that trade immediately before buying RY stock; there’s no need to wait for the first trade to settle. The amount of RY stock I buy doesn’t have to exactly match the proceeds from the first sale. I can buy more RY if my account was already holding some Canadian dollars, or I can buy less RY if I want my account to be left with some Canadian dollars. I make sure to account for trading commissions because the cash level InvestorLine shows doesn’t deduct commissions until two days later when the trades settle. I make sure the trades in step 2 all take place on a Canadian exchange and in Canadian dollars.

3. Sell RY stock in the U.S. This should be the same number of shares of RY as I purchased in step 2. If I’m planning to use the resulting U.S. dollars to buy a U.S.-listed ETF, I make that trade immediately after selling the RY stock; there’s no need to wait until the RY trade settles. Once again, I make sure to account for trading commissions. I make sure the trades in step 3 all take place on a U.S. exchange and in U.S. dollars. Note that I place all the trades in steps 2 and 3 on the same day.

4. On settlement day two business days later, I call InvestorLine and ask them to “flatten” my account. “Flattening” means moving RY shares from the Canadian side of my account to the U.S. side of my account to cancel the negative number of RY shares. For some reason, InvestorLine representatives insist that I don’t need to request account flattening because their system does it automatically. I tell them that I get charged interest every time because the system is a day late. They insist this isn’t true, even though it’s happened to me more than a dozen times.

5. Set a Calendar reminder 45 days later to check if I was charged interest. InvestorLine has one-day delays between certain actions and when they take effect or become visible in my account. If the flattening is done either early or late, one side of my account will seem to have a short position. Just in case the account flattening didn’t happen exactly on settlement day, I check if I was charged interest. However, it can take a long time for spurious interest charges to appear because they show up on the 21st of the month.

6. If interest was charged for the so-called short position, send a message asking that the spurious interest charge be removed. I get a different response every time I do this, but they have always reversed the charge.

7. If interest was charged, set another calendar reminder 5 business days later to confirm that the interest charge was removed. The interest charge has always been removed for me, but in theory, I might have to do another round of messaging and checking whether the problem is fixed.

Because I’ve included so much detail, this may look like a lot of work, but it isn’t too bad at all. It’s definitely worth it to me to save hundreds of dollars.

Monday, April 9, 2018

A Couple Who Made Millions Beating Lotteries

We all know that lotteries are a loser’s game that taxes the poor, but Jerry and Marge Selbee made millions of dollars playing lotteries in Michigan and Massachusetts. Jason Fagone tells their story in the entertaining article Jerry and Marge Go Large. I think Fagone and some of the players in this story let state authorities off the hook for badly-designed lotteries.

The key to how the Selbees made money is the “roll down” feature of the lotteries they played. When the top prize is large enough and nobody wins it, some lotteries roll down the money for this prize into lesser prizes. So, if nobody matches all 6 out of 6 numbers, those who match fewer numbers get bigger prizes.

The Selbees were able to predict when a roll down was likely to cause the lottery to pay out more than it took in. By buying tickets at these times they had an expectation of making money. So, they weren’t cheating. They were playing the lottery the way it was intended to be played. There was nothing special about the way they picked their numbers; they were just random picks. What set the Selbees apart from most other players was that they were selective about when they played, and they bought massive numbers of tickets.

After the story broke that the Selbees and other groups made millions this way, the Massachusetts inspector general conducted an investigation. “There was no evidence, wrote the inspector general, that the game had harmed anyone—not the small players, and not the taxpayers. … The large groups had bought some $40 million in tickets, $16 million of which was revenue for the state.”

This conclusion is based on bad accounting. On average, across all players, 40% of lottery ticket prices became revenue for the state. But, this is very different from saying the state made 40% on every ticket sale. In truth, regular players contributed more than 40%, and the savvy players took revenue away from the state.

Fagone paraphrased a Reuters article as saying “Cash WinFall [the lottery’s name] was possibly more fair than other lottery games, because it attracted rich players as well as poor ones. Instead of taxing only the poor, it taxed the rich too.” This is a ridiculous conclusion. How can we reasonably conclude that the lottery taxed those who played with an expectation of winning?

In reality, regular lottery players have reason to be upset. The state designed a lottery badly allowing some players to pocket millions of dollars contributed by the regular players. I don’t blame the clever players for making their money. Blame lies with the states that offered badly-designed lotteries.

Thursday, April 5, 2018

Informed Financial Choices

Morgan Housel wrote a thoughtful article titled How to Talk to People About Money that I highly recommend reading. He makes the case that not everyone’s financial goal is to get richer. Many people just want to maximize the chances they can keep living the way they’re living.

He likens financial advice to medical advice where doctors lay out your options clearly and let you decide what medical intervention you want. Just as people want a say in their medical treatment, they want a say in their goals when investing their money. Financial advisors are trained to examine their clients’ risk tolerance and other factors, but a better model may be to lay out the possible outcomes of different investment approaches and let people decide for themselves what they want.

There is an important caveat here, though. In medicine, there is the concept of informed consent. Doctors need to explain medical procedures and the possible outcomes to their patients in a way they can understand. If financial advisors are going to lay out choices for their clients, they need to explain the probabilities of various outcomes in a way their clients can understand. This is a challenge.

For example, an advisor might tell a 60-year old woman that her nest egg could buy an annuity that pays $2500 per month for the rest of her life. If she seeks safety, she might like the sound of this. What she might not understand is that 3% inflation would leave her with only $1384 per month buying power when she’s 80. If those two decades include 5 years of 10% inflation, then her buying power drops to $996 per month at age 80. She might not like this so much if she is properly informed.

In principle, I agree that financial advisors should not make all investment choices for their clients, just as doctors shouldn’t make all medical choices for their patients. However, I think financial advisors have a tough job in getting informed consent. It’s very difficult to get people to understand the range of possible long-term outcomes from different investment approaches. And just doing what people say they want is very different from helping them make informed choices.

Tuesday, April 3, 2018

The Power of Saving More

The title of this article is a play on a working paper from the National Bureau of Economic Research called The Power of Working Longer. This paper languishes behind a paywall, but the Wall Street Journal interviewed one of the authors, Professor Sita Nataraj Slavov, and this interview is at least temporarily accessible.

One quote from Slavov:
“We found that a 56-year-old would only need to work about a month longer to earn the equivalent of saving an additional 1% of their salary for 10 years.”
I find it funny that it takes a “study” to draw this conclusion. If you save 1% for 10 years, that’s like saving 10% of a year’s pay, or about 1.2 months’ pay. If you invest the money for a return that exceeds the growth in your pay, your savings will grow to a little more than 1.2 month’s pay. So, it shouldn’t be at all surprising that you can get the same benefit by working a little over a month longer.

I guess the message is that we shouldn’t stress too much about not saving enough because we can always make up for it by working longer. But many of us aren’t shorting our savings by only 1% per year for only 10 years. Many will have to work a decade longer to make up for inadequate savings, if their employers will have them. The alternative is a lower standard of living in retirement.

For those of us who have little trouble saving money, reversing this study’s conclusion is more encouraging: to arrive at financial independence sooner, all you have to do is save a little more.

I’m not against the idea of people working longer to make up for a savings shortfall. If working longer is realistic for you, then this option can be a sensible plan. Savers like me prefer to think of higher savings leading to the option to retire sooner.