Bank Phone Systems and Scheduled Calls

January 19th, 2021 by Potato

I’ve been quite unimpressed with the big banks’ phone systems during the pandemic. Not just the long wait times (nearly two hours the other night with TDDI) which is somewhat expected (it was regularly 45+ minutes in the before-times, and more has to be done remotely these days), but their schedule-a-call services have been particularly disappointing.

My first attempt at a scheduled call was with RBC… who completely ghosted me at the appointed time. That was set up in the first place because the regular phone staff couldn’t answer an estate question after the first hour-on-hold wait. I gave up on trying to resolve it remotely at all, and sat on the issue for a few months until I could deal with it in-branch.

When I went to set up a new youth account for Blueberry, TD wouldn’t let me do it self-serve online — it required an appointment. Fortunately they offered the option of a phone appointment so I could avoid an unnecessary trip out of the house (and the accompanying covid exposure). Which was my second experience with a scheduled call. They did call on time… only to tell me they couldn’t open a youth account over the phone and I had to go into the branch. Someone should tell the web team so the website scheduling the calls doesn’t waste everyone’s time — I got to the schedule a call in the first place from choosing to open a youth account within the website. And while some banking services are essential, I wasn’t going to worry that much about setting up an account for Blueberry that I’d go out to do it during a stay-at-home order.

Anyway, Blueberry now has her very first bank account at Tangerine, which we were able to set up completely online — I didn’t even need to call! How is this still so hard for the big banks?

Does Fraud Create Alpha?

January 4th, 2021 by Potato

[Editor’s note: I’ve been sitting on this draft for a few months. Other than compiling some ideas from others and ranting a bit, the post as it is isn’t all that original. I thought the really clever bit would be to add some actual research and back-testing on fads and frauds to semi-seriously answer the question, but that turned out to be too much work and I now realize I’m never going to do that much research and stats even if there’s a chance that it’s more than just a lark. Anyway, I figured you may as well get to read it instead of killing it off. This one certainly isn’t investment advice, and I’m not alleging any companies or people are frauds here — I’m linking to the allegations and cases where I can, innocent until proven guilty, etc. etc.]

Elon Musk tweeted out in the middle of the trading day: “Am considering taking Tesla private at $420. Funding secured.”

Funding was not secured, not remotely. It was one of the most egregious and blatant cases in living memory and the SEC filed fraud charges. It revealed significant problems with corporate controls given that his Twitter account was identified as a channel for official company communications, and looked like a slam-dunk open-and shut case for the SEC.

Yet he settled for a slap on the wrist: no D&O ban, no forced divestiture of his holdings, just a requirement to add two new independent directors, and a $20M penalty (the company also paid $20M). Less than two years later, he got an incredible pay package tied to the stock price, orders of magnitude larger than the fine, despite the company still not producing an annual profit [at the time — it has eeked one out between drafting and posting this] and even clawing back bonuses for its workers. Oh, and despite coming very close to driving the company into the ground along the way (though there was no going concern language in its reporting at the time).

Securities regulators are broken. They are not working to protect investors or provide for rational, functioning markets. It was only at the last minute that the SEC stopped a bankrupt company from issuing more stock that it knew to be worthless. It’s the golden age of fraud.

And it’s not just a SEC problem. Germany’s BaFin failed spectacularly in regulating Wirecard, even prosecuting people working to expose issues at the company, instead of taking their leads and investigating the company (i.e., their jobs). And here in Canada, we have a patchwork mess of regulators. Not just the provincial securities regulators, where even when they get someone, the penalties can be the cost of doing business, but even within a province we can have different regulatory bodies letting problems slide. Bad actors can use the courts as a weapon, and even if you win a SLAPP suit, it can be costly and disruptive to your life, while bad actors buy themselves months or years more time to keep fleecing investors as critics and defenders of everyday investors are forced into silence.

Bad actors have free reign in the capital markets. None has put it quite so boldly as Musk’s “I do not respect the SEC,” (or the 2020 remix) but the days of fearing the wrath of the regulators appear to be a quaint figment of history. And regulatory capture is such a joke they don’t even try to hide it any more.

Indeed, I have heard it said1 that frauds are some of the best investments out there. After all, they don’t have earnings misses when the numbers are fake anyway.

Or as some have so eloquently put it: Fraud creates alpha2.

As an investor, you almost have3 to assign some portion of your portfolio to frauds and fads to keep up. And given that there is no downside any longer, as a CEO or Director of a company, you have a fiduciary duty to commit fraud2.

That’s a fine angry rant against the state of the markets as they sit today. If we had elections for OSC or SEC head, I might be just ticked off enough to throw my hat in the ring (or go campaigning for someone with a more protectionist bent). But that’s not how it works. There’s nothing to do but rant and carry on. Yet I keep coming back to that lovely, infuriating phrase:

Fraud creates alpha.

It’s a thing that we say — shaking our heads and laugh-crying — to encapsulate the absurdity of our times. But… is it true? Does fraud create alpha? Like in a systematic way? Should we be checking if it might be a 6th factor in the Fama-French schema to round out size, value, profitability, and investment?

Let’s make it F&F — fads and frauds, because that’s another area where there has been some outsized stock performance lately. Indeed, it’s almost like that litmus test of the Nigerian scams, where the emails are purposefully full of spelling mistakes to try to weed out those who may not be sufficiently gullible. The business models in some cases have no hope of working, or at least will never reasonably justify the stock price4. But that’s likely the point — as long as no fundamental analysts are buying it anyway, then the sky’s the limit. 3X revenue may be crazy-sauce in a low-margin business, but once you’re already there, 7X is really no crazier! And with a touch of what some may interpret to be stock manipulation, why not see if we can shoot for 20X while we’re at it?

Many modern “success stories” are incinerators of capital, serially selling stock to fill the hole created by losses and growth for growth’s sake, though as a side effect they have created a world where our lifestyles are subsidized by dumb capital. Oh, and skirting (or at the very least, bending) the law is a key element of disruption for many of these start-ups — from how they pay and treat their workforce as independent contractors, to flaunting municipal taxi, zoning, or other laws, if not securities laws themselves.

We who can recite the Litany of Saint Graham (“In the short run the market is a voting machine, but in the long run it is a weighing machine”) believe that fads and frauds will one day crash. Some people even make their living shorting them. But far too often, they go up first. They go up a lot.

And therein is the question: do fads & frauds create alpha? Now if you hold until they crash — assuming they do eventually crash and burn — then you’d think not, it would be trivial. To cite the Disciple of Graham, a string of impressive numbers multiplied by a single zero is still a zero. But if you take an approach where you rebalance away as they go parabolic, there might be something there. In an equal-weight portfolio of shit, you may not care much when your German payment processor is finally de-listed if your California vapourware company has sextupled in value. It’s skewness of returns in over-drive.

So let’s build an index and backtest. For example, if you buy in as soon as a report or article or forum post first suggests something fishy, and then rebalance away after each doubling (to other F&Fs or a core market portfolio if you run out of ideas), would that generate alpha?

This is the point where I thought actually doing a bunch of research and math would make the post more fun (and maybe even prove or disprove the point instead of just ranting), but it’s also a lot of work and it’s been many months since I first drafted this and I don’t think I’m ever going to get the research/math part done. So I will leave the idea there — maybe someone else with some time on their hands can go back a few decades and see if you can construct an index of fads & frauds and some rules (equal weighting? trend-something?), and see if it provides improved risk-adjusted returns.

1. Likely Carson Block on a podcast — apologies to whoever said it as I didn’t keep the source, but I think it was a podcast and not an article if that helps.
2. I think this can be attributed to TC. There’s probably more in here that can be attributed to the Chartcast.
3. No you don’t especially if you’re a smart passive investor, this is a whiny post and not actual investment advice.
4. I have heard it said (Chanos?) that one of the worst things for a fad company to do is to make a profit because it’s stock will crash when it suddenly goes from being valued based on some dream about TAM to being valued on a price/cash flow or price/earnings basis.

Tangerine’s New Funds First Look

January 3rd, 2021 by Potato

Tangerine just released some new versions of its all-in-one mutual funds with lower fees. They have three flavours: 100% equities, 75-25, and 60-40. The new fees are 0.65%, which is competitive with robo-advisors (the actual MER will have to wait until a year has passed to be reported, but will likely be about 0.7%).

I’ve been waiting a long time for this news. It was over a year ago when they invited me to a survey about lower-cost versions of their funds and the future of their investment arm. I should note that it was a survey just as a regular customer — they didn’t hire me to consult. But, if you’re listening Tangerine, you could. I like consultant money. And the first thing I’d tell you is to not launch a new set of funds with a confusing “ETF” in the title, to just lower the fees on your existing funds. Yes, the funds all have names like “Equity Growth ETF Portfolio” even though they are not ETFs. (Though they are not the first bank to so confusingly name their mutual funds)

After a bit of confusion between announcing the funds in the fall and now, people with the old funds can finally move over to the new ones. And they made it super-easy to do: when you log into your investment account, there’s a great big “switch my portfolio” button. That’ll take you to a risk tolerance questionnaire, after which you can choose your new, lower-fee fund (or one of the old ones if you really want), and your funds will be moved over.

I’m glad it’s finally here, and gives people who have long been wringing their hands about sticking with Tangerine’s super-easy funds or switching to a robo-advisor a reason to stay. It may make Tangerine the killer choice for ease-of-use, especially in non-registered accounts. (Though if they could have shaved another 10 bp off the cost then they could have blown the robos out of the water)

However, I think I’ve read through all the documents on their site, and I can’t for the life of me find what they’re going to actually invest in. They mention an equity and fixed income split, and then a global equity index as the benchmark for the equity part. Does that mean there won’t be any home country bias in the new funds? They’re going to hold ETFs (possibly related party ones, which would likely mean the Scotia ones), but don’t spell out specifically which ones. I think Tangerine’s earned a fair bit of goodwill over the years, so for the moment I’m switching my portfolio there over to the new lower-cost funds to see how it goes, and trusting that whatever the specifics are that they’ll be fine, but some more easy to find details would have been nice (also, consulting money please).

Stephen Colbert making the 'give it to me now' grabby hand

CPP Calculator Comparison

December 17th, 2020 by Potato

For a long time I was the only game in town when it came to a CPP calculator that included the CPP enhancements — important for planning purposes! [Note: I’ll point back to the article on the calculator and you can download it from there — if I provide a direct download link here I’ll forget to update it next year and I’ll get hatemail in the future]

Now there’s some alternatives. Doug Runchey (yes, the Doug Runchey who writes all the CPP calculation articles) has teamed up with David Field of Papyrus Planning to create a web-based CPP calculator. It can import data from your statement of contributions if you have that, or you can go ahead and enter data manually. We here at Blessed by the Potato Publishing know that as savvy consumers you have your choice of free-to-use calculators, and there are advantages to choosing Excel: the web-based one will throw an error if you enter earnings that are above the YMPE for each year, forcing you to go back and change. every. line. manually. And fill-down is handy when playing what-if scenarios e.g, for retiring early or re-training. However, some people don’t like spreadsheets (heathens, surely, who wouldn’t read this blog anyway), so it’s handy to have a web-based alternative.

Mine is based on years, while the underlying CPP calculation (and drop-outs) uses months, so I have some approximations there. I also approximate the weird way CPP calculates the maximum pension (based on the average of the last 5 years’ YMPE) to make it easier to use real dollars into the future. That sometimes gives me a few percentage points of difference with other calculators and the ground truth — I tried to future-proof it for estimating far into the future rather than making it more accurate for pensions available today. But there will be some difference — on the main page I put a caveat that it’s only accurate to about 5% (which should be good enough for planning purposes).

So let’s see how the two calculators stack up. I compared 3 scenarios: (all amounts are per year in today’s dollars)

Scenario Mine at 65 DRDF at 65 Difference Mine at 70 DRDF at 70 Difference
65 yo, max earnings 31-60 $10,779 $11,215 4.1% $16,062 $16,304 1.5%
35 yo, max earnings 31-60 $15,953 $15,528 -2.7% $22,653 $22,050 -2.7%
45 yo, 30k/yr 25-65 $9,585 $9,380 -2.1% $13,610 $13,362 -1.8%

Honestly, I thought the only differences would come from rounding drop-outs to full years and how I estimated inflation for the 5-year average pensionable earnings, and that the differences would likely have come to ~2%, so I was a touch surprised to see a few scenarios with greater differences. Still, all scenarios are within my 5% “good enough for planning purposes” margin of error (assuming that the real value would either be between our two estimates or that DRDF’s version is precise to the dollar). For long-term planning/what-if scenarios you probably have more uncertainty than that about time off work (like in say a pandemic), and if you’re close enough to need precision to the last dollar, then you may want to hire Doug to run a personalized calculation.

It’s also informative to compare the scenarios: the first two are the same set of earnings, just for different starting points. The difference in the amount of CPP the hypothetical people get is due to the CPP enhancements. The 35-year-old has almost their entire working career (since we don’t start them until 30 – 2016) in the enhanced CPP regime, while the 65-year-old finished just as the announcement was being made.

They also include a break-even graph, which is something I’m on the fence about.

Breakeven graph for CPP with lines crossing at age 80

I had the idea to add one in to my calculator a few versions ago, but there were two main problems with that: 1) it’s work and I’m short of time and kind of never want to have to dive into CPP calculations again, and 2) I’m afraid it’s terribly misleading. This deserves its own post (which has been in the works for years now and has been scooped (and done better) by MJoM and a recent paper by Bonnie-Jeanne MacDonald) but briefly, it’s a mistake to try to frame it as a decision where you want to get the most out of CPP in an expected value calculation. The point is not to be playing a game of you versus the government* where you die at 75 and go “ha! I took CPP early and WON! Screw you, government!” These break-even analyses frame it wrong and get you thinking about how long you’ll live (which we are really bad at estimating) and make a decision based on that.

CPP has enormous, unmatchable longevity insurance benefits. There, that’s the main point and why you shouldn’t get too hooked into these break-even calculations. Basically, you should always defer it to 70 unless you can’t because you need the money now (i.e., you don’t have the savings to live off of in the first place — which should cover those who would get GIS), or you have a specific diagnosis/severe risk factor that limits your life expectancy (not that your parents died young of something with weak inheritance [like getting hit by a car or having a heart attack] or that you can’t possibly imagine growing that old). Just saved myself another 3,000 word post.

Some people also frame it as spending more early vs later, which is wrong too. As Michael James puts it (though I can’t find the specific post to point to), delaying CPP to 70 lets him safely spend more of his savings now, knowing that the long term is taken care of by CPP — he gets to safely spend more throughout his retirement, including the early years by deferring CPP.

PS: Doug & David say when you sign up that they won’t spam you, and that’s mostly true. They look to have a script set up to send you messages for the 3 days after you sign up, but they’re not solicitations.

Picture of 4 emails from David Field in my inbox after signing up for his CPP calculator

* – I have to credit Sandi Martin with coming up with this analogy.

Does Anyone Know About Captive Insurance?

December 1st, 2020 by Potato

As the title states, this is a question to all the smart BbtP readers out there — does anyone know much about captive insurance companies?

I came across the concept when looking into how a certain popular be-all robo-advisor was offering people a way to buy bitcoin. Now, without going on too much of a rant, bitcoin is stupid in large part because it’s stupidly hard to get and keep. There are huge barriers to entry to regular people, but it’s going up and people want to buy, so there are a whole host of businesses springing up to serve that market. There are companies that are buying bitcoin on their balance sheet1, trusts that simply serve as publicly-traded securities that hold bitcoin, as well as a bunch of brokerage/exchange type services that range in professionalism from a group of basement-dwelling hackers cosplaying as investment bankers to groups with actual infrastructure and legal agreements.

There’s a huge trust problem with bitcoin (or crypto in general) — if you lose your keys, or get hacked, your coins are gone. If you die and forget to give your heirs the key (or let them know the coins exist in the first place), they’re lost forever. If you let someone else hold your coins and they get hacked (or fake their death and abscond with the money or whatever else might happen), then they’re gone, with no regulator to cry to reverse the transaction. For the most part, people don’t seem too worried about this — it’s a mania after all, you can’t sit around when there’s buying to do! As far as I’m aware, all of the more-convenient ways to access bitcoin trade at a premium, indicating that people want the convenience and are willing to pay for it (or can’t arbitrage it away).

So I checked out that be-all robo to see what all the fuss was about. And while bitcoin isn’t covered by CIPF, they say they’re insured. So if you click through the fine print, they’re using the services of an American company specializing in being a custodian and exchange for crypto. And they have a Bermuda-based captive insurer providing $200M of coverage, and that sounded weird to me. I don’t really know how captive insurers work — I could do a search and see that it’s when the insurer is wholly owned by the company taking out the insurance, which explains the name. But I don’t know how to answer the main question: do they actually have $200M in assets to backstop that insurance policy (or sufficient re-insurance)? Is there a Bermuda-based regulatory filing database like SEDAR?

Hopefully one of you knows.

1. I fully expect Tesla to announce they’re doing that or have been doing it all along and that’s the explanation for the interest income anomaly.