Blessed by the Potato

The Prius just turned 2. Still love it, though we got pretty much the biggest infant carseat on the market (a Graco Snugride 35) because it will keep baby rear-facing longer… but it barely fits in the back, which is a bit worrisome. We have to move one of the front seats forward a bit to get it in. We did a test install a few weeks ago, and when the weather gets warmer I’ll try again to see if I can comfortably get it in behind me in the driver’s side (I know I’m never going to need to recline once I get my seat set), otherwise the passenger seat will just have to be a touch further forward than normal.

I still have to figure out what I want to do for protecting the seats from the inevitable baby mess. Any suggestions from the blogosphere? Some people swear by the wet okole neoprene fitted covers, but they’re pretty expensive. Canadian Tire has some much cheaper generic covers, and just scotch guard may be enough to prevent any permanent damage.

As you read in the summer, there’s only been one problem with the car: the plastic cover on the underside came loose while driving and had to be replaced (and somewhat more troublingly, removed while in the middle of nowhere). That was replaced under warranty.

For the past two years real-world fuel consumption has averaged 5.1 L/100 km, vs an expected ~9 L/100 km real-world for a comparable alternative (if I had gone with a Matrix/Accord/other). Gas has averaged $1.15/L, so I’ve saved about $1500-1600 so far, putting me on track for a ~5 year “pay back”. Of course, I’ll save that much again for the 5 years after that, and the 5 years after that, and reduce my exposure to these volatile/rapidly rising gas costs the whole while. So yeah, I’m still pleased with my decision.

I just finished Dave Chilton’s The Wealthy Barber Returns (and a big thanks to Nelson of Financial Uproar infamy for not only giving me a free copy of the book, but also eventually shipping it, too! [And a further aside: he gave me some free slurpees to make up for the delay in the thing he was giving me for free anyway, which shows that deep down inside, he’s really a super nice guy] ;)

I really enjoyed it. It’s a short read, just over 200 pages with block-formatted paragraphs and many blank filler pages to make it fly by even faster. He writes with a very casual, humourous, down-to-earth tone and conveys the simple yet important financial lessons we all need. The book is broken up into many short chapters of just a few pages each; in fact the whole thing reads a little like a well-put-together blog printed out and bound. It reads like my blog, or at least, what I imagine my writing voice reads like outside of my head (though that may go over about as well as how I imagined my speaking voice sounded outside my head before I had a tape recorder).

There are no complex calculations, just common sense (or uncommon sense) and some rules-of-thumb. I’m going to find this a very easy book to recommend and pass along.

About the first half of the book is spent on the basics: living within your means, controlling debt, paying yourself first. He does a good job of covering the psychological tips that can help people set and meet goals, and candidly discusses some strategies that have and have not worked for people he’s met with over the years. The second half is more on investing, and covers index investing, the importance of fees, reasonable rates of return (and how important the rate of return can be to final outcomes), and so much more. He very nicely hits the main points on the eternal RRSP vs TFSA debate, including two important behavioural ones that don’t fit into the math: what if you spend the tax return from your RRSP so you aren’t really contributing pre-tax dollars, or are tempted to raid your TFSA for non-emergency spending?

Other random take-aways: he calls the Vancouver and Toronto housing markets crazy. It was just one paragraph, but I was glad to see it — the bubbles really do impact the financial planning in the rest of your life. He didn’t have a definitive position on emergency funds or LoCs either: EFs are great, but entice people to over-spend. But so does having a LoC at the ready. He’s got a very sensible answer for the eternal question of paying down the mortgage or investing (yes, and right away!). Mentioned at several points, living within your means and saving for the future actually leads to people being less stressed and happier, even though they don’t have as much stuff to enjoy right now. Stuff isn’t that awesome, anyway.

All-in-all, good points.

Now if I may be permitted to wander off into unnecessary criticism land (where I spend enough time to be a dual citizen), the lack of math and scary details cuts both ways. It’s a very easy read as it is, and not at all intimidating, which makes it easy to recommend to the financial novice in your life or the financial expert who will just enjoy it as a breezy bedtime read. But the lack of details mean people are going to have to fend for themselves or go off and do some further reading before they get into the tricky business of actually following through on creating a financial plan and investing. That extra step may slow them up, and some details, tucked safely away in a protective appendix where no one could accidentally hurt themselves, might have helped with the get-up-and-start-now aspect. Or it might have doubled the length of the book for no good reason.

Anyway, that leads me out of unnecessary criticism land and into the kingdom of self-promotion (whose customs I find strange and foreign). As you may recall, I wrote a book called Potato’s Short Guide to DIY Investing (one I now have to update, if only to include The Wealthy Barber Returns in my reading list for what you should have read before reading my book to get the basics of having money saved and ready to invest down). It is a short book, written by me, about do-it-yourself (DIY) investing, and it was written by me! Wait, I’m doing this self-promotion thing all wrong.

What I was thinking as I was finishing off this book is how well my book complements it. David’s book does a good job of telling you that it is important to invest for your future, explaining the ways you can invest, and most importantly, prefacing all that with a lot of good advice about how to budget and save enough so that you’ll actually have money left over to invest. He tells you about the importance of fees (though I have a graph), and does a better job than I do about explaining why indexing is the way to go. From there, my book picks up and tells you how to do that: what a few examples of low-MER index-following investments are and where to find them. Step-by-step instructions on how to open an account and actually buy or sell the bloody things. A bit about basic asset allocation (though admittedly, that could use a bit of spit-polish in v1.1). What you need to write down as you go along so that you have a head start on panicking at tax time. Basically all the stuff that’s not in the other personal finance books.

I wrote my book intending for it to be so short, so easy to read, and so practical that it could be the first book you read on investing, and use it to get started so you could get the power of compounding working for you as soon as possible while you continued to educate yourself. I was clearly wrong on at least one point: it should be the second book you read.

Over at CMF user Uranium101 asks when the correction to Canada’s housing bubble will come. He wants to buy a house. I’ve seen similar questions around, or people saying things like they’ll wait a year or a few months or whatever before buying. I’ve been fairly vague on timing for the most part, focusing more on valuations, but it’s a topic worth addressing.

You’ll have to be very patient. On the one hand, we don’t have jingle mail and all the other positive feedback elements that sped up the US crash; on the other, after witnessing that wreck the common buyer may be a little quicker to slam on the brakes, slowing things faster here once the correction does start. Assume the two factors roughly cancel and our unwinding will proceed at about the same rate as the US.

So if you’ve spotted the bubble with good timing near the top (and weren’t early like myself or Mike Burry or whatever), then for the US experience that would be sometime around 2006, maybe even as late as 2007. When is the time to buy? It’s still not clear if the US market has bottomed yet, but maybe around 2011/2012 you agree that even if there is more downside, the fundamentals are back in line and that it’s worth the risk to buy again.

That’s a good 5 years or so. More if you were early in spotting the trouble. Maybe you figure once the major declines started to peter out in 2009 was close enough; that would still be 3 years from the peak you’d have to wait.

Similarly, if in Toronto you had spotted the problems close to the peak in 1989, you’d have had to wait 3-4 years before you’d want to pencil “house shopping” into your day planner.

Real estate is not a fast-moving, efficient market, so patience will be required. But a 30% correction on a $600k house is $180k, and that savings can be even greater if renting is cheaper while you wait. Plus you expose yourself to less risk. Sitting out the insanity will require finding a nice rental you’ll be happy in for several years and patience, but you’ll be very well rewarded for it.

Just a quick note: TD Waterhouse has removed the $50 admin fee for TFSA accounts as of 2012. Previously, this fee was easily avoidable by signing up for their “e-services” electronic statements program, but now you don’t even need to do that. IMHO, TD Waterhouse still remains a great option for passive investors: use TD e-series until you get up over the $50k mark, at which point you qualify for $10 commissions and can start switching to even lower MER ETFs.

A fairly exciting few weeks. My last lecture at UWO (at least until I get invited back), yet my first as a full-fledged PhD. It was not as polished as the version I gave last year, which is a shame since the students this year seemed a little more bright eyed and bushy tailed; that may have been helped by the fact that it was a decent day in an unbelievably mild winter, and not… ugh, I don’t even want to think of last winter.

Then I found out I won tickets to the Book Lover’s Ball, via a contest to write an attention-catching opening line to a novel. The ball is a fundraiser for the Toronto Public Library, so I entered hoping to win since it would be the perfect gift for Wayfare: a lover of both fancy parties and libraries!

The Ball was very much not what I had expected. I know of basically two definitions for ball: a fancy dance party, and a round thing you kick, bat at, or throw. The key part to the first definition being the dancing, and Wikipedia backs me up on that. There was no dancing. There were black ties and ballgowns and an excellent dinner, but no dancing. Which is just as well, because Wayfare is progressing from very pregnant to extremely pregnant, which would have made dancing awkward and painful. While I can see the poetic symmetry between Book and Ball, I think perhaps some more descriptive titles could have been chosen, such as: the Author’s Affair; Book Lover’s Banquet; the Knowledge Feast [which I particularly like since it could also apply to the library itself]; the Library Soiree; the Book Lover’s Benefit; or the Public Library Gala.

We met some famous authors, as well as a number we were assured were famous, though we had to take the organizers’ word for that (certainly more famous than me, anyway, which counts). We were asked to adopt a branch or implored to bid on the charity auctions several times, had some drinks, chatted, had dinner, and then the lights came on and we were asked to leave since people had to get up for work the next day. It was a fun night, and in support of a cause I can easily get behind.

We had a last chance to get dressed up in our finery and have a fancy night out to ourselves before having to worry about babysitters, which was fun. Please, take that as the take-home message before I get into the painful financial blogger OCD part below (in fact, feel free to skip the next two paragraphs, look for the bold text to start the link summary).

The tickets, won in a contest, were free. Given the face value (which granted is in large part a charitable donation), it was quite the contest win and a fantastic gift. Yet we spent hundreds of dollars on a tux and gown to go. Then hundreds more on a hotel room for the night. Then a surprisingly large amount on overnight parking downtown: I figured it would be expensive: $20 or maybe $30 for less than 24 hours near Front St.; I was shocked and angered to find it was $66 for 21 hours. Even though it was the least consequential cost of the evening, it really burned me up. Partly because I didn’t take a few minutes to research my parking options and to know in advance what to expect, and partly because I blindly followed the hotel’s instructions on where to park, and they should have warned me or had some kind of reasonably-priced option (a voucher or something if they don’t have their own lot). All told, the event ended up costing a majority of the vacation budget for the year, though I don’t think we had big vacation plans this year since we’ll have a newborn and I’ll have a new job which may not allow for a vacation this first summer anyway. The whole experience reminded me of the story of Diderot’s dressing gown (which is in recent memory thanks to reading The Wealthy Barber Returns — review to follow).

And speaking of Diderot’s dressing gown and creating new obligations, I now have a winning opening line to a novel, so there is some expectation that I follow that up with, if not a novel, at least a story of some kind. The thing is, I had no inkling of a story to go with that line: I was just reaching for something humourous and attention-catching that would fit within the strict character limit of the twitter contest. But if I’m unemployed anyway, no harm in trying to write a story, I guess (as long as I keep up the job applications)…

Links: The notion of housing risk goes mainstream.

A slew of articles recently on the risks associated with sky-high housing prices, like most everyone is waking up to the reality at once, including: the Globe’s connect-the-dots, Canadian Business’ prediction that the market will crash, and several others.

Macleans is surprisingly straightforward: “Yes, we’re in a bubble, and it will probably pop soon.” which was bolded in the text. I wasn’t happy to see “A whopping 75 per cent of mortgages in Canada are fully insured by Ottawa, according to the Financial Stability Board.” put forward as a reason not to worry.

The Financial Post reports that banks are dumping their exposure to even “prime” mortgages on the CMHC or securitization market. “Financial institutions are required to have mortgage-default insurance when a consumer has less than 20% equity. However, the banks have been seeking insurance on loans with even high downpayments — something not required by law — so they can securitize those bulk lending loans, thereby getting them off their balance sheets and reducing their capital requirements.” This is bringing the CMHC close to its limit for providing coverage, and it’s asking the banks to slow it down.

Just a few weeks ago, the news was dominated by the rush to the bottom in medium-term fixed-rate offerings by the banks. Now, those special offers are coming to an end.

A neat new hedge fund opportunity. Have a read, and no matter what you end up thinking of it, trust me and click on the “invest now” link to have a look at what comes next.

A very short post over at Divestor about selling Rogers Sugar after appreciating so much. I’ve had many such dilemmas this last year or so: with prices on things like Rogers Sugar, REITs, or other low/no-growth dividend payers hitting all time highs, am I being paid to take on equity risk? Sure, they’re towards the less risky, less volatile end of the equity spectrum, but I’m not sure if I’m comfortable locking in at 6%, especially when many preferreds are in the 5% range.

An article about behavioural economics.

Stats Canada is apparently going to refine the CPI calculation, which if it lead to a lowered CPI figure could lead to savings for the government (as many payments are inflation-adjusted). The article indicates that CPI is currently overstated, and I find that a bit odd, as I’ve long thought that CPI was understating inflation. Given the current government’s philosophy on stats, I wouldn’t be surprised if the revision was more about cost savings than data accuracy.

Canadian Capitalist talks about a “barbell” investment strategy. This is perhaps a good example of where combining two extremes doesn’t really give the same result as having a bunch of average stuff, or where increasing risk does not mean increasing returns.

Michael James says his MERQ measure is too extreme to be believable. But it’s really showing the impact of high fees. I still think it should be in dollars (and whenever I get off my butt will do short post on exactly that), but either way the important part of the message is that fees build up and cost an investor dearly.

Warren Buffett chimes in on investing in gold, bonds, or stocks, businesses, and other things. The summary widely picked up is that he isn’t keen on gold, but there’s also this gem: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.” John Hempton adds some colour to that notion of investing in stocks rather than gold or bonds.

And after a few posts in a row cheerleading hybrids, news comes out that the Prius is going to get cheaper and better equipped for 2012. I’m kind of torn on that news: on the one hand it’s good for future hybrid owners, as it makes the financial decision even easier (though the Matrix also got stability control standard, so you don’t need to move up as many feature packages on the comparison car), which will be good for helping to get more on the road. On the other hand, reducing the MSRP of future vehicles means mine will now depreciate faster (not that I entertain plans to sell any time soon — I kept the last car until it was ~14 years old).

The teaser page for the Prius C (for compact) is also up, indicating it will get a fuel consumption rating of 3.7 L/100 km and a price tag under $21,000. Just a bit bigger than a $17k Yaris, that could be a tough choice for those that need a cheap, efficient commuter vehicle.

Hybrids (like my Prius) contain many awesome innovations that give it that great efficiency, leading to lower fuel use (and lower expenses!). With plug-in hybrids starting to hit the market, the ways that technology provides efficiencies increase. Yet even though hybrids have been around for well over a decade, they are still very poorly understood (particularly by auto journalists).

Quick, which one innovation contributes the largest portion of the fuel savings in a hybrid like the Prius, is it:

a) regenerative braking
b) exhaust gas recirculation
c) atkinson-like cycle engine
d) electric motors and a battery to power acceleration
e) aerodynamics, including a tear-drop shape and a plastic cover for the underside to smooth airflow
f) lightweight aluminum construction
g) low rolling resistance tires
h) continuously variable transmission
i) an engine that turns off when not in use (coasting, at stops)

All of those innovations (and I’m sure a few I’ve forgotten) add to the efficiencies. Odds are good that you answered a, or d, or i, since those are the items that are the most distinctive about a hybrid, and which get the most press. And of course, none of those three are of much good when smoothly cruising on the highway, which is why auto writers keep saying stupid, easily disprovable things like “all that hybrid gear is useless on the highway.”

Yet a quick check of fuel consumption ratings shows that indeed, hybrids get fantastic highway mileage. The gap between them and a regular car isn’t as wide in the highway cycle as in city driving, but it’s still a really good improvement. So why is that?

It’s because the actual answer is (c): the atkinson-like cycle engine. Estimates vary, but something like half of the total improvement in overall mileage (and nearly all of the highway-rating boost) is because the engine is simply more efficient at turning hydrocarbons into motion (the “thermal efficiency”). All that business with the electric motors helps, and there certainly is some benefit from pairing the properties of an electric motor (which generates maximum torque at low RPM, and is great for helping to meet peak demand) with a gas engine (which needs to rev up to produce acceleration, and which has a high-density fuel source for steady-state power demands), but it’s there largely because with an Atkinson engine, you’re not going to get anything approaching an acceptable 0-60 time. That efficient engine needs help getting going.

If you wanted (e.g.: if you’re an automotive engineering student looking for a summer project), you could strip out all the electronic stuff from a hybrid and just drive around with the Atkinson engine, and you’d get a big part of the benefit. Of course, you couldn’t actually use that in traffic since it would take you forever to accelerate, but on a closed course to prove a point…

Anyway, once you’ve got the electric motor in there for the acceleration boost, you can do all the extra tricks with it to squeeze out even more efficiency, like shutting off the engine when coasting, regenerative braking, etc.

So now that you know about the importance of the Atkinson-cycle engine, you see why hybrids still rock on the highway. In fact, improved thermal efficiency is also the reason why diesels get decent fuel consumption numbers on the highway: the higher compression of a turbo diesel is also more efficient at turning hydrocarbons into motion. In terms of litres burned per hundred kilometers, diesel (like a Jetta or Golf TDI) is on par with a hybrid like the Prius; though once you factor in the higher energy density of diesel, well, you can see who the winner is (and I won’t get into the issue of city driving, too).

And of course, knowing that this is the single biggest source of efficiency is why I was so upset that GM didn’t include an Atkinson-like engine in the Volt, instead just slapping in an off-the-shelf engine, which is why its efficiency isn’t so great once the charge from the plug-in is used up.

Another idiodic piece about hybrids in the press. It never fails that they say such inflammatorily stupid things that I get all angry at them. It shouldn’t be all that surprising: you don’t become an automotive journalist because you’re smart or know science or can do basic math, you do it because you like G-forces and want to make engine noises all day. You crave the open road and have an expense account for gas. The typical automotive journalist is about as far from a hybrid buyer as one could possibly get.

But for people who are stuck in stop-and-go and pay for their own gas, a fuel-efficient hybrid is a great choice.

Asking “why carry around the battery on the highway” is like asking “why carry around gears 1-5+R if I’m only going to use 6th on the highway?” except even dumber. If you bother to look up the ratings, you’ll see that not only is the Prius efficient in the city, it is also head-and-shoulders above any gasser on the highway — even diesels. Holy crap, it even beats out the tiny Smart Fortwo by almost 20%. There might just be something to this hybrid thing. I could go into the why of it*, but the point is it’s an extremely easy fact to check, yet I’ve seen these assclowns get it wrong so. many. times.

And if you’re a travelling salesman? Then a hybrid should be the only thing on your shopping list. With a lot of miles to put on, you’ll find the payback to be phenomenal. Ditto taxi drivers, who have found it’s cheaper to get a brand new Prius than a surplus former police cruiser Crown Vic.

“So hybrids, apart from their benefit for city drivers, have failed to sweep the world. Will anything change this pattern?”

Perhaps if instead of panning them at nearly every opportunity, if auto journalists actually came out and started writing some articles more along the lines of “well, the ride’s ok, I guess, and by paying a few thousand more up-front, you’ll save thousands in fuel expenses over the life of the car. If you do a lot of city commuting, or a tonne of driving in general like a travelling salesman, you should take a look.” Then maybe people might buy.

And on the heels of that ill-informed article, this diesel-scented turd.

“Diesel fuel should be taxed at a lower rate than gasoline for one simple reason: the fuel carries more energy than a comparable amount of gasoline, thus it is more efficient.”

Actually, that’s a good argument for diesel to be taxed more on a per-litre basis, since it’s using more barrels of oil per litre to make. But, the fact is, diesel is taxed less than gasoline: the federal excise tax is 10 cents/L on gasoline, and 4 cents/L on diesel. In Ontario, the provincial excise tax on gasoline is 14.7 vs 14.3 cents/L on diesel fuel.

“The fuel-efficient turbodiesel delivers the highway fuel economy of a Toyota Camry sedan.”

…without accounting for the higher energy density of diesel, and allowing for a very large fudge factor (using the V6 Camry vs the more popular V4, and even then, he’s off by over 6%; off by over 21% when comparing to the 4-cylinder).

Now, I’m not totally against diesel: it is more efficient than gas in many driving conditions (though not more efficient than a hybrid, and with about the same cost premium). A select few models will end up being cheaper over their lifetime than a conventional gas car. But it is a dirtier fuel, and one of the benefits of hybrids is reduced emissions as well as efficiency: diesel presents a trade-off (better efficiency but higher emissions). I simply don’t get the auto-journalists’ thinking of “diesel good, saves money and fun; hybrid bad, costs more up front” when it could have just as easily been the opposite. I suppose it’s their pre-existing bias towards diesel (more torque, grunt grunt grunt). It seems so arbitrary since those positions could easily be reversed (”The diesel Touareg is $5000 more than the gas version, a premium that would take over twenty years to break-even on.” “There is hardly any difference in fuel economy in city cycle driving, and with diesel fuel a bit more expensive than regular unleaded, there’s no point if you do anything but cruise the open road.” “The new emissions systems for them are completely untested, and with so few VW diesels on the road, good luck finding a mechanic if you run into a problem down the road.” “The AdBlu emissions control additive will need to be replaced frequently, and VW is very secretive about the pricing. Unverified rumours we are too lazy to fact check indicate that this could cost you an additional $5000 down the road.” “Diesel: fine for early adopters, but not ready for primetime.”)

* - Because the engine is more efficient. Atkinson cycle, yadda yadda yadda. And that is because the battery and motors are there for peak demand. Even on the highway they are used (e.g., to pass, or go uphill). It’s a far cry from dead weight — and even if it is, well, the numbers speak for themselves.