Blessed by the Potato

The Value of Simple has been out for a month now, and as my first “real” book it’s great that my friends are still willing to talk to me about it. Most often though when I say it’s about investing, I hear some variation on this comment:

“One day I hope to have money to invest…”

I know I have an investing book to flog, but no, that’s not the right attitude at all. If you’re closer to 40 than 30 you should have some, or be really close to that point. Having money to invest shouldn’t be some far-off, lofty goal.

Maybe it’s an issue of perceptions: many people may see “an investor” as some old moneybags, banker-type character from the Monopoly board game, rather than everyday people like you and me who may have as little as $1,000 to sock away in a TFSA for the long term. Indeed, do a Google image search on “investor” and the entire first few pages are people in suits, followed a little ways down by old people smiling in front of computers. No one imagines investors as people with toddlers running around at their feet. But yes, they too may be (should be) investors, and exactly the target market who would be helped by The Value of Simple.

You don’t need a big pile today if you’re at the part of your life where those savings will start flowing in now — you’ll be investing that little bit, month by month.

If the savings aren’t coming in then given that it’s New Year’s Eve as I write this, it may be a great time to resolve to fix it.

Now of course, if you’re in debt then you’ve got to focus on getting out of that hole. Maybe aggressively paying down your mortgage first is your plan and it works for you, and investing outside of that may still be a decade or so in the future. But if you’re living right at your means, where everything coming in is getting spent, then no time like the present to fix that — you will need a buffer and long-term savings. That’s easier said than done of course, and I’m sorry for that, but the earlier you start the better.

I’m a believer in just-in-time learning — I don’t want to push the book on someone who’s still scraping by while in school, or dealing with debt after it, because it’s just not going to resonate at that point. But many people are (or should be) investors who don’t think of themselves as investors.

There was an article in the Globe & Mail a while ago claiming that it’s best to go with a smaller house because the bigger the house, the bigger the associated bills. Ok, that makes perfect sense.

But then it went on to claim that “it would seem reasonable to assume that it would cost twice as much to heat (or air condition) a 3,200 square foot home than it would one that is 1,600 square feet. But, as reasonable as this seems, it’s incorrect; it actually costs more than twice as much. […] Circumstances vary, but it can cost up to three times as much or more to heat and cool a home that is only twice as big.”

Now that just doesn’t make physical sense to me. We all know how scaling laws work: assume you have a spherical house, then the surface area will scale by r^2, while the volume will scale by r^3.

Ok, we don’t live in spherical houses, but still, this guy’s math must be way off. So I thought about it, and scaling with houses is actually a problem without any clear answer. Let’s set aside the complications like your own body heat or the waste heat of your home server farm (everyone has that, right?) and just talk about heat loss through the outside walls: even narrowed down with all that ceteris paribus it’s still a tricky question because houses are not spherical.

The simplest case I can think of is to take a cubical house. It has 6 unit surfaces: the roof, floor, and 4 walls. Now if you make that house twice as big by adding a second storey, the roof and ground floor are the same, and you’ve doubled the size of your walls (8 unit-walls). So doubling your floor space was less than doubling in your heat transfer area: only 1.67 times as much.

There are other ways to double the size of a house. You could go longer: expanding your floor plan from a unit square to a 2×1 rectangle. You only save on one shared wall between the unit squares in that case, so you do nearly double the outside area: 6 unit walls facing the outside, 2 floors, 2 roofs… but that’s again a 1.67 times increase (though more roof and floor with fewer walls added). Oh yeah, that’s just the first case turned sideways.

If you want to go crazy with shapes you could try find a way to get really inefficient. If you built a really long house (or made a C-shaped house to fit it on the lot — same difference for walls) that was 5 times as big as our unit square house, then it would be 3.67 times as costly to heat… wait that’s still going in the way I thought it would, with bigger houses being more costly, but scaling less than the increase in space.

In fact, the only way the author’s math works out is if you do non-apples-to-apples comparisons, like one house at 1,600 sq.ft. with 8’ ceilings and one at 3,200 sq.ft. with 16’ ceilings to drive the volume up but not the livable space measured in square feet. Or maybe it comes down to one of the complications I ignored, like floors and walls being roughly equivalent in terms of heat loss… but I doubt it.

He does mention more windows and doors just after the part I quoted, but again that doesn’t make sense to me. Yes, I lose more heat through my door than through a solid wall, but my house has two doors. A slightly bigger house would still have two doors. My parents’ house, which is maybe 2.5-3 times the size of our house, does have four doors, and my friend’s parents’ house, which is in-between, has three. But again, the number of doors are not scaling up faster than the increase in the size of the house. And the portion of the walls that are windows is not really any different with the bigger house.

So I will conclude for now that yes, a larger house will cost more to heat and cool, but it’s likely to scale less than the difference in size, because math. Fortunately, the massive building boom of recent times means that somewhere out there are a few developments with good test houses, ones built with the same insulation and materials and styles, but to different sizes. If anyone has some experimental data to back up (or refute) the spherical house reasoning, I’d love to hear it.

Before I launched the book I tried to envision how it would do. I did the Fermi math: there are millions of Canadians who need a book like The Value of Simple: people who are not DIY investors, but want to be (I even found stats on the number of discount brokerage accounts that are opened yet not used for DIY*); or who are paying outrageous mutual fund fees and don’t even know it, and would want to look at a low-cost investing method if they only knew. But I knew that despite the size of the target market, very few of those people would buy it. If I hit 10% of them it would be a huge, smashing success, but fractions of a percent were more likely. Sales measured in ppm were possible.

Like a good scientist I defined three levels of success for myself in advance.

I’m happy to say that at the end of the 2nd week of release, I have hit the first level of success — which perhaps I should instead define as not-failure. I have now sold enough books that I have broken even! When I put up my posts on the publishing process I’ll talk more about all the out-of-pocket expenses involved, from paying the artist for the cover, to the set-up fees at the printer, to printing and shipping review copies, to various office and mailing supplies. But those have now been covered by the sales so far. I was pretty sure I would hit this first level going in: I only needed to do a bit better in sales than Potato’s Short Guide to DIY Investing did to break-even, and The Value of Simple is a much better book than that first guide was.

The next level of success I defined as the point where I would get something close to minimum wage back on all the time I invested in writing and publishing the book — easily 1,000 hours that I’ve tabulated (and I’m sure I missed some in that estimate). That’s the point where I would feel really justified in the effort of putting out the book and would call it successful enough to actually consider doing something like that again in the future. That would be “success.” Beyond that would be a “smashing success” — selling over 5,000 copies, which is the approximate rule-of-thumb for being a Canadian bestseller (though whether the book would actually appear on any such list is another question).

The sales pattern for the first two weeks is kind of interesting: a peak at release, then another one after some favourable reviews and giveaways were posted, followed by an exponential decay — though I’m hoping that there will be an even larger peak to come with a lag from the first two as people read it, love it, and go tell ten or twenty friends about it.

* – A third of Canadians would like to invest for themselves, but don’t have the confidence to start. Half of those who have opened a self-directed account continue to pay an advisor.

In a shocking change from vague mumbles about concern over debt levels, the Bank of Canada broke out The Potato Gambit this week, explicitly saying that houses are over-valued and by how much.

I’ve said several times over the past few years* that the housing bubble is held up by a number of factors: belief that there isn’t a bubble being the main one. There are many possible ways for that belief to be tested and for the bubble to end. Having someone credible coming out clearly on the news stating that there is over-valuation could help end it overnight, as the veil is lifted from the eyes of the masses in one move. In other words, that it would be possible to talk the market down by pointing out that the emperor has no clothes, absent any other catalyst (despite the “need” for rates to rise, or unemployment to rise, or for the yield curve to invert, or CMHC to be reformed, or whatever other supposed necessary condition people come up with).

Stating how much housing was over-valued by was a key component of the gambit — the end of bubbles is always a nasty, drawn-out affair as the market gropes to find solid ground. Many houses will go unsold, their owners trapped as the market goes “no-bid” with people waiting to see where the bottom is, unsure if 10% off the last traded price is a good deal, or just the start of a more substantial correction. So, the theory went, if someone like the finance minister (or as it turned out, the BoC) stood up and said “the market is over-valued, and by this much” then people could bid 30% less, and sellers would know that indeed, that was not just some totally flaky buyer taking the piss but a legitimate post-correction offer that they should take. And the sellers won’t list just to see what they can get — if they’d rather hold than sell at those prices, then they can do that without all the listing and rejecting offers business, keeping inventory at normal levels. Boom, the correction could be over in a day.

All that has to happen is for all the buyers and some of the sellers to get with the program.

I know we’re only a few days into the new enlightened age, but it’s not looking good so far. The government is not presenting a united front, with Joe Oliver sticking to the old party line that there is no bubble. The media is not following-through on the gambit with the “so there, correct your bidding strategy now!” message, and headlines of “what a 30% correction means for your local town.” There are a few stories taking it seriously, but no real call to action. This article in the Globe has the headline “Why Canadians should consider Poloz’s overvalued housing warning “, which kind of starts to make the case that this is a real issue, but then it ends with “You can, of course, brush off such threats…” And I’m not seeing a massive shift in sentiment on the various forums or at a party this weekend — as credible as the Bank of Canada is, the message isn’t taking hold.

So maybe it will work if it can stay in the news cycle a little longer, but given that this is already the nadir of the market for housing activity, and the story may be forgotten come spring, it’s not looking good for the Potato gambit’s effectiveness. It was worth a shot.

* – Apparently mostly on forums, as I can’t find a post in my archives to link to, other than an unpublished draft.

First, a quick boring set of personal notes:

Two somewhat hysterical issues around the TFSA have been running around the last few weeks. The first is some worry that people can stock big TFSAs and thus have lots of money to live on, but because it’s not income they’ll still get GIS. Will it lead to a TFSA nerf?

Maybe it will. It does seem like a loophole or unintended consequence that in a few years someone could have a pretty decent pot of money in a TFSA and yet still get GIS. Young people starting today may be able to exclusively use TFSAs to fund their retirement, especially if the contribution room doubles next year. But there are already loopholes for otherwise rich people to collect GIS: like many government programs, it is income tested and not wealth tested. So people with tonnes of money in a chequing account earning no interest could collect GIS (though it may not be wise to do so vs. investing in a TFSA), as can people with large real estate holdings that are not spinning off active income. I don’t see the government ever closing the real estate loophole. Maybe they will close the TFSA one in time, but it’s going to take another decade or so before it’s really an issue for enough people to have enough TFSA room to be doing well enough that they clearly shouldn’t get GIS but do.

Moreover, we’ve known this since the TFSA first launched. Indeed, the general advice is for lower-income people to prioritize saving in their TFSA specifically so that they can keep their GIS eligibility.

The second is that the CRA is cracking down on some day traders, disallowing the tax shelter for carrying on business. A key point of information that I haven’t seen in these articles is that the regular partial inclusion of capital gains doesn’t apply for professional traders — it’s all business income. So if you just got lucky in your TFSA it doesn’t look likely that the CRA is going to come after you and disallow the tax-free nature of that gain — it will almost certainly require a few other factors, which would have put your non-registered gains at risk as well. Again, I don’t think it’s something the average person has to start worrying about now.