Blessed by the Potato

It’s been a rough new year, and I haven’t been able to shake a vague feeling of being “loser-ish”.

First up has been paper rewrites. This one has been particularly grating since I’m a good writer, damnit. I was supposed to have finished this while at my parents house over the break, but didn’t even look at it there. In the process of writing the paper the first time, I had to keep it very succinct so a lot of stuff from the first draft was cut out. After being rejected from the first journal, I should now stretch it out to about double the length so it’s an appropriate length for our second and third choice journals. However, it’s not a simple as just going back to the first draft and cut & pasting some of that information back in. For the most part, I was convinced that what was cut should have been cut, and I don’t like that text any more. I also need to tailor the text to the audience of our target journal, which means I largely need to pad out the introduction and include some topical references, and that’s the part of scientific writing that I’m the worst at. Particularly since I don’t have the references I want to cite handy, so I’m doing literature searches at the same time. All this is complicated by my peculiar “publication performance anxiety”. I don’t seem to have any problem giving presentations of my data to large groups or leading classes, but as soon as it comes to submitting my stuff to a peer-reviewed publication I get all panicky. I worry and obsess over the fact that my work is now going to be part of the body of scientific knowledge in a very indelible way, and fret constantly over my data and arguments, because any mistake is going to be out there for years, misleading scientists who follow in my footsteps, and dangling in front of my detractors as proof of my fallibility. It’s worse with rewrites of course, because I hate rewrites. I’ve always been a one-pass writer. Often, I don’t even read what I write here, just trusting that it came out of the keyboard making some kind of sense, and hoping that no errors creeped in. So wordsmithing a paper to get that exact subtle meaning, to include exactly what we want to convey and waste no words on anything extra can be quite painful for me.

I’ve got two other drafts to work on as well, though neither one is really even at the “outline” stage yet. Plus some short story ideas I could work on. Usually having a number of things to flip between works well for the scatterbrain spazzy writer inside of me, but this week it just seems to be paralyzing me. I don’t want to write any of them, so I stare at my word document, like a deer in the headlights, then decide to let that one go and open up another one, just to also draw a blank.

The weather hasn’t helped much. To stave off winter, the hospital keeps the heat on. Really, really on. Most days in the office I’m so hot even in just a T-shirt that I can barely think straight. Oddly enough though, I don’t sweat through it like I do in the summer. At home though, I’ve been getting cold, which is very unusual for me. Usually Wayfare gets so cold so quickly that the thermostat creeps up enough that I’m quite comfortable in a T-shirt at home, as long as I have nice thick socks on. The last few days, I’ve been layering up in sweaters and blankets in front of the computer, which doesn’t help fight the desire to put my head on my desk and take just a little nap.

That loser-ish feeling hasn’t been at all helped by the other things in my life, either. I’ve been really sucking at curling in the new year (though admittedly, one night I was so tired I could barely stand, let alone curl). This is particularly disturbing since it was not too long ago that I was starting to think of myself as really hot shit out on the sheets, even thinking I was good enough to try out for competitive curling. I thought I made a decent showing at the varsity try-outs, and while I didn’t make the team, I figured with a bit of practice I could have a real good run in a few spiels. This week though, I can’t even hit the house, let alone the button. To think, they used to let me teach new curlers the sport!

At work, we had a very important grant rejected. I don’t know how much I’m allowed to say, but suffice it to say we were not impressed with the tragically mis-informed reviews we got back on the proposal.

And of course, the stock market has been an absolute nightmare in the new year, yesterday in particular. I feel pretty stupid for buying on the way down and not listening to conventional wisdom about catching falling knives. There were a few stocks that looked like they were priced at more than fair valuations last week (TSE:RUS and TSE:YLO.UN in particular) that I snapped up, only to watch them fall much further just a few days later. I spent some time researching the financial sector and came away really liking TD, especially at the $65 price point it was at over a month ago… after buying it I was proven right by a decent rally, only to find all that and more wiped out yesterday. My dad says that I picked the right company for all the right reasons, but the “macro environment” is just hammering financials, and the good ones are going down with the bad. And the pain is not over yet, with indications that today is going to be just as bad. I’m trying not to panic, to stay the course, and to remember, as Wayfare tells me a few times a day, that it’s just a paper loss. As long as the Accord doesn’t die on me I won’t need the money for at least a few years, and by then the market should have rallied. However, that doesn’t make it hurt any less when I look at the sheer magnitude of that “paper loss”, or when I look at my portfolio update and see nothing but red numbers all the way down the column… nor does it make me feel any less stupid for seeing that my most recent buy, at what I thought was a great value, is one of the worst stinkers in the lot.

Buying opportunities should be ahead, and for those who aren’t in the market with some cash, and a long investment timeline (i.e.: the young people who actually read my rants) this might be a very exciting time. I’ve decided to pace myself much more than I have been. I’ve cancelled most of my “bargain basement low-ball” standing bids which turned out to be a little too optimistic about the bottom of the market. I put a sticky note on my monitor with the word “patience” on it. I was in a “stock picker” mentality last week when things were looking pretty bad but figured I could find the gems with real value in there, the stocks that may have been unfairly oversold. After yesterday’s crash across pretty much the entire board, those TD e-series index mutual funds are looking a lot more attractive again. While they make up a small part of my portfolio, I’ve been steadily buying them up every 4 weeks here (with my 3rd round of buying due in ~2 weeks), $100-$150 into each of the Canadian, US, and International indexes. For the long haul, I think those are pretty good bets, and the small, steady buy-ins save me from some of the pain of the markets going down and at making any effort to call the bottom.

Remember: even if I may spout advice, it is generally useless. This is particularly true for financial advice: while I’m learning fast, I’m terrible at this. Don’t listen to me, just go off and do your own research or consult a proper advisor. For those curious, the “lowball” bids I haven’t cancelled are NAL.UN at $12.50, which I might very well get today, GE at $27.20, which I doubt I’ll get. Feel free to laugh at me for being foolish, either right now or in the coming months.

I’m pretty committed to renting for at the very least the next 3 years. I’ve done a fair bit of reading over the past few days to help convince me that it’s the right thing for me to do (confirmation bias? you betcha!). For example, Millionaire Mommy Next Door’s blog. There’s a lot of “conventional wisdom” out there about buying is clearly superior in every way, with arguments about “wasting money” on rent when that money could be building equity in a house, etc. Looking into it, things are (as things generally are) more complicated, and the decision can depend greatly on how the real estate market is doing relative to the renting market and your assumptions about saving discipline, the performance of the stock market vs housing market, and budgets for things like repairs.

I found the discussion of when it might/might not make sense to buy a house interesting. One rule of thumb involved a house value of a certain multiple of rent for the same unit. Under 150X rent, buy (12.5 years worth of rent); over 200X, rent (16.6 years worth of rent). That seems like a pretty small difference, but I plugged it in with our house. We rent at $1400/mo, so 150X that would be $210000. 200X that would be $280000. Now, I don’t have any experience to have acquired any kind of real estate sense or gut feeling (beyond surfing MLS and reading blogs), but to me, buying this place for $200k sounds reasonable. Wayfare recently guesstimated that this house in this neighbourhood would probably go for $300k, maybe a bit more, and that seemed crazy to me. So perhaps that is a good rule of thumb. It also makes me wonder where the numbers come from, so I did some quick playing around with a mortgage calculator. For the figures I have here, the monthly payments on a 25-year 7% mortgage are quite close to the rent payments when the house is 150X the price of rent — which readily explains why at that point buying would make a lot of sense. In that case you really would be building equity for not much more cost, and renting would be “wasting” money. Much higher, and you have a lot of extra money going into servicing the interest on that giant principal, money which might be better off in the stock market.

Here’s the rent-vs-buy calculator to play around with some numbers. It’s not quite as simple as some people would like, and the decision of whether it is better to rent or buy will depend on a lot of factors (inflation, savings rate, property tax rate, rent of an equivalent place, the performance of the real estate market vs the stock market, etc). Sometimes, buying is better, sometimes, renting is better. Sometimes renting for a bit is better and then buying once a big deposit is available… though options like that get harder to model in a simple calculator :)

Some things to keep in mind that might not be present in conventional wisdom are issues such as opportunity cost of having your money “sit” in your house: since historically (again, the current red-hot real estate market aside) housing prices have barely beat inflation (so houses are a poor investment) while stocks have done a fair bit better over the long term, you’re giving up a potential whack load of income/capital gains from having your money invested. Likewise, even if a house’s value goes up over the course of a few years, there is a harsh fee to sell it (generally 6% I believe), so if you have to sell within a few years for whatever reason, it can be much more painful. That might lead someone to skip a “starter house” and go straight to one they think they’ll need in 3-6 years — but then that reasoning causes one to carry the costs of a larger home than necessary for a few years. Buying a house tends to then make the house the largest asset on the familial balance sheet by a huge margin, which is kind of bad from a diversification point of view.

Interestingly, some of that reading has also made me wonder if it’s the right thing to continue doing, forever (or at least until there is a significant correction in the market). There are a lot of things about home ownership that are appealing to me (and, I think, to Wayfare), quite aside from the discussion of finances:

• The freedom to do whatever you want to a house. Paint it, upgrade the furnace, get stained glass windows, get a drooly dog, run network cable through the walls, soundproof it, get a custom kitchen, and long-term improvements/investments that a landlord might not make like efficient appliances, solar panels, relandscaping, extensions…
• The idea of owning property that no one can take from you. Of being in a community for the long-haul (though renters can get this as well).
• Having essentially the pick of virtually any neighbourhood, any house. There are a lot of condos and apartments to choose from as a renter, but finding a nice house in a nice area is tougher (I think there are 4 houses that have renters in them within a 10-block radius of my parents’, versus maybe 40 homes for sale in the last year).
• Never ever having an inspection on short notice (though half the time my old landlords dropped off a notice they’d be coming by they never did — they mostly just dropped them in everyone’s mailboxes, but really only wanted to check up on the problem tenants; we can’t pay our current landlord to come over).

Of course, renting also has its perks:

• No risk from repair costs.
• The tenant board will largely keep rent increases in check, but property taxes don’t necessarily have that protection.
• No risk from a change in real estate fortunes.
• Often the landlord will take care of chores (or hire someone to do them) such as mowing the lawn and washing the exterior windows.
• Easier to move if needed (job change, extra kids, difficulties with neighbours, etc).
• Many telemarketers go away when you say the magic words “oh, I’m just renting”.

[Ok, some of those were financial, but they were about risk rather than the relative benefit/financial freedom/opportunity cost discussed with the calculators]

I didn’t mention the benefit of “forced savings” that comes from having a house and building equity with a mortgage. It can be a lot easier to save when the money has to go into the mortgage… But that’s not really a savings plan, since using that equity is quite hard, and current real estate market trends aside, the money won’t really “work for you” and is critically linked to a single asset. A better savings plan is actually saving to a diversified portfolio…

An extreme example of the rent vs. buy decision: I was surfing MLS trying to find examples of comparable homes to see how much rent was vs. buying. I lucked out and found one house that was offered for either rent or sale, which makes the judgment of whether one house is equivalent to another or not very easy. It also serves as an interesting example because I know the partial history of this house — it’s the one right next door to the one I grew up in! The house is offered for sale at $549k, and for rent at $1650/mo. That’s a sale price of 333X the rental price. What makes this comparison extreme is that the house really isn’t being sold for the house, but more for the land it’s on and the potential there. The house itself was the largest one on my block 20 years ago (3 bedrooms and a finished basement compared to 2+den for most of the rest of the houses), but after the family with the two girls moved out in ~1985, a long series of tenants moved through. This house needed significant renovations back in the 80’s, and from the look of the knocked-over fence between the houses in the pictures, still does. Anyhow, this example sort of shows how important estimating all the factors can be. With a cheap mortgage assumed, the Toronto rate for property tax, and no other fees (except sales commission), the results can be swung either way by the assumed cost of upkeep/repairs and by the spread between the stock market and the housing market. 3% or more in favour of the stock market (what has historically been true for all but the last 4 years or so) and it makes sense to rent and invest… a narrower gap between them and buying looks better and better, though that also depends on the assumed upkeep (maintenance, insurance, etc). That actually surprised me a little; with such an overpriced house I figured it would take an insane comparison (like the housing market going up 9% a year to 6% for the stock market) to make buying lucrative. Of course, with a house that would need work, buying is the better non-financial decision :)

The housing market is generally assumed to be over-valued at the moment, and there are a large number of articles and websites debating that. Of course, some of them have been saying that for years (I know I can’t believe it’s gone up so much so fast). I think generally these arguments are true: first-time buyers are being priced out of the housing market, and it’s only through fancy lending practices that people can buy a house at all now. Any more increases, and too few people will be able to buy in at all, and it will start to turn around (or at least flatten out until inflation in other areas, such as income, can catch up). The arguments from fundamentals and long-term historical trends is largely true, but some markets have special factors. Demand is a big one of them: Toronto and Ft. McMurray have grown so much in recent years that part of the real estate boom there is just due to demand (rather than speculation or fancy lending). While I still think there’s a turn-around coming for those markets (esp. Ft. McMurray if the oil companies stop the massive increases in hiring, which would stop the immigration there, and if they ever get a supply of rental housing), I don’t think it’ll turn around all the way to the trendline: some part of the increase is genuinely due to higher demand. That high demand is part of what prompted the massive numbers of tiny, ittybitty condos and townhouses: land is simply getting scarce in the GTA (at least until GO and the TTC improve access and capacity in the 905).

Another interesting rule I found: “your monthly housing costs should not exceed 32% of your gross monthly household income. Housing costs include monthly mortgage payments, taxes and heating expenses. If applicable, this sum should also include half of monthly condominium fees.” Apparently that’s not a rule of thumb, but a guideline for how much of a mortgage a bank can give you. At first I thought that was quite low, until I realized that I was still thinking like a student. 4 years ago, 74% of my income went to rent. Even still, with housing prices the way they are, that could become a barrier to some people.

Note that the rent vs buy calculator will take a number of things into account, but if you’re really seriously considering the decision you might want to draw up a spreadsheet so you can see what happens with more complex scenarios. For instance, the calculator only had a dollar field for property tax, but in Toronto at least property tax is a percent of your house’s appraised value, and they’ll hit you with increases every so often — and even more may be coming just from the budget shortfalls over the years. Modeling an increase in property tax cost didn’t seem to be an option (though rents increased at the rate of inflation), but might be something to consider if the alternate scenarios were similar. Likewise, you might want to model some kind of “lifestyle expense creep” as a gradual loss of savings discipline: your first year of choosing to rent, you may bank all the money you would have saved by not buying, but by year two or three you may have lost some discipline, and bought a big screen TV instead… Though the calculator can roughly handle this by putting in an inflation rate that’s higher than what you actually expect (so that your “rent” will go up year over year).

With their high interest rates, credit cards can become a maw of doom for people with credit issues. For everyone else though, they can be a great way to defer your payments by a week or two and earn rewards at the same time. I’ve been looking into my credit cards and figured that it’s time to upgrade my Mastercard. A few years ago I got my BMO no-fee Mozaik card, which gives me 1 air mile for every $40 I spend (an approximate return of about 0.35%), which was a pretty good offer at the time. Now, however, that rate of return is a little lacklustre. Part of the problem is that Air Miles have been devalued in the last year or two (they used to be worth about 16 cents each, and now are just above 14 cents each — based on the number of Air Miles required to get a gift certificate), and part is that other no-fee rewards cards have come out and become competitive. Right now I’m trying to decide between the PC Financial Mastercard, which essentially returns 1% good for groceries at any Loblaws/Supercenter/Valu-Mart/No Frills, and a Canadian Tire Mastercard, which won’t tell me its rate of return but which I believe is also 1%, good for stuff at Canadian Tire. I’m leaning towards the PC card for a number of reasons, mostly because I also have my chequing account there so things will just be easier.

While I’m not looking for a Visa card, TD has a cash back Visa that can return up to 1%. My RBC Gold Visa also gives a return of about 1% (though it is a fee-based card; of course, I have that card for other perks like free insurance on certain purchases).

So 1% looks to be the rewards level to shoot for these days. Does anyone know of any cards with even higher rewards? I’d really prefer a no-fee card, but might run the numbers for a card with an annual fee and higher rewards to see if it makes sense. Does anyone have any other recommendations? (I’m not really interested in getting an AmEx card — I haven’t found a single place that would take AmEx but not Visa/MC, and I’m not interested in a card from MBNA since their telemarketers drove me crazy).

I’m really not much of a negotiator, and usually roll over after the first refusal. I do try though, and I know that it can work sometimes. Of course, in retail the sales drones really don’t have much flexibility in pricing, but in other matters, discounts can sometimes be had. What brought this to mind was thinking about my budget recently, and how when we moved in to the house, we managed to get the landlord to agree to keep the rent fixed as long as we were here (instead of increasing it 2-3% per year). It’s the sort of small thing that was pretty easy to get her to agree to, but which does make a difference in the long term for me. I mean, grad students in my department haven’t had a raise in the better part of a decade (probably longer, since who knows how many years before I arrived the last stipend increase was), yet rent and food and gas keep going up year after year. Not having a rent increase will save us over $400 this year, and something like $850 the year after. Contrarily, in the old apartment rent went from ~74% to ~78% of my stipend over the course of my MSc (all the while quality of life there went down the shitter as increasingly noisier and messier neighbours moved in).

Unfortunately, I still have another few posts under money to come over the holidays; apologies to those of you bored by this already.

I know I just got through talking about diversification and mutual funds, and how I had parked some of the cash I was sitting on in my high interest savings account into a few low-cost index funds from TD. I warned against the hazards of trying to pick individual stocks to beat the market — since only a minority of investors do manage to beat the market. But my dad calls the stock market “the great casino” and of course, every now and then there is the great urge to gamble.

So shortly after becoming “fully invested” my beloved Trans-Alta (TPW.UN) has been bought out and my shares were forcibly redeemed. That’s left me once again with cash to invest somewhere. I could follow my earlier reasoning, and buy some more index funds and just hold on for the next decade. Or, I could look at the signs of dreary economic forecasts coming in and say to myself that this might be a good time to have some cash, and to not worry about buying anything for a while. Or, I could gamble.

I’ve been watching the bank stocks for a while now, and they have been hit fairly hard by this subprime/ABCP fiasco. And they deserve to be: there’s billions of dollars of debt at stake, and their loosey-goosey lending/accounting/risk management may pull the whole continental economy down into a recession. However, if any industry can turn it around in the long term, I’m sure it’s the banking industry. So, if the current crisis makes bank stocks a good value for a long term hold, then I’m going to look into that.

One bank I like is TD: they have quite good customer service including extended branch hours, and were the only ones conservative enough to stay the hell out of the ABCP mess. They’ve been fairly flat for the last few weeks and are probably close to their fair value. TD is probably the least risky Canadian bank at the moment for both the near and long term, but since it looks like a lot of other investors see it that way as well, it’s also not “value priced” at the moment.

Going to the other end we have CIBC. While I love PC Financial, which is offered through CIBC, I’ve never been a direct customer of theirs and have heard of customer service problems from other people that have been long-standing. They’ve also managed to dig themselves into the deepest pit of any Canadian bank with this subprime mess. Will they lose a billion dollars? TEN billion dollars?! It’s not going to be pretty whatever happens, and there’s still a lot of risk and uncertainty there. However, they’ve also had the ever-loving shit kicked out of their stock, down 20% in the last month, about 8% in the last week alone. So with a stock like this, at what point is the price low enough to reflect the losses and risk factor? At what point is there a potential over-reaction and thus a potential value buy? When I was first looking at what to buy a few weeks ago, I read through a lot of information available on CIBC, and jotted down a quick note: “Don’t touch till $75”. Well, today it’s crashed through that point, closing down at $73.60.

Trying to value something like this is a skill I do not really have. I tend to rely a lot on people like my dad and stock analyst reports. Unfortuantely, my dad says that the risk is too big with CIBC at the moment, since they keep saying that they’ve released their bad news, just to have another batch of bad news come out the next week. No matter how cheap it may seem he’s not interested in touching it, so he’s not going to walk me through how he values companies. And I think the analyst reports I’ve read are wrong, overly optimistic, or at least out of date. So I’m going to have to wing it on my own.

There are a number of ways to try to put a value on a company’s stock, and I’ve probably never heard of the ones that actually work well, but here are two very amateurish methods I can try to apply to CIBC. First, we have price-earnings-ratio. This is the ratio between a stock’s price and the earnings per share. For instance, CIBC has about 335 million shares, and made about 3 billion dollars last year, or about $9/share. Many bank stocks typically trade at about 12X earnings, so to put it very simplistically you expect to buy about 12 years worth of earnings with your stock purchase. If there’s anything that might upset the forecast for future earnings (such as massive losses from a subprime mess), then you have to adjust your stock value accordingly. So if we imagine that over 12 years, CIBC might stand to make 12*3 = 36 billion dollars, but might also have 10 billion in losses from bad investments or an economic downturn, then we might project that the 12-year earnings would be $26B, or $77.60/share, and then we say that’s what the stock should be worth. If the losses are “only” 5 billion, then we might be looking at $92/share. Of course, things are more complicated than that, since the losses wouldn’t be averaged out evenly over the 12 years like that, they would happen soon, and things that happen soon are worth more (in this case, more of a hit) than things that happen later. There’s also still so much uncertainty about what’s going to happen, and uncertainty and risk carry a price penalty as well. This little analysis also started from the current year $9/share earnings, but that might be an optimistic start point, as that’s a pretty high earnings figure for this bank. The 5-year average looks to be more like $5.40/share/year. Using that to find 12-year earnings (~$22B), taking a subprime hit ($5B), and then finding the share value gives me something like $50/share. I think that might serve as a good “floor” price.

Another simplistic valuation is to look at the share price relative to the book value. The book value is about $33/share (about $11 billion total when you multiply that out). Take off a $5B subprime hit (and how arbitrary these numbers can be in the face of uncertainty) and that book value comes down to $18/share. The stock had been trading at something like 3X book value, which would put the new, adjusted price at $54. If the hit to book value is only $2B, then we’re looking at $81/share, which we’re already below.

From all this you can plainly see that I am not at all qualified to be doing this kind of value analysis without further training. However, I think that some point between $50 and $75/share, CIBC might be a good long-term buy. “Calling the bottom” is a very difficult thing to do, but I think if CIBC drops any more (below, say $70/share) I might buy some, though I’ll probably wait until it starts to turn around, possibly months from now. One complication is that the share price is quite high, especially compared to TransAlta, so I don’t have enough money to buy a “board lot” of 100 shares. Normally, I’d stay away from odd lots, but for big bank stocks there is so much volume, so many shares being traded every day, and so many dividend reinvestment plans producing odd lots that I think it’s pretty safe to not worry about getting a block of 100 shares and just investing what I can (and as always, only what I can afford to lose).