Blessed by the Potato

One thing I struggle with is convincing people of the importance of certain elements of personal finance. I’m pretty sure it is important, and the struggle is not that I need to change minds per se, but that I need to find a way of conveying the message that resonates so people follow-through. In particular just convincing people of the very basic need to take some time to learn a bare modicum of this stuff for themselves. After all, time is at such a premium, and personal finance can be so dull.

So consider this: if you aim to be retired sometime around 60-70, and will live into your 90’s, you could be retired for 30-some years. The money to support you will in large part come from your investments. In a way, investing is going to be your career – it’s where the money to live off is going to come from in retirement. Indeed, of all the careers you will have over your life, being a professional investor/retiree will likely be the one with the longest tenure.

That’s not to say that it will be the most intensive career: you’re not going to be sitting in front of a trading desk 9-5 in your golden years. If you follow a passive strategy it might only take a few minutes a month while you sell down investments, move cash to your chequing account to spend, plus a few hours at tax time. But in terms of putting food on the table, it will be nearly as important as whatever it is you’re supposed to be doing now when you’re reading this.

It’s going to be so important, and you’re going to be at it for so long – isn’t it worth spending the time to get some education on your future career?

Now of course this side career will become important long before retirement starts, when you’re in the accumulation phase, so you don’t want to wait until your retirement party to start looking into some good reads and continuing education. Think of it this way: you’re going to spend nearly 2000 hours/year working, for four decades of your life just to save the money you’ll need to live the rest of your life in comfort. How much of that time should be spent on learning the ins and outs of investing, saving, and retirement? Taking a full weekend (16 hours) and devoting it to reading and planning how you will manage your savings is a pretty miniscule amount of time compared to even a single year’s time spend accumulating said savings.

I know, there are always excuses: while you’re young (especially if you can get freelance work) you can always say that those hours could be better spent working to get more money to save, and doing just about anything else is more entertaining. Yet taking the time is an investment in its own right. So come on, give me a weekend.

It’s summer, you’re going to spend some time reading by the pool/beach/lake anyway (I hope), so let’s start with the reading. Here’s a really quick curriculum for you (and I welcome tweaking and book recommendations in the comments). Start by identifying what “year” you’re in for the summer curriculum.

Year 1: Budgeting and Debt. You need to get your household budget in order and tackle outstanding debt before you get into worrying about saving and investing. Dave Chilton’s The Wealthy Barber Returns covers a number of topics, including paying yourself first. “Debt gurus” abound with their books — I can’t make any personal recommendations (because they haven’t sent me review copies and it’s not my area of interest) but it’s a big market and a decent one shouldn’t be hard to find. For something lighter, maybe try Findependence Day by Jon Chevreau.

Spend your weekend skimming through one or a few of these. Dig up your statements to see where your money is going. Draw up your family budget, make a plan to pay down your debt. Call your bank (most have 24/7 phone lines) and set up a pay-yourself/your creditors-first plan if you need to. Take the rest of the year to get this right, get your emergency fund in place, and we’ll see you next summer for year 2.

Year 2: Saving and Investing. Not to be too self-promotional, but start by reading my book. It barely takes an afternoon to read all the way through, and from there you can decide if you need to read more, and in which direction (it has further reading recommendations inside). Exercises: determine your risk tolerance. Set up an investing account (brokerage or mutual funds, hopefully somewhere with low-cost index funds; non-registered, TFSA, and RRSP) — you can fill out the paperwork and place some calls, though opening an account from scratch may involve waiting a few weeks. Call to set up an automatic investment plan if needed.

Year 3: Planning. What will you do in retirement? How much will you spend, how long will you live, and what do you want to leave behind for family and charities? What’s a reasonable set of assumptions for rate of return? What are your tolerances and sensitivities? What’s your backup plan, and what signals will tell you you have to cut back on spending? Have you logged into Service Canada to see what your CPP benefit will be? You can get some books and spreasheets, but at this point there’s no shame in reaching out for a consultant/planner to help. I fully believe that most people can do this on their own with a reasonable time commitment and some reading material; but I recognize that can and will are different things so many may need to hire help (even if only because writing the cheque makes it painful enough to pay attention). Just be sure that you get value for money. Remember that at the end you should have a plan with multiple plans inside of it, including how you will adapt to various future possibilities.

As the years go by set aside some time (perhaps continue with a summer weekend each year) to review your plans and progress, and adjust course as needed. Consult: join forums, as talking will stimulate ideas. If your friends and family don’t view anything remotely related to money as taboo then discuss with them, it may even help spur them to get with the program and start training for their final career.

It is an eternal debate: do we live for today or save for the future? Some kind of balance needs to be found, as living a hedonistic, spendthrift lifestyle only to end up spending your autumn years on government assistance is no good, but neither is playing the miser through your younger, healthier years just to die and leave it all behind.

I always thought I managed to walk this line fairly well: I work hard and save for the future, with a plan to retire earlier than 65 (after all, who knows what kind of shape I’ll be in by 60), but still enjoy the moment. I’m aware of the power of compounding, and have internalized the math that saving & investing a dollar today means I can spend three in retirement. Inversing that, taking a year off from work now might mean I’d have to tack on 3-5 more working years at the end of my career before retiring.

That’s pretty simple logic on the opportunity cost of taking time off — and it gets even worse when you consider the potential damage of a gap to my career. So I’ve never really considered taking time off without a damned good reason to. Heck, even on my vacations I tend to find side projects to work on, even if they’re not the most profitable post hoc (e.g., book). But now that Blueberry is on the scene I start to wonder.

I missed my daughter’s first steps today. That’s not such a surprise, as even Wayfare has missed some of her firsts (she seems to show off for grandma), and I’m at work all day. Yet it kind of puts a sharp focus on something that’s really been bugging me about my job: I spend so much time commuting and working that I hardly see the whole reason I’m going through the whole mess. A few months ago when she was into her “stranger danger” phase, I went a full week without seeing her, and when I finally did she freaked out and cried because she didn’t recognize her dad. So missing her first steps is a moment that does make me — for perhaps the first time — step back and seriously consider taking some time off from my career.

It’s also a bit of a timely issue because Wayfare’s mat leave has run its course, and yet Blueberry is still too young for daycare, leaving us searching for childcare options. It is heart-wrenching to even think of handing over our little girl to some stranger to watch over, yet it is also difficult to get by on just one income, particularly in this city. I know eventually she will have to go off to spend more time being raised by strangers than with us — at school if not daycare — but it doesn’t stop me from wondering if taking a year off now and draining my savings might be totally worth it. It sure seems nicer to spend some time at home taking care of my baby than to be able to take more time off at the end of my career, when the house will be cold and empty.

And this is the age when I want to be there for her: at 12 she won’t want to see “Da”, she’ll be at school for most of the day and then want to disappear into her room with a book or video/holo game when she’s not. Right now she’s thrilled to have me around, and the world is a magical wonderful place full of adventure and discovery. I want to be there to see her point to a bird singing in a tree and exclaim “Bir!” or to a passing jet and do the same*. I want to watch her dig through her bag of toys until she finds a match for whatever’s already in her hand, and then merrily bang the two similar items together. When she’s a teenager she’ll likely just infuriate me if I see her at all.

But the cold math is the same: Wayfare and I make more than a nanny or daycare service, so Blueberry goes off to the strangers’ arms while we work to keep our heads above water in this crazy world.

An alternative to quitting or taking a full leave of absence — indeed my preferred solution — would be part-time work: ideally I’d work 3-4 days a week, Wayfare would work 2-4, and with one of us having the flexibility to work weekends plus occasional childcare from the grandparents we’d be set. But unfortunately it’s tough to find part-time work — I doubt I’d be able to swing it at my current job, the HR system isn’t really set up for it. Indeed, a 9-day bi-weekly work option (adding ~1 hr to each day and then taking a day off every other week) is a recent experiment there, and that plan’s only around for the summer. Plus there’s too much for me to do to just cut back (though they could almost use another 0.5-0.8 FTE, so perhaps hiring a full-time person and dropping me down to 4 days a week would work for everyone if only the money in the budget could be found).

Health insurance is another hurdle: I get it, Wayfare doesn’t, so it made and continues to make some kind of sense for me to try to keep a stable full-time job while she gets to take the mat/pat leave and spend all the time with Blueberry, even though she’s actually the higher-earner in the family. The value of group insurance for someone so sickly nearly covers the spread in gross pay.

Taking time off would be an easier decision if I had more freelance experience and could use that as essentially a part-time career. Part of what makes me consider it so closely is that I do have some margin of safety in my planning: pushing a planned retirement age from say 60 to 65 is not so bad, not like moving it from 65 to 70 — it’s not like I’d be cutting things so close as to be taking major risks on my ability to work later in life (health, etc.).

Though really as I get more comfortable (even as I write this out) with the idea of sacrificing disposable income and retirement savings to spend time with Blueberry, the big remaining fear is the gap on my resume. It took months to find a decent non-academic job in the first place, and that included accepting the dreaded subway commute. It did kind of backfire on me: part of the reason I went for a non-academic job was to have more stable hours to spend time with my family, and here I am a year later lamenting how little time I manage to spend with my family. Part was for better (short-term) pay: it would have been a lot tighter on a post-doc’s salary, yet here I am considering throwing the financial plan out the window for shits and giggles (literally). With such a gap on my CV and publication record I doubt I would have the option of trying to pursue an academic career now — will it be the same for a non-academic career after a year of being a homemaker?

I just don’t know what to do. I suspect that all my considering and weighing will lead me back to the default choice: keep working, let the woman take the mat/pat leave, and after that let her work part time with hired help to cover the rest of the childcare. It’s kind of sad, but I don’t really see another path…

* – It is apparently babies who confuse birds, planes, and Superman.

There is a legitimate reaction of fear and disgust when a dividend-paying company cuts their payout. The cut can often just be the first of a series, and after all, companies that are growing with steady profitability don’t need to cut so it must be a clear sign of trouble. However it’s far from a certain sign: sure, Priszm and Yellow Pages went through a series of cuts before becoming worthless, and investors who bailed at the first cut (or earlier) were in the right — there was not just one cockroach. On the other hand, many companies have a clear plan and future path to follow with a dividend cut, and an over-reaction to the news can be a great buying opportunity.

Superior Plus was recently featured in the Globe and Mail with a very bullish article, yet just after cutting their payout nobody loved it despite the attractive price (indeed, it’s almost doubled from that point). The business was not growing, but it was not crashing at the time of the cut, either. The problem had been too much debt taken on in the past, and no wiggle room with a 100% payout ratio to get it paid off. By slicing the dividend in half, SPB laid out a plan to start paying that debt off in a meaningful way. This was in my opinion the wiser use of their cash, especially given the interest rates they had to pay on the debt. It shouldn’t have been the first cut of many — just a one-off cut, that would likely last for five years or so before going back up. Investors liked the company at $10 before the cut, then even though the underlying business hadn’t changed, were only willing to pay $6 for it after the cut (and now, back to $12).

Similarly, HR.UN had to cut their dividend when capital markets froze up in 2008 and they were caught with their pants down and a half-finished building. They used the cashflow they would have given to unitholders to fund the construction, with a plan to reinstate the dividend at the conclusion of the project. Partly due to this, and partly due to general market uneasiness, there was a point at which you could have bought H&R for roughly a quarter of where it is today. Even if you factor in that the overall market was down roughly 50% at the time, H&R had shed an additional $3/unit. So there might be some value to looking into companies that have recently cut their dividends in case there is an over-correction in the price.

I think Extendicare might fall into this category now. I bought some a few months ago on the thesis that their payout ratio was near the edge: they had refinanced some debt into low-interest long-term form, which is good, but profitability concerns with Medicare cuts left them dancing around the 100% payout mark. I figured they could go either way on a cut, but it would likely be shallow (to get them down to an 80% payout ratio), and that the US and its insurers were likely done trying to squeeze care homes for additional savings. Now clearly I was wrong on the depth of the cut, and possibly on the rounds of cost-cutting coming to an end, but I don’t think this is just the first of many: in the conference call they say that basically they can now fund the payout entirely from the more stable Canadian operations. That should make EXE a pretty decent buy at these levels (<$6). I wouldn’t be too surprised if 2 years from now it’s back at $8 and that‘s when all the bulls come out of the woodwork to exclaim in the press about what a great buy it is at that price.

Any other potential over-corrections to look into out there?

Here is a recent TED talk on philanthropy and advertising you should go watch.

This is an interesting perspective. As someone who is currently “overhead” I can, to a certain extent, agree. Besides my current day job, I also recently picked up an interesting freelance gig. A donor hired me to rewrite and revamp a fundraising brochure for a local hospital. Because I’m being paid directly by the philanthropist and not the foundation, my fees will not appear in their books as overhead, though I hope that the work that I’ve done indeed helps multiply the donations they eventually receive regardless. (You can see a PDF of the brochure here.)[Update: I did a second related one.]

To some extent there is a need for scale in philanthropy. A charity attempting to say fund research looking for a cure for cancer is not going to be able to make much of a dent with an annual budget of $100k — that’s barely one research grant (and even then the lab has to have some other source of core funding). It takes millions to be able to have enough to get together a panel of peer reviewers to examine grant proposals, or to buy expensive pieces of infrastructure such as PET scanners. And that takes some kind of investment to scale up — whether resources for advertising, or the volunteer effort to go viral on the internet.

But there’s a limit. At some point you could just be raising money to pay people to try to raise more money. In the talk he mentions that charitable giving has been stuck at 2% of GDP for decades. If there is some sort of mechanistic reason for that — it’s the amount people are capable of giving, or some sort of unconscious philanthropy budget in the population as a whole — then pushing for more overhead is just shifting the charity spending around, and in fact a net negative due to the overhead. It is possible that, by being able to tackle large challenges smaller organizations could not, we would be better off with one (or a few) massive billion-dollar charities spending a total of $240B than with a bunch of smaller million-dollar charities spending $275B with lower overhead costs. But if outcomes are directly related to dollars spent, more overhead would indeed simply mean more waste.

Consider a parallel with investing: you could pay a brilliant manager some percentage of your funds under management, and they might be able to beat the market for you. But there’s only so much return out there to be had: if everyone else hires an investment manager then everyone is on an even footing and is back to getting basically average returns… less the overhead to the managers.

There were three other points of his I want to discuss.

The first was on compensation. The big unanswered question for me was whether you would get value for that extra $300k spent on talent in his hypothetical. Perhaps everyone is better off if the MBAs pursue for-profit $400k salaries and donate $100k to the charity, who can then hire an $87k/year executive. If the charity tried to hire someone for $400k, would they get more than the ~$300k difference back in value? Charities, after all, don’t have all the things to manage that for-profit businesses do: maybe the extra money buys you advertising and capital markets experience, which you just don’t need as a non-profit. And why doesn’t that logic apply all down the chain? We pay grad students and post-docs a disgraceful pittance for trying to find the cures to our modern medical ailments, but brilliant technically-minded and driven people can make far more in the private sector. Would we have long since solved this pesky cancer problem if we were only willing to retain top talent in the research enterprise by setting post-doc starting salaries at $400k, and grad student stipends at $75k?

The second was on the whole comparison of the for-profit and not-for-profit sectors. You see, the two are very different fundamentally. When I give my money to Coca-Cola for a beverage, or to Amazon for a book, I am transacting with them for something. I don’t care how much they spend on overhead, because I am making my decision on whether or not to give them money based on what they are giving me in return at that moment. I need to only extend a small amount of trust to them (trust that Coca-Cola hasn’t diluted my Coke Zero, trust that my book from Amazon will arrive undamaged in a under a week), and I have recourse if my trust is violated: I can demand my money back, sue for breach of contract, etc. But once I send my money to them and receive my item, it is no longer my money. It’s their money, they can do with it as they wish.

Giving money to a charity is a completely different thing. I’m not getting a thing or a service, I’m giving my money to the charity to make the world a better place. I am trusting them to put my money to good use. Though the money is out of my hands and I have no recourse to get it back once I give, at no point do I consider it “their money” to do with as they please. Maybe they could give me a better “product” if they spent three times as much on overhead as I had reasonably expected — but that is a lot of trust for me to give. While only people donating staggering amounts of money expect to be able to direct their donations precisely, I still expect that, in general, my donation will be used for the stated purpose — ultimately mostly directed towards some kind of program spending rather than churning overhead or as risk capital. Their use and governance of the money will continue to be the concern of the donors, and so there is a very real reason for spending on overhead and risky activities to be perceived differently than in the for-profit sector.

In an analogy to investing, let’s say that there was a company that raised $100M in a stock offering to pursue a business idea. They went out the first few years and spent $90M of the money doing what had to be done (hiring people, renting office space, advertising etc.). After a few years of losing money they discover that the business model is just not viable. To continue is to throw good money after bad so they wind up operations. As a shareholder, through the first few years you would have been obliged to let management take the risk and pursue the business, spending your capital on whatever “overhead” was needed to do so. After it failed, you would expect that any residual money ($10M in this example) would be returned to you as the business was shuttered, and promptly. If they dragged their feet in the wind-up, paying salaries for years, burning through your capital with no purpose you would rightly be pissed at that loss.

In the not-for-profit sector, overhead spending that is going to have a multiplicative effect is difficult to discern from the telemarketer full employment program. How do you know whether you’re in the phase of risk capital spending that is pursuing the innovative business model with lots of potential, versus the phase that is basically the insiders stealing from the other contributors of capital? The risk-reward equation is not the same in the not-for-profit and for-profit examples, and the governance is different: profits are much easier to measure than “impact” or “do-goodery”. And as unethical and despicable as it was for the executives in the hypothetical example to burn the remaining shareholder capital after it was clear nothing would come from it, it is even more morally repugnant to live large off people’s charitable donations — hence the aversion to overhead spending.

And the last point I wanted to discuss was that of spending more overhead as a percentage to scale up. In the presentation he just kind of implicitly assumes that to scale up an organization might have to spend a larger percentage on overhead. But should this be so? Shouldn’t scaling up offer economies of scale? If instead of spending $100 to raise $1000 at a bake sale, a charity should spend $100M on organizers for a massive event and TV air time, then shouldn’t that investment be expected to pull in $1B for program spending, rather than just $250M as his 40% figure would indicate? Now again, maybe the efficiencies come on the spending side (perhaps spending $250M in one organized way with a unifying strategy does more cumulative good than spending $1B in separate $1M chunks).

So while I can see some of his points about needing large-scale charities to tackle large-scale problems, and that sometimes investments have to be made (to train people, to build infrastructure, etc.) and sometimes more overhead has to be spent (for strategy, for advertising), I do not fully agree. Sometimes overhead is just money not going to program spending, and I would hope that scaling up would bring about more efficiency rather than less. The not-for-profit and for-profit sectors are have larger fundamental differences than he suggests. And when you come right down to it, I want to be able to know that my charitable donation is going towards the stated purpose and not to the Canada Foundation for Telemarketer Employment. Maybe looking at the percentage of spending on overhead is not the best way to choose where to donate — perhaps we need some impossible measure of impact per dollar donated — but we will naturally gravitate towards metrics that are easily enumerated.

Cyprus has been in the news a lot lately for the seizing (“taxing”) of some assets. Some have questioned whether the same could happen here. The sad truth is that there is always the possibility of the government deciding to seize your assets; whether they’re insured or not, in a bank account, mutual fund, or real; through legislation, crooked courts, or by military force.

But it is not an event that happens often or lightly. In general, governments do not suddenly seize assets — that’s not what good governance is about. Of course, if the hole is big enough and the options limited (as in Cyprus) they may not have a choice, which gets into a moral lesson about not choosing “bread and circus” leaders.

There’s a slightly higher chance of loss with more “virtual” assets and those that can be divided for tax (e.g., the income trust Halloween massacre). But the government could decide to appropriate your house, eliminate your principal residence capital gains exemption, or tax your assets instead of just your income.

This knowledge may not help you sleep well tonight. Do remember that it is quite unlikely. Ideally, your government would be open and logical, so you could anticipate such moves (or rather, sleep soundly anticipating the lack of such moves). Of course, for the Harper government that was my big beef with the income trust fiasco — not that they decided to tax them, but that they broke an explicit promise not to do so, with no justification given. How were we to know what the next materially important decision would be? Ditto with strategically important takeovers — there was next to no way to anticipate what might or might not be allowed. In the depth of the US financial meltdown some (e.g. John Hempton) complained that the FDIC just stepped in and closed certain banks over the weekend, arbitrarily deciding to make bondholders whole while wiping out equity and preferred holders — though in a more controlled liquidation and wind-up, it’s likely that either the bondholders would take a haircut, or the preferred shareholders would be left with some value. The process is often just as important as the outcomes…