Blessed by the Potato

I haven’t had a round-up post for a while, so let’s correct that now. Things have been pretty busy with me the last little while. Though the market has been volatile, which should be presenting opportunities, I just haven’t managed to find the time to do any real analysis for active investing. One depressing case-in-point was Armtec: I started working on a post called “Is Armtec Going Bankrupt?” on Sept 29, thinking that perhaps the answer might be “no.” I meant to finish my research on the company over that weekend, but instead found myself crawling under the car and reading Ready Player One (BTW: a good read, way more fun than annual reports). “Oh well,” I figured when the weekend came and went and I hadn’t finished my analysis yet, “I’ll just do it next weekend.” Unfortunately the market doesn’t always let us take our time with these things: the next week it was up about 100%. D’oh! Now of course, I hadn’t yet made up my mind on the company, so it’s just as likely I would have done all that reading, decided not to buy, and then had it go up 100% anyway… but I think I would have preferred that outcome to the one where I maybe might have ended up buying it on the Tuesday, and made out like a bandit by Thursday, but didn’t because I just couldn’t be bothered to get off my butt and do some DD. Ah, well, c’est la vie.

The post-doc weight loss progress has been underwhelming, but not an entire write-off. It’s been almost two months and I’ve lost a little over 2 pounds. It has ever-so-helpfully been mentioned that that could just be measurement error, which is true, so we’ll see how I make it through the difficult Halloween then post-Halloween-candy-sale then xmas-and-Boxing-Day-candy-sale gauntlet coming up.

Futurama has a great thing called the “Parade Day Parade” to consolidate all the parades which, in the 31st century New New York, would otherwise eternally tie up the streets in gridlock after accumulating a millennium’s worth of events to hold a parade over. So with all the bloody marathons and charity fun runs, I’m not surprised that conflicts are starting to arise. I don’t know what the fascination is with running along commuting routes or through downtown Toronto. Surely some of those races could be moved to the burbs, or better yet, a dedicated running trail. I guess it’s marathon brain taking over: once you run a truly suicidally stupid distance like 40 km, you must start to think you are a car, and try to plan race routes on streets.

Michael James has a good, short post asking what predictions are profitable. It’s not good enough sometimes to know what’s coming, but also to know without the rest of the market having already priced it in.

CC has a post up showing that the recent market volatility is not “unprecedented”. There have been plenty of cases of high volatility in the past. Note that much of the volatility is intra-day (I was scratching my head for a while as to how there could possibly be more 5+% days than 3+% days, until I noticed that difference in the legend).

Dave Chilton tackles the RRSP vs TFSA question. He takes a bit longer to cover it than I do in my book, but is also a little more thorough, with some humour as well. Short answer? Sounds similar to mine: TFSA is pretty good, but the RRSP is better if you’re in a higher tax bracket now (and expect to be in a lower one at retirement). Both is better yet. Oh, and don’t blow your refund.

Preet admonishes those who convert to market timing after stocks falter in the Globe: “Please. The fact that the market has already fallen should be proof enough that you have no authority to suddenly become a market timer. If you were good at it, you would have taken your money off the table before the decline.”

Then after saying something so clever and catchy, Preet goes on to try to deny the Canadian housing bubble, dragging out some of the flimsiest explanations. “Looking at debt-to-income is only part of the story. You need to see what that debt was spent on. […] A lot of that debt is mortgage debt. Housing has done well, so on the asset side, we are doing much better.” was one of the worst. I haven’t dug up the citation, but I’m sure I heard that from the Americans a few years ago. If house prices go down, the debt doesn’t go away without pain. And it’s backwards: ask not what was used to secure the debt, but what has fuelled the rise in the asset itself (answer: debt).

An x-ray tube was stolen in Markham, but the report has basically no details. I can’t even tell if it’s a Beryllium-7 source, or a regular x-ray tube with a Beryllium window (or if the radioactive Beryllium-7 part is a mistake or a minor component). I couldn’t find any information about it at the CNSC website, but then I wouldn’t necessarily expect to yet. A stolen (sealed?) source (if it’s even a source) isn’t a radiation accident, just an accident waiting to happen. (Edit: the York Regional Police release says that it’s also dangerous if broken, which suggests it is a sealed source and not just a x-ray tube).

Netbug has been glued to the development logs of Windows 8. I’m a bit slow, still loving XP on my main computer, and I have no intention of getting my hopes up for a product that may be years out, may bear little resemblance to the work presented now, and will likely be a disappointment no matter how low I set my expectations. However, the proposed task manager improvements do look neat.

New firmware has come out for the Kobo, which overcomes some of my criticisms from before: it adds the ability to annotate passages, search within a book, and my personal favourite, a low battery warning when you hit 10% and 5% of battery life remaining. It also lets you change which parts of the screen are receptive to page turns. I’ll try installing it later tonight!

Ok geeks, here’s an accounting debate for you: how should cash be reported on the balance sheet?

At first it seems like a nonsense question. Of all the things you have to adjust for and debate how to report on the balance sheet, cash is the one sure thing: it’s carried at exactly what it’s worth, with no concern over depreciation or market value. Yet once again today I heard a familiar refrain: “Oh, they’re sitting on a tonne of cash. But it’s all overseas, so they can’t bring it back to pay a dividend without paying tax on it.” Well, if it can’t be used without tax being paid on it, then is it really honest to report it at full value on the balance sheet? Shouldn’t there be a corresponding liability for tax payable but not yet incurred to reflect the fact that — should it be needed — the cash isn’t really there? Yet right after saying that, I heard another familiar phrase “so if you back out the cash, it’s only trading at 10 times earnings.”

Well, which way is it to be: is the cash money good that you should “back out” of the valuations, or is it stranded overseas, and only worth some fraction of what it’s reported as on the balance sheet?

Should GAAP/IFRS reporting specify where cash is, or apply some discounting mechanism to reflect the fact that it is not truly available to shareholders at the indicated levels?

I’ve been productive with my long weekends: I wrote a book! It’s a book aimed at beginner investors, and recommends a passive indexing strategy. The main strengths of the book are:

• It’s a short book.
• It covers the basics in plain language.
• It’s written by a Canadian for Canadians.
• It has pictures of bunnies.
• It has step-by-step instructions for how to apply the basics of index investing to actually get starting investing, including how to set up an account and how to place a trade, with some key screenshots to help.

Though it’s only been about two months from when I first started to now, IMHO, the book is done. The formatting is there, the text has been revised a few times, and I even sacrificed a counterfeit $10 bill Tim Horton’s passed to me to mock up a cover image. If you’d like to review the book (preferably to post on your blog and the Amazon/Indigo reviews when available) please send me an email at holypotato@gmail.com and I’ll send you a copy. I have two formats at the moment: regular letter-sized (best for reading on a computer or to print in hard-copy at home) and Kobo/Kindle formatted PDF (not quite as smooth as an epub or Kindle native format, but looks really sweet on my Kobo), both as DRM-free PDFs.

Most of the material is not exactly unique to me or new for an investing book: basic stuff about why saving/investing is important, what’s a stock/bond/fund, what’s an RRSP/TFSA, etc. What is unique is that it’s written by me, and that it includes the kind of hands-on material that I’ve never seen anywhere else that’s needed to actually get started on your own (how to open an account, how to enter a trade, where to go to find CC’s rebalancing spreadsheet), and just inside, written in large, friendly letters are the words “Don’t Panic.” (Though in contrast to the HHGTTG, the words are not all-caps.) It is, as I mentioned, short: just 37 letter-size pages once you discount the pictures and things like the title page and ToC; in kobo format, just 89 screen refreshes including all the filler.

If you’d like to buy a copy right now (just $5) before I sort out publishing, again just send me an email at holypotato@gmail.com and I’ll sort out PayPal with you and email you both PDF form factors.

So I have just a few main questions that maybe you all can help me answer (whether you feel like reviewing the book or not):

1. Do I go for a self-publishing model, or try submitting to a traditional publisher? If self-publishing, e-book only, or physical copies too? If a publisher, which one?
2. Should I publish under my “real” name, or Potato? On the one hand, I might want to offer education services alongside the book, which is really a real-name kind of thing. On the other, I have more “brand recognition” for investing discussions as Potato… though people who aren’t familiar with my writing might take it somewhat less seriously with the pseudonym, and those who do read enough to recognize Potato as being a serious force in Canadian personal finance probably don’t need a beginner’s book.
3. If I do publish under my real name, do I “out” myself in the process and use this site to promote the book, or do I just not mention the book again here and hope the connection isn’t made?

Another option (Wayfare’s sage suggestion) is to just split BbtP: do all the finance stuff on a new blog with my “real” name, and keep all the video game/political ranting/science/random stuff here.

Thank you all for the messages of congratulations. The long slog is over, the thesis is revised and accepted by the faculty, and in the morning I’ll be dropping off the printed copies to be bound into book form (I tried to get it done today but just barely made it up to campus graphic services just as they were locking up).

Some quick notes before I get back on track with the regular blogging:

Yes, it is a PhD (Doctor of Philosophy) degree, so I’m “not that kind of doctor”.

No, I didn’t end up meeting my weight goals (which were initially to lose a certain amount of weight, then to simply not gain weight during the final stretch), I ended up gaining about 8 lbs over the last few months. I’ve been really bad on both the exercise and diet fronts: though I started out the spring ok for exercise, when the oppressive heat hit in July I pretty much stopped biking and haven’t really gotten back in the saddle. There have been three times now that I went on road trips with my bike packed in the car, and didn’t even end up taking it out (though to be fair, on one of those the water pump at the cottage broke just as I was on my way out for my ride, and I didn’t much fancy the notion of going for a 20 km ride with no working shower at the end).

For student finances, it worked out almost according to plan. I’m pretty good at being frugal and sticking to a budget, and though it did end up taking longer than I thought (and after my MSc, I really thought I wouldn’t be overly optimistic for my PhD timeline… yeesh) I managed to cope. As you may recall, I had a scholarship for a number of years and was actively saving a portion of that since I expected I wouldn’t finish by the time the scholarship ran out. Most of that savings I invested, and most of that into dividend payers, so in this later phase I was using the dividend income to help make ends meet when departmental minimum funding wasn’t enough to pay the bills (well, it was enough to pay the rent and food bill, but not the internet, phone, insurance, or tuition bills). I did get surprised by a few mis-calculations, the most recent being figuring when my last stipend would be paid out: I knew June was the last month I was getting paid for, but I thought my pay was arriving the following month, so that I could count on money arriving in July — it turns out I had my pay cycle wrong and the money I got in June [which I thought was for May, etc.] was the last I got. So that lead to an even tighter belt than I thought, but I suppose that’s what emergency funds, lines of credit, and investments are for. I picked up a bit of contract work in July, and I didn’t realistically expect to be paid for it until August, but here we are at the end of August and I still have no idea when I’ll be paid. Wayfare’s in much the same situation, I think she just got her paycheque for work done in May.

So right now I’m into full-on defer everything mode. I know that I’ll eventually get paid again, but until then I’m trying to defer as many expenses as possible, and tapping my non-traditional emergency funds like reward points to pay for things like groceries and gas where possible. I normally keep a large stockpile of food on hand (I suppose I have my mom to thank for that), and aside from seeking some variety and fresh foods, I could probably go 3 weeks without having to go grocery shopping. So I’m going to eat through some of that cache. I wore a suit for my lecture and defence (yes, I own a suit now, crazy!), but I think it can wait a few more weeks to be dry-cleaned. My shoes have holes in them (not serious ones, I’ve just worn through the lining near the heel so the plastic heel cup is showing on the inside), but they still work and soon enough I can switch to my winter boots which are in good shape.

I’m really good at procrastination.

As to where I’ve been for the last week: well, I didn’t have that many revisions to make, but there were a few, and I only had a week or so to make them. Otherwise I’ve largely been catching up on half a lifetime of sleep deprivation and spending time away from the internet. I got a kobo reader as a graduation gift (which I’ll review shortly) and picked up the next few books in the George RR Martin Song of Ice and Fire series, and they are not short books. I’ve already finished the second one and have moved on to Storm of Swords. It’s still technically summer, so I can make some progress on that summer reading list!

Now that I’m done my PhD what comes next for Dr. Potato? The clever-boots answer I came up with was “Dieting. Definitely dieting.” Short-term, I’m going to be doing some more research work for the next few months. After that, I don’t know yet. I’m looking for jobs, but seem to have more of a geographic limitation than an occupational one: I’m open to private sector R&D, academia, or may even try a turn at finance or pure teaching/lecturing. I’ll just have to see what opportunities present themselves.

There have been a few questions in the fora recently about market-linked GICs. From the description, they sound like the best of both worlds: sharing in the returns of the stock markets with full, government-backed downside protection. I’m sure that’s where a lot of the attention is coming from. Unfortunately the reality is far different: these are usually sneaky products (only including partial performance, caps, etc) so it usually ends up being the case that if you need downside protection you’re probably better off to just get a regular GIC (where you’re guaranteed some return too) and a regular low-cost market index fund for the bit of exposure you can tolerate.

I just saw a new version of this trick in a product from Meridian credit union that promised “No cap on returns, no fees, participate in 100% of return.” The sneak on this one comes in the way they calculate the return:

The interest earned will be based on the average return of the index for the five years of the investment period. The average is calculated by adding the month-end closing values of the index and dividing the sum by the total number of months.

So if the index is at say 100 now and closes at 134 after 5 years (a total 34% return or 6% compounded annually), you’d only get ~20% return (or about 3.7% compounded). That hardly sounds like participating in 100% of the return to me, and that’s not even getting into the matter of how these products conveniently forget the dividend yield, or that the return you get is counted as interest income rather than capital gains (like it would be if you had invested in the markets).

It also makes the return path-dependent: if the market goes down for the next 4 years, then rallies hard in the last year to finish up, you’ll get far less out of a product like this than if you had just invested in the market. For example, if the market goes down 10% and stays down that much for 4 years, then rallies in the final year to finish at 134 (the same ending value as the previous example), you’d get nothing.

Though to be fair, this method would still give you some return if the market tanked just before redemption. But a regular GIC would likely give you just as much or more in that scenario, and you’d at least have a predictable return, too.

So how do you go about making your own version of these types of products? Well, one way is like I said above, buy a GIC and an index fund. If you figure that the worst 5-year return you need to protect yourself from is -25% (and even then you’d have to be really unlucky — but you can get more pessimistic if you wish), then just figure out how much you can risk for a given regular GIC rate so that even in that “worst-case” scenario your principal is still protected. Right now a regular 5-year GIC can be had for 2.75%, which would give a total return of ~14.5% after 5 years. If the amount to put in a GIC is g and the amount to put in the markets m and your total principal p, then you have two equations with two unknowns: the amount to invest at first g + m = p and the amount you have left at the end in your worst-case scenario: (remaining stock value)*m + (GIC total return)*g = p. Using my example numbers (predicting that even in a bad stock market outcome 75% of the value would remain after 5 years, and that the GIC would return 14.5%) that second equation becomes: 0.75m + 1.145g = p. Pull out some grade school arithmetic, and you find that you if you have $1000, you can risk investing $367 in the market while putting $633 in a GIC, and still be very likely to have at least $1000 at the end of your 5 years.

If the market performs well, at say that 6%/year I used above when examining the Meridian GIC, you’d walk away with $125 in profit from the equity investment, and $92 from the GIC, for a total return of 21.7% over the 5 years. Plus, you’d collect any dividends paid out by the companies in the index giving you a fairly significant boost to returns, get a slightly more tax-efficient mix of income, and you wouldn’t care how you got to the end point at the end of the 5 years. If the market doesn’t perform well, things can get a touch complicated: if the market ends up returning 3%/year, you’d get less than that from the market-linked GIC scheme, but nearly 3% from this plan (since the vanilla GIC-portion is also yielding about 3%). If the market goes down, the tax situation can be a little more complicated because instead of ending up with nothing, you end up with taxable interest income from the GIC plus a capital loss from the mutual fund.

The big issue is that though in all likelihood this scheme would give you every bit as much principal protection as a market-linked GIC, based on historical 5-year returns, it’s not actually a guarantee. If a new stock market crash hits that’s off the charts (like the 30’s — an investor in 1929 had a 5-year return of -75%), then this approach will fail. I don’t think it’s really worth worrying about events that are even worse than the 2008/2009 credit-crisis crash (which is where I got my worst-case 5-year -25% from — and even then, your timing had to be unlucky to the month to be down that much).

To get an actual guarantee with a scheme like this you can instead invest more in a GIC and use options to get that bit of market exposure. Preet and Michael James described that some time ago. The issue there is that you may notice they say things like “for a $100,000 investment…” because the options route just isn’t feasible for someone with a smaller amount of money to invest (like ~$1000 for a market-linked GIC).

In the end, removing risk or providing a guarantee ends up being costly almost no matter how you construct it (though the DIY-option allows you to collect more of the upside from the market). With a lot of ways to get less than the interest from a regular 5-year GIC, these market-linked products are usually a bad deal if you do need absolute protection.