Blessed by the Potato

In my last post on the CMHC, I said: “Unfortunately it’s one of those things where what’s good for one person is bad when it happens to everyone in society at once.”

I tried to find out what that thing is called. Surely there’s an economic theory of some sort that describes this phenomenon — if not, I will gladly accept a Nobel prize in economics for outlining it here. :)

It’s a concept that’s similar to, but not quite the same as, the tragedy of the commons. In the tragedy of the commons, you have some finite public resource, and even though everyone would be better off if consumption was limited, each individual gains when they take a bit more, whereas the costs are spread out amongst everyone, so overconsumption results unless there is some organization between the players to prevent it.

Here there is no finite resource: the government keeps increasing the CMHC’s budget so everyone can get cheap money. For one person, access to an affordable homes program like that lets them get a house with a lower downpayment (and thanks to the insurance, lower interest cost than would be expected with a low downpayment), so it does make housing more affordable. Of course, as I outlined before, when everyone has the same access to the program, asset prices skyrocket and a bubble forms.

Ignoring the confound of government involvement, the same thing can happen with other behaviours. For example, it’s a good thing for people to save their money for a rainy day. When the economy starts going into upheaval, it makes sense for an individual to start saving more as their perception of the risks of say losing their job increases. However, if everyone suddenly reduced their spending at the same time, that would be bad and would cause or worsen a recession.

So, aside from “congestion” (which doesn’t seem to fit well with every case) what’s the term that describes this negative unintended result of following the herd, where each person is acting individually in their best interest?

As a new year rolls around, I’ve noticed a lot of questions out there about what to do about contributions to the TFSA: how much room there is, whether to contribute, what to hold, etc. I’ll try to break it down, and don’t mind going into more detail in the comments if anyone has detailed questions, but to put it very simply:

You have $5000 of new contribution room for 2010. Contribute $5000. Invest in something (TD e-series mutual funds if you don’t need the money for a decade or so, or a high interest savings account if you might need the money soon). If you procrastinated all the way since last January, then you also have your $5000 of room from 2009, for a total of $10,000 of contribution room that you should use.

That’s it, see you next year.

Seriously, it’s not that complicated — it’s certainly far simpler than the RRSPs people have been dealing with for years. There’s no need to check your notice of assessment for your contribution room, no need to figure out tax brackets and deductions, and no deadline. Everyone out there, if you have $5000 to invest, should be sheltering it in a TFSA.

There is some sidebar discussion about whether a TFSA or an RRSP is a better way to save for the long term if you only have enough money to fill one or the other. My answer, at the risk of over-simplifying, is simple: go with the TFSA. Why? Because if you screw up and need the money back, you can withdraw penalty-free* and get the contribution room back in under a year. People all too often get paralysed when faced with too many complicated decisions, so don’t sell yourself short. If you’re going to procrastinate until the end of the year over which vehicle is better for you and end up in neither, then just trust me and pick the TFSA. Perfect is the enemy of good enough.

*(though your bank may charge a transaction fee, sometimes hefty)

Note that TD does not give me a kick-back for all the referrals I throw their way but I wouldn’t mind if they did <nudge , nudge>. While it’s a bit more paperwork to set up, a self-directed TD Waterhouse brokerage account may be easier than an e-series mutual fund account since the reps actually know what it is, and it can be done in person. Both can hold the low-cost e-series index funds.

The other bloggers got to play a stock-picking game for 2010, so I suppose I will too! Note that this is a game with a set end-date so looking for value is not necessarily the way to go — often a shoot-the-moon approach works well in these kind of games. So bear that in mind, and don’t consider any of these as recommendations for you to actually buy!

First off, I’ve got to agree with Mike from Four Pillars and say that I’m bearish on gold. As suggested in the comments, I’ll short the bull ETF rather than long the bear one. As an aside, I very nearly bought some HBD in real life at the beginning of December, I was fairly certain that gold’s shine had reached the end. Unfortunately these commodity ETFs are highly dangerous financial instruments — even if you’re right in the end, you can be destroyed by volatility in the meantime. After giving it a long, hard think through, I doubt I’ll ever be sure enough to buy in for real.

Pick 1: Short TSE:HBU. ($22.22)

Next, I’ve read through analysis of the US mortgage insurers, Fannie and Freddie. I have a real hard time deciphering their books. More importantly, I can’t get my head around the political risk — is the government purposefully trying to drive these two entities into the ground? The terms of F&F’s bailout were much stricter than any of the banks, and in the last reporting period, Fannie had buttloads of cash on hand, which is costing them 10% to hold on to! I can’t fathom why the government is making them carry that load, rather than making the bailout a demand loan, other than to kill them. However, if the US government isn’t going to kill them off entirely, then there looks to be a good chance that the (now junior) preferred shares will have some value. I don’t know if that value will be realized by year-end, but since they’re trading for pennies on the dollar, I’ll make that my next pick.

Pick 2: Long NYSE:FRE.W (I’m not sure which series exactly to pick — I figure depth below par value is probably more meaningful than the coupon that’s not being paid. The W closed 2009 at $0.95 US)

IMRIS is a small Canadian biotech company that makes an MRI system hung from rails so it can be moved in and out during surgery (vs moving the patient in and out of the fixed MRI). They have a pretty decent order backlog as it is, and a partnership with Siemens. In addition, they’ve had some new applications recently approved. I think now that the economy is recovering (which affects hospitals and universities too), that their business will pick up and they’ll resume the parabolic growth curve for a few years, although they’re still at the money-losing stage of their development. Also, hopefully the market’s attention will return to small, speculative plays like this.

Pick 3: Long TSE:IM ($5.30)

Finally, I still like the energy sector. I’m tempted to pick XEG (an ETF of Canadian oil companies, not a commodity ETF), but I own it in real life; while I like it as an investment, I don’t think it’s going to shoot the lights out in a competition like this. So instead I’ll pick A123, a maker of batteries for electric cars, on the theory that a return to high gas prices will goose the hybrid/nascent PHEV market. Personally, I think A123 is already overhyped and I probably wouldn’t invest in it in real life at this point. Lithium ion batteries have a lot of potential, but NiMH batteries are almost as good (ok, heavier and bulkier, but cheaper too), and have decades of demonstrated real-world reliability in EVs and hybrids. For the next year or two, A123 may do well (especially if GM ever actually builds the Volt and it doesn’t suck), but I have to wonder what will happen when the Cobasys patent runs out in 2014 — will LIon become an expensive niche?

Pick 4: Long NASDAQ:AONE ($22.44 US)

I’ve been taking advantage of a little bit of time off to catch up on some gaming here. I have had surprisingly little time to game over the last year or two, so I’ve got a fair number of games on the pile already, in addition to all the games I don’t own that I haven’t played.

For the Wii, I got Metroid Prime 3: Corruption and Zelda: Twilight Princess shortly after getting the console itself. Although I’ve picked up (and finished) new games since then, like Force Unleashed and Mario Galaxy, I never finished those two, which I had such high hopes for. So I put them back in to see if I could finish them off.

Unfortunately, I’m just stuck at a point in both games where I’m frustrated and sick of them, and I have to say it’s due to poor game design in both. Zelda is the lesser of the two evils in terms of brick wall of difficulty: I was just getting frustrated at one point (actually, many points) where you’re running around and these bat-like things would come down from the sky to attack you. But, you couldn’t look up to take them out until the scary music was playing and they were almost on you. It was annoying, and I just wasn’t finding the plot or the rest of the gameplay for this Wii entry to Zelda to be engaging enough to put up with it, so I shelved the game. Metroid I found (to my surprise, since I was expecting to love Zelda) was a pretty fun game, one of my favourite “serious” games for the Wii (Sports and Play and Fit are fun toys that are characteristic of the Wii, but not “serious” games) and I got used to having to point the Wiimote at the screen to play. However, I got to one point where what was a “casual” FPS suddenly turned into an impossible, frustrating challenge. It was the second AA gun on Bryyo — you can Google it to see that I’m not the only one who thought that spot was ridiculous. You have to flip these 4 levers in the game, and enemies will spawn to attack you and flip the levers back. However, they respawn in pairs virtually instantly after you defeat the last pair. And, they’ll prioritize flipping the levers you just flipped back over staying in your vicinity. It was just too annoying to try to shoot these guys down from across the area to keep them from undoing the work I’d done to continue with the game. I just spent another hour or so trying to pass this stage and I just can’t do it. Really poor level design, IMHO. Even a 5-10 second delay in the respawn would give you enough time to flip a lever while they were dead if you were quick, then it would still be challenging (but doable) to kill the next pair before they undid your work.

Speaking of respawn, it’s one element of Borderlands that I am not digging. It’s a single player (or small group) game. There really isn’t a call for respawn, and certainly not the amount of respawn that we’re seeing. I’m loving the fact that it’s a co-op “post apocalyptic” RPG/shooter. I’m thrilled that Wayfare likes it too so we have a game to play together, but the ~10 minute respawn is really ruining it for me. Much of the time the game feels like playing a MMO without all the other people as there’s been a fair bit of just grinding going on to clear an area to finish a quest, and then clearing it again to get back out.

Ghostbusters is cute and light-hearted, and features the voicework of the original cast. However, I’ve been getting annoyed at its game design as well, since there are a lot of points where the ghosts you’re hunting/zapping disappear. I know, that’s what ghosts do, but what’s the point of wrangling them with the proton pack if they’re just scripted to run into the wall and disappear into another part of the building on you? The game just feels too much like they couldn’t decide whether to make a Ghostbusters 3 movie or a game where the player actually has control. When the ghosts are behaving themselves, it’s not particularly challenging.

I finally managed to finish Batman: Arkham Asylum, which was a good bit of fun. Just as I was getting fed up with the trippy Scarecrow sequences, Batman finally did him in, which worked well. I’ve also been trying to work my way through some of the challenges, which is a good way to extend some of the better points of the gameplay (the sneaky assaults on armed thugs, and the giant slow-motion melees). I think that speaks volumes as to the quality of the experience.

Netbug’s Xbox Live account expired this month. Mine will expire in February. I have no plans to renew it — I’ve had trouble enough finding time on my own to game, let alone coordinating a multiplayer session over Live. The last time I actually played online was in October when Borderlands first came out; before that, April-ish. I also can’t understand how microsoft can get away with charging what it does for access to the multiplayer gaming service when pretty much all competitors (most PC games, as well as PS3 and Wii) are free.

I suppose they did sucker me into paying $60 for a one-year membership, but now I clearly see that the value proposition isn’t there…

Anyway, I hope everyone has a happy new year, and that StarCraft 2 makes the year an awesome one!