Blessed by the Potato

Well, time to fess up to another investing mistake: I’m not Ben Graham. The story behind the mistake is that I invested in a small biotech company shortly after it’s IPO (this is not the part where I thought I might be Ben Graham). As a scientist I thought that I understood their tech and that it looked good and that they could make it big, and essentially gambled a small amount of money on the stock.

Things went poorly, as they so often do, and the share price tanked. It tanked so far in fact that the company was trading at about one-tenth its remaining cash on hand. Since it was still fresh from the IPO it still had cash on hand and wasn’t neck-deep in debt or anything, so I figured that rather than bail on my initial position (which at that point was worth less than the commission it would have taken to sell out), I bought some more. This is where I did mistake myself for Ben Graham. I figured that since it was at such a discount to the cash it just made sense to buy it up while it was still in distress from the poor results. It was a one-trick pony, and that pony had just been brutally killed, so I saw no way that they could continue as a going concern. I figured that they were either going to raise more cash and take another go of it (which was contra-indicated by the wording of the announcement of the failed clinical trial), or close up shop and distribute the remaining cash back to the investors, with the second option being far more likely.

They just recently announced that they managed to sell their patents, for an amount that alone would have made the company worth five times what it was trading for at the bottom, but in the deal they were only going to distribute a tiny, tiny fraction of that as cash to the investors. The rest of the cash would sit in the company to “pursue other opportunities”. There’s been no prospectus or guidance yet as to what form those opportunities would take, but with no patents and a small (but not insignificant) mountain of cash I don’t see how a biotech company can really pursue any opportunities. I was just not seeing how this deal would return value to me, so I bailed today when the stock went up a bit. I ended up doubling the small amount I bought after the bad announcement, but it was a ~60% loss over all because of that larger first bet, and still only about 25% of the book value. I might have sold too early, and when the details of the arrangement come out along with the proxy forms then maybe I would have seen the light, but I was also eager to just get out and not see this 60% loss in my portfolio every day.

I was quite able to look at the (very simple) balance sheet and do the math as to how undervalued the shares were, but what I failed to realize is that I don’t have the power to actually get the value out of the corporate shell — I couldn’t buy up a majority of the shares and bring about a liquidation, or charm the board of directors. Even if I could have identified another 50 such companies to hope value returned in enough of them for it to be positive overall, I don’t have the resources to take a position in all of them…

As a small-time investor I’m just along for the ride.

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First off, a series of disclaimers.

1. I’m sick at the moment with a nasty hacking chest cold and I just chipped another tooth, so I’ll be looking at another stupid thousand-dollar crown in the near future. I didn’t even bite down on a tic-tac or anything like that: it was just that an old filling was starting to come apart, and I lost part of the tooth as the decay got in and there was only a small bit of natural, healthy enamel left holding the back quarter on. So it would be fair to say that I’m a little grouchy at the moment, so take anything you find offensive in the rant with that in mind.

2. Wayfare has accused me of wanting a housing crash and moreover of wanting reasons to delay buying a home for a few more years and having a case of confirmation bias where I seek out evidence and articles that support a crash coming to Canada. Likewise, I accuse her of the same thing, of wanting to fulfil the dream of homeownership right now so badly that she ignores the doom-and-gloomers and focuses on anything that indicates that now is the best time to buy (or better yet, that January 2010 will be). I hope that the downturn will be quick, like ripping off a bandaid, and that we’ll be back to decent values by then, but I fear it’ll take a few years, like it has in the States. Of course, our respective confirmation biases don’t really help the discussion one way or the other, but it’s important to acknowledge that I do look at the data with an eye to how that housing downturn is coming along.

3. I’ve ranted a few times before about the real estate market, so some of this may seem like a repeat. Hey, what can I say, I just don’t have that much new material, and it’s not that fast-moving a market.

On to the rant, which is really a series of interconnected mini-rants.

Rant #1: the Rent vs Buy rant. I talked a bit about the rent vs. buy calculations before, and discussed the merits of the two ways of finding shelter. In a comment at Bad Money Advice this was put even more plainly: you can rent your dwelling from your landlord, or rent the money for your dwelling from the bank. Anyhow, after talking with a few people (homeowners or hopeful homeowners) about how renting is not blindly throwing your money away some of them came back somewhat vehemently with two points: that you need to own so you can have control over the property, and the forced savings. For the latter a real-world example was used of several people (no one I know closely) who are unable to save unless forced to by a mortgage. Even though they knew owning would cost more than renting (thus depriving them of money they so love to spend) they would rather own because then they build equity. Now this is unfortunately the fault of the CMHC and zero-down mortgages, but someone who can’t save doesn’t need a house, they need help. Whether it’s a shrink or an inappropriately starchy friend with a calculator and some graphing paper, a mortgage is not the answer. For the near term, for the good times they will build equity by having to pay down that mortgage, but that isn’t enough. And, it puts them at risk: if they lose their job and can’t pay the mortgage and have no other savings they could get foreclosed on, lose their house, and their life savings along with it! Whereas someone with actual savings would just dip into that to pay the rent…

The other reason for needing to buy, to personalize your space, is way overstated. People don’t seem to appreciate both how much freedom you do have as a tenant and how little most people actually renovate. Heck, for the first three years after I moved out I had white, barren walls because I didn’t dare paint or put any holes in them. But you can paint however you want, the only stipulation in your lease agreement is usually that you have to paint back to white (or whatever it was) when you leave. Hell, look at my bedroom: the last tenant painted bugs on the walls for her daughter! (they were awesome, so we chose to keep them, which also let us take over the place a week earlier since they didn’t need to repaint, which made moving much easier) Likewise, you can put holes in the walls to hang pictures or install shelves, but you can’t get too ridiculous (I don’t have a legal definition on “ridiculous” though). Moreover, nearly anything is negotiable with your landlord: want a new fridge or stove? Heck, want a natural gas fireplace in the living room? If you’re going to stay there a while and were willing to pay for it anyway, why not discuss it with the landlord? Now of course it’s harder to bring yourself to spring for a full kitchen remodel, or to convince the landlord to bang out a wall to open things up, but those sorts of renovations are much rarer than people seem to feel they might be when they need to have that control — and vice-versa, people looking at condos will find they have much less control over radical renovations than they might think. Sure, at some point in your life you’ll probably want your dream home kitted out just the way you want, but you don’t necessarily need to get into that with the first place you move into after your parents’ basement.

Rant #2: the Silly Real Estate Agents rant. It should be said that there are a number of real estate agents that just need to be taken out behind the shed and put down. It’s a field with very little repeat business, low barriers to entry, oh, and it’s commission-based. So there’s a lot of incentive for agents to be greasy sharks, and to be constitutionally unable to see past their own efforts to rationalize that now is always the best time to buy. They pass off their failures to properly price the market as victories, but the thing that really cheeses my nachos is that they charge tens of thousands of dollars for their services, the most important of which is access to their exclusive listing system, and they can’t even take a minute to proof-read, or spend the $5 to have a high-school student do it for them. That’s leaving alone the issue of not taking advantage of the ability to post pictures to MLS.

Of course, not all agents are all bad, but they can have a silly side. One has a blog that I just found and read a few posts on. He’s a decent writer, and for the most part has his head on his shoulders, but still says a few silly things about property values. In one post he talks about the difficulties of assuming a tenant can pose to selling a property. The points he makes are valid, but he ignores the elephant in the room: that the condo in question is flaberghastingly over-valued (and what rosy realtor(TM) glasses he must be wearing to call it “a very attractive price”). While it can be a pain to deal with a tenant if you just want to just live somewhere, having one who wants to stay can make the life of someone looking for an investment property much easier. In this case a potential investor can’t fool themselves about what market rent might be, it’s right there in the listing that this unit screams overpriced. The asking price of $575k is 230X the monthly rent of $2.5k. At a generous 5% interest rate/opportunity cost on the purchase, the cash flow is already down to about $100/mo, easily coming to a loss with just the condo fee, let alone maintenance or vacancy allowances. Yet just two weeks later this guy talks about a four-plex being overvalued and having poor cap-rates, and at the current rents it is rough, at 270 times rent — but if he’s right and the rent could be $1600/mo for each of the four units, then it’s just 203X, a better buy than the very attractively priced condo he talked about two weeks previously! (and it could be better yet since they added a 5th unit to the basement!) One more example with a price-to-rent of 260X, yet the conclusion is “I’m shocked that this house is available at a ‘paltry’ $1,299,000. But I’m not so shocked that nobody is banging down the door to rent it for $5,000 a month…” Yet again he doesn’t see the buy vs rent logic: if the interest cost alone is closing in on $5000 per month, why wouldn’t someone who wants to live there consider renting it at that price? The only reason I can think of is conspicuous consumption/pride — people don’t rent million-dollar mansions.

There are other factors to consider, of course, not the least of which being the cracked foundation mentioned. But one distinction is that one was a luxury condo, and the other was just a regular brick four-plex. For some reason condos make people in this city stupid. You’d be hardpressed to convince a group of homeowners to band together to pay monthly for services they didn’t really need, like having a surly security guard patrol the neighbourhood at night. But, call him a concierge and have him nap behind a desk and you’ll get condo owners springing for it in their monthly condo fees every time.

To give credit where credit is due, I think anyone thinking of buying a pre-construction condo (if any still exist, as many pre-construction projects have been cancelled) should read his post on why that ship has sailed.

Rant #3: A Conversation With My Dad: In the mid-80’s, my dad left a small job at a major accounting firm to start his own company. His financial consulting business covered a lot of bases, but developed a focus on assisting clients through bankruptcy (or skating around it). In the late 80’s and early 90’s this part of his business took off, and one thing he had to do a lot of was evaluate and dispose of properties. I knew he had been all over Ontario and parts of Alberta looking at houses and to a lesser extent, office buildings, helping to arrange for hundreds to be sold, but I was just a kid at the time and there wasn’t really much call to talk about it since. With the downturn in real estate coming though, it’s looking like old times to him, with the first sign being the freeze in sales, especially at the higher end (and around their house there are dozens of listings that are now closing in on over a year for sale; others that spent months on the markets and were delisted, but still don’t have drapes in the windows).

We took a walk around the neighbourhood one day with the dog pointing out houses for sale, and ones that obviously weren’t lived in. The beginnings of the end could be seen in some, for example one house a builder obviously ran out of money and has been sitting with the inside unfinished. For sale, as-is 1.2M, or 1.46M if finished, and over a year on the market (in another realtor blooper, the picture with the for-sale sign and snow on the ground has a date of February 2008).

Oh, that listing I linked to above with the spelling errors? It’s actually been relisted with a new price and a new host of spelling mistakes (and oops, he also forgot to take the old listing down). $600k to $520k, a 13% decrease. Still more than I’d pay for that house, but getting there. An improvement over the 2% drop for the other pair of houses that have have been sitting for over a year just down the street from that one, and it might actually move.

Back in the very beginning of the 90’s he was faced with a client’s home to dispose of. It was in a small town north of Toronto, and there were a dozen nearly-identical houses all sitting for about the same price — their 1988 price. And some of them had been on the market for over two years without entertaining an offer. But since the last completed sale in that small, illiquid market might have been in 1988, that was the only set of comparables the agents had to work from. It was clear at that point that the only way to get things to move was to “lead the market lower”. So they put the house up at 15% less than all the other homes were at, and they got a buyer. That got the whole market for that town moving again — generally lower and lower each sale until it bottomed out, but at least people who needed to sell could.

This time around it is a bit different. Things are still fairly seized up, and sellers are hoping that the nice weather of spring will make it all better and they can get what their house is “worth”, but the buyers aren’t buying. Someone will probably start leading the market lower before the volume picks up again, but the low interest rates are confounding that, making things appear affordable because the monthly payments are lower.*

We also had a long, painful discussion about what to do about the family cottage in northern Ontario. Last October the stock market was crashing, and it was looking like we would have to sell the cottage; Wayfare and I were up there on our honeymoon, and we very nearly had to hang the for sale shingle on our way out. When things stabilized (however temporarily) and my dad’s heart stopped racing, we were thrilled that, while things were not as good as they were last year, they were not so dire that we would be forced to give up things like the cottage just to keep my parents in retirement. However, over the winter we had some really nasty weather, with snow squalls pretty much every week. My parents didn’t make it up there even once a month, and with my dad’s poor health it’s not like they snowmobile or go boating anymore anyway.

So the issue went from having to sell the cottage to one of maybe we should. On the one hand the cottage costs a fair bit every month to keep up, money that’s just wasted if my parents are only going up once or twice a month now (they used to spend more time at the cottage than in the city, when they did snowmobile and swim and paint the deck or cut down a tree just for the sheer hell of it). They could spend a few months in South Carolina every winter just on the money saved in property tax and energy, let alone the opportunity cost of the equity in it. While they used to sometimes go up just for a few hours and drive back the same night, the cost of gas is not negligible anymore, and not getting cheaper. Plus as painful as it would be to sell now, as frozen as the market is, it’s not likely going to get better in my estimation. We could be the ones to lead the market in that area down, since it’s still frozen for now, and get a decent price (even if it is ~20% less than what we could have got last year). I figure if they’re not enjoying it like they used to, my parents might as well sell it. Being down in London I only make it up there once a year, and my brother only goes a few times a year himself, despite still living in Toronto. However, the other issue is the long-term destiny of the cottage. Despite the expenses, might it be worthwhile to hold onto through the next few years of limited use so it’s still in the family when us kids have the opportunity to go more, when my sister and I finish school and move back to the city?

* – I drafted this in London before leaving for my dentist appointment, but after arriving in Toronto I see that the market, bewilderingly, isn’t completely frozen. There are a half dozen “sold” signs up, and the place across the street from Wayfare’s parents, that had been up for so long the paint on the for sale sign was fading also finally sold (though we have no idea how much any of the properties sold for). Of course, in some cases I have to wonder if the agents weren’t just putting sold stickers up on houses that were merely delisted: one had Re/Max (I think) sign up for 6 months that now has “sold” plastered on it, and right beside it a new for sale sign from another brokerage has cropped up. Either someone is taking this house-flipping thing a little too seriously, or the representation changed after no action was had and a misleading sold sticker was put up (I kind of doubt CREA regulates the use of sold stickers). While I’m a big believer in the rent-vs-buy calculation and price-to-rent ratios for determining when things are overheated, which to me points to at least a 25% downturn needed in Toronto, perhaps 10-15% is all we’re going to get if that’s all the price reduction it took to get these properties moving again… I still feel it’s probably a “bear market rally” driven by low interest rates, nearly meaningless tax credits, and buyers that couldn’t out-wait the sellers… but I’m not as sure of it any more.

I’m sick at home with a lung infection (that sounds cooler than “hacking chest cold”). As we learned from the Tick, there’s only one way to wear down a cold, and that’s with many hours of daytime television. Of course, I’m not a big fan of what’s actually on TV during the day, but fortunately we’ve got all four seasons of How I Met Your Mother here on DVD (or for the current season, on the Xbox/Tversity).

How I Met Your Mother is a really, really funny show that’s nearing the end of its fourth season. I avoided it for a long time because the premise is terrible. Bob Sagat telling his kids the story of how he met their mother in dozens of 20-minute increments? Puh-lease. However, I finally tuned in last year after Wayfare caught a few episodes and fell in love. It’s a great show with some really funny characters (starring Allyson Hannigan and Neil Patrick Harris in particular). The writing is spot-on and very quotable (in fact, several quotes from the show have worked their way in to the charade pile at Wayfare’s place, as those unfortunate souls who had to act out “Quote – ‘We Thought of Traditional Native American Headdress Before We Thought of Hat'” or “I’m a robot sent from the future to win the marathon” knows all too well). The story-telling framework is often best ignored, and aside from the show’s intro they do leave it alone, except for when it truly does add to the comedy — in particular it’s a neat way to censor the swear words. “I’m too old for this sh– stuff.” Voiceover: “Yes kids, he said stuff.”

By now I’m sure everyone has heard about the Ontario government’s plans to harmonize the PST with the federal GST. I don’t particularly care for this move, for two very simple reasons. The first is that this is going to take away the provincial government’s ability to have incentives for specific areas through PST changes. For example, the Ontario government doesn’t charge tax on the bare necessities such as electricity, natural gas, diapers, or most food items. While most food and diapers will remain free of the new HST, it looks like home energy is going to be taxed, and the MERs of mutual funds might get hit too. An even better example would be the green transportation initiatives: the Ontario government rebates $2000 of the PST paid for a hybrid car (new or used) — will they still have that ability when it’s HST? At the same time, they also cancelled PST for bicycles last year, to encourage Ontarians to take up cycling — will they have that ability with a federally-managed HST?

The other reason is that Wayfare is currently a private contractor at her job, and so she has to remit GST to the government; this is basically a charge she eats out of her “salary”. We don’t know what’s going to happen when the HST comes around, but at the very least she’s going to have to renegotiate her contract with her employer/client.

Wayfare’s old Toshiba laptop is having some issues lately. It’s a “regular” 15.4″ laptop weighing in at roughly 6 pounds. While I take my 8-pound monster nearly everywhere, for her 6 pounds is too much and she often doesn’t bother to take it on the train with her. Combined with the other issues (such as an upcoming trip), she’s looking at getting a new netbook now, something under 3 lbs and 12″.

I have a computer under my desk running the Apache/SQL server behind this website. It’s 10 years old, a Pentium-III. Despite its age it has plenty of power to surf the net and do word processing (maybe not with Windows XP and Office 2009, but that’s beside the point). So when my brother spilled water on his laptop and fried it (for the second time), my purchasing advice for him was to just go to the store and get the one he liked the most. Any of them would have plenty of power for what he needed.

So likewise when Wayfare wanted to buy a netbook, my advice was to just try it out in store to make sure she liked the usability, they should all do what she wants (and in fact, they all seem to be running the same Intel Atom processor and chipset). She had done her own research and decided on an Acer Aspire One. It’s a cute little 10″ thing, comes in an attractive shiny case… and within seconds of trying it, she realized she hated it. Why? Because they made the moronic decision of changing the keyboard layout. There are of course always unique keyboard layouts on any laptop under 17″ because there just isn’t enough space for a standard full-sized keyboard, but usually the compromises are made at the periphery: half-sized function keys, weird insert-home-delete-page keys with dual or triple functions depending on concomitant key presses. The parts for touch-typing are often left alone. However, we found the weirdest thing (and I wish I took a picture): they put a half-sized backslash key where the enter key should be, and then made a tall enter key that was further from the home row.

They sacrificed the usability of the enter key in favour of backslash.

Wayfare walked into Best Buy, credit card in hand, ready to buy that Acer tonight, and didn’t because she knew that changing how she typed (on a computer that would only be used for web surfing and word processing) would cause her more frustration than the computer was worth. Bizzarely enough, that same keyboard layout was used on a few “regular” (14-15″) laptops from Acer, Gateway, and HP. Thankfully, HP’s 10-inch laptop didn’t succumb to the same insanity. I’ve complained before about how prominently the backslash key is featured on keyboards, and it makes even less sense in its new position.

She’s out in the living room right now researching alternatives (the Dell Inspiron Minis and the HP 10″s are still in the running) and muttering “stupid Acer” to herself all the while. So obviously that keyboard layout lost them a customer, and I can’t fathom any that it would bring in, unless *nix uses a lot more backslashes than I thought (I really thought they were forward slashes, which is how we have forward slashes in URLs). Even then, ewww. Backslash should be above enter, and that’s all there is to it.

Right now the HP 1035 10″ netbook and the Dell Inspiron Mini 12″ are neck-and-neck in the running. My favourite of the two is the Dell: it’s a more comfortable size, you get a bigger, higher-resolution screen (12″ you could use for quite a long time for work, whereas I wouldn’t want to use a 10″ screen for much more than I’d use an iPhone for) and a better keyboard/trackpad combo (thanks to the marginally larger size) for only a small increase in weight (about 2.5 vs 2.7 lbs). Because of the larger screen the Dell is reported to have a bit less battery life (about 2.9 hrs vs 2.5 hrs), but has an option to go over 3 pounds (up to about 3.1 lbs — this figure is harder to come by exactly) for a 6-cell battery (5-6 hrs of battery life, $50 more). It just seemed to have to make fewer sacrifices: a half a pound for more usability. If she’s carrying it in her backpack then the extra width shouldn’t matter, and it’s actually a bit thinner than the HP (though the smaller HP or Acer might just fit in her purse, whereas the Dell looked a little too big for that). The Dell has 3 USB ports to the HP’s 2, and the Dell also has a standard VGA-out port in the event that she wants to connect an external monitor or run a presentation; the HP has a proprietary port that requires a dongle.

Update: Ah, this weird vertical enter key is apparently a european feature, allowing more space for accented characters (rather than the useless backslash it is here). Still, eewww. Why not bring the enter key closer to the home row, make it a single row, and deal with the accents somewhere else?