Blessed by the Potato

“Just” can be a dirty little word. Sandi Martin has done that rant a few times, most recently on Twitter, and Chris at Rags to Reasonable incorporated it into his love letter to financial planning.

To put it simply, not everyone has the background and expertise for all problems to be easy, or for short-hand to make sense. “Just open a brokerage account and buy 3-4 ETFs that give you global diversification” is good advice, in that it is something someone could act on and would be in their best interest. But unless they already have a brokerage account and experience buying stocks or funds and the associated skills and knowledge, the “just” is deceptive as to how hard that is to do the first time. Now to toot my own horn, that’s exactly why I wrote The Value of Simple the way I did, because so many other guides take for granted that you already buy and sell stocks or mutual funds and they just have to convince you to shift your focus to a slightly different set of things you already know how to buy. But making the implementation seem like it should be oh-so-simple can make people feel bad for asking how they’re supposed to go about it.

But it’s hard to see that when it’s something you know and know well. So let me give you an example from science: just take a Fourier transform, and solve in frequency domain (or in imaging, k-space). This is rather simple, rather helpful advice that can solve a number of life’s problems (or at least, physics problems). But this advice is probably completely unusable unless you’re about three or four years deep into an undergraduate physics or engineering education. Indeed, it may not even make sense without some background knowledge in the field (are those words?).

For I would wager the majority of Canadians out there, acting on “just buy a few ETFs” is just as difficult to implement as “just take a Fourier transform” without doing some further research. (Fortunately, that further research in the first case will not involve several years of undergraduate math and physics, and can be done with a single book, pulling up a few dozen blog posts, hiring some coaching/educational help, or taking a course or two).

I was one of the first to sign up for an Air Miles card when they were offered at my local Dominion over 20 years ago. All I had to do was carry around a little piece of plastic and shop like I normally did (with maybe a few extra rounds of stocking up when bonus offers came around) and I’d get free movie tickets? Sweet deal.

And of course, over the years the points got devalued, and the bonus offers weren’t as good so they didn’t accumulate as fast. Then the deathknell: air miles cash points. I should have read the tea leaves and switched over right away, but I didn’t, because for a short time movie passes were still an option. Quite rapidly over the last two years, air miles have stripped away virtually all of the things you could use your points on. And they don’t allow you to convert your stranded dream points to cash points, so they’ve effectively become worthless.

There are some news stories out this week making a splash about how air miles points will start expiring soon if they’re old, but really, it’s already happened. If you have a big stockpile of “dream” points, go ahead and see what you can get, but it will be a frustrating experience on many levels. Not only because all the stuff you may have got or been saving up for before (gift cards, movie passes, zoo passes, electronics, magazine subscriptions) is gone, but also because of how slow the air miles site is. Plus it’s all cluttered up with stuff to buy with cash rather than redeem your miles for, which is highly frustrating. I don’t know if that’s just a bait-n-switch (I clearly clicked on the section for redeeming my points, air miles, so why are you pitching me on ways to spend cash and get more stupid points?), or if it’s to have something in those categories because otherwise the possible redemptions are really sad looking, or if they just don’t even know what they’re doing over there any more.

How sad? Under house & home there are zero items you can redeem your points for unless you are a Gold member or want to use one of their terrible, scammy “cash + points” deals. Under electronics there is one item. Kitchen and dining has two, one of which is a hideous woodgrain grain mill, something I know is at the top of everyone’s kitchen wishlist </sarc>. Personal care & lifestyle has a few items left… but only two are under 2000 points and again, weird, underwhelming items no one would want.

So whether they officially take them away in the coming weeks or not is just semantics — if you weren’t paying attention (and I wasn’t), your air miles have already expired.

I think this devaluation of points and the effective elimination of the “dream” option was a huge mis-step for air miles. There’s no longer a reason to bank points, which means people don’t feel good about getting their statements and seeing ridiculous amounts on there. Instead they’ll save a few bucks here or there, $10 at a time, and the program will lose its ability to act as a loyalty/incentive/draw. Making points only usable for cash makes the value completely transparent, and that doesn’t work in their favour (the return is poor relative to other points plans).

The program is so bad now that it’s working in reverse: instead of a store offering air miles being a perk and a reason to shop there over competitors, a store offering air miles is just a sad reason to keep air miles alive. I don’t shop at Pharma Plus because they offer air miles — I haven’t cut up my air miles card because I still shop at Pharma Plus. When MoneySense offered me bonus air miles to renew my subscription (a subscription I got in the first place by redeeming miles which is no longer an option), I wanted to write in and ask if they could just stuff the air miles and give me a few bucks off instead. In part because they burned us, air miles are a bit of an annoyance, and in some cases I’d rather avoid stores that offer them.

And as a final note: don’t transfer your points to someone else. They “offer” the ability to transfer your points to another person, but it is a scam. They charge 15 cents per point to do it, when the points are only worth about 10 cents each in the first place! If you have points expiring, trying to combine with someone else will not work out for you unless you just need a few more points to reach some threshold for redemption (not that there’s much left to redeem for).

When talking about passive investing and diversifying across many asset classes, a common quip is that if you knew in advance which asset class would perform best, you’d just put your money there. Since you can’t, you diversify.

Well, in a recent issue of MoneySense, Norm Rothery delved into the “hot potato” that does exactly that (he also wrote about it in August of 2015). Using a momentum strategy, it goes all-in on whatever the hottest sector was over the previous 12 months. The extra return over a more vanilla, diversified approach is sweet — too much to ignore without some further thought.

Norm puts in a number of disclaimers at the end of the article, but before going ahead it’s worth thinking about those risks and more.

Firstly, I have to point out that going all-in on something (even something as diversified as a broad-market ETF) opens you up to blow-up risk. It didn’t happen in the recent past, but that’s not saying it couldn’t. That’s a fundamental risk of concentration — you could go all-in on the one asset class that goes down one year, then switch and catch the next loser.

It also looks to me like a strategy that’s possibly not very robust and vulnerable to execution risk. I don’t have data on returns with monthly resolution going back very far to test out how robust it may be, but it’s easy to get for the ETFs available to Canadian investors for the 2008 market crash and do a spot check. Norm mentions that the monthly rebalanced version of the hot potato only fell 10% in 2008 and recovered by 2009. Going into 2008 the hot potato had you do a few little dances between XIC and XBB. In August of 2008 it would have had you buy XIC, just to eat a 12.5% loss, and switch back to XBB the next month. If you went on vacation and missed that switch by two months, you were down 33%; if you missed by five months you were down 40%.

Momentum is a weird thing in the markets: it’s there, it looks to be exploitable, but it doesn’t have a “mechanistic” basis: controlling costs does, as does diversification — you can predict that those “should” work in the long term. But for momentum, even if there is some psychology or whatever to the momentum effect in general that makes it a real effect that may possibly form the basis of a successful strategy, what is it about trailing 12-month returns and monthly rebalancing that worked so very well for the historical check of the hot potato? Could that shift in the future to 6 or 24-month returns being the momentum sweet spot, and leaving someone using 12-month/rebalanced monthly strategies in the lurch? Are the features of momentum stable and exploitable enough to bet it all (or even compromise with dynamic sector weightings) on something like the hot potato? Or is this an accident of over-fitting historical data? Those question marks may make it a difficult strategy to stick to when a period of underperformance eventually comes along.

Larry Swedroe has an article looking at momentum in general that’s worth reading, in particular the line about how the strategy becomes less valuable as correlations between global markets increase.

I don’t know, and haven’t invested a tonne of time doing research here — hopefully Norm or someone else has a more data-driven answer. For now, I’m not brave enough to try it with actual dollars in the uncertain future — I’ll stay diversified and lazy.

There’s a neat experiment in behavioural economics where people see a scenario that is more specific (and is actually less likely to happen) as being more likely to occur than a general case because it resonates better. The classic example (via Wikipedia):

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.
Which is more probable?
Linda is a bank teller.
Linda is a bank teller and is active in the feminist movement.

The first is more likely — it’s less restrictive and completely contains the second. Yet many people will choose the second option because it resonates better, or because it’s easier to visualize a representative example. Similarly people may pay more for insurance against a specific hazard they can visualize well (like dying in a terrorist attack) than more general insurance that also covers that specific case (dying from any cause).

So the watercooler gossip turned to the housing bubble today. I don’t usually say much when the conversation turns to real estate, as bearish views are not usually pontificated in polite company. I was especially restrained today, shocked into silence by the sudden agreement happening that all was not sunshine and roses — that in fact houses and condos were too expensive in the city.

For years I’ve been trying to say that the wise course is to rent because price-to-rent is out of kilter — but this has been a hard message to sell. Why is it cheaper to rent? Because of many factors, but the math says that’s what’s most likely the best course. When will it correct? Who knows but likely not tomorrow, a few years or so. You know nothing Jon Snow — I have an open house to hit. Those theoretical, general answers clearly didn’t cut it.

It seems that the meme unleashed by the Panama papers and stories of money laundering is one that resonates really well. Foreigners driving the cost beyond all reasonable affordability is a more salient reason for renting being a good move for now than a simple it’s too expensive for many possible reasons.

“We’re just Panama north!”
“There are so many empty condos in my building.”
“They’re not even playing the same game we are.”

I find it weird that a bubble described as high (and rapidly increasing) prices compared to moderate (and flat) rents was completely invisible — not even admitted as a low-probability possibility — but high prices plus alleged money laundering is immediately apparent as being an almost certain bubble, but that’s the conjunction fallacy for you.

There tend to be two camps on how to respond once people buy in to the predicate that hot money is behind prices increasing¹:

1. Greater fool/FOMO thinking, where the response is to buy now at any price while you still can, because you can sell later for even more because there’s no limit to the foreign money as long as we are cheaper than Tokyo/London/New York.
2. Let the Grizzly have the fish thinking, where you stand clear of the explosive situation and see what shakes out — getting into a bidding war with a billionaire who’d be happy paying a 6-figure grease fee just to sneak money out is not a game you should be playing.

The conversation moved to the ironic feedback loop: foreign buyers buy for several reasons, but for capital flight it’s important that they can liquidate if needed. Even though they’re “clearly” responsible for driving prices up, they’re not the only market participants. Canadian buyers keep paying any price and are not suspicious of recent flips, reinforcing the idea that a GTA/GVA property can be liquidated at will.

Finally, another feature for the rental camp: price-to-rent is explained because hypothesized foreign capital is clearly not competing for rental space. They are not buying to have a pied-a-terre in Toronto or Vancouver — the prices paid are not for the usage of the property, as many are reportedly left empty.

Interesting changes in the small slice of the gestalt I can overhear.

1. Again for clarity: I don’t think hot money is the sole or even main reason, I’m more in the low rates/animal spirits/general cause camp. Prices are unsustainably high for many interacting reasons, and almost no matter what the underlying reason is the end conclusion is the same — managing your risk exposure and renting your shelter.

There are now a few updates for the Value of Simple on the errata page that have accumulated over the last year and a half since release. Now with some screenshots that need to be changed for the new Questrade system, I’ve decided to take those and roll them in to the e-book version, along with a few other very minor tweaks, which should be going live across all platforms as you read this. If you’ve already purchased the book you may be able to download a new version from your vendor of choice, and if not that’s ok — all the information you need is there in the errata. If you purchased directly from me just let me know and I’ll re-activate your download link within the store software and you can get the new version (but again, this is minor stuff — no need to re-read it if you’ve already put it away).

Updating the print edition is a bit trickier, in part because I really have to increase the price at the same time — the crash in the Canadian dollar does not play well with printing costs in USD (at this point the book is just a hair over break-even). Also because versioning is a bit more rigid in print: a second edition gets a new ISBN to track it, though there is some grey area around what constitutes a second edition. Minor corrections can be made without a new ISBN as part of a second printing without updating all that metadata. I really don’t want to release a 2nd edition over a few minor corrections, but I don’t want to let the e-book version get ahead of the print (even if everyone up until today had to get these changes through the errata page). Finally, updating print is trickier because (even with print-on-demand technology) there’s inventory. So even if I uploaded new files tonight, it may take a while for a new print run to hit the shelves. For now I have not pushed through an update to the print edition, but likely will soon (I just need more free time to make it happen).

So that is to say: if you want the print version, grab it while you can still get it for under $17 (based on the change in the exchange rate, the CAD price on a new print run will need to go up to near $20). As always, the e-book is natively priced in CAD.