Blessed by the Potato

I keep thinking that there are a lot of people who really want or need a course on personal finance and investing, and there aren’t many resources for it. There are books of course, but some people just aren’t book learners, or prefer a course for one reason or another. There are some good continuing education courses offered through UofT and a few other universities across the country, but for most people who don’t live close to campus they’re out of luck. So I’ve thought about putting together a full online course on the matter, and while few people think it’s needed, when I actually asked who would sign up for such a beast the response was under-whelming.

A full course would be something like 12-16 hours of lectures and discussions, which would take hundreds of hours to prepare, practice, and coordinate. It’s madness to put in that kind of work before knowing for sure that there’s actually an audience at the other end. So it’s a bad idea. No one wants it, at least not online.

And yet it’s an idea that won’t die. I’ve kept thinking about how to put it together, how to change and add to the content of the book for a course, and moreover talking myself into thinking that it is needed and maybe the reason for the previous response is that people just don’t want to raise their hands over vague hypothetical options (also, the people who would want a course are likely not on r/PFC or here, excusing the underwhelming response earlier). So I’ve doodled a bit and come up with a preliminary syllabus for such a course.

But it’s still a terrible idea that’s going to take way too much time that I don’t have. Fortunately I’ve heard that Ellen Roseman plans to take one of her UofT courses online next year, and Bridget of Money After Graduation is putting together an online course on investing too. So maybe I can bow out and let them solve the problem.

Here is the preliminary course outline/syllabus, make of it what you will. Maybe it will get you excited and you’ll want to enroll or back a kickstarter-type thing to make it happen. Maybe Ellen and/or Bridgette will liberally borrow for their courses (and the outline is not the hard part of creating a new course so I don’t really mind). Maybe you will tell me that my outline is bad and that I should feel bad.

Planning, Investing, and Other Grown-up Money Concerns
Proposed Course Outline (each unit approx. 45 minutes + time for questions)

• 1. Introduction and Money 101 Review
  a. What you should already know and have mastered.
  b. Budgeting and living within your means.
  c. Saving saving saving
  d. Emergency funds (insurance?)
  e. Credit cards, lattes, etc., etc.
  f. Clever parables, Diderot’s housecoat, Chilton’s four most dangerous words.
  g. Reading list to kick-start the course.
• 2. Free Your Mind and Your Ass Will Follow
  a. The importance of attitude, behaviour, and long-term thinking.
  b. Neat grey matter tricks, including why free makes us stupid.
  c. Social animals and keeping up with the Joneses.
  d. Heuristics and rules-of-thumb (or should this be a whole other class?).
  e. Points-of-view.
  f. On uncertainty, and why a scientist is talking right now.
• 3. Canoeing Down the Spanish River: Goals, Direction, and Having Fun [w/ Sandi Martin]
  a. Sandi’s talk from TPL, expanded a bit.
• 4. Needs, Wants, and Other Sundry Topics
  a. Some concepts, because I had to stick them somewhere (inflation, compound returns, how to read graphs, use a spreadsheet, probably some other stuff).
  b. Needs and wants, and creating your minimum plan and ideal plan.
  c. Other goals and things that will affect your planning.
  d. An aside on the industry, some ranting, why I push the do-it-yourself way.
  e. Sketching out a plan and how to get there.
• 5. Finally, the One in Which He Talks About Investing
  a. Investments help us make our plans a reality.
  b. Types of investments.
  c. Investing in businesses.
  d. Lessons from active investing: intrinsic vs market value, and what it means for long-term investing in a world that survives the coming zombie apocalypse.
  e. Investing in bonds, real estate, commodities, and other stuff.
  f. History and setting reasonable expectations.
• 6. The Quick and Dirty Yet Completely Convincing Explanation of Index Investing
  a. The importance of fees.
  b. For repetition sake, a discussion of how fees matter.
  c. What can be controlled and what cannot be.
  d. Active vs passive – theory and past results.
  e. The added benefit of simplicity.
  f. Other ways of investing, and what they entail.
  g. The importance of “I don’t know”.
• 7. Risk, the Gom Jabbar, and the Unfortunate Gambling Analogy
  a. Risk in everything.
  b. Many definitions of risk, and blending of volatility and uncertainty with risk of lifestyle impairment.
  c. Risk on different timescales.
  d. Risk tolerance.
  e. Enduring a market-crash in real time and Dune’s Gom Jabbar.
• 8. Let’s Do It: Asset Allocation and Your Plan
  a. The canonical portfolio.
  b. How to decide on an allocation that will work for you.
  i. The age-based rule-of-thumb, and the completely arbitrary equity split.
  ii. The classic 60/40 one-size-fits-all portfolio.
  c. Apocrypha.
• 9. How You Actually Do This: Three and a Half Investing Options
  a. Robo-advisors.
  b. Tangerine.
  c. TD e-series.
  d. ETFs.
• 10. How You Actually Do This: Taxes and Tax-Shelters
  a. TFSA.
  b. RRSP.
  c. RESP.
  d. RDSP.
  e. Non-registered: taxes, dividend tax credit, capital gains, ACB.
• 11. How You Actually Do This: Writing Stuff Down and Making Spreadsheets (Or Whatever)
  a. Condensing your goals and direction down into a written plan.
  b. Writing down your asset allocation and a rebalancing plan.
  c. Tracking stuff with spreadsheets (or pieces of paper in a binder, or whatever works for you).
  d. Tools that already exist and can help.
• 12. Where I Talk About Processes and Take a Break to Riff
  a. Processes, lessons from engineering and health care.
  b. Good enough solutions.
  c. Execution risk, and some more talk about the behaviour gap.
  d. Some slack time to review any material from the previous classes that needs further discussion.
• 13. Au Secours, Au Secours!
  a. When to get help.
  b. How to find help.
  c. Getting value-for-money.
  d. What an advisor/coach can do, and what they can’t do.
• 14. The One Where I Reveal My Thoughts on Real Estate and You All Hate Me for It.
  a. The biggest purchase – and biggest expense – in your life, and why it deserves more thought than it gets.
  b. Rent vs buy analysis, and busting myths about renting. The ball pit analogy.
  c. Income suites are not magical.
  d. The housing bubble, and the pernicious myth of the property ladder.
  e. A look back at US housing bubble and why it’s not really different here.
  f. Real estate as an investment, direct and REITs.
• 15. The Hardest Problem in Personal Finance [hopefully w/ secret guest(s)]
  a. The options that open up as you near retirement (annuities).
  b. Government benefits in retirement, CPP.
  c. Sequence-of-returns risk, longevity risk.
  d. Sustainable withdrawal rate, and the various schemes to convert a pile of investments into lifetime income.
  e. Decumulation plans.
• 16. An Hour for Questions, or Lacking Those, Delicious Discussions of Dirty Dealing
  a. Q&A.
  b. Why I hate market-linked GICs and their dirty advertising.
  c. TANSTAAFL in general, being skeptical.

The subway was yet again disrupted this week, with all three subway lines out of commission for an extended period Monday morning (and for a while the SRT too) — and not even shuttle buses to try to take up some of the load. I personally think it was a terrorist threat and they’re just not telling us, because the official explanation does not make sense to me at all, and just makes me angry.

Officially, it was a communications failure, and they can’t run any trains in any fashion without communications. TTC spokesperson likened it to “trying to land a plane without having communications with the tower.”

No, come on, pull the other one. I’m going to try to track down a few drivers and see if the media contacts at the TTC will talk to me, but there is just no fucking way it is like that at all. They’re trains, running on tracks, with human drivers. The equivalent scenario is closer to drivers having to cope with a power outage knocking out traffic lights — things slow down, you approach every intersection with caution, but you don’t just throw your hands in the air and say that it’s too unsafe to leave the garage today.

Trains are not cars, but in many ways the differences make the situation easier: they’re on tracks, on isolated rights-of-way, with no worries of kids running across to chase balls or geese¹ sauntering across the road. The main thing to worry about are the switches, and it should be super-simple to interlock them to lock in straight-ahead mode for safety when comms go out.

So I can’t see any damned reason why a train can’t creep along under the direction of the human driver, and get some kind of service going. Yes, they may have to go slower — a train can’t exactly stop on a dime, but usnig publicly available information TTC subway trains can come to a full stop from 30 km/h in about 50 m without bowling anyone over, and in as little as 25 m in an emergency braking situation (for scale, the trains are 23.2 m long). Now I know that distances are hard to judge accurately by eye, especially underground in the absence of familiar landmarks for scale, but from all the time I’ve spent on the subway gazing out the front of the lead car, I’m pretty sure the visibility down the well-lit tunnel is at least 50 m in all parts of the line, and multiples of that in most places. And even if it’s not in some curves, from a relative 15 km/h crawl — that still moves something — a train could stop in 12 m.

That leaves the 6 switches at the terminal stations as the main sticking point to operating without communications. And seriously, if those can’t be manually operated by a half-dozen people sent into the tunnels to direct traffic, then they should be redesigned to do so ASAP.

Yes, it would still have been a sucktacular delay, and without communications its likely we’d get trains bunching and gaping through the system pretty quickly. But I just can’t believe that professional, unionized drivers are completely unable to operate their trains without being directed by central communications in constant contact, that there isn’t a 15 km/h failsafe mode. I mean, many cities had subway and trolley systems before radio communications and signalling systems were even invented, and the trains ran.

1. Who can fly, but choose not to. Seriously, fuck geese. Now that I think about it, the TTC’s mascot should be a Canada Goose.

Update: As soon as I hit publish I think I got it: they think it’s a safety issue not because the trains will crash but possibly because the emergency response strips won’t send a signal to TTC central so that they can call an ambulance and hold the line up for the false alarm of the hour. Again, I don’t see how waiting until the train hits the station for a runner to hit the surface and call 911 is such a major safety issue that it warrants a complete shutdown. But then again, if that’s the reason then the plane landing analogy above is totally off base and even more idiotic.

“Officials will also be hoping and praying many Torontonians will voluntarily opt to work from home, carpool or work irregular hours to cut down on congestion. The transportation plan hinges on a 20-per-cent decrease in transportation demand during peak hours.”

I believe strongly in the success of any transit plan that involves hoping and praying that one in five people who somehow have not yet found a way to avoid commuting in this city will find a way to not commute especially for the games.

The Star featured a story last week of a family in a tight situation: they had bought a pre-construction house, which was delayed by several years and had shrunk from the sales model. They decided to cancel the deal and get their deposit back, which led to trouble of one sort.

And another.

The developer delayed for months on returning the deposit, which raises some interesting questions about the solvency and decency of Urbancorp. But as part of their complaint against the developer, the family claims that without the return of the deposit — a rather substantial $95,000 on a $850,000 house — they won’t be able to scrape together $5k for first and last on a rental.

It’s mind-boggling how an apparently well-to-do family with over a million dollars in real estate assets (between the pre-con house and existing condo), who were able to put down over a hundred grand on two places, doesn’t have an emergency fund of any kind — not even one month’s expenses.

Even if the pre-con house had been built according to plan and the original schedule, how were they going to close the sale with no assets? Where were their savings from living on a budget to prepare for the higher ongoing costs of the house? I could go on about this case, but that’s not what I’m here for today.

I don’t want to focus on their particular case: they were simply in no position to buy in the first place. It’s another Toronto family over-reaching for real estate.

Instead, I want to rant about the dangers of pre-construction. How most people are in no position to buy pre-con.

Lots of people made lots and lots of money in pre-construction in the early and middle phases of Toronto’s condo boom, without needing a lot of capital, effort, or smarts to do it. That’s helped create the widespread impression that pre-construction is a great, risk-free way to make lots of money — and developer advertising reinforces the investment message every chance it gets using dirty tactics that would not be legal in other investment industries like mutual funds or stocks.

Part of how these people made money was that pre-construction came with a discount to existing units — as David Fleming has most famously covered, that discount has been essentially non-existent for years. It’s supposed to compensate the investor for the risks and inconveniences of pre-con, so when it vanishes it indicates that the average pre-con buyer is not doing so from a detached, analytical investment perspective — or if they are, it’s from the footing of a speculator looking to boost the leverage used. The other big part that contributed to the profits reaching stupid levels is the use of leverage inherent to real estate and pre-con purchases (and again, the magnifying benefits of leverage are highly played up in developer ads).

However, leverage is risk and that cuts both ways. If things don’t go as hoped and there are problems, people buying pre-construction can face massive cash calls and losses. To try to protect the stability of our economy, development projects in Ontario must sell a certain percentage of units before they can get financing from banks to fund the construction. This helps provide the banks with a buffer so they won’t end up foreclosing on massive, empty towers that no one wants to buy in a few years’ time, leading to the collapse of the banking system. However, the pre-con purchasers then end up shouldering a lot of the risk for the project, risk they are by and large not equipped to evaluate or handle.

What are some of the worst-case scenarios with pre-con? Well, consider the case where you have done your due diligence on the builder perfectly, and they deliver a unit to you that looks exactly like the sales demo, exactly on the expected occupancy date (note: none of these things ever actually happen) — but the long-feared condo downturn actually appeared some time in the three and a half years between committing to the purchase and the completion of construction. Your unit is now worth 25% less than you thought, and because you haven’t been able to unload the place you were living at, the bank won’t give you a high-ratio mortgage. So you need to come up with ~30% of the original price to close.

Put some numbers to that: you like the looks of a $400k pre-con condo. You scrape together $40k as a deposit for pre-con, and plan to sell or refinance your existing place to free up another $40k upon completion so you can close. Instead, the market crashes and your pre-con is only worth $300k. The equity in your current place is gone, and the market is locked up so you couldn’t dump it even if you could stomach realizing the loss. The bank is only willing to lend against the current value ($300k) of the new place, but you’re contracted to pay the developer $400k for it. Somehow you have to come up with $60k just to get you back to even, and another $60k to get a mortgage on your second property — where are you going to get $120k from on what might be as little as a year’s notice?

Yes, it’s a rare event. But for many families, the low-but-not-zero likelihood events that can happen with pre-construction represent extinction-level events for their finances. Especially if they own two properties by buying pre-con before selling an existing place.

Pre-construction is too risky for most people out there who are doing it anyway — they are in no position to buy or to assume the risks that they are. It is not the everyday riskiness of the stock market, where there’s volatility and unpredictability and small losses all the time so you never forget it. It is the risk of rare events — the “black swan” — coupled with massive leverage that leads to what we term “blow-ups”.

IMHO, only accredited investors should be allowed to buy pre-construction in the province, or the rules should be changed to limit liability to the deposit. I’m a lefty protectionist bastard that way (and housing bear to boot), but an investment product that can lead to losses that are an order of magnitude higher than the deposits people are putting down (what they may naively assume is the limit of their liability) is one that should be most highly regulated. But that’s not going to happen, so instead here’s a short list of things to bear in mind with pre-construction:

1. 1. Pre-con should be cheaper than something you can live in (and inspect) today. This is to compensate you for the risks, the inconvenience, the uncertainty, and the time you have to wait. If there is no pre-con discount (and David Fleming has made the case that there is not in Toronto), then do not buy pre-con¹.
2. 2. The moment you lock in to the contract (which may be as many as 10 days after you sign if you have a cooling-off period), you are on the hook for the unit, at the price you agreed to. If you also have a current owned unit (house, etc.), you now have two units. Do you have pockets deep enough to own and maintain two units through thick and thin? If not, then do not buy pre-con; or sell your existing unit and rent it back (or rent something else) until your pre-con unit is done for safety.
3. 3. You will likely need liquid cash to close. If you do decide to ignore point #2 and hold two units, this is not the time to aggressively pay down your mortgage by making extra payments — you may need that liquidity, and you’ll need it most in the scenario where it becomes inaccessible as real estate equity (whether due to a down-turn in prices, tightened lending, or slowing in turnover in the market). That may mean losing out on interest rate differential by paying a 3% mortgage while holding cash that’s only earning 1% — it’s the cost of protecting yourself against a blow-up, and may serve as a reminder that you are in no position to buy pre-con.
4. 4. Do not do it by the skin of your teeth. There are many things that have to go right for pre-con to work out: if even in that scenario you would be stretching, just don’t do it. You will need big buffers and emergency funds for the rare cases where it does not at all go according to plan — and some buffer for the exceptionally common cases where it’s off by a bit. These include:
• a. The unit is not as advertised, or as polished as you expected, and you have to renovate your brand new unit in some way (e.g. refinishing floors, patching holes, replacing appliances, fixing plumbing issues). Do not count on help from Tarion.
• b. The unit is late. Late here is a relative word as no condo project in the history of the city has ever finished by the date on the sales office billboards.
• c. The unit cannot be flipped. So it’s no longer your bag, baby. Maybe in the 5 years you were waiting for your swanky 1-bedroom ultimate bachelor pad to be built you found a mate and spawned, and now live somewhere else. You want to flip upon completion — only to find that 42 other people in the building had the same idea. You’re going to have to either accept (and cover!) a loss to under-cut them all, or come up with the funds to close and rent it out for a year or two until the supply spike subsides and you can find a buyer — or carry it empty for months looking for buyers.
• d. There has been yet another tinkering in the mortgage market and the financing terms you were expecting when you signed the contract 5 years ago no longer apply. Now you need to come up with more money and/or pay a higher rate than you expected. Or the unit isn’t worth quite as much as you were hoping for when the appraiser is done and you have to cough up a larger down payment to close.
• e. Occupancy and carrying two units. Occupancy is a weird period in a new development. You have to pay monthly fees, but don’t really own the unit yet. You can live in it, but don’t want to because the rest of the building is still a construction nightmare. Add on illiquidity on one side or the other, and if you have two units you may have to be prepared to carry both of them for a time.

1. The bold statements here are for regular people who risk bankruptcy by placing leveraged bets on pre-con. Go ahead if you greatly resemble a land baron from Monopoly and are trying to spice things up with a bit of speculation.

I wonder how effectively I’ll be able to communicate with Blueberry as she grows up. I mean, so much of the way we communicate is based on shared experiences, which was accelerated in an age of cable TV. So many people my age watched so much of the Simpsons that quotes from the show are an integral part of our lexicon (“I bent my wookie.” “Boo-urns.” “The goggles do nothing!”). Indeed, Scott Meyers mentioned this effect in Magic 2.0: Off to Be the Wizard. With my friends it’s even worse, we can communicate almost exclusively in quotes and imitations from various shows and movies.

It reminds me of that Star Trek: TNG episode Darmok and Jalad at Tanagra, where Picard has to communicate with aliens through references to stories and metaphor.

On one level, she’ll be coming into a different world: she’ll likely never use a command-prompt OS, the mystery of bigfoot and UFOs will be so much less viable, and she’s already started learning how to read and write on a computer before she can even write the alphabet by hand. She may never know what it’s like to memorize facts just because encyclopedias aren’t always at hand/searchable. It will be different. Although there is a chance she’ll pick up my crazy language on the fly, knowing that “SPOOOOOOON!” is just something you say before doing something heroic, even without knowing the source.

Of course, I already have that Darmok and Jalad issue with Wayfare, who should be fully versed in shared pop culture lexicon. Through the winter she was constantly nagging and harassing helpfully reminding me about putting my boots on the mat at the front door. “Arrgh!” She’d exclaim randomly, “how many times have I told you, put your boots on the mat! I’m tired of stepping in puddles!” So I’d apologize, obviously thinking I forgot or something, then go check and see that my boots were indeed on the mat. Squarely, securely, indisputably on the mat. Oh, maybe she moved them for me, I’d think — next time I will definitely be conscious when I pull my boots off after coming in. Then it would happen again, and again, and I went down to see what the problem was with her. And there, despite her complaining, were my boots, sitting as neatly as could be on the mat.

“They are on the mat!”

“No!” she said, “Put them on the mat! THE MAT!”

“Look Mr. Burns, I don’t know what you think sideburns are, but…” and she just didn’t get the reference, even though it was the perfect Simpsons allegory for this particular issue.

Eventually she picked up the boots, and put them on the plastic tray and I was like “oooh, you meant the tray.”

So I don’t know if Blueberry is ever going to get that sideburns reference. But there is hope: she knows that a TARDIS goes “bwwwfff kkkkk kkkk kkkk” [I am not good at onomonopias], and I will shortly be teaching her the Transformers sound for shape changes. Of course, maybe I shouldn’t hope for too much, as it provides us old folks with a secret language all our own for when she figures out how to spell things. For instance, how do you discuss what to have for dinner without having the toddler lock in on one option and dominating the choice?

“Let’s order something in. What do you want?”
“Cowabunga!”
“No, we had that one the weekend. Ludicrous speed? What’s the matter Colonel Sanders?”
“No, the Pentavritim is just too far away. Look at all your different coloured hats?”
“Yes! Sandwiches!”
Blueberry: “Sandwiches?! With cheese, and cucumbers, and cheese, and buns!”
“And now there’s no backsies on sandwiches.”

But as much as I’m a little nostalgic and concerned that her youth will be different from mine, making it hard to relate, I’m also a kind of excited about her future. She is turning out to be quite shy — possibly just as shy as I was, maybe even moreso. So maybe she’ll be a bit socially awkward, but she won’t have to wait until she’s 15 for email to get big, or 18 for ICQ to be invented. I also know that she’s clever (beyond just a daddy’s pride) and in today’s society I don’t think she will ever be called a nerd except as a complement. I don’t think kids these days even know “four-eyes” as hate speech.

Not all the new experiences she has will be for the best, but at least she will always know that I am a robot sent from the future.