Blessed by the Potato

UWO has decided to rebrand itself, going from the University of Western Ontario to Western University. And it’s not even April 1st yet. I don’t particularly like the new name; it’s not terrible, but I don’t see the need to change, and it kind of makes me think it’s in the wrong part of the country (shouldn’t “Western University” be in Alberta or something?). UWO had a fair bit of brand recognition under both UWO and Western which was working, so I don’t know why they’d throw away the UWO part. They mention in breaking down the new logo that they’re proud to be in London, and proud to be Canadian… but apparently not so proud to be in Ontario.

Kind of funny, because just a few weeks ago we were making fun of a newspaper article that referred to “Western University” — so perhaps not wrong, just early.

One weird thing is of course that web address — still at the old uwo.ca. I tried going to western.ca, and there’s nothing there. According to the whois, the domain is owned by a HR firm in BC. So the URL will likely be anachronistic now. [update: they did get westernu.ca] They say that the legal name is still the University of Western Ontario, and that’s what will appear on the diplomas.

Anyhow, one upside to leaving (sob, sob) is that I don’t have to go and redo all my powerpoint templates to suit their new branding.

There is a company out there with the majority of its operations in China. It has had an incredible, unbelievable run in its stock price, up 400% from the bottom in 2009. This run has been supported by impressive sales numbers, growing the top-line (revenue) by better than 50% per year for several years running, and the bottom line (net income) by better than 70%.

They are in a business that is apparently not very capital intensive: their PP&E is less than a third of one year’s earnings, yet their margins remain very strong. This company generates an impressive amount of free cash, with minimal capex requirements (the single largest use of cash, by far, is for “investments”, which commentary indicates are largely fungible bonds). They carry an incredible amount of cash: 10X inventories, and almost 3 year’s worth of capex, in cash, at any given time. Including investments, they have resources to cover their current inventory and full-year’s capex 19 times over. They could stop all shipments, not make a single sale ever again, and still continue paying the expenses associated with the R&D and general operations of the company for a full 10 years by using the liquid resources they have built up.

That, my friends, is a staggering amount of non-productive assets to keep on the balance sheet. Why is it not going into R&D, or capex, or aquisitions, or better yet, to dividends and buy-backs? If you knew all the intimate details about a business that was doubling every other year — because you are running it — why would you ever choose to hold cash — so much cash — instead of buying more of that business? So my spidey senses start tingling: are the assets listed in the financial statements really there?

Is this the next great Chinese stock fraud?

Now of course, you probably all know exactly which company I’m talking about. We all know the company is real. The books are very likely real. I’m not seriously suggesting otherwise. But I have to wonder if perhaps when you are looking at this company if one of the risk factors you write down on your analysis shouldn’t be “potentially the biggest stock fraud since Nortel, WorldCom, or Enron. Biggest ever.”

Disclosure: no position. And yes, I am a little jelly.

Krystal Yee weighs in on the eternal savings vs line of credit (LoC) emergency fund debate. I disagree with her on a number of points which is largely just personal preference, but importantly she’s needlessly fearmongering on a few points, and that needs to be cleared up.

To begin, I think of emergency preparedness as having multiple levels, each of which requires its own solution.

The first level is not financial at all: what if you get stuck in your house? A bad blizzard, a quarantine, earthquake, or zombies roving the neighbourhood. Whatever it is, money won’t help you. You need to have a few days’ supply of food and water (and um… q-tips). The government has a site that’s a good resource for basic planning. Remember, it doesn’t necessarily have to be a separate dedicated cache: if you normally keep bottled water in the house, then just make sure your inventory never goes below a few litres; likewise for shelf-stable, easy-to-prepare food.

The next level is for the likely but not severe “emergencies” or “lumpy” expenses you may face, and that’s IMHO best kept in cash (in your chequing/savings account, not literal paper cash). Whether it’s HR screwing up and delaying your pay by a month, getting hit with a car repair, needing to fly across the country for a funeral, or finding a sale on a big item you didn’t properly budget for, there’s a reasonably high likelihood you’ll need a few hundred to a few thousand or so dollars at the ready. But much beyond that and I think it’s more optimal to put the money to work rather than keep it around.

After that comes the less likely but larger expenses. This level, I argue, shouldn’t be kept in cash unless you are very conservative. A line of credit is a good option here, alongside the ability to sell investments and use that cash.

What are the trade-offs? If you don’t keep cash and are hit with an emergency that needs more than a few hundred/few thousand dollars to cope with, you’ll have to find a way to cover that. If you borrow from a LoC you’ll have to pay some interest, if you sell investments you may have transaction fees, you may be forced to sell low and buy higher later when you recover from the emergency, and you may have to temporarily give up some TFSA room. None of that sounds so onerous to me, especially when faced with a rare, expensive emergency.

So, what did I find so objectionable about Krystal’s post? A few points:

Her first point, she says “after your emergency money is gone, you will still be debt-free” which implies that after using a LoC to cover some emergency, you would be in debt if you didn’t keep a cash cushion. But if you approach it from an all else being equal perspective, you see that’s a ridiculous false dichotomy: if you had cash and spent it you’d realistically be no better or worse off than if you had invested the cash and then borrowed against the investments in an emergency. Yes, there is debt, but you’re not in net debt — with the click of a mouse you can sell your (bond) index funds and pay off the LoC if you so choose. And if you’re debt averse, you may be less likely to tap the LoC for avoidable “emergency” spending that might otherwise drain the cash account. In other words, the choice is not between cash and debt, the choice is between cash and investments with a debt option.

Her second point is entirely personal: sure, going into debt is stressful. I had to experience it myself when I went 4 months this summer without a paycheque, and sold off investments and tapped my LoC to make ends meet. But the fact I had debt on my LoC was a trivial, marginal increase to my stress caused by the overall situation. And because I had invested my money rather than keeping $6000 in cash lying around, I made several hundreds of dollars on that money over the years, which was more than a fair trade-off for that marginal stress.

She almost gets the point on the 3rd bullet: the bank controls the LoC. The big risk of the strategy is that the bank could pull your LoC at exactly the moment you need it most (e.g., if you lose your job, or during a liquidity crisis). One way to help ameliorate that is by securing the LoC against your house, if you have one and have enough equity (a HELOC). “If your line of credit is secured by your home equity, you have the added pressure of knowing that you will be putting your house is at risk.” [sic] No. Well, technically, yes. But realistically, no. No one in the history of Canadian banking has had the bank repossess their house over a few thousand dollars on a HELOC. The risk to your house is there from the emergency itself: if you don’t make your mortgage payments, or pay your property tax, or whatever. Not from actually using your HELOC to cover a few thousand for an emergency (the amount she says you should keep in cash instead).

To say it again more clearly, the risk of using a HELOC for your emergency fund is that the line gets taken away, not that the house gets taken away. It’s more risky than holding unproductive cash, but it’s a remote risk that’s not really worth getting worked up over.

So in the end, I think a better strategy is to keep a small (~1 mo) emergency fund, and then have the rest invested, with access to a LoC/HELOC if needed. The choice is not between a large cash emergency fund and nothing to fall back on at all — those investments are available if you need them. And of course, that’s one of the reasons I recommend filling the TFSA first over the RRSP, since you can withdraw from the TFSA if you do hit a bump in the road and need to cash out. Since it may take a few days for transactions to clear, the LoC can help you bridge that time, and also give yourself some time and breathing room to decide if you do need to liquidate, or just borrow and repay the LoC from future savings.

It all depends on your own risk tolerance of course: if you can’t sleep at night without a big metaphorical mattress stuffed with cash under you, then so be it. You’d most likely be better off investing most of that cash, but you do need to take your own psychology into account. Just don’t go out of your way to make up risks to frighten yourself with, the world is scary enough as it is.

I’ve long been a user of Trend Micro’s Internet Security largely because it worked without eating up an unreasonable amount of system resources, wasn’t too intrusive, and because it was cheap (just $20 a copy as a UWO student, and each license could cover 3 computers). But beyond inertia, I didn’t have any particular devotion to it.

My new laptop came with a subscription to McAfee, and I figured that would be fine: all the big anti-virus programs are pretty competitive in terms of protection offered, since it’s not an area they can afford to fall on their face over. However, the other aspects have just been terrible. A lot of restart-nagging for updates, but worse is the subscription nagging: I once every week or two it pops up asking me to renew now, even though I still have over 6 months left on my subscription! And the pop-ups don’t have little X’s in the corner to quickly dismiss them. You have to click on a drop-down menu and select close to get rid of it. I just got two renewal ads tonight, so I’m thinking of blowing it away and starting over with something else (likely Trend Micro), it’s simply inexcusable to start nagging me about renewal that far in advance.

But there are other issues too:

• Details are buried 3-4 menu levels deep. Great McAfee, you found a trojan and saved me: but on what file? How do I know it’s not a false positive and something important is about to break?
• It’s slow. I know full system scans can take a while and slow you down, it’s just a fact of life with antivirus. But usually there’s a bit of a trade-off: a scan will only take an hour or so, or it won’t noticeably slow you down. McAfee’s scans are taking 4+ hours, and I can barely use my computer in the meantime. That’s worse than any other antivirus I’ve used.
• At a friend’s work a recent McAfee update appears to have upped the firewall sensitivity, and killed the network.

In short, McAfee sucks, and I’m to the point now where even for free with it already installed and running on my computer, I don’t want to use it any more.

Aside from the one a week and a half ago, I haven’t ranted on hybrids & EVs in a while. Nelson had a post at SPF talking about the GM Volt that kind of opened the door though, so here I go. There are a lot of nits to be picked: it’s less of a back-of-the-napkin analysis than a wave-your-hands-in-the-air-and-throw-a-dart analysis. He didn’t even use a spreadsheet! …But that’s not the main point. The point is, the Volt doesn’t seem to offer compelling value, even with the subsidies.

First up, in general efficient hybrids make a lot of sense. I’ve shown this again and again: you make the extra cost of the upgrade back several times over over the life of the car, which can lead to tremendous savings, though of course that always has some factors that can change the balance like gas prices or your driving habits. I made the ridiculous spreadsheet for you to figure it out yourself more precisely.

EVs make a lot of environmental sense: more efficiency, lower emissions, yadda yadda yadda. But it’s not clear yet if they’ll be financial slam-dunks like the efficient hybrids, in part because the first few models are only just hitting the showrooms now. They’re going to cost more up front, but require less maintenance and use cheaper power (especially off-peak). There are some other trade-offs, most notably range anxiety. They’re not going to be the car for everyone, but they don’t have to be — no single car is.

To help combat the big range anxiety factor, plug-in hybrids (PHVs) were developed: you could run off electricity for your daily commute, but still have the gas engine for longer trips.

The Chevy (GM) Volt is the first PHV to hit the market, with the plug-in Prius to follow later in the year. Now, I haven’t yet had a chance to see a Volt in person, but everything I’ve seen from the very first announcement has suggested that GM created it to fail.

Why not? They created their previous hybrids in a way that suggests they were trying to fail: the mild hybrid stop-start system was the cheapest upgrade from a regular car out there, and yet the least economical since it provided hardly any gas savings. Then the two-mode system was developed for the largest of the large SUVs, and it’s complex, expensive, and only offers modest efficiency improvements. But hey, you can tow with it. Basically everything was geared to sell more large SUVs: either hybrids that didn’t work whose sole purpose seemed to be so GM could shrug and say “oh noes, no one wants to buy hybrids. Guess we’ll just build SUVs” or hybridized SUVs, so they could say “well, the American consumer really wants an SUV.” If you’ll allow me to indulge in a bit of conspiracy theory thinking, GM was behind a lot of the anti-hybrid FUD spread in the early days, with ties to the CNW report. Many of their executives certainly didn’t hide their disdain for new technology and saving fuel. And of course, this was the company that took perfectly functional electric cars and crushed them. They wanted very much to just keep building gassers and hoped hybrids and EVs would go away never to return.

So the Volt was announced at a time of desperation: gas prices were spiking upwards, and consumers were running away from fuel-gobbling SUVs. The Volt announcement had the air of vapourware: less of a “look at this awesome car we’re putting together that you can buy any day now” and more of a “please don’t run out and buy a Toyota, Honda, or Ford… just hold on for a few more years and we’ll have something for you!” The initial specifications (which I am too lazy to look up now and link to) were clearly unrealistic. The concept versions at autoshows were the antithesis of practical: square, blocky corners with no aerodynamic properties. Huuuge long engine compartment, tiny passenger/storage compartment. Basically, designed to look like a muscle car or land yacht of old. They joked that it would be more aerodynamic backwards. The initial estimates for efficiency were laughable: no way was it going to hit those targets.

Commercials started being aired on TV for a car that hadn’t even been invented yet. It was clearly just another exercise in marketing.

But then the financial crisis hit and GM went bankrupt, and suddenly it seemed like they had to actually make the Volt.

In the end, it is a plug-in hybrid. But that’s about all I can say: instead of taking an Atkinson-cycle engine to get Prius-like efficiency when running off the gas engine, they just grabbed an off-the-shelf Otto cycle 4-cylinder and plopped it in there. Once the initial charge runs out, it gets far worse fuel economy than a Prius — about the same as a regular gasser. It’s expensive, far more expensive than promised in the vapourware state. I don’t have the exact Canadian numbers to work with, but it looks like it only breaks even vs. a gasser, and that’s after the government subsidy. In the end, a Prius or other efficient hybrid would be the smarter choice (or perhaps a true EV like a Leaf, though I don’t yet have the specs for that, either).

It’s ugly, and that’s coming from a Prius driver. It’s small, seating only 4 because of the T-shaped battery, and from early reports has poor visibility and trunk space. It’s not terribly efficient. I just can’t get away from thinking that this damned thing was made to fail. It has all the hallmarks of being cobbled together at the last minute, and doesn’t seem to be a very worthwhile effort. As much as I believe that EVs, hybrids, and PHVs are the way of the future, so far I’ve found little to recommend the Volt.

But just because the Volt doesn’t have the efficiency to be worthwhile doesn’t mean that’s going to be the case for EVs in general, or PHVs for that matter. And hybrids already make both financial and environmental sense.

One of the concerns that just won’t go away is the batteries: now with plugging-in the batteries are going to go through deeper charge/discharge cycles. Plus they’re bigger and more expensive, so the question people ask is what’s the risk of a battery failure? For Toyota, the last reported figure was less than 1 in 40,000 odds of a failure in the 2nd gen battery packs (currently on 3rd gen). These things are basically going to last the life of the car, and have a lower failure rate than an equivalently expensive part in a gasser (like a transmission going, cracking a cylinder head, etc.). Cabs have gone over a million kilometres with no serious degradation in battery life, and the first of the first gens are now about 15 years old and haven’t started dropping like flies from pure calendar age. The batteries are not a risk factor, and even then the cost is not steep since more are piling up in scrap yards from collisions than are failing otherwise. Ford recently announced their numbers and they’re even better: the odds of a battery failure are 1 in 8.5 million.

Now as incredible as that is, that’s for tried-and-true Ni-MH batteries, like the ones in the Rav4EVs that are also still going strong in deeper-discharge EV mode. The Volt has a new Li-ion battery pack, so we have yet to see if those figures will carry over (plus of course, the GM quality factor).