1. Larry MacDonald pointed to some interesting articles including a brilliant piece by Eliot Spitzer on CEO pay . Companies are supposed to be controlled by their shareholders. CEOs are employees. A company’s board of directors is supposed to represent the interests of the shareholders. However, CEOs have too much control over who serves on their boards of directors, and they also have too much control over the choice of compensation consultants who make recommendations on CEO pay. It’s time that we fixed the system to represent shareholder interest rather than continue to complain about unethical CEOs. Who among us wouldn’t line our own pockets with millions of dollars if we could do so legally? This doesn't excuse CEOs, but the solution is to take away their opportunity to line their pockets unfairly. 2. A guest post by Neal Frankle explains why the 10-year returns of mutual funds are going to start looking very bad . Obviously, recent poor stock market returns are a bi...

Wired magazine had a great article explaining the causes behind our credit problems. Unfortunately, they blamed math as the root cause of the problem, which is silly. It’s like blaming a hammer for smashing your thumb. A decade ago, most investors didn’t like to put their money into mortgage pools (unless they were backed by the U.S. federal government) because they couldn’t quantify the risk. Then along came a clever guy named David Li who developed a formula to measure the amount of risk. This formula came to be used in finance all over the world to measure the risk of baskets of mortgages and other types of debt. The main problem before Li came along was that although financial markets could measure the risk of an individual mortgage, they couldn’t measure correlation: the degree to which debtors tend to default at the same time. Li had a solution. However, Li didn’t really work out the correlation himself. He examined the movement in prices of individual debts (in the c...

Looking at history we have a tendency to see certain events as inevitable, but they didn’t seem inevitable at the time. We can agree now that the tech boom of the late 1990s was destined to crash, but the crash didn’t seem inevitable to most of us while we were living through the boom. This provides a lesson for our present difficulties. As is often the case, the truth is somewhere in the middle. We are too confident in our ability to see the reasons behind past events. But we also have too great a tendency to believe that our present situation will persist. Many believed that the tech boom would continue indefinitely taking us to a glorious new future. This turned out to be very wrong. On the other hand, many of us now see the tech crash as inevitable. However, another plausible outcome could have been for tech stocks to remain flat for 20 years while their value caught up with their prices. The markets have more than one way to get back in line. History tells us that th...

The basic idea of insurance is that you pay a premium to an insurance company that agrees to cover you for a low probability large loss. For example, you might pay $500 per year for house insurance, and the insurance company agrees to rebuild your house if it burns down. For some reason, typical health insurance plans have this basic idea of insurance backwards. To illustrate what I mean, I’ll look at Sun Life’s basic personal health insurance plan (as of February 2009). I don’t intend to promote or criticize Sun Life in particular; other insurance companies have very similar plans. Sun Life’s basic plan has fairly low yearly dollar limits: - Prescription drugs: max $750/year - Dental: max $500/year - Alternative treatments: max $25/visit and $250/practitioner - Hearing Aids: max $400 per 5 years - Dental accidents: max $2000/injury - Medical equipment and in-home nursing: combined max $2500/year and max $20,000 lifetime To run a profitable business, an insurance compan...

General Motors and Chrysler are asking for $10 billion in aid from Canada . This sounds like a big number, but it’s hard to put into context without some analysis. Millions, billions, and trillions can all sound the same until you think it through. This aid package amounts to about $300 for every Canadian, including children. If the government agrees to this bailout, you can imagine $300 flying out of your pocket and going to GM and Chrysler. This money would be transferred from all of us to benefit the auto workers. According to the Canadian Auto Workers (CAW), 33,000 of their members work for GM, Chrysler, and Ford. Out of these, about 12,000 work for GM, and 11,000 work for Chrysler. So, the GM and Chrysler bailout would support 23,000 employees. This amounts to about $430,000 per employee! This doesn’t tell the whole story, though. There are other jobs that depend on the auto sector. The CAW claims that “there are approximately 7 jobs created for every one job in the...

1. Million Dollar Journey tells us how to get free HDTV in Canada legally . 2. Gail Vaz-Oxlade tells us the difference between living within your means and doing without (in a post no longer online). The distinction is crucial. We need to find a way to enjoy life within our means. If we think in terms of doing without we’ll eventually break down and spend. The same applies to the food we eat. It’s important to find a way to eat that is satisfying and doesn’t have us gain weight. Doing without enough food isn’t sustainable. 3. Preet’s continued discussion of fee-only versus fee-based financial planners generated quite a few comments. 4. The Big Cajun Man hosted the Carnival of Personal Finance that included my article Teenager Jobs that Pay Well .

I try to avoid making predictions because as Niels Bohr once said “prediction is very difficult, especially about the future.” However, I see the world on the verge of a long, slow decline in cell phone use. Am I predicting that people will no longer feel the need to have a phone with them at all times? Absolutely not. As a matter of fact, I think that the percentage of people who carry communications devices is likely to increase in the future. Cell phones are going to be replaced. Roaming calls will eventually be carried over the internet rather than a separate cell phone network. Many of us have wireless internet set up in our homes with a data rate many times higher than is needed to carry a phone call. In fact, if you used a cell phone continuously day and night for a month, the total amount of voice data transmitted would be less than the 60 Gigabyte monthly cap on typical home high-speed internet plans. Technology to carry phone calls over the internet (called voice over i...

Some say that the best time to invest is at the point of maximum pessimism. The theory is that just at the point when the most people are sure that the world of stocks is collapsing, prices should be lowest, and this makes it the best time to buy stocks. Money usually flows into mutual funds during RRSP season, and so far this year is no different. January saw $1.17 billion more money flow into mutual funds than was withdrawn. However, this applies to all types of mutual funds collectively. It turns out that money market funds and bond funds were popular. Equity funds had net withdrawals of $376 million. So, despite the fact that this is RRSP season, money is still flowing out of stock funds. Even though stock prices are low, there continue to be more pessimists than optimists. If you’re waiting for a sign that the point of maximum pessimism has been reached, this data suggests that we haven’t reached it. However, I’m no fan of trying to predict the perfect time to jump in...

I recently saw an ad for TD Bank’s 5-year “Stepper” Guaranteed Investment Certificate (GIC). The ad made the product seem quite attractive. A sign of great marketing is turning a negative into a positive. A Stepper GIC offers a low interest rate in the first year with an increase in the interest rate paid each year. It’s like getting a raise each year. Who wouldn’t want a raise? All the major Canadian banks have GICs like this with different names: Royal Bank - RateAdvantage GIC Scotiabank - Accelerated Rate GIC BMO - RateRiser GIC CIBC - Escalating Rate GIC TD Canada Trust - Stepper GIC In TD’s ad, the most prominent part of the picture showing the interest rates is “8.0% In the 5th Year.” Where else can you get 8% on your savings? Here are the advertised interest rates for each year of this Stepper GIC (as of February 2009): Year 1: 1.5% Year 2: 3.0% Year 3: 3.5% Year 4: 4.0% Year 5: 8.0% The average compound interest rate works out to 3.98%. Suppose that this GIC were m...

Warren Buffett’s investment record has been very impressive for decades. It seems a virtual certainty that his success is due to skill. However, there are some who say that it may be just luck. They argue that out of billions of people, you’d expect at least one investor to perform as well as Buffett. Let’s take a stab at figuring out which side is right. From the first table in Buffett’s 2007 letter to shareholders we see that over the 43 years from 1965 to the end of 2007, the S&P 500 (including dividends) returned 6840% and Buffett’s Berkshire Hathaway returned 400,863%. An investment in Berkshire over this period would have made you 57.8 times richer. This is an impressive record, but we want to know if it could have happened by chance. This depends greatly on how Buffett approached investing. To see this, consider the following scenario. Suppose that in January of 1965, a few hundred people took $1000 each to gamble on blackjack. They all used the same strategy....

After a draw that gave all entries an equal chance, the winner of a copy of Gail Bebee’s book No Hype: The Straight Goods on Investing Your Money is Kelsi! It is quite a coincidence that Kelsi won. I was prepared to mention her entry anyway because she included a colourful love poem for Valentine’s Day: Roses are RED YOUR blog is the best Please send me Gail’s book To help me INVEST! Thanks for the poem and thanks to everyone who entered the draw!

1. If you want a chance to win a copy of Gail Bebee’s book No Hype: The Straight Goods on Investing Your Money , send an email to me with the subject “Book” at the email address in the upper right corner of my blog before noon on Sunday. The original announcement of the draw has my review of this book . 2. Million Dollar Journey had a guest post on the different ways that couples can share their finances. Predictably, my wife and I don’t exactly fit into any of the options. Option D with one joint account for everything where there is no yours and mine (just ours) comes closest. However, we don’t use joint accounts. We just freely give each other money as necessary. 3. WhereDoesAllMyMoneyGo discussed where to find a fee-only financial planner. 4. The Big Cajun Man is put off by a picture of a store front combining cigarettes and a free lottery ticket with each payday loan and cheque cashed .

Gail Bebee, author of No Hype: The Straight Goods on Investing Your Money was kind enough to send me a review copy of her book. In addition to reviewing it, I will be having a draw to give away this gently-used book. The Draw Parts of the book are specific to Canada, and so the draw will be limited to Canadian addresses. To enter, send an email with the subject “Book” to the address shown on the upper right corner of this blog. The draw will close Sunday Feb. 15 at noon. I will contact the winner to get a (Canadian) postal address. Book Review On the whole, this book lives up to its “no hype” title. Bebee covers many important subjects for investors giving clear explanations of advantages and disadvantages of different investment products and approaches. A common theme throughout the book is “think for yourself,” which is very important if you don’t want others to take advantage of you financially. Bebee is not a financial industry insider, which is a plus. She tells ...

We’re often told that we feel losses twice as strongly as gains. This tends to make us risk averse, which is a good thing when crossing the road, but may not work out so well for long-term investing. I tried a little experiment with Walmart stock to see how emotional accounting would affect the perception of this stock. Walmart has been one of the greatest success stories in business. A $10,000 investment at the start of 1975 would be worth over $25 million today even ignoring dividends! This is an average compound return of over 25% per year for just over 34 years. Imagine that our hero, Dave, invested his $10,000 savings in Walmart stock at the start of 1975. He then checked the previous day’s percentage change in stock price each morning. We’re assuming that all he looks at is the percentage change each day and not his portfolio value. I downloaded a spreadsheet of daily Walmart closing prices (ignoring dividends, but incorporating stock splits) and calculated the daily percen...

When we think of jobs for teenagers we tend to think of minimum wage jobs at fast food joints. Back when my older son was first refereeing house league basketball, he dreamed of getting a “real” job in fast food to make more money. What he didn’t realize was that his refereeing gig paid more per hour. My younger son is now refereeing house league basketball and gets $60 to referee four 45-minute games on Saturdays. There are 45-minute gaps between games for the teams to run a practice, and so he has to be there for a total of 5 hours 15 minutes. You can think of this as either $20/hour during the time he actually works or $11.43/hour for the full time he has to be there. Even $11.43/hour looks pretty good when you get three 45-minute paid breaks. And running up and down a basketball court is a whole lot more enjoyable than flipping burgers. I’m interested to hear from readers if they have other ideas for good jobs for teenagers that pay better than a “real” job.

Visa has a booklet of financial advice available online called Practical Money Skills: A Guide to help you manage your money . It contains a fair bit of very basic, but useful information. The advice on how to allocate your income is consistent with other sources of financial rules of thumb, but it struck me how useless this advice is for anyone who wants to develop some financial independence. The first page of content after the mandatory giant pictures of smiling families contains the following chart in large font: Guideline for after-tax expenses: 30%: shelter 10%: fixed expenses 10%: loan payments 10%: personal spending 10%: savings Presumably, the missing 30% is income taxes. On the surface, these percentages seem sensible enough. The truth is that staying within these guidelines will work fine if your goal is to be like everyone else and trudge off to work each day for most of the rest of your life to a job you will come to hate but can’t afford to leave. If you’...

1. We had some good news about the “buy American” part of the U.S. stimulus package. U.S. legislation has been changed to include “a requirement that the U.S. not violate its international trade agreements” (the web page with the article quoted has disappeared since the time of writing). It’s not clear whether this will be enough to protect Canadian exports, but it’s a step in the right direction. 2. President Obama has capped executive pay at $500,000 per year at companies that accept government money. A Wall Street Journal video (that is no longer available online) explains some of the other measures designed to prevent executive excess. 3. Preet gives a good explanation of why the average active money manager must lose out to the index . 4. FrugalTrader explains how Canadians’ investments are protected by CDIC and CIPF .

Lotteries were in the news a while back because of problems with insiders claiming many of the prizes. It turns out that the problem is worse than we thought according to CTV . The Ontario Lottery and Gaming (Gambling?) corporation (OLG) has studied lottery wins over the last 13 years. Originally, they said that 1.7% of the money went to insiders, but they have now revised this to 3.4%. Of course, this should be viewed as a minimum because they can only report insider wins that they know about, and they couldn’t possibly know about all of them. The suspicion is that not all of these insiders bought these winning tickets. No doubt the fraud took many forms, but the classic example given is the lottery player who hands a winning ticket to a convenience store clerk who either says the ticket didn’t win or says a prize amount that is smaller than the real prize. It’s amazing that people get so worked up about insiders skimming 3.4% of the prizes but are unconcerned about the incredibly...

Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA) is out. For the fourth quarter of 2008, 53.2% of actively-managed Canadian equity mutual funds beat the TSX composite index. Some will tout this as a sign that you need active fund management for protection during down markets. We need to dig a little deeper to see the truth. To begin with, 53.2% is such a narrow victory that it is better to think of it as a tie. The next thing to look at is how this slim majority of actively-managed mutual funds beat the index. The fund industry would like to have you believe that managers cleverly move your money around from one stock to another to avoid losses. The truth is that every mutual fund must keep a certain percentage of its money in cash or cash equivalents to deal with the constant inflow and outflow of investor money. During the fourth quarter of 2008, the TSX composite dropped about 23%. This means that cash in your mattress outperformed stocks by a wide ma...

Common advice about controlling spending is to track all your purchases and add them up each week or month. I believe that this is effective, but have been fuzzy on why it seems to work so well. Why can’t people just spend less without the constant reminder of how well they are doing? I got some insight on this question from, of all places, poker. For poker players there is a certain thrill to dragging in a pot of chips. The thrill is there whether it is a $1 pot or a $10 pot. The $10 pot gives a bigger thrill, but not 10 times bigger. Similarly, losing a $10 pot feels worse than losing a $1 pot, but not 10 times worse. This leads to some players playing in such a way that they maximize happiness by taking in many small pots, but losing some big ones. As long as they don’t count their dwindling chips, they can actually be happy playing this way. Counting your chips is a lot like adding up your spending at the end of the month to see what happened. You may feel good about ...

A while ago I discussed how to build your own market-linked GIC . A friend (who prefers to remain anonymous) mentioned that his market-linked GIC has a maximum return. It turns out that he has what Scotiabank calls its “Market Powered” GIC or MPGIC. This MPGIC is similar to other market-linked GICs in that its return is linked to a stock index. In this case, it is linked to the TSX 60 index of large Canadian companies. This GIC also returns only a fraction of the index return, called the participation rate or participation factor (PF). Three differences with the MPGIC compared to other products I’ve looked at are 1. it guarantees a minimum return, 2. it caps the maximum return, and 3. it bases market return on the average index value over the whole time period instead of just an average over the last year of the GIC. For the 3-year MPGIC, currently the guaranteed minimum return is 0.5%/year and the maximum additional market-linked return is 20%. Once again, we’ll try to...