Warren Buffett’s latest letter to Berkshire Hathaway shareholders is out and contains his usual mix of wit and wisdom about not only Berkshire but other financial matters. Here is a sampling of some interesting nuggets: America’s Future “Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born.” “America’s best days lie ahead.” On Buffett’s Desire to Buy Large Businesses “Our elephant gun has been reloaded, and my trigger finger is itchy.” Investing Horizon Berkshire has made many infrastructure investments in its businesses that won’t pay off until well into the recovery from the recession: “At Berkshire, our time horizon is forever.” Dream of Home Ownership “Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.” On the 2008/2009 Stock Market Cr...

The winners of the TurboTax giveaway were 1. Rob 2. Lyne Congratulations!  Both winners have been contacted by email.  Thanks to all who entered.  On with the interesting articles this week: Jason Zweig explains why U.S. companies are sitting on mountains of cash they can’t access. This hurts job recovery and explains why some companies borrow money even while they have large cash reserves. Canadian Mortgage Trends summarizes the Bank of Canada’s study on how people get the best mortgage rates. The most interesting part to me was the fact that new clients get better deals from banks because existing clients face switching costs. Canadian Couch Potato shifts his gaze to the best way to rebalance a portfolio. Beyond rebalancing with strategically-applied deposits and withdrawals, the number one way that people can benefit from rebalancing is to buy stocks during a crash and sell them during a boom. Sadly, these are exactly the times when investors are most...

Some Canadian taxpayers have to pay income tax by quarterly installments. The rules surrounding these installments are confusing and few people understand them well. It helps to go through the reasons why installments exist and why the system works the way it does. Why do income tax installments exist? Most people with jobs get income tax deducted from their paycheques. This means that the government gets paid throughout the year rather than getting a lump sum at the end of the year. It would be easy to make up impressive-sounding reasons for this but the real reason is that if we paid it all at the end of the year, too many people would blow all their income and the government wouldn’t get their money. Some people make income through the year that doesn’t have any income tax deducted from it. A common case is a retiree with a large investment in bonds. The government doesn’t want to wait until the end of the year to get their tax money. So, these people have to pay quarte...

In some ways Gail Vaz-Oxlade reminds me of a sports coach who empathizes with players’ feelings one minute and calls them pathetic weaklings the next. Her book Debt-Free Forever delivers tough-love messages, hope, and wake-up calls for the debt-ridden. Most financial books are aimed at helping those who are well-off optimize their finances and investments to make even more money. This book is aimed at the other end of the spectrum where people have multiple maxed out credit cards but still can’t resist the latest iThing or pair of boots. If you’re ready, Vaz-Oxlade has practical steps to right your financial ship. “If you’re still waffling, put away this book and go buy something else you don’t need.” Vaz-Oxlade delivers practical advice for spendthrifts in a blunt but engaging style. Most people who overspend know they need to spend less and just telling them to spend less is unlikely to help. This book lays out practical steps for people to change their habits. Tough Mes...

QuickTax is now called TurboTax to line up with the U.S. product name. This appears to be a change in name only. A quick look at the Canadian version of TurboTax 2010 shows that it is quite similar to the 2009 version. I wanted to do a more extensive review before giving away copies of TurboTax 2010 but I’m still waiting for too many tax forms. For those who have never used QuickTax before, you get two different views of your tax information. One is the traditional blue forms that induce fear in even the most fearless Canadian. The other is a more friendly “Easy Step” view where the software takes you through a long series of questions until you’ve entered everything required to fill out the forms. For the most part, I use the Easy Step view because it’s easier and I’m less likely to forget things. Occasionally I switch over to the forms view to check on something or to understand exactly how a certain claim affects the calculations. On rare occasions over the years I’ve had...

Preet Banerjee brings us some short videos of interviews with Harry Markowitz. The topics are somewhat advanced and are quite interesting. My favourite part is Markowitz’s assertion that you can’t borrow unlimited amounts at the risk-free rate. This has been my criticism of many investing strategies that have the built-in assumption of borrowing at the risk-free rate. The Blunt Bean Counter gives us the benefit of his experience to explain who is likely to be audited by CRA. Financial Highway says that free checking accounts are becoming scarce in the U.S. Big Cajun Man gets a good rant going about the idea of good debt. I’ll allow that it makes sense to take on certain types of debt, but once you have debt you’re better off working toward getting rid of it. Million Dollar Journey gives a rundown of the top Canadian stock screeners. Money Smarts explains how to do a background check on a Canadian financial advisor.

Money Smarts recently ran a piece about the RRSP Home Buyer’s Plan and this reminded me of some trouble I got myself into years ago with this plan. Today the 90-day rule says that RRSP contributions made less than 90 days before making a Home Buyer’s Plan withdrawal cannot be deducted from your income in any year. The old rules used to have a longer restriction as I found out. Below is the explanation of my troubles that I wrote on a public forum. Something similar could still happen to you today if you run afoul of the 90-day rule. For those who like happy endings, I did eventually manage to save my $2500 (a large sum to me at the time). I used my RRSP money to buy a house and due to some unfair rules, I may lose about $2500. If you are thinking of entering the RRSP home-buyer’s plan, you may want listen to my troubles. My life story follows. In Jan. 1993, I had $12,000 in my RRSP. In Feb. 1993, I put in $5000 and claimed it as a deduction on my 1992 tax return. In Aug....

UPDATE: Just hours after I published this post my TransUnion credit report arrived by mail.  Apart from fairly harmless errors in my home residence history everything is in order.  Chalk one up for waiting and hoping it all works out! Just under 6 weeks ago I began the process of ordering my free credit reports from Equifax and TransUnion . Things went fairly smoothly with Equifax but TransUnion has been a tough nut to crack. I was able to order my Equifax report by phone , and I’ve since mailed in a request to have some errors be corrected. Equifax replied by mail with an update that corrected most of the errors. (They still list a comic phonetic spelling of the name of one of my past employers, but I don’t think this will cause me trouble.) TransUnion hasn’t replied at all. I tried to request my credit report by phone and was told I’d have to mail in a request. I mailed in a request carefully following the directions and haven’t heard back. They didn’t even mail ...

After reading about mental blocks on RRSPs , reader Robert asked for an explanation of the value of tax-free compounding in an RRSP. Here is my paraphrase of the essence of his question: Starting with the example of a 40% marginal tax rate, an investor can either save $6000 in a non-registered account or $10,000 in an RRSP (and get a $4000 tax refund for the same $6000 out of pocket amount). With an 8% return in the first year, the RRSP would grow to $10,800 and the non-registered account would grow to $6480. However, if the investor withdraws the RRSP money and pays taxes on it, he will have $6480 left. This is the same amount as was in the non-registered account. How is the RRSP any better? The short answer is that we haven’t accounted for the income taxes on the non-registered gains yet. Any interest would be taxed at 40%, capital gains at 20%, and dividends at around 19%. Even if the gains are all capital gains, the investor would have to pay taxes before he could spend ...

Many U.S. stock mutual funds and ETFs available to Canadians come with currency hedging to eliminate changes in the relative value of the U.S. and Canadian dollars from the fund returns investors get. This may seem natural to many, but it seems very strange to me. This comes from my view of different world currencies as a kind of asset class rather than absolute measures of value. The basic idea of currency hedging is that if a U.S. fund goes up 10% as measured in U.S. dollars, a Canadian investor will see his investment rise 10% as measured in Canadian dollars, even if the Canadian and U.S. dollars move relative to each other. In reality, Canadian investors would usually get a little less than 10% due to tracking errors caused by currency hedging. Just because the U.S. dollar goes up or down doesn’t mean that the value of U.S. stocks follows. Suppose that inflation rises in the U.S. and drops the value of the U.S. dollar over the course of the next decade. It doesn’t follow t...

Squawkfox is in fine form with her amusing and informative account of how to break up with your cable company. Big Cajun Man has some fun with his top 10 list of bad financial top 10 lists. Canadian Mortgage Trends says that when you’re offered free legal fees on mortgage refinancing, those fees aren’t so free. Money Smarts reports on changes to the Children’s activity tax credit for Ontarians.

For some reason even people who know better can’t keep themselves from listening to “experts” who make predictions about stock markets, bond markets, interest rates, and other aspects of the economy. Unfortunately, these predictions are about as valuable as confident predictions of the numbers for the next lottery draw. Many naive investors who lose money when stock markets drop are unhappy with their investment advisors. They think their advisors should have seen the losses coming and should have done something to avoid them. The truth is that no investment advisor can reliably see these things coming. These investors are doomed to be unhappy every time there is a significant drop in equity prices. Expecting market predictors to make accurate forecasts is about as logical as expecting someone to be able to predict the next spin of a roulette wheel. How much money will you plunk down on number 23 if a well-spoken “seer” says that 23 will come up next? This makes about as much...

I’m looking forward to a big, fat income tax refund for the 2010 taxation year. It will be nice to get the cash, but it would have been better if the money hadn’t been taken off my pay cheques in the first place. In many cases there is a way to do this using CRA’s form T1213 Request to Reduce Tax Deductions at Source . The most common reason for me to get a large income tax refund is that I made a lump-sum RRSP contribution. When I’ve made that contribution early in the year, I’ve sent in a T1213 form, got a favourable response from CRA, and took it to my employer who then took less tax off each of my pay cheques. Unfortunately, some complications with my 2009 income taxes that haven’t been resolved yet prevented me from using a T1213 form for the 2010 taxation year, but I plan to use one for 2011. If you plan to make a lump-sum RRSP contribution for 2011 well before the deadline in a little over a year, consider collecting your tax break a little at a time instead of waiting ...

Many commentators have made good analyses of the advantages and disadvantages of RRSPs. However, many who rail against RRSPs make a fundamental mistake in their thinking. For the purposes of this discussion, I’ll consider a Canadian Jerry who has a 40% marginal tax rate. If Jerry makes a $10,000 RRSP contribution, he will get a $4000 tax break. If he chooses to save outside an RRSP, he will have to pay the $4000 in taxes. This means that his choice is either to save $10,000 within his RRSP or $6000 outside his RRSP. Too many RRSP bashers lose sight of this fact. One way to think of this is that 40% of the money in the RRSP is not really Jerry’s or is some sort of bonus. Unfortunately, we’re not really wired to think this way. If Jerry’s salary were doubled, he’d be shocked initially and would feel very lucky and somewhat undeserving. Over time, though, he’d come to think that this new salary is his due. He’d probably even come to think he deserved more. This is human natu...

When it comes to stock market gurus making predictions, I pay little attention. But what if we did believe a prediction? Laszlo Birinyi predicted that the S&P 500 would get to 2854 on 2013 Sept. 4. If we really believed this prediction, what is the best way of exploiting it? You have to admire the precision of this prediction. Some would just predict 2800 sometime in late 2013. However, if we’re going to believe in one of these predictions, it might as well be a precise one. So, we take it as a given that the S&P 500 will get from 1310.87 last week to 2854 on 2013 Sept. 4. One way to exploit this would be with SPX options. Last week options expiring in December 2013 struck at 2500 were selling on the Chicago Board of Options Exchange (CBOE) for 95 cents. By our magic date in 2013 they would be worth 2854-2500=354 plus a little more for the remaining time value. Our plan would be to buy as many of these options as we can afford now, and sell all of them on the magi...

Better late than never! On with the interesting links this week: Tom Bradley wrote an excellent piece on what leads money managers and advisors to promise more than they can deliver, and how they can take a different approach to give their clients reasonable expectations. Larry Swedroe explains how bond funds game their risk ratings and make their returns look better than they really are. Million Dollar Journey gives one person’s take on a way to convert a principal residence into a rental property with mortgage deductibility. Big Cajun Man had a bad experience with a retailer and wonders why the retailer is more concerned about being right than continued business. Canadian Couch Potato ends his dividend myth series with an explanation of why the popular “yield on cost” measure has little real meaning. Potato has some analogies to explain the internet usage-based billing (UBB) debate. Financial Highway has some suggestions for how to get a discount from your car i...

The consensus among index investing experts is that index investors with small portfolios should invest in mutual funds such as TD’s e-series and those with larger portfolios should invest in index ETFs. The idea is to minimize portfolio costs. However, the best choice depends greatly on how you trade in your portfolio. Mutual funds tend to have higher MERs than ETFs do, but buying and selling ETFs has the costs of commissions and spreads. Once the investor’s portfolio becomes large enough, the MER savings with ETFs overcome the trading costs. But we can’t determine the portfolio size where ETFs become superior without knowing the investor’s trading habits. To illustrate what I mean we’ll consider two hypothetical beginner investors: Jack and Jill. Each investor has chosen a portfolio mix of domestic stocks, foreign stocks, and bonds with target percentages for each. Jack chose to invest in mutual funds and Jill chose ETFs. Jack likes to stay very close to his target percen...

Many investors who live off their investments use the rule of thumb that you can spend the interest you make, but shouldn’t touch your principal. I’ve found this way of thinking common among those who are now well into their retirements. However, their notions of what “principal” means aren’t necessarily useful. The idea behind this rule of thumb is sensible enough. If your savings are adequate to produce enough return to live on and you never spend your principal, then you should be set for life. GIC Investors For GIC investors, the most common notion of principal is a fixed number of dollars. A retiree with $500,000 in GICs feels that he can safely spend the interest from the GICs. These investors long for the good old days when interest rates were high and they had more interest to live on. The problem with this thinking is inflation. Each year the $500,000 of principal will have less purchasing power than it had the year before (unless there is deflation). Many peopl...

Dividend investing is very popular. Many investors like to have their long-term savings in a collection of dividend-paying stocks. There can be good reasons for preferring dividend-paying stocks over other stocks, but I suspect that the main benefits are emotional. For investors in the lowest tax brackets, dividends are taxed less than capital gains. This is one good reason to prefer dividends over capital gains. However, most of the dividend investors I know are in a high enough tax bracket that they would be better off with capital gains. Some investors believe that dividend-paying stocks pay a larger total return (dividend plus capital gains) than non-dividend-paying stocks. All evidence I’ve seen says that this isn’t true. Some investors believe that long-time consistent dividend-paying companies are less risky than other stocks. I have no opinion one way or the other on whether this is true, but I don’t think this is the dominant reason why some investors prefer divide...