Year: 2010

Fisking John Heinzl

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The problem with investing is that it is as much an art as it is a science.  There is no one formula which will lead to success.  Investing is more about a person’s temperament than it is about implementing rules of success. Nevertheless, financial columnists are always giving rules of investing.  John Heinzl of the Globe and Mail offers several today in his article “Thirty nine investing secrets revealed at last!“, and I list only the ones in italics that I wish to comment on:

1. Learn as much as you can about investing. Nobody (except maybe your heirs) cares more about protecting and building your wealth than you do.

This is probably not feasible for many people.  Sure if you have nothing to do except read about investing it fits.  But consider my father-in-law who was a successful entrepreneur who started two different prop-shops in his career in two different cities.  His greatest investment was his own business, and when it came to his retirement savings, he needed to rely on others.  My own father was a physician; during my entire childhood I don’t remember my dad ever watching an entire 1 hour television show without falling asleep.  People with successful careers must unfortunately rely on others.

2. As the ING guy says, “Save your money!” Without savings, you have nothing to invest.

3. If you’re having trouble saving, track your income and expenses to the nearest dime for a few months. It’s the only way to find out where your money is going and, hence, the only way to figure out where you can cut back to save more.

Being able to save many not be about tracking every dime so much as keeping in check one’s desires and cravings.  But sure, track your expenditures and see analyze how you are spending or even wasting your money.

5. Keep a percentage of your savings, roughly equivalent to your age, in low-risk bonds or GICs. This is your “sleep at night money.”

In periods of inflation, fixed income assets that pay low interest rates are as risky as any other asset class.  With governments actively seeking to create inflation, all investments are risky.  All of them.

7. Always be on the lookout for “black swans” – rare and destabilizing events that aren’t supposed to happen but do. (Credit meltdown, anyone?)

Well disasters can happen.  Even death.  That’s why it is important to have faith in God and trust in Jesus Christ for one’s eternal salvation.  But being on the look out is not the same as being prepared.  How would one have prepared for the last credit crisis?  I think by not being leveraged to the hilt and therefore having the cash or credit to be able to take advantage of the bargains that will be out there if there is another meltdown.  If it ends in your country being defeat or annihilated in a world war , it won’t matter what you invest in.

8. Invest a portion of your savings in a low-fee index mutual funds or exchange-traded funds.

This is advanced investment advice?  Fifteen years ago when I had a less than $2000 for my registered retirement account I used mutual funds.  But I eschew both ETFs and mutual funds today, because as a DIY investor I pay far less in commissions and management fees at $9.99 per trade for stocks.

9. When buying individual stocks, stick with those that pay dividends, preferably rising dividends.

My best performing stocks don’t pay dividends.  They are small, junior oil companies that are high risk but largely off the radar.  You usually pay premium for large companies that pay rising dividends.  In the long run, they perform very well, but neglected small companies can give multiple rates of return which greatly outperform the dividend payers.

10. Reinvest your dividends and interest payments to benefit from compounding.

11. Remember that investing isn’t a sprint but a marathon – a very, very long marathon. The longer you invest, the greater the benefits of compounding.

This is true.  Reinvesting the earnings from my stocks that pay monthly redistribution has really work out well for me.

12. Don’t listen to stock tips from your brother-in-law.

My father-in-law gave me a great tip:  tfl, which became mel.  It is my best performer thanks to my strategy of averaging down.

13. Avoid “story” stocks. They’re usually duds.

I don’t know what a “story” stock is.

14. Stay out of debt. If you’re in debt, get out.

In October 2008, my wife and I took a HELOC and bought numerous Canadian income trusts.  Thanks to trading, distributions and my day job, I’ve been able to pay it off completely.  Then I borrowed funds on my margin account in order to do carry trade against the US dollar.  I am making net profit from the distributions and am waiting for the investments to improve in value and the US dollar to depreciate.  So far I can’t complain.  Not all debt is equal.  Some debt is good debt.

15. Pay off your mortgage as quickly as possible.

This is too true.  Because we replaced our mortgage with a HELOC. The advantage is that the money that we now borrow against our house is used for investments for which the interest is deductible (in Canada, interest on the mortgage for a person primary dwelling is not deductable, only interest on investments which provide an income).

16. Take full advantage of RRSPs, TFSAs and RESPs.

This is advice for Canadians (like me soon to be) and residents of Canada.

17. Invest in Canadian banks. The same reasons we hate them as customers – too big, not enough competition – are why we love them as investors.

Ok.  Canadian banks however experience periods when they are over bought.  They are not a panacea investment.  I’ve lowered my exposure to banks recently in favor of higher yield oil companies.  I have profitably traded Royal Bank.

18. Invest in boring companies – pipelines, power producers, utilities.

I think Enron was a utility company, power production and pipelines.

21. Always question your adviser, and never pull the trigger on a trade until you get a second opinion from someone you trust.

When we had an advisor he would talk us out of our ideas.  At first he saved our asses because we didn’t know anything.  Later it became annoying; so I took over completely our portfolio and learned to rely on my own judgement.  I win some and lose some, but I now always save on commissions.

22. Read The Investment Zoo by Stephen Jarislowsky.

23. Visit the website, dividendgrowth.ca, run by Mr. Jarislowsky’s biggest fan, Tom Connolly.

24. Read The Single Best Investment: Creating Wealth with Dividend Growth , by Lowell Miller.

Thanks Mr. Heinzl!  I’ll have to check these out.

25. Keep your trading costs as low as possible.

27. Keep trading to a minimum to reduce commission costs.

I have had some success, and some failures, in well-timed trades.  My commission at $9.99 are a negligible cost.

28. Resist the urge to check your portfolio every five minutes. It encourages excessive trading.

I confess.  But I don’t trade excessively at all.

29. Consolidate your investments with one broker. It’s easier to track how you’re doing.

Once over 1 million in an account you aren’t insured anymore in  Canada.  Be careful not to exceed that limit.  Also beware of the Madoffs in the world.  The worst possible investment would be to be consolidated in pyramid scheme.

34. Don’t invest in anything you don’t understand.

Thirty-four is very true.  But you don’t have to understand absolutely everything, just the basics like P/E ratios, revenue, dividend yield, book value, market capitalization and net asset value (NAV).  Also, one should have a fundamental understanding of the business, why their products sell, and who are their competitors and their markets.

The New Berlin Wall: Heroes Earnings Assistance and Relief Tax Act 2008

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Yesterday I sent my application for Canadian citizenship via registered mail to the Sydney, Ontario, Processing Centre.  An American citizen from birth, I’ve lived outside the USA, first as a student then as a permanent resident of Canada, since 1986.  I’ve never really felt that I needed Canadian citizenship.  My reason for applying now is that it is inconvenient being an American living in Canada.  So before my citizenship ceremony in a year or so, I will be renouncing my US citizenship.  Likely, for a few days while awaiting the ceremony, I will be a stateless person. [actually, I became a Canadian on February 28, 2011, and informed the US Consulate in Toronto of my relinquishment on April 7, 2011]

The United States is the only country in the world that requires that all its residents and all its citizens, even if living abroad, pay tax, though there is an earned income exemption of $70,000 [over 90,000 today] and foreign tax, dollar per dollar, credit.  The threshold for filing is ridiculously low.  As a married person filing a separate return, I must file if I make more than $2000; this despite the knowledge that as a resident of Canada, it is difficult to imagine very many scenarios where I might be liable for tax, since the rate here is higher than in the USA, particularly for lower income earners.  But it is a hassle to file every year, and it creates a lot of anxiety for me.  Last year, my accountant forgot a certain form and he was sick when I was required to send the amendment, and so I had to do it myself and that created a huge headache.

So I am not going to renounce my citizenship because I owe tax.  I am liable to the IRS for nothing.  I am doing it first of all because I am tired of filing a frivolous return to the IRS each year; frivolous because I owe nothing, and cannot possibly owe anything living here in Canada.

But there is another even more important reason which I call the “New Berlin Wall”.  Since 2008, the US has placed particular restrictions on wealthy people who wish to expatriate.  If I were to own 2 million in assets or if my average net income tax liability over the last five years were $139,000 , I would be a “covered expatriate” upon renouncing my citizenship.  The law penalizes these individuals with exorbitant expatriation tax that boggles the mind.  Why?  To keep them in the USA.  So it is a Berlin Wall designed to keep people from leaving the US.

I am long way from being a covered expatriate.  But with the devaluation of the dollar due to hyperinflation, I foresee being there soon.  Therefore, I’ve decided to leave before the law applies to me; because it was much easier to leave East Berlin before the Wall was built.

Oh and by the way, Go Canada Go!!!

[corrections, 20 April 2011]

Is debt sin?

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I stumbled upon an interesting article today called, “Debt is Sin“.  The author, Bob Mallory writes:

The fact is, everyone knows that debt is wrong, and no one refers to it as if it’s a good thing. Yet the further we seem to wade into financial bondage in America, the more our Christian financial counselors and pastors falter when it comes to the Word of God.

Let’s cut to the chase: Debt is a sin. It’s a sign of a covetous heart, and not trusting that our Heavenly Father will provide us with everything we need. Since American Christians worship an insufficient savior, they turn to credit to purchase the things they want. The Scriptures are consistently negative when discussing financial debt for believers. It’s never neutral or positive, as many financial counselors will tell you.

He lists a set of scripture verses as proof texts:

Exodus 22:25-27; Deuteronomy 15:6; Deuteronomy 28:12; Deuteronomy 28:43-45; Leviticus 25:35-38; Nehemiah 5:1-5; Psalm 15:5; Psalm 37:21; Proverbs 6:1-5; Proverbs 11:5; Proverbs 12:9; Proverbs 22:7/1 Corinthians 7:23; Ezekiel 22:12; Matthew 5:42; Matthew 6:24; Luke 6:34-36; Luke 16:13; Romans 13:8; 1 Timothy 6:6-10; 2 Timothy 3:1-5.

Now first of all, many of these texts warn against covetousness and the love of money (e.g., 1 Tim 6.6-10; 2 Tim 3.1-5; Matt 5:42; Matt 6:24), but not against debt.  Others, to be sure, counsel the Christian to avoid debt (Rom 13.8), explaining that debt puts the person into virtual slavery to the creditor (Proverbs 22), and naturally, it was a blessing that Israel was to be a creditor nation, not a debtor nation, unless it sinned against the Lord, in which case they would become a debtor nation (cf. Deuteronomy).  Proverbs 6.1-5 actually counsels against providing security for someone else’s debt.  Finally, in Israel, it was against the Torah to charge another Israelite at interest.  But do these passage all say that debt is sin, no matter what kind of debt it is?

First, I would suggest that this way of thinking is basically a “fundamentalist” approach to the Scripture (see this post) in that it attempts to create a new law for Christians; that if the Christian followed that law, he would be on the path of blessedness.  It may be true that this path of avoiding every form of debt could be blessed.  Certainly in our current recession, had you avoided debt, you could be far ahead of those who were leveraged to the hilt, such as stock holders who received margin calls in 2008 and 2009; or Lehmans and Bear Sterns, which were highly leveraged investment firms.  Such advice might have seemed prescient for such people.  However, I approach the Bible differently.  The Bible contains wisdom and advice, which is bound to a particular context.  The crucial task of hermeneutics is to determine the principles taught by the Scriptures and to attempt to apply them in new cultural contexts today (see Klein, Bloomberg and Hubbard, Introduction to Biblical Interpretation, chapt. 11) through the help of the Holy Spirit and the accumulated wisdom of the church through the ages.  Thus, the categorical use of biblical advice as the new Torah is not a good way to apply the Bible today.

Contemporary financial advisers correctly distinguish between good debt (cf. this post) and bad debt. The effect of bad debt is that the debtor becomes a slave to debt payments.  The effect of good debt is the opposite.  It leads to profit and wealth.  I would agree that wisdom teaches us that bad debt should be avoided, and it is a sin if it is accompanied by greed and a lack of self-control.  A poor person who borrows in order to survive is probably to be pitied rather than called a sinner; the Bible often defends such people and condemns those creditors who exploit the poor.  However, people who accumulate credit card debt to buy consumer goods because they can’t defer gratification have a problem, not too dissimilar from alcoholism.  It is a spiritual problem related to a religion of consumerism.

But there is also good debt.  Good debt is money borrowed to make a gain or profit.  An example would be the borrowing of money to purchase a high yield stock.  As long as the interest rate is lower than the yield and the stock maintains its value or experiences a capital gain, the debt creates a profit for the debtor.  Another example would be the purchase of a house to live in or to rent out;  as long as the mortgage holder saves on rent, builds up equity through the repayment of the principle and capital gains, this is good debt.  Another example would be the line of credit that a business has in order to fill orders.  Without the line, they would not be able to make sales without first taking a large percentage of the cost from the buyer, which is actually a form of borrowing from the buyer instead of the bank.  This is not always convenient. So businesses will often borrow money from the bank in order that they do not have to charge their customer in advance.  Businesses also have what is called “net-30” or “net-90” etc.  This means that they extend credit to their customers of 30-90 days; the customer in turn has borrowed because they don’t have to pay for it up front–they can then in turn sell the item to their clients and pay their supplier only after they themselves receive payment.  Without these different kinds of debt, businesses today would come to a virtual standstill.  Our current economic system puts creditors with capital together with businesses and people who need it–banks serve as the go-between between these two parties, and everyone is supposed to make a profit from such transactions.  The question then is:  Would the Bible forbid categorically such transactions?  Is it so clear that good debt is sin?  I don’t think so.  My wife’s company which was started by my father-in-law about 45 years ago has debts;  it provides jobs to 25+ employees.  Now if we decided that it was sin to take on debt, undoubtedly we would have to close the business, and all those employees would lose their jobs.  I think it is better to use debt wisely and to continue to provide good jobs with benefits to these hard working men and women.  [Note it would be eventually possible to use retained earnings instead of bank credit to make these transactions–but Canadian tax law makes it very expensive to retain earnings in a company of this size].

But is there biblical support for my position?  Let’s consider the parable of the talents in Matt 25.14-30, which is the “canon within the canon” of this blog.  Jesus teaches that a man going away on a journey lends his capital to three of his servants, with the ostensible purpose that upon his return, he will receive a rate of return on his deposit.  These three servants receive 5, 2 and 1 talent respectively.  This is an  enormous amount of capital:  a talent is 6000 denarii, and a denarius is probably about 2-4 days wages at minimum wage in ancient Palestine.  So the man who received 5 talents had enough capital to pay 60,000-120,000 people minimum wage for one day; this would certainly be enough to start a business of some kind.  The servant with five talents received the equivalent of well over half a million US dollars.  The first two servants were entrepreneurs who were able to double their master’s money during that period. They would receive their reward for their diligence and their willingness to risk.  The one who received one talent was afraid of his master and of risking the capital, and so he buried the talent which equals about US $87,000-174,000 (considering $7.25 per hour as minimum wage). Imagine the master’s wrath!  He lent the wicked servant an incredible sum and the man buried it.  So the master says that he should at very least have given it to money lenders so that if he himself wasn’t going to risk it, they would at least find a suitable placement for the funds, and pay him interest on the money.  Jesus called this man wicked, and he received his reward (to be cast in outer darkness).  So Jesus teaches us that the wise risk of capital is not a sin; the sin here is the failure to put at risk the capital that has been lent.

This parable is amazing on so many levels.  But at very least we must acknowledge that Jesus commends those who are not afraid to take risks.  But he does not even tacitly condemn creditor/debtor relations in this parable.  He acknowledges them as facts of life and uses them to illustrate our relationship to the Kingdom of God.  We are debtors before God, because it is He who has made us his regents and lent to us his capital to see what we will make of it, and we need to use what we have from Him profitably so that on the day of reckoning our master will commend us as good and righteous investors.

I would like to conclude by making the following points:

(1) The New Testament is not the new Torah.  Its principles need to be applied to new contexts with judicious wisdom and with the guidance of the Holy Spirit.

(2) We need to distinguish between good debt and bad debt.

(3) Jesus does not condemn the wise use of good debt, but rather, told a parable in which standard business practices illustrate our indebtedness to God.

(4) In our culture, not all debt that leads to profit making is a sign of greed, for it can be vehicle for creating wealth (which is a blessing) and providing jobs.

(5) The wise servant is the one who can thrive in the circumstances in which he finds himself.  Thus, we must ask, given the current economic environment, culture,  and tax structures, how can we Christians learn to thrive and create wealth?

Plagiarism: An international education bubble

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Prof. John Stackhouse writes about plagiarism on his blog.  He writes:

Plagiarism is a vital problem in academic work, since the academy is a culture of both honour and honesty. (Don’t get me started on how dishonorable or dishonest the academy can be—I’m talking about ideals here.) Without honour and honesty, we can’t do our work since so much of it depends on trusting each other to tell the truth, including truth about our sources.

In my time as prof (both in Africa and Canada), I have given what I think is a disproportionate number of “F’s” for plagiarism, not because I was too hard but because too many of my students were ill-prepared for their studies at the undergraduate or master’s level.  Generally I found that my academic deans were halfheartedly supportive, for it was disruptive of the process of higher education for one of the professors to mark students so hard.  I am of the opinion that some cases of plagiarism merit immediate dismissal; other students should be sternly warned and should fail the paper or class without remediation.  But in every case, I was advised to wield a lighter hand and to allow the students second and even third chances.

In my opinion, there is an international education bubble.  We have too many schools and too many people who graduate from the schools whose diplomas don’t indicate any real competence.  I know that I’ve passed a few students who had no business being in school.  I even had one case where a student repeatedly failed remediation in a course with me, a course which was necessary for his undergraduate degree; and yet the dean still allowed him to enter into a Master’s program and to defend his thesis while never having passed my course!  He is in Congo-Brazzaville now– I heard he became a professor in a faculty of theology there.

Paranoid fear of government

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Craig Carter wrote an insightful post at his blog, “Applying the hermeneutic of suspicion to the state.”  Liberals, he says, are afraid of big business but trust the state.  He shows that such trust is utterly unfounded.  In my view there is insufficient fear of government.  Consider if you were a car manufacturer.  Now you are competing with Obama Motors (GM, Chrysler) and the US government is your competitor.  Wouldn’t it be frightening if all of a sudden your company was being investigated because of floor mats? I mean it isn’t as if everything in my GM cars works all the time.

Lord Conrad Black is in a federal prison today because he received non-compete payments which are perfectly acceptable in Canada. The Canadian media was urging the confinement of this Canadian because he is rich and a conservative.  But if you are terrorist in Guantanamo or subject to extraordinary rendition, or if you are on death row, the Canadian media gets out the handkerchiefs and begins weeping for you.  But with Lord Black, it was, “Throw him in prison and lose the key!”  Black’s conviction has put a huge dampening effect on my desire to do business in the United States.  In fact, forget it.  I told my brother on Saturday that I wanted to settle my 19% interest in our limited partnership in Austin, Texas, before the end of 2010.  It is too much hassle for me to conform to all the tax regulation.  I have enough problems worrying about what the CRA is going to do to me.  I want to stay out of US federal prison.  But I assure you, dear Reader, that the US federal government already has the power under the current federal law to throw me in prison for a very long time–not for substantial crimes but for procedural errors.  Not that the Feds would want to throw me in jail–there are bigger fish to fry–but the very existence of such powers makes me afraid, very afraid.

We test drove a RAV4 last week.  We made an offer and hopefully our new vehicle (for my wife) will be delivered by Saturday.  It was built here in Ontario.  It is our first “foreign” car (before we were married I owned a Mitsubishi pickup).  Currently we drive a Chevy Malibu and Pontiac Montana (which I’m keeping).  The 2002 Malibu has an appraisal value of $900 CDN from the original price of $28,000.  The A/C and heat don’t work, the ABS brakes are faulty, and the electrical system diagnostic light is malfunctioning.  Apparently, our new car is much more likely to maintain its value over the long haul.  As consumers, we are voting against government owned car companies and we believe that it is incorrect for the government to harass the competition. Therefore, we are using our own funds to support a NGCC (non-governmental car company).  We believe that the government should not have the power to eliminate their competition through unfriendly regulation and harassment.