Author: Mr. Cheap

Categories
Book Review

Book Review: The Alchemist

A friend gave me a copy of “The Alchemist” by Paulo Coelho and it’s one of the few books that I’ve liked well enough to keep in my personal library (I move a lot, so I try to keep the weight to a minimum). I’m not usually into “personal motivation” style books, however this book is the odd exception that I greatly enjoyed it (and have re-read it a couple of times and loaned it to friends).

The book centers on the shepherd Santiago, who has happily tended his flock of sheep and felt quite content for the lifestyle he has chosen. One night he dreams of a treasure buried at the base of the pyramids. Unsure what to do with this information, he eventually embarks on a quest to find this treasure (his personal legend) and encounters a host of people who help him, hinder him and provide insight on his journey.

As an allegory, the book explores the author’s views on the meaning and purpose of life, and how we get sidetracked from doing what we truly desire (and value). At one point he meets a Muslim man who has dreamed of traveling to Mecca his entire life, but has always found excuses why not to go. Eventually, after his interactions with Santiago, the Muslim man realizes that he has not gone to Mecca because he fears realizing his life’s dream, and losing his reason to live:

“Because it’s the thought of Mecca that keeps me alive. That’s what helps me face these days that are all the same, these mute crystals on the shelves, and lunch and dinner at that same horrible cafe. I’m afraid that if my dream is realized, I’ll have no reason to go on living.

“You dream about your sheep and the Pyramids, but you’re different from me, because you want to realize your dreams. I just want to dream about Mecca. I’ve already imagined a thousand times crossing the desert, arriving at the Plaza of the Sacred Stone, the seven times I walk around it before allowing myself to touch it. I’ve already imagined the people who would be at my side, and those in front of me, and the conversations and prayers we would share. But I’m afraid that it would all be a disappointment, so I prefer just to dream about it.”

Other characters have similar obstacles that prevent them from pursuing what they desire in life. Conversely, some characters are in pursuit of their personal legends, and their interactions with Santiago help them both on their journeys (he meets an Englishman trying to learn how to turn lead to gold, and falls in love with a woman whose personal legend was to find and love him).

Other concepts include paying to pursue our legends (he promises a gypsy 1/10th of his treasure to interpret his dream, and gives a king 1/10th of his flock of sheep for information about how to find his treasure. Between them they teach that everything in life has its price.

Allegorical Structure

This book probably wouldn’t have worked if it was presented as a literal guide to getting what you want in life.  I’m not sure if this is a good thing or a bad thing.  Perhaps the structure gives the impression of meaning to ideas that are tired clichés?  Perhaps it is the best vehicle to convey ideas about universal human experiences – as soon as you become concrete, you lose the ability to convey your ideas to some readers?  I have trouble pulling out specific strategies that I got from the book, and I’ve been hard in past reviews on other books that are short on specifics.  This book did a good job of getting me reflect about what I want to do in life and what’s holding me back from doing it (conveying knowledge and a fear of failure respectively for the record).

How To Get It

The author doesn’t mind having his books pirated, however he doesn’t own the copyright for foreign translations (the original is in Portuguese) so you can decide for yourself if you’re comfortable finding and downloading a copy.  It’s a very fast and easy read, and while some of the ideas are quite meaty, it’s digestible at multiple levels.

In your heart of hearts, what do you think you should be doing with your life?  Or, if you don’t mind the theological overtones, what do you think is the purpose of your life?  If you’re not actively pursueing this, what’s holding you back?

To order this book:

If you are from Canada then please use this link for Amazon.ca

From the United States then please use this link for Amazon.com

Categories
Investing

Mr. Cheap Answers – Should I Buy Some Stock on Margin?

We recently received the following question by e-mail:
Hi Mr. Cheap, I just wanted to get your opinion on this theory and if you think its worthwhile in the long run. The theory goes like this; for every dollar you have in a trading in account, you can borrow a dollar on top of that. In some accounts, even more than that. Now, I’m a young guy(21) and plan on investing in dividend stock that offer me a decent yield(over 5%). I have an account with scottrade and the most they will charge you on inteest in a given year is 7.5%.
My question is, if I started off with $2,000 in account and therefore have buying power of $4,000(due to the 1 for every 1 rule), would it be better to buy $2,000 worth of  shares as I can of a stock like MO(altria) using only my cash which gives me a 7.5% dividend or $4,000 worth of shares? The idea behind this question is that in the first year, the money I make on the extra shares earned on the first year would be canceled out with the interest paid to scottrade for the borrowed money but every year after that, my extra shares earned off the borrowed money would be able to compound interest free. Another note is that as time goes along after my initial deposit of $2,000 into my account, I would continue to put in about $200/month and hopefully more as I earn more. This would allow me to buy more shares and therefore earn more more interest on the shares as time went along. Does this make sense? After the first year, am I right that I would be making pure profit off the extra shares that I earned from the borrowed money?

To start with, I’m not 100% sure what changes after the first year.  If you borrowed $2000 and bought stock with them, and if the dividend payments EXACTLY matched the interest payments, you’d keep paying on the debt forever (not just 1 year).  If you mean that you’d be paying off the margin debt with $200 added to the account each month, yes you’re right (I guess you’d pay it off in about 10 months ignoring dividends from the stock you bought that wasn’t on margin and decreased interest payments as you paid down the debt each month).  I wrote a post about doing something similar to this.

I always enjoy question / discussion about buying on margin (or with other borrowed funds). I share you sense of excitement when considering constructing such financial vehicles, as it almost has the feeling of playing alchemist, creating wealth out of nothing. Please be aware that this feeling is *FALSE*, and there’s nothing magical about buying on margin. Basically you’re exchanging increased risk for increased reward (as they say, there’s no free lunch).

To begin with, Altria is a great company and a great dividend payer. At it’s current dividend yield of 7.36% you’re right that its dividends almost match the interest you’d be paying, and it *looks* like you’d be owning the stock for free. That’s how I felt when I bought Bank of America (BAC) on Feb 4th, 2008 for $44.46. At that point it had a dividend yield of 5.8% and had been increasing its dividend for 30 consecutive years (read over the analysis and look some more at the company’s recent history since this was posted if you want to be impressed by Dividend Growth Investor and his analysis).

To make the analogy perfectly clear, Altria may be a great company but you never know what the future holds. I was shocked that BAC cut their dividend. I was floored when Washington Mutual went bankrupt. The future isn’t certain, and nothing makes it impossible for Altria to cut its dividend or go bankrupt (perhaps Obama might decide everyone in America has to stop smoking since Michelle made him quit).

If Altria cut its dividend a number of things would happen:

  • Your dividend payments would no long cover your interest payments and you’d have to make up the difference yourself
  • The value of the stock you own would probably plummet, meaning that you’d owe more money than the stock you used it to purchase is worth
  • If the stock price dropped enough, you’d get hit with a margin call, which would force you to repay a portion of the money you owe, otherwise they’d sell stock (at a loss) from your portfolio to cover it.  We regularly get people complaining on our brokerage posts about having been forced to sell at a loss due to a margin call.

One of the other considerations is that borrowing to invest is great from a tax perspective, but as a young guy, your income probably isn’t in the highest bracket, so you won’t be able to benefit from this (as much as a 50 year old medical doctor might for example).  I’ve been backing off on my margin debt for partially this reason:  I’m a poor grad student, so the tax deductions don’t help me.

I know I shouldn’t make investment recommendations, but I can’t help myself.  Personally (and remember, I’m just some guy who likes to blog) I’d suggest you save up cash in a high-interest savings account (and keep adding the $200 / month to it).  As a 21 year old, who knows what the future holds and you may find capital preservation most valuable at this stage in your life (you could use that money to start a business, deal with a financial emergency, as a down payment on a condo or house, to pursue further eduction, to get married without going into debt, etc, etc, etc).

If you *insist* on getting the cash into the stock market, I’d follow Canadian Capitalist‘s sleepy-mini portfolio (or one of the other easy, passive investment vehicles).

If you *insist* on buying an individual company, and understand that you’re massively increasing your risk & volatility by doing so, I’d buy MO (or whatever company you decide on) in a low fee brokerage account (Scottrade is pretty good at $7 / trade) WITHOUT using margin.

If you *insist* on buying on margin, I’d suggest you consider a strategy I mentioned at the start on using margin to lower trading costs and keep the margin debt below 10% of your portfolio value.  When I was 58% on margin, the Canadian Capitalist wisely assessed this feelings on this as “Ouch. What are you thinking Mr. C?” (read over the comments on that post, a lot of smart people there recommend approaching investing on margin VERY cautiously).

Do any commenters have additional / alternative suggestions for a 21 year old thinking about getting into margin investing?

Categories
Personal Finance

H1N1 and Irrationality

pigI’ve been amazed at people’s reaction to H1N1 for a number of reasons.  I was *SHOCKED* that they were able to get the name changed from “Swine Flu” to H1N1 (people involved with the pork industry started oinking immediately after the pandemic started and amazingly managed to get it renamed).  I still like to call it “the pig flu”.

I’ve also been amazed at the crazy reaction people have been having, trying to avoid contact with other people and lining up for hours to try to get vaccinated (and coming close to rioting when they’ve run out of vaccine).  Pandemic is a scary word, but I’m going to go on record saying that we’ll look back at H1N1 and say (much like Y2K or SARS) “what did we get so worked up about?”

Please check out Mike’s post – Should I get H1N1 Vaccine for my kids?

As of Oct 26th, 86 Canadians have died.  This is sad.  Since the flu debuted in April, let’s call this 13 people / month or 0.41 Canadians a day.  The average Canadian has a (0.41 / 33,212,696 [Canadian population]) = 0.00000123%) chance of dying from the pig flu.  Another way of expressing this is you have a 1 in 81,006,575 chance of dying from the pig flu EVERY DAY!!!

Given that Americans have a 1 : 280,000 ANNUAL chance of being struck by lightening (for the sake of simplicity, let’s assume comparable odds for Canucks),this would give us a 1 : 102,270,000 (280,000 * 365.25) daily chance of being struck by lightening (slightly less likely than dying from catching the pig flu).  How many precautions are you taking to avoid that?

In 2005, 2,860 “road users” died.  At 7.83 / day, this gives us 19.1 TIMES the chance of dying on a road (in a car, as a pedestrian or as a cyclist) than from H1N1.  This actually UNDERSTATES the comparison, because we considered all Canadians with the flu, but only “road users” are at risk of dying on the road.  Remember also, this is just fatalities, we’re ignoring non-fatal injuries.

To switch it around and consider a happier thought, the chance of winning the Lotto 649 is 1/13,983,816 = 0.000007151%, or more than double your daily chance of dying from the swing flu, EVERY TIME YOU PLAY!!!  Should we all run out and buy tickets?

Of the hordes stampeding to get vaccinated, how many are avoiding roads?  If we consider the risk of death associated with road use to be reasonable (which, clearly, most of us do), how can we be panicking over something that is far less likely to affect us?

Some may say “well, yes, but there’s a CHANCE it’ll kill me, so isn’t it worth taking some small precautions to avoid it?”.  Yes, sure, but remember there are INFINITE ways to die.  Some of the actions you’d take to avoid some, will INCREASE your chance of others (say you become a shut-in to avoid the dangers outside your home, you’ve now increased your exposure to all the ways you can die at home).  If you can easily get vaccinated and it’ll reduce your stress level, knock yourself out.  Just to pump up the stress back up a little, think about all the things that are more likely to kill you that you haven’t even thought of!

What does this mean for a personal finance blog?

First of all, behaving rationally is worthwhile in life, but it’s VITAL in investing.  Getting caught up in the madness of crowds is what leads to dot-com (or tulip) bubbles.  Just by identifying the craziness as craziness (and getting off of the ride), you can improve your returns MASSIVELY.

Secondly, I’m not sure what they are but I think there must be some killer deals to be had based on the public’s over-reaction to this.  Perhaps now is the time to book a flight and travel on the cheap?  Maybe some stocks are beaten down with investors expecting the next black plague.

How worried are you about H1N1?  Can you think of any investments that would pay off if H1N1 turns out not to be a big deal?

Categories
Announcements

Money Back Guarantee

Eaton’s was a famous Canadian department store which was famous for it’s catalog, being a pioneer in having a “no haggling” policy and for its slogan “Goods Satisfactory or Money Refunded.”  Combined with the Eaton’s reputation, this provided a powerful guarantee to customers:  either they’d be satisfied with a purchase, or they would get their money back.  It showed great confidence, on the part of Eaton’s, that they could deliver goods as advertised (and allow the customer to be the judge).

In “The Four Hour Work Week” Tim Ferriss discusses how he finds it hard to market with a “money-back guarantee” (saying that customers have become too used to it) and instead offers a “Lose-Win Guarantee” which is that not only will he refund money, but he’ll give a 10% bonus if someone requests a refund.  He explains the money-back guarantee being dead as people don’t want to have to spend an afternoon at the post office and that risk elimination isn’t enough.

I don’t think this is the reason money back guarantees don’t work.

It seems like EVERY infomercial offered on television, EVERY over-priced seminar or “boot camp” and EVERY scam posted in the classifieds, on a lamp post or bulletin boards offers a money back guarantee.  They can easily offer this guarantee:  if they’re prepared to lie about their product, why not lie about a fake guarantee?  Ripoff Report has 8,430 hits (as of writing) on the term “money back guarantee“.  I feel for some of the posts, where they say “they have a money back guarantee, I asked for my money back, and they WOULDN’T GIVE IT TO ME!!!”  Sadly, for people willing to mislead consumers about their products or services, lying about a guarantee is pretty easy.  They’re also experts at making sure you can’t cancel credit card transactions (one trick is to get you to sign a contract, even for a product, then the credit card company can’t do a chargeback).  A guarantee is only as good as the person or company offering it.

This wacky business idea is fairly straightforward, you set up a business that sells its reputation to honest small vendors who actually want to offer a money-back guarantee (or any variant on it).  For a flat-rate (or portion of the transaction), you provide the ordering services (phone, website or whatever) for the vendor, collect the money and hold it for a set “money back guarantee” period.  At the end of that period, if the customer hasn’t complained, you pass the funds on to the merchant.  If the customer complains during that period, you give the money back to them.  It’s like a very easy to use escrow service.

In order to gain (and build) consumer confidence, the company would require vendors to conform to set structures.  For example, the vendor couldn’t create complex return procedures to prevent return of goods, or very short return periods so customers would be out of the return period before the received the goods.  If the company found a vendor was getting an unusual number of complaints or returns, they would suspend selling for them until the problems were investigated and remedied.

Customers would use a single point of contact (one website and one phone number) so they’d always know they were dealing with the real escrow company.  Orders would always be recorded (including audio recording of all calls), and this transaction history could be made available, with the consent of the customer, in cases of dispute.  If someone was complaining about the escrow company mishandling things, they could say “do we have your permission to post details of the transaction and show that you were told about limitations or time limits?”.

Vendors would have their “terms of sale” vetted, and made to conform to a standard, straightforward agreement (that would always be presented to the customer at time of purchase).  Any terms that tended to be confusing to large numbers of customers would be removed from current agreements and not used in future agreements.  For example, if customers would be required to package and ship items back to the company for a refund, the escrow company would tell them this (and provide an estimate on shipping costs) at time of purchase

The escrow company could also be hired by the customer, so they could go to a company and say “I want to order your goods and pay through this escrow company, I’ll pay the extra fee”.  If the vendor consented, the buyer would then get the standard protections (and the vendor would be paid after the set period).  Vendors could also offer goods with and without the escrow protection (with different prices).

I’m aware of E*Bay’s trusted partner Escrow.com, and this would be something along the same lines, but not just for online purchases.  You could use it for mail order, for phone orders, or for face-to-face transactions (like hiring a contractor to redo your kitchen).  Amazon does something half-way along these lines where they force customers to directly deal with vendors who sell through Amazon, rather than with Amazon themselves.  However, they say “You should be able to reach an amicable agreement with one another“, which I HOPE implies they’ve evaluated all vendors.

Obviously, once you’d done a few transactions with a company / person you could drop the escrow intermediary and deal directly.  The escrow company would just be there for transactions that you don’t know person or company (and would let customers deal with the escrow company, a company they WOULD know well, instead).

The trickiest part of this would be growing to be a well-known standard that people have heard of and trust (this would be very challenging at the beginning).  The company is selling its reputation, so building this would be the core of what they do.  Partnering with (or growing out of) established large companies like E*Bay, Amazon or Paypal would probably be a worthwhile way to “jump start” such an enterprise.

Categories
Investing

Socially Responsible Investing

There’s probably a decent chance this post will make you angry.  Feel free to skip it if you want to stay in a good mood.  If you decide to read it anyway and are looking for ways to vent your anger, insulting the author (Mr. Cheap) or announcing that you’ve unsubscribed to our feed are both popular options :-).

Some time ago Larry MacDonald wrote an interesting article on socially responsible investing for The Globe and Mail. For those unfamiliar with the term, SRI is a mutual fund which only buys stock of companies that meet the ethical criteria of the fund. As an example, almost no SRI would ever buy Rothmans or British American Tobacco stock, since they wouldn’t want to profit from tobacco sales.

What was most interesting about the article, is that Mr. MacDonald points out that SRI funds have performed as well as general funds. The explanation for this is that ethical companies are less likely to be involved in a lawsuit or to have a business affecting PR nightmare if their unethical practices come to light.

I owned Rothmans stock and have actually suffered from ownership on two occasions. I was briefly corresponding with a reasonably famous investor and after I admitted that I owned Rothmans stock he stopped corresponding with me. Another time a reader (who was clearly crushing on me) and I exchanged a few e-mails, and after it came up that I unabashedly own tobacco stock she told me off and stopped writing as well.

I always wonder about social beliefs that the main argument for them is people who say “believe what I believe or I won’t be your friend”. I have friends who are pro-choice and pro-life, chums who are pro and anti gun control, religious (from numerous faiths) and atheist pals, I have socialist buddies and capitalist buddies. I have my own firm opinion on each of these issues, but it has never prevented me from enjoying the company of someone who has another point of view.

SRI are fine for what they are, but I somewhat disagree with the underlying philosophy.  To use my Rothmans stock as an example, not a single additional cigarette was sold because I’m the owner of part of the company.  If I had sold my Rothmans stock to Mike, the company would continue to function in EXACTLY the same way it had before the sale.  The only difference is that Mike would be collecting the quarterly dividend instead of me (and he would be able to vote on shareholder issues instead of me).  I was one owner of a well run, very profitable Canadian company that makes money selling legal products to people who want to enjoy them. I would have been delighted to continue owning it if the sale hadn’t been forced, and I’ve considered buying Altria on a number of occasions.

Say now, someone objects to ownership (fair enough).  They sell their Rothmans stock, because even though they aren’t materially affecting the operation of the tobacco company, they don’t want to profit from the supposed suffering it causes.  They can’t own most mutual funds (which might buy Rothmans or another unethical company at any moment), or index funds (which will almost certainly own unethical stocks).

If we object to being a shareholder in these companies, which doesn’t affect their day-to-day operation, we certainly can’t be CUSTOMERS:  which DOES affect their day-to-day operation.  If I buy Rothmans smokes, the company has more money to spend on advertising, improving their operations and other business activities (such as paying those nasty dividends to shareholders which I’m opposed to).  I also can’t sell Rothmans smokes, or patronize companies that do (for the same reasons I can’t buy their product).

At this point I’ve isolated myself from pretty big part of the economy (convenience stores, most grocery stores, etc).  Certainly if I can get enough fellow consumers to join me, we’ll be pressuring stores not to do business with Rothmans, and hurt their business. Alternatively I could lobby the government to make smoking illegal and criminalize people who choose to smoke and the companies that try to sell to them. If I’m not doing either of these things (and just not buying sin stocks myself), I’m not really accomplishing anything except letting others collect the profits from these companies (and if enough people refuse to buy them, it WILL drive profits up for the remaining buyers).

To focus on a specific example, tobacco companies, I can understand why people are against smoking: it kills people. If someone asked my opinion whether they should start (or continue) smoking, my advice in EVERY case would be “don’t smoke”. HOWEVER (and this is my personal politics creeping in), if an adult CHOOSES to smoke, with full awareness of the consequences, who am I to try to force them to stop? Should I try to stop obese people from eating junk food? Should I try to stop skiers from skiing (and other sports with a danger component)? Should I try to force people to stop drinking (and stop myself)? Putting aside the “addictions” argument, people engaging in “harmful” activities have weighed the possible consequences and made decisions for themselves. Without knowing everything about them, how could I possibly make a better decision for them then they could for themselves?

Some people bring up the health care costs, and how people engaging in self-harm drive up costs in taxes or health-insurance premiums. Again, look at the examples in the previous paragraph. Are we really ready to ban everything that’s harmful?

I have no problem investing in a company that I wouldn’t shop at (I *HATE* BMO as a customer, and it’s one of my main holdings). Given this, if a company does a good job delivering a legal product, why should I avoid investing in it? Not that it’s at all relevant to this post, but I don’t personally smoke cigarettes (I occasionally share a hookah with friends, and VERY occasionally enjoy a cigar).

Do you invest in “sin stocks” or do you try to follow a SRI approach?

Categories
Opinion

Working With Computer Nerds

My recent post about Working With Canadians generated some interest (and discussion), so I figured I’d move forward with a second post on a related subject.

Much like the previous post, my goal isn’t to provide a perfect profile of every techie (generalizations, by their very nature, don’t hold for every member of a group).  Instead I just wanted to highlight some of the characteristics that are common with people who’ve chosen to work with computers.  This could be useful to help understand the system administrator at your office, the web developer you’ve hired to build a website for you or that cousin who earns a living designing digital circuits.

Much like the Canadian post, I am a computer nerd, so against my best intentions I might be projecting some of my own characteristics onto computer nerds as a whole (please call me out on it if you disagree with anything I write here).

Social Awkwardness

“The Big Bang Theory” is about physicists more than computer workers (one of them is an engineer, so that’s a little bit closer).  They’re certainly nerds though.  The running joke of the series is contrasting the four main male characters intellect and geekiness with their neighbour Penny’s attractiveness and common sense.

Allowances have to be made, if someone is doing technical work at a company, don’t put them in a role which requires social skills they may not have.  If someone is a genius programmer but insults customer, KEEP HER AWAY FROM THE CUSTOMERS! (and let her code)  I’ve always warned employers in the past that I have no artistic skills, so if they ask me to build an interface (or design the website myself), it’s going to be ugly.  Fortunately most are aware of this, and respond something along the lines of “oh yeah, we never expect programmers to do the design”.

Some technical people DO have solid social skills, and for this rare combination consider putting them in a role to take advantage of both (such as managing other techies or working with customers).

Honest

dilbert_honesty

I don’t mean to say that a nerd will never tell a lie, but there IS a tendency for them to BE more honest than is typical and to EXPECT more honesty than is typical.  I had a job pull a “bait and switch” on me (they said I’d be working on one thing, then after I’d quit my current job and started with them they moved me to another, less desirable, project).  I was never able to get over this initial deception and the job didn’t work out in large part because of this.

Don’t try to “sell” stuff to techies.  Computer people tend to be very good at thinking for themselves, and if you misrepresent something they’ll probably be able to see it.  Present the facts, if some things aren’t ideal, be upfront, provide an explanation and let the nerd make up their own mind about it.  For example, if you need a website done, DON’T try to convince a nerd that 1/2 market rate is the going price for websites!  They’ll realize that’s not true and get angry at being lied to.  If you say something like “there’s a lot of developers looking for work right now, so we’re looking for someone with extra time who can give us a good deal” or “that’s all we can afford right now and realize it’s below market, but we want to build a relationship with someone and will hopefully be able to offer higher paying jobs in the future”) they’re more likely to buy it.

Interesting Problems

This isn’t to say that salary or working environment are unimportant, but computer nerds NEED interesting problems to work on.  If you hire someone and say “we want you to do this exact thing in this exact way for the next 5 years”, they aren’t a real computer nerd if they don’t quit.  This isn’t to say there aren’t jobs well suited to people who are willing and able to use computers, but for people who *love* them, we need variety and challenge.  One fortunate element to this is you can turn a boring task into an interesting one by saying “how can we automate this or make it easy enough to let someone earning minimum wage operate it?”.  *BAM*!  It just got interesting.

How Things Work

A computer nerd will be very interested in understanding how things work.  The benefit to this is that they’ll learn systems inside and out.  The downside is that they’re likely to spend time where it looks like they’re just playing with the technology (which they are), but that’s part of the process.

Hackers

surgery

The original meaning of hacker, rather than meaning someone who breaks into computer systems, was people who delighted in understanding a system so thoroughly that they can stretch it’s capacity and make it do new and surprisingly things.  From a security perspective, this often entailed getting permissions from the system you weren’t supposed to have, but other real world examples include things like the coffee cam, creating new senses or Steve Wozniak building one of the first personal computers.

Competency

linux_foxtrot

Because they investigate things so thoroughly, hackers tend to to be VERY good at what they do.  Like any other employees, problems come up, but if you have a problem with a nerd, jumping to the conclusion that they’re not competent is probably a mistake.  It’s dangerous territory to accuse them of this.  On the off chance you’re right, they’ll probably be abashed and redouble their efforts to understand what they’re working with and become competent.  If you’re mistaken about this, it’ll probably trigger the honesty issue and lead to very bad feelings (being called incompetent, or having this implied, is probably one of the worst things you could do to a serious computer type, so tread carefully).

Optimists

Computer nerds are natural optimists (I read once that no one would ever start writing software if they were honest with themselves about how many problems they’re likely to run into).  The good side of this is probably they’ll see a new project in the best possible light.  The downside is that you’ll often get “best case” estimates from nerds, no matter how often you ask for most-likely or worst-case.  Pad estimates whenever possible so that there are resources in reserve that can be allocated if it turns out the problems are harder than expected (they always are).

Inmates Running the Asylum

Bag CheckWhen you’re working with hard-core hackers, chances are they’ll understand what they’re working on FAR better than you do.  Many people used to a traditional management role will be bothered by this.  It means that you’ll have to ask questions and gather information from the techies working for you, instead of dictating things to them.  Say they estimate it’ll take two weeks and you demand it be done in one?  You’re going to have problems (if they *DO* deliver it in a week, I guarantee either it won’t work properly or your team will have killed themselves to meet the deadline, they can only do that so often).  Say they recommend designing things one way and you demand they do it another?  Chances are there are going to be unforseen (by you) problems with the design that could have been avoided by talking to the people implementing it.

So I’ll turn the post over to our readers at this point (nerds and non-nerds hopefully both have a perspective on this).  Any of these you agree with?  Any big points I’ve missed that you’d add?  Any of these points that you feel miss the mark?

Categories
Opinion

Unintended Consequences

I’ve been planning a post on the concept of unintended consequences for the last two years.  I keep coming up with different perspectives on it, put off posting, and continually rework it.  I don’ t think there’s any way I’ll be able to do the idea justice in under 1000 words, so I going to take a friend’s advice and just put a stake in the ground (and hopefully commenters and future post can flesh out the idea better).

I’ve always been fascinated by the concept of unintended consequences.  From an early age we develop an awareness of cause and effect, and as this awareness grows we gain more control of our environment and our place in it.  You touch something hot, burn yourself, and learn that it’s a good idea to figure out the temperature of something before grabbing it.  Eventually however, we begin experiencing situations where cause and effect break down and we don’t get the expected outcome.  Say, as a child you’re being bullied, and eventually one day you’ve had enough and get into a fist fight.  The teacher takes you aside, and instead of being reprimanded (you’ve been told not to fight), they commend you for standing up for yourself.

The fields of ecology and medicine are full of examples of unintended consequences.  Rabbits were originally introduced in Australia as a food animal.  They were more successful than expected, and ended up becoming vermin that were pests to farmer (causing millions of dollars of damage annually) and devastated the local ecology (they’ve driven a number of species to extinction).  Aspirin is primarily used for as a pain reliever, but has a side effect of thinning blood (which makes it also useful in that capacity for people at risk of blood clots).

Because we are so enamored with the idea of cause-and-effect, people are reluctant to acknowledge or consider the multiple levels of effects that can result from any action.  We like to think in terms of absolutes, which may be knowable, instead of potential side-effects which are inherently unknowable.

The father of one of my friends worked for most of his career at environment Canada.  There was a popular phrase there called “environmental management” which used to drive him nuts.  Basically the idea is that the impact of humans on the environment can be predicted and controlled (such as allowing a certain number of trees to be cut annually, deer to be shot or fish to be caught).  For a while he carried around a Rubik’s cube and would hand it to the person using the phrase and say “try to solve it”.  After they’d played with it for a couple of minutes he’d then say “environmental management is like solving a Rubik’s cube made up of thousands or millions of smaller cubes, if we can’t solve this small toy, how will we manage an environment?” As a side note, his position WASN’T that we should ban all human activity that impacts the environment, just that we shouldn’t fool ourselves by pretending we can perfectly predict environmental impact.

Say we decide sweatshops are bad.  We organize a band of activists and put pressure on a company to move its factory to a country with stronger labour laws which will police them and prevent child labour, exploitation and hazardous working conditions.  We are proud of ourselves and happy for having helped the workers at that far-off factory (imagining that they’ll move on to better jobs with better pay and working conditions).  Now, back at the shut-down factory, the workers were barely feeding their family on the low-wages they were receiving, and without that job (since the factory moved out of their community) there isn’t comparable work for the former workers.  The influx of new workers looking for jobs drives down the wages in their community (since there’s more competition for the remaining jobs) and some members of the community starve to death (the ones who were barely making it when the factory was operating).  Say that community had been building a school and source of clean water by reinvesting some of the (relative) prosperity they had had into community development, but with the tougher times members are having they cancel those projects (and focus on more immediate needs).  By trying to help a community, our actions have led to the death of some of its members and permanent set backs in the infrastructure that could have led to a higher standard of living.

I’m not saying that sweatshops are good, or that this is the result from such activism, but this is a situation where a group of people INTENDED to help a community, but instead ended up harming them.  Consider the story of the butterfly and the cocoon, where our intention to help can sometimes harm.

Conversely, taking a knife and cutting someone up is a pretty mean thing to do, unless you’re a surgeon and potentially saving their life (by cutting in the right places).  Sometimes the side-effect of harming someone is to help them long term.

I’ve been quite interested in economics (and almost studied it for my PhD) and have read it described as the study of unintended consequences.  It’s seemed strange to me that personal politics can heavily influence an economist’s work.  Democratic or republican physicists should arrive at the same conclusion, so what is so different with economics?  Perhaps the infinite possibilities and depths of repercussion gives those studying economics the latitude to keep investigating until they find the results they want.

Unintended consequences happen CONSTANTLY in personal finance (and investing in general).  Interest rates drop, making housing more affordable, which leads to more people deciding they can afford to buy a house, which leads to more competion among buyers in the housing market, which leads to an increase in the sale price, making housing less affordable.  Investors lose confidence in the economy, leading to a stock market crash, which offers shares of a company at a more attractive prices which is more likely to provide a greater return in the future.

Have you had unexpected benefits or perverse results in your life?  What was the most memorable?

Categories
Real Estate

Discount Purchases

In a recent comment, on a very old post (“5 Ways to Make (or lose) Money With Investment Properties – Part 5 – Buying at a Discount”), Awesome asks “i live in Toronto, how and where do I find the deals”.  I found this a perplexing question, as the assumption seems to be that there’s a website, or a very simple technique, which leads to low priced real estate.  The obvious follow up to this is you buy from the cheap market, sell on the regular market, then start lighting your cigars with $100 bills.  I pointed him to my posts on inefficient markets and Mike’s post on valuing real estate but never heard from him again (I guess he’s off searching for the “simple”, “easy” way).  I also told him that if someone knew where a deal was, they’d just do it themselves (and make the money themselves).  If they knew a good approach for consistently finding deals, they’ll execute that strategy themselves (and not make it harder by advertising it and drawing competition).  Between these three posts I felt like there’s still some missing information, so this post is my attempt to fill in that gap.

In “How to Buy Real Estate For At Least 20% Below Market Value” John Reed talks in the beginning about how he never saw a bargain purchase in his years as a real estate agent (not even 5% below market value).  At the time he thought they didn’t exist (and thought people who claimed they did were selling snake oil).  Once he looked into it, he found they did exist, just that they never showed up in the “official” (MLS) channels.

He summarizes the two ways to buy at a discount (for goods which are USUALLY traded on an efficient market):

  • properties which no one wants and
  • properties which no one knows are for sale

The impact of these principles is that you can’t buy ANY property at a discount (there’s no way to get a 20% discount on that cute little bungalow you have your heart set on), but you can buy MANY properties at a discount.  It’s like dating: if you’ve got your heart set on dating Mary Jones or Johnny Smith you’re sunk.  HOWEVER, if you just want to date someone (who meets some reasonable minimum criteria) there are ways to make it VERY LIKELY that you’ll be able to get dates.  Sadly (or happily), romance can be a numbers game.

One way to find deals is to hunt for desperate sellers (they’d fit into the “no one knows are for sale” category).  One approach to this is to make low-ball offers on many items, and try to find the person who needs to sell quickly (and can’t take the time to advertise properly and let all interested buyer know it’s available).  I detail this process in my “Shotgun Investing” post (and is also how I bought my investment condo).  I still giggle when I read Mike’s description of a “for sale by owner” sign (that might have been a big tip off that they’re desperate sellers)

Another way to find deals is to hunt for what Reed calls “leper properties”.  These are properties that have something about them that causes most buyers and agents to immediately dismiss it as a potential purchase.  Properties with foundation problems are an example of this.  I was suspicious that there might be an opportunity for buying co-ops (as opposed to condominiums) in Toronto because of this.  My agent told me not to even bother looking at co-ops, which IMMEDIATELY got my interest.  This is the “no one wants” category.

Obviously for a leper property you must have some way to fix the problem (for less that the amount of the discount), otherwise you’re just buying someone else’s problem.

In my home town (around the corner from my parents) there’s a property that at one time was the nicest in the neighbourhood.  It was on a double lot, and was far bigger than the properties around it.  The owners let it get really run down and then were trying to sell it.  It sat on the market for a LONG time, and EVERYONE in town had heard how run-down it was.  Eventually someone bought it, and immediately started a massive renovation.  I don’t know what the purchase price was, but they’re fools if they paid anything close to market (it was a property no one wanted).

Not Easy

One other factor with discount purchases is they aren’t as easy as buying on the market.  If you buy the typical way, everything is set up to make it as straightforward as possible.  As soon as you start buying in an unusual way (such as either of these approaches), the risk is going to go up and the difficulty is going to go up.  You’ll put time into a deal, then have it fall through at the last minute (or you’ll try 10 deals and have them all fall through).  Part of a reasonable approach to discount purchases is to be as efficient as possible in evaluating when a deal may occur, and dumping prospects IMMEDIATELY when it looks unlikely (so you can put your time into pursing a deal that has a higher chance of going through).  Many people don’t have the stomach for this (and will get angry if a deal doesn’t work out) and they’ll abandon their strategy because of the emotional toll.

Have you seen situations (real estate or other) where a good price has been had for one of these two reasons?