Author: Mr. Cheap

Being Unusual

As much as it can be uncomfortable to be the “odd man out”, I think it actually leads to benefits in many situations.

When I was at university for my undergrad, I found it quite cosmopolitan (and it was compared to the small town in Northern Ontario I grew up in). Next door to me were students from Afghanistan, Hong Kong and Bangladesh. Some students from Toronto would laugh at me and say they looked around campus and saw nothing but white faces, but I delighted in the exposure to new ideas and cuisines.

I really noticed that all the people from overseas could date as much as they wanted to. When you have a campus full of Canadians, I guarantee there are going to be a certain number of people interested in Afghani, Chinese or Bengali people, and then you have a lock on the market!

I experienced this personally when I was teaching in Taiwan. Any Taiwanese woman who liked white guys had slim pickings (so they even had to consider ugly guys like me).

I’m sympathetic to people who are uncomfortable being the object of attraction based on their race, but a date is a date. As they sing on Avenue Q: “Everyone’s a Little Bit Racist“.

John Reed writes about this topic in a broader context than race or dating. He makes the wise observation that none of your co-workers will be impressed that you’re a doctor when you’re working at a hospital (there are lots of doctors running around). Other university professors won’t be amazed at how smart you are (there are a large number of smart people drinking coffee on any university campus) and none of the other mechanics working at the garage will be singing your praises because you can change an oil filter by yourself.

He suggests that you work in a field where your abilities are valued, but rare. I had this experience where I worked at a couple of publishing companies on short term contracts (doing web development). Their staff could barely use office and were wildly impressed by anything we created. The downside was they wanted to pay wages closer to publishing industry wages instead of computer industry wages and it could be annoying having to explain things over and over to people who clearly didn’t get it (some of whom were making big decisions that would impact the project).

I think a good way for a techie to slip up the ranks to upper management would be to focus on a non-software or hardware industry. Keep getting experiences in that industry, and keep looking for promotions (even if you have to move companies to get it). There won’t be as many people competing for the CTO position (compared to people gunning for the COO or CEO positions). Your blend of industry experience and technical knowledge will be rare and valuable.

Conversely, I certainly was never the star at software companies I’ve worked at. However, I’m able to present ideas in written or verbal form better than the average computer nerd. After I went to a conference at a startup I worked at years ago, I wrote up a brief overview of the sessions I attended and the vendors I talked to and sent it out to everyone at the company (with the idea that it would give them a feel for the “buzz” at the conference). I got compliments on it from the receptionist up to the CEO (who told me that even if my programming skills were no good, there’d be a place at the company for me given that I could write something like that).

At the time I was perplexed. Long term readers are probably just as confused that anyone would compliment me on my writing skills. It wasn’t that the writing was particularly gifted, it was the blend of being able to understand the nuances of the technology industry, and convey those in writing that was rare, and therefore valuable.

Do you work in an area where your talents are rare? Could you move to an area where they’d be valued but scarce?

Business Ideas

Customized Cosmetics

I’ve talked to women who have all told me this wouldn’t work. Since I’ve never bought cosmetics, I’ll defer to their wisdom, but I still think its a good idea.

Years ago one of my ex-girlfriends was talking about how personal perfumes are (and how she’d lie if anyone ever asked her the name of her perfume because she didn’t want anyone else to wear the same scent). This lead to the idea of a website, something like CafePress where people can customize perfumes, colognes, shampoos, etc. There would be a variety of bases, to which various amount of scents and other additives could be mixed in, in amounts determined by the customer. The final, totally unique, product would be mixed up and sent out on demand.

Lipsticks, mascaras, blushes, etc could all be “tweaked” to subtly different shades.

The site could purchase discontinued products, and continue offering them on a “made for you” basis. A friend of mine has a hair gel she is very loyal to. The company that makes it has fallen on hard times and stopped selling retail. For a while she was ordering cases of it directly from the company, until they recently shut their doors for good. She ended up tracking down the guy who developed it, and she’s trying a new product he’s developed at his new company.

Clearly when a customer is at this point, they aren’t trying to save $0.50 off of their next purchase. They know what they want and they’re willing to pay to get it. If you had the equipment to mix up other products, you could probably also continue to make them their “discontinued” product.

“Tester” packs could be offered with certain mixtures that could be used as a “base” for people experimenting with creating their own (they could take the default option, then add a bit of “apple” scent to it for example). Once someone had a formula they were happy with, they could get a better price by ordering a larger volume. There’s always the possibility of people not being happy with the product when they receive it (especially if they get wildly experimental) which could be handled by encouraging them to try very small batches when they’re first experimenting.

While its obviously more expensive to create customized versions of a product, they would still probably be cheaper than some of the super-pricey name brand cosmetics (its shocking to me what people sometimes pay for a bottle of perfume).

Like CafePress, if someone wanted to share their creation, the site would let them advertise it and send a portion of the profit to the creator. People who wanted to keep it secret could do that as well.

As I said in the introduction, this is a type of product I have *NO* understanding of. I never wear cologne, and I buy whatever shampoo is the cheapest. My highest aspiration is not to smell bad. For those who do buy products along these lines, would you ever be tempted to order completely customized creations?

For this post, or any other of the wacky business ideas I post, obviously I’m releasing any ownership claims I may have over these ideas. If you like something I post and feel like you can make money from it, please feel free to do so! Let me know when you’re opening and we’ll do a post on it to give you some free advertising.

Investing

Buying What You Know

In my recent review of “Rule #1” I talked a bit about people taking Buffett quotes and twisting them. A while ago during a conversation about “Rich Dad, Poor Dad” a similar idea came up that people can use aphorisms to mean whatever they want. One Peter Lynch quote that I think gets bent beyond recognition is “invest in what you know“.

Years ago I was working in San Francisco at the tail end of the dot-com boom (I think I may have caused the bust after I arrived). RIGHT at the height I got into buying tech stocks with a NY stock broker (JDS Uniphase and all the usual suspects). I liked to talk to people and say it was ok for me to be buying tech stocks since I worked in the field and had a deeper understanding of the technology than the man on the street (I was investing in what I knew, dontcha know!). This didn’t stop me from losing 75% when the bubble burst (and forced me to realize that I was just being greedy chasing the trend like everyone else).

During the boom, I was talking to one man who called me on my foolishness. He looked me in the eye and said “You may have a computer science degree and be working at a startup, but that has nothing to do with tech stocks. You don’t understand global demand for the various technologies being developed, you don’t understand the financing behind the companies, you don’t understand the coming economic cycles, etc, etc”. I was a bit annoyed at the time (who likes being called on their foolishness?), but if I’d listened to him and got out I could have avoided a pretty good shearing.

A psychologist I know gets a newsletter about pharmaceutical and biotech stocks and buys based on information from it because “it was his field, so he had a deeper understanding of it.” He isn’t someone who’d be particularly responsive to warnings so I just nodded and smiled.

My brother wanted to buy Lululemon’s IPO because his girlfriend shopped there and he saw so many new stores opening up. He quoted Lynch’s idea that he was seeing a trend before it hit Wall Street. I cautioned him that he wasn’t the only one who saw all the expensive yoga-wear being sold and that IPOs were notoriously volatile. Tim Horton‘s IPO got quite a bit of attention, mostly because people like their coffee I think.

In “Your Money and Your Brain” Jason Zweig talks about how investors, including professionals, tend to over-buy geographically nearby companies. I think its possible if you’re a domain expert or if you have extensive experience with a local company that you might be able to shave a small amount of time off of you company research (if that’s your investing strategy). However, I suspect just buying things just because they’re familiar is a very dangerous practice.

Book Review

Rule #1 – Book Review

I’d come across a few references to Phil Town’s “Rule #1” and finally decided to pull it out of the library and give it a read. The rule #1 referred to in the title is Warren Buffett’s idea that the most important rule of investing is “never lose money”. Mr. Town promises a “simple strategy for successful investing in only 15 minutes a week!”

“Successful investing”, according to the author, is a return of 15 percent or more “with almost no risk”. He claims by the end of the book he’ll have proved it. Its presented starting with the idea that the author is a simple river guide who saved the life of a rich guy, who rewarded him by teaching him how to invest (and now, lucky for us, he’s decided to make money by selling us information how to invest via books and $90 get motivated seminars rather than just make cash in the market himself). Unfortunately, I remain unconvinced.

The first 32 pages basically explains repeatedly that a 15% return is really good. I get annoyed at books that start by saying “I’m going to tell you something great here, but first let me start by saying HOW great its going to be!!!” I *KNOW* that a reliable, 15% returns is good. When I was a kid, interest rates were sky-high and I got some bonds and GICs yielding over 10%. I don’t need 32 pages telling me its good. I knew as a kid this was a good thing (some people reminisce about snowball fights or fishing trips of their youth – for me its interest rates).

Warren Buffett quotes can be a bit like proverbs or fortune cookies messages, very open to interpretation. Perhaps Warren Buffet meant one shouldn’t invest in anything that might go down in value (and we should only purchase investments with FDIC insurance)? I know he doesn’t mean that, but it’d be pretty easy to take that position if “don’t lose money” is the sum of our instructions.

While the author definitely tries his best to tie his strategy in with Warren Buffett, from the title to his Ben Graham-esque approach, he undermines it later in his book when he suggests incorporating elements of technical analysis (MACD, Stochastic and Moving average) when deciding when to buy and sell.

Warren Buffett has this to say about technical analysis: “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer” and “If past history was all there was to the game, the richest people would be librarians.” A pretty damning judgement from the guy Phil Town respect enough to use as the basis of his system. Another Buffett quote which could be used to denounce this book is “The best way to own common stocks is through an index fund”.

I understand that its the nature of anyone with a stock buying system to discount the Efficient Market Hypothesis, but Mr. Town gets snarky towards Professor Malkiel, taking some of Malkiel’s comments out of context and unfairly condemning the man and his ideas.

The system itself SOUNDS good, but I think any trading system probably has a good story behind it. The basic idea is that you find a business you like, with a moat (a reason why it should be able to keep beatings its competitors, such as Disney’s brand, or Microsoft’s massive install base). He identifies 5 big numbers (ROIC, Sales, EPS, Equity, & Cash) and demands they be consistently above 10% over the last 10 years (and trending upwards). He suggests looking into the CEO, and finding someone who is honest with the shareholders and looking out for the company’s best interest. Using some magic he determines a “sticker pricer” for the stock (what it *SHOULD* be worth), then insists on a “margin of safety” where you buy it for half this price or less.

He presents equally convincing rationale for his recommended technical analysis tools.

Its an entertaining read for what it is (I suspect Phil would be a fun guy to have a beer with), but I couldn’t help but feeling at a few points that “this could be dangerous stuff if he’s wrong and people buy it”. Ultimately I don’t believe its possible to earn 15% in a low risk manner (we’d all be doing it if it was). He makes the argument that its possible for us small guys but not for the institutions, because they’ve got too much money, which I accept for what it is. But somehow Buffett does it with lots of money. And lots of small guys lose their shirts.

I was wondering if there are any bloggers who have been following his system and posting returns. He uses what I think is a bit of a cop-out by demanding that people invest in companies they personally care about (the meaning part of his system), and therefore he doesn’t release many details about his own trades (since what is meaningful for him is different than what’s meaningful for you). I did find one trade where he bought Whole Foods in 2005 (he mentions it in his book), and while they did great in the year after he bought it (doubling), its since kept sinking (he bought at $45, adjusted for the stock-split at the end of 2005, and its currently worth $20). One of Buffett’s quotes he uses is “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”

I realize its not fair to pick a single trade and judge a whole system by it (although honestly this was the first trade with concrete details where information was provided at the time of purchase, instead of cherry picked later, I came across that was made using his system). Mr. Town would probably defend his pick either saying “10 years isn’t up yet” or “I used my technical analysis tricks to sell it at the peak”. Fair enough, but I’d love to see someone who provided an ongoing, real-time history of their trades using this system and see how close they get to 15% a year.

I also realize that, as much as I like his approach, Derek Foster is also selling a stock picking system (and many of the criticisms in this post could be leveled against his books).

If there’s any uncertainty, I don’t recommend this book. If you’re dead-set on implementing a stock picking strategy, you could probably do a lot worse than this, so maybe this would be the least of many evils. I’d recommend following Mr. Buffett’s advice and just buy an index fund.

Investing

U.S. Philip Morris Wants To Buy Canada’s Rothmans

Post author By Mr. Cheap
Post date August 5, 2008
18 Comments on U.S. Philip Morris Wants To Buy Canada’s Rothmans

It was recently announced that Philip Morris put in a generous offer to buy Rothmans (of which Mr. Cheap is a little less than a majority owner). On news of the offer, Rothmans stock shot up above $30 / share then sank back to a bit below it (to $29.71 as of the holiday weekend). We received a reader’s question (from Mike’s sister!) asking what’s going to happen to Rothmans stock. I’ll write up what I’ve read and my understanding of the process, please feel free to correct me if I get anything wrong and I’ll update the post (I’m certain many of our readers understand the process better than I do).

To start with, a share of stock is partial ownership of a company. When an offer is made on an entire company, the person putting up the offer is sayings “I’ll give you $X for the whole thing”. If the company rejects the offer, then its business as usual. If the company accepts the offer, its ownership is transfered to whoever purchases it. This can be another company (as in this case with Philip Morris), some legal entity (as in the case of the BCE buyout by the Ontario Teachers Pension Plan, or an individual (I don’t have an example of this, can anyone suggest when this has happened recently?).

When the offer is made, shareholders get to vote on whether to accept it or not. More than 50%A certain number (usually 2/3rds – thanks MoneyGrubbingLawyer!) of the shareholders by VALUE (remember, you get one vote PER SHARE, not per person) must agree to the offer for it to go through. Since there wouldn’t be much reason for the average shareholder to accept less than the current stock price (if they wanted to sell, they could sell it at the current price on the open market), the person trying to acquire the company usually needs to offer a premium (higher price) above the current price of the stock.

If the offer is approved (I’ve never actually gone through this personally), my understanding is at some point every share of the company is bought at the agreed upon price, the cash is transfered to the previous owners, and 100% ownership in the company is acquired by the purchaser.

If you’re in the minority that doesn’t want to sell, its tough luck. Usually part of a corporation’s articles of incorporation will allow majority rules in situations like this.

This is the opposite of when a holding company sells another company that it owns (as Philip Morris did with Kraft and as GE wants to do with its appliance business). In this case they package it up as a separate company, sell it to someone else who wants it, and it now exists as a separate entity (and the selling company now has a bunch more cash). They can even do any IPO and sell the newly created company directly to the public.

There are all sorts of business, legal and tax reasons why a company would want to purchase another company (or sell part of itself).

After the purchase goes through, and the cash has been received, for the previous shareholder its as if they had chosen to sell the stock. They are liable for capital gains if the price its acquired at is higher than their purchase price (which is likely if they bought it years ago). This is why BCE shareholders were squawking so much about the acquisition, they knew it was going to lead to a hefty tax bill for them.

Currently the board of directors at Rothmans has recommended that shareholders accept the offer, which is a good sign. The price went ABOVE $30 briefly, because there was a feeling that a higher price may be forthcoming if enough shareholders didn’t bite at $30. The famous Canadian investor Stephen Jarislowsky (author of “The Investment Zoo“)’s company owns 13% of Rothmans, and he’s known for holding out for high prices before approving sales. Conversely, the price will sometimes be lower than the buyout price, which reflects both that the payment will be in the future, and investors’ concern that the deal won’t go through (thanks Preet!).

If shareholders push for a juicier offer, and its not forthcoming, the stock may sink back to its previous level and we can continue as before.

As I said in the introduction, please highlight anything I’ve got wrong, as I’m not 100% sure about this information.

Book Review

Your Money And Your Brain – Book Review

Post author By Mr. Cheap
Post date August 1, 2008
6 Comments on Your Money And Your Brain – Book Review

Yesterday Mike posted his review of “Your Money and Your Brain”. Coincidentally I took the same book out of the library a while ago and had been meaning to write up my impressions about it, so now seems like the perfect time for us to have a “virtual book club”. Canadian Capitalist also wrote up his impressions about the book a while back, so that’s three perspectives you get.

In “Your Money and Your Brain” author Jason Zweig sets out to explain the psychology and neuroscience behind how we think about money. I’ve read similar books, such as Malcolm Gladwell’s Blink and Tipping Point, and I tend to like books about cognition.

Mixed in with investing anecdotes, the author visits researchers working in the field and participates in their experiments while explaining their findings to us. Early on he introduces the concept of our reflexive and reflective systems (dealing with emotions and complex problems respectively). Many of the ideas throughout the book discuss how the reflexive system trips us up in investing decisions (and Zweig’s advice is to let your reflective system take control by not rushing into any decisions, sleep on the issue and give your reflective system a chance to process it).

Because money is so closely tied up with all our biological rewards (you can buy any of them), investing decisions light up a number of primal areas in our brain. The obvious problem of our brains evolving to deal with short term threats like predators rather than long term threats like inflation plays into a number of the issues he discusses.

Overall, while I found the book interesting, I didn’t find much I could take away from it and apply to make myself a better investor (I definitely don’t agree witht he tagline “How the new science of neuroeconomics can help make you rich”). Just as I didn’t change how I live my life after reading Gladwell, I don’t think I’ll change how I invest after reading this book. “Don’t rush into investing decisions” is good advice, but I was hoping to get a little more than that out of a 340 page book. Perhaps it was unfair of me, but I was expecting more applicable techniques.

I also found the lack of bigger themes a bit disappointing. While its the nature of the work, little interesting tidbits from different reasearch programs, it very much comes across that way. It would have been nice if he could of put the different research results into a larger model but that wasn’t how the book presented its material.

While I can definitely see why Mike and the Canadian Capitalist enjoyed it so much, and I also found it a good read, I would only recommend it as a pleasure read, not necessarily as a book that will make you a better investor.

Opinion

Dreamkillers

When people get indoctrinated into MLM (multi-level marketing, where you make money by getting other people to join and pass you a share of their earnings – the people who start it make all the money and the people who join later pay all the money) they’re warned to beware of dreamkillers. What’s a dreamkiller? Someone who tries to talk sense into them.

Much like abusive spouses and cults, MLM networks know its important to separate victims from the people in their lives who love them and will try to help them. The abuser gives a reason why the person’s social network isn’t to be trusted, isolates them, which makes it easier to continue harming the person. MLM networks label a person’s social supports as “dreamkillers” and warn inductees that the dreamkillers in their lives just want to keep the inductee as a boring ordinary person and are trying to sabotage the inductee’s efforts to improve their life.

I came across a heartbreaking letter (linked to the google cache, the original site, Writers Manifesto, seems to have exceeded its bandwidth). The woman writes a letter dripping with venom to her parents, who’s primary insult to her seems to have been warning her off of MLM, suggesting that a restaurant might be a good business to start in Australia, and wanting to talk about family instead of the author’s latest schemes.

‘How sharper than a serpent’s tooth it is to have a thankless child.’

Reading between the lines, I’m sympathetic to the parents’ perspective, they worry about their child, tried to warn her away from businesses they knew were bad news, try to help channel her entrepreneurial spirit to more productive ventures (or encourage her to build on the stability of a traditional career) and get depressed when they hear their daughter getting worked up about a new scheme (and perhaps getting angry at them when they won’t get dragged into it).

Paul Graham gave what I think is the best explanation on why parents are risk-adverse:

One is that parents tend to be more conservative for their kids than they would be for themselves. This is actually a rational response to their situation. Parent’s end up sharing more of their kids’ ill fortune than good fortune. Most parents don’t mind this; it’s part of the job; but it does tend to make them excessively conservative.

Our author goes on to iterate that she resents everything she’s done for her parents over the years, moved to another country to get away from them, and plans to become a millionaire and then spite them for not supporting her (I assume by not giving them money). Charming to the end.

I DESPISE people and organizations which willfully and systematically introduce this kind of discord into families. And in the case of the MLM, its just to make a fast buck.

If someone is trying to prepare you to ignore advice from your friends or family, please be very, very careful. Whatever their rationale, when someone tells you to stop listening to all the people who love you, you’re getting out on thin ice.

Having known people who survived abusive relationships, cults and MLM networks, sadly the only thing we can do from the outside is keep telling them we think they’re in danger until they get angry at us, then we need to shut up. After that just let them know how much we love them and we’re there when and if they need help.

Business Ideas

Annuities That Work

I love the IDEA of annuities. You trade cash upfront for a guaranteed income stream for life. The Derek Foster approach to investing is along the same lines (although his approach hopes for regular dividend increases in addition to a steady income stream).

The problems I see with annuities are:

You have to be older to collect the income stream. You can purchase one when you’re young, but it doesn’t pay out until you’re much older
They pay out a very meager return (quite a bit of the returns from the investment go to pay whoever sold the annuity and the company that manages it)

The vehicle I’d like to set up would be something like a university endowment, where the money is conservatively managed and an inflation adjusted return is guaranteed to the purchaser for life. The return should actually be quite decent, since you’ll have a large pool of money for the long term, have new money coming in every time someone purchases a new annuity and will get to stop paying out to people when they die (at which point their funds become available for increased investment returns or to payout still living subscribers). An actuary would be needed to figure out the price and returns (factoring in purchaser life expectancies and whatnot), but I suspect for a very young person, more than 7% could be offered (since 7% is the expected long-term market return and you won’t have to keep paying out to all your purchasers forever – you’re guaranteed to be able to stop paying out to a certain number each year).

Since the purchaser is sacrificing liquidity (they can’t ask for a return of their initial purchase price) and are forfeiting this money and the income stream when they die, the fund should be able to offer an ongoing high return.

Consider these annuity returns. They’re giving a 7.7% nominal return to a 65 year old male. Since the male is expected to live for about 14-18 more years, the insurance company is making BANK! These are fixed payments, so just from the expected market performance the company should be making a nominal 2.3% return on the purchaser’s $100K. After earning income from HIS money for 16 years or so, they get to keep it all! Pretty sweet payment for whatever small risk they’re taking (yes, they may pay out to someone in the middle of a bear market, but they also would have been collecting extra during previous and subsequent bulls). I think they could easily afford to offer a 7.7% nominal return to a NEWBORN BOY, let alone a 65 year old! (although I have no idea why a newborn boy would need it).

If you invested the money YOURSELF, and withdrew $650 / month, you’d expect to have more than $100K left when you died! With the annuity there’s nothing left after you died. Even with a 2% nominal return (you could easily get this from GICs/CDs) you’d expect it to last you about 15 years.

This would be ideal for someone who needs a guaranteed income for life (someone worried about running out of money), but doesn’t need to leave behind an inheritance (sorry kids!).

Obviously there’d be no transfer to a surviving spouse (unless this was chosen as a purchase option and a correspondingly lower payout was offered), and an income stream would be more expensive the younger the purchaser is (i.e. a 20 year old might be able to purchase an inflation adjusted stream of $100 / month for $17,142 while a 70 year old might be able to purchase the same stream for half the price).

I know this is VERY similar to annuities that are already offered, but the core of this idea is to have very cheap management (do something like the couch potato portfolio so that your management fees would be minuscule – along the lines of an index fund) and no sales or marketing budget (let the smart customers find out about it and come to you).

Legislation would probably be the tough part of setting something like this up, as you’d be an insurance company and would have to conform to all the legal requirements insurance companies do to prove you can cover your policy holders (I have no idea how this works).

I’d call the product “death insurance” since its the opposite of life insurance :-).