Author: Mr. Cheap

Categories
Personal Finance

Last Minute Tax Advice

With the Canadian tax deadline looming (Apr 30th), what should a tax payer do if they’ve encountered a situation with their taxes that they don’t know how to handle? Every accountant worth their salt will be working overtime now so who to turn to for advice?

How about Revenue Canada? I haven’t often come across the idea of calling them when you have problems, but I’ve done it a few times over the years and its very easy. The contact numbers are available here, they work extended hours leading up to tax time, and I’ve found them to be helpful and polite (although less so after you’ve called them “money grubbing soul suckers” as I had to learn by experience). A couple of years ago when I asked whether an external hard-drive should be treated as a expense or a capital cost allowance (CCA) they were able to promptly answer (CCA), and when I asked them what class number of CCA, they put me on hold and got back to me within a couple of minutes (class number 10).

The benefits are that they’re readily available (I’ve never had a long wait when I’ve called) and free.

The drawbacks are that if anyone is going to be a stickler for tax laws, its Revenue Canada. They’re CERTAINLY not going to give you any tax planning advice or suggest better ways to structure your finances. Additionally, they’ll interpret any ambiguities in their own favour. The flip side of this is that you never know what will be the outcome if your accountant gets too creative, so playing by the rules is a good idea (Mr. Cheap doesn’t fear much but he does fear Revenue Canada!).

This being said, I’ve found that accountants I’ve worked with in previous years weren’t particularly helpful either (which is why I’ve gone back to doing my taxes myself). Apparently tax preparation and tax planning are very different activities (accountants charge FAR more for tax planning: if you hire them for preparation that’s all you’re going to get).

The other drawback might be if you’re doing something illegal, you might draw attention to yourself. I’m not, so that wasn’t a consideration for me (if you have numerous accounts in the Cayman Islands perhaps calling them isn’t a good idea 🙂 ). Asking them what expenses are valid for a grow-op might be a bad idea too. They’ve never asked me for identifying information (SIN or tax id or anything) – so I *THINK* its anonymous information (maybe they trace telephone numbers – who knows?).

What has your experience been dealing with Revenue Canada? Are their benefits / drawbacks I’ve missed?

Categories
Real Estate

Shotgun Investing

My brother has to travel constantly for his job. While he was in North America, he and his girlfriend owned a Mazda3. As they were getting ready to leave North America they wanted to sell their car (instead of paying for it to sit in storage). A bunch of his co-workers were also going to sell their cars, so they invited a used car dealer to come and view them all at once. My brother was offered $8500 for his car, and after refusing, sold it later for $19,000. Apparently the dealer made everyone similarly low offers and no one sold to him. The dealer was following what some people call the “shotgun approach” to investing (which I touched on in a previous post).

Like a shotgun, this approach doesn’t focus on accuracy. You don’t care whether any individual deal goes through or not. Basically you make MANY low ball offers, and the profits from any that are accepted pay for all the legwork for deals that didn’t go through. Real estate agents like to warn about “offending” sellers with low ball offers. There’s a very good chance you’ll offend people with this approach, but you don’t care: it’s volume you’re after.

Those signs you see that say “We buy houses for CA$H” are all people pursuing this strategy. They call it “wholesaling” and they basically try to get a killer deal from people who are desperate to sell.

Some real estate agents claim that people who try to do a “for sale by owner” will get swamped by low ballers. I’ve asked people who tried to sell their own homes and they say that’s not the case. For both FSBO and real estate represented sales, I think going to tons of open houses or visiting listings in the area you’re interested in and making low offers would be a great approach to finding a good deal if you have the time / energy to do it. Many real estate agents won’t work with you as a buyers agent if this is what you’re doing (they’ll give you lots of excuses, but ultimately I’d guess it’s just because they’d be putting SO much work into every purchase). You may have to deal with the selling agent / owner directly.

Obviously you need to be able to properly value something to do this. If someone is selling their place for a crazy high price, and you offer them a low ball based on their asking price, you might still be overpaying. If you pay a low price for a property in bad repair you can get into similar problems. Finally you might get burned if you bought a bunch of properties right as the market was turning, so probably the best approach to this would be “slow and steady” rather than getting a bunch of places at once.

Finally, you need to be able to sell whatever you buy at the proper price. If you get a property cheap, then find you are getting eaten alive by the holding costs, you’ll turn into a desperate seller yourself!

I don’t think there’s anything inherently wrong with making low ball offers. You’re not trying to trick them or force them into anything, you’re just saying “This is what I’m willing to pay, if you have a better offer – take it, otherwise give me a call”. That being said, you’d need a pretty thick skin to offer someone $120K on a $200K property and be able to smile and say “give me a call if you change you mind” when they start cursing at you. I don’t do this myself, but am always tempted (I’m too sensitive and would find it hard to keep going when people kept getting angry at me – I wouldn’t be able to do cold-calling sales either).

Categories
Book Review

A Million Bucks by 30

After spending another afternoon at Indigo, I read “A Million Bucks by 30” by Alan Corey. This book has been previous reviewed by Million Dollar Journey and Thicken My Wallet (who were sent review copies – humph!).

The format of the book is “slices of life” from when Alan graduates and starts job hunting (he soon reaches New York) to when he reaches his goal of becoming a millionaire at 29. In a typical Hollywood ending, the book advance for this book supposedly puts him over the threshold of being officially a millionaire.

Spoiling the ending doesn’t matter (I’ve already spoiled it for you now – bwahahaha). His journey is more of a framework which lets him talk about where he was at each stage, highlight things he did that saved or made money for him, and throws in a bit of humour to keep you reading. Each chapter takes a snapshot of his life at that point, what he was doing with his finances, and what his networth was (broken down by cash, retirement savings, stocks and real estate).

When I was reading it, I got to some of his “frugal suggestions” and agreed with what others have said that they were somewhat unethical (things like taking umbrellas from lost and founds and keeping a “refillable popcorn tub” between movie visits – he used the same container for 7 movies). Afterwards I was talking to Quietrose about the book, and she asked what he’d done that was so unethical, and when I articulated it, I reversed my position. The things he does aren’t illegal (the police wouldn’t pursue him even if they were) and it seems to be more grey area stuff than anything.

Keep in mind, I’m the guy who read the book at Indigo so I wouldn’t have to pay for it, so maybe I’m not the best ethics judge. The Ethicist from the Wall Street Journal seems to agree about the umbrella though (I can’t find the link, but he wrote a column that basically gave the ok to taking abandoned umbrellas).

Each chapter seems to have a “save money” and a “make money” component. In the first chapter after arriving in New York, he lives in the projects to save money and opens a retirement account (Roth IRA) to make money. This continues through to the end where he buys a bar to make money, then always drinks there (to save money). En route he buys a one bedroom condo (and rents out the living room), buys a duplex and converts it into a rooming house (living in the smallest room himself). He compares this to being on “The Real World” which I can believe.

Halfway through our conversation Quietrose was laughing at me claiming I actually wrote the book (cheap guy buying real estate). I didn’t write it, but I can definitely relate to it. He does acknowledge some of the downsides of being frugal (such as getting dumped, and having friends refuse to visit him in the projects).

My other big feeling at the end of the book was that Alan didn’t really need to do what he did. He *REALLY* hustled, doing 4 significant real estate transactions though this period. He lucked out (which he acknowledges) that real estate took off while he was doing this. In the end I felt that he could have been successful as an entrepreneur WITHOUT being as cheap as he was (he might have had $950K instead of a million at the end – who cares?). Alternatively, he probably could have lived a happy, frugal life without doing all the entrepreneurial stuff he did. I kind of get the feeling that he’s going to be a Warren Buffet type – living off of a small fraction of his wealth while he keeps increasing it. At a certain point you wonder why people would want to keep making money they aren’t going to spend. Good for him, but even better for whoever inherits it all when he dies.

If he’s looking to adopt, I’m available.

Its a fun book. But its not the greatest for practical strategies: you wouldn’t learn enough from it to implements any of the things he did, other than living a frugal existence – and he doesn’t even give a complete framework for that, just a scattering of “money saving tips” that shows where his mind was at. Its would be a great gift for any cheapskates you know – I saw myself in some of his adventures and had a good laugh.

A podcast interview with Alan Corey is available here.

Categories
Investing

Early Excitement in New Investments

A man I knew a few years back got seriously into real estate after reading “Rich Dad, Poor Dad” and inheriting a million dollars (his father-in-law died). He had been living in Toronto, and after discovering how much cheaper property was in smaller towns (duh) he started buying anything he could get his hands on (this is the guy who evicted me when I wouldn’t loan him money).

I was talking to him after he’d bought one building with a commercial store front. I asked him if there was a tenant in it when he bought it and he said “no”. I then asked him if he had a tenant who would go into it after he fixed it up, he again said “no”. He followed this up with saying there was a non-profit group he could let use it in order to get a tax credit. I asked him why he bought it if there wasn’t any clear way to make money with the building, and he said that it was so cheap, he couldn’t lose. After he fixed it up he could just resell it for a lot more than he paid if he couldn’t find a tenant (although he expected to have people want to rent from him).

At the time this didn’t add up in my mind, but I figured I must not have a proper understanding of real estate. If the property was selling cheap now, it’s because there wasn’t much of a demand for store fronts in the small town. It just seemed to me that he was buying a rock around his neck to get the property, pour a lot of time and money into it, then have it sit empty for him (like it was for the person who sold it to him).

He proceed to buy up a bunch of properties, went looking for more money to keep buying (enter Mr. Cheap) and just recently, a few years later, I’ve found out that (surprise, surprise) it hasn’t worked out very well for him.

There’s a funny thing when people first get into a new investment, they seem to convince themselves that they’ve somehow stumbled in on it at exactly the best possible time. He was convinced that for some reason real estate was available at an unbelievably good price and he needed to buy as much as he could get his hands on.

I’m throwing rocks in a glass house here, as I got into dividend stocks in mid May last year, and as soon as there was a dip I bought a bunch more on margin (I thought I was being conservative, but I got hit with 2 small margin calls).

If anything, chances are good that if you learn about a new investment strategy, it’s probably been doing well recently (given that people are writing or talking about it and advocating / teaching new investors about it). From just a reversion-to-mean perspective, it’s probably LESS LIKELY to do well in the near future, BECAUSE it’s been doing well recently (like real estate and dividend stocks right now). Perhaps the best investment strategy would be to read 10 year old “get rich quick” books and copies of the Wall Street Journal? 😉

I’ve seen the pattern repeatedly where people learn about a new strategy, think it’s great, then bet the farm on it before they’re knowledgeable enough to really assess the risk / reward trade-off being offered. Cooler heads wrote early on that the bank stocks were probably going to keep falling, and I could have saved myself thousands of dollars if I had waited a few more months to buy.

My fear was that I’d miss the dip and be kicking myself for not buying when they were higher.

I’m not sure if this is a general problem for anyone learning a new strategy, or just an issue for certain personality types. The rational approach would obviously be to start small with a new investment strategy, test the waters, and gradually increase your investment as you learn more. People (in my experience) don’t do this, and seem to fall into two camps: either they don’t invest at all (all money sits in GICs and savings accounts), or they seem to over-invest early in their self-education.

Do you think putting too much money in an investment while you’re still a novice is a common investor problem, or do you think Mr. Cheap is just trying to project his issues on the rest of the investment community?

Categories
Frugal

A “Decent” Lifestyle

My mother recently went on vacation to Spain with one of our distant relatives from England. During the course of the trip, it turned out our relative is deep in credit card debt. She split up with her husband (of over 20 years) and has been struggling to get by on jobs that pay a pretty low wage. She told my mom that she “couldn’t live a decent lifestyle without going into debt”. No one in my immediate family could make heads or tails out of that comment.

To me living beyond your means is a party that is inevitably going to end badly. Eventually you’ll have to radically change your lifestyle once you lose access to the credit you’re abusing. Beyond that you’ll have the pain of filing for bankruptcy, probably at a stage in life when you’ll be less able to deal with it (since you’ll be older – working a second job will be even LESS appealing than it is now). Or, you’ll try to reverse your lifestyle before bankruptcy and have even less money to live on as you’re servicing your debts.

Perhaps, for extra fun, you’ll borrow money from friends and/or family and blow that before the party ends as well.

It’s a cliche, but some people truly don’t understand the difference between a need and a want. Vacations are wants. No one needs to travel for pleasure. I enjoy travel greatly, but if I can’t afford it, I don’t go. It’s incomprehensible to me that someone would think it’s a good idea to go on vacation or buy a fancy TV and add the cost onto a debt they’re already struggling with.

1 billion people live on $1 / day or less. At this level of spending you’re probably not meeting the long-term survival needs of your body (although I think a lot of people don’t realize that a dollar goes a lot further in a rural village in a developing country than it does at the Eaton’s center). These people can say that they don’t earn enough to live a decent lifestyle, but can ANYONE earning a western salary really make the same claim?

A while back I read through a blog of a guy who lived off $1 of food per day. Unappetizing? Sure. Unhealthy? Yeah, probably. That being said, how much more do we REALLY need to spend before it’s considered a decent lifestyle? $60 in snacks at The Carrot Commons seems like a want rather than a need to me. (for those not familiar with the Carrot Commons, it’s a hippie spawning ground masquerading as a grocery store here in Toronto along the Danforth – their hummus is great!).

Debt Kid and Violent Acres both have stories about times in their life when they were living pretty rough. This is probably the threshold of what I’d consider a “decent lifestyle” for Westerners, but in both of their situations they admit that they made poor choices and got themselves into a bad place, and they chose to temporarily live the way they did to get out of it. My brother spent 6 months travelling across Canada and the US in a pick-up truck with a mattress in the back (covered by a cap – those shells that cover the bed of the truck). He was homeless living out of his truck for half a year and he loved it! Hobo Stripper lives out of a van (and takes off her clothes as a job). I suspect she does have a problem or two, but I don’t think money is one of them – she chooses her lifestyle and seems pretty happy with it.

My brother probably would have been happier if he’d had a stripper with him in his truck, but I’d argue that would have been a want, not a need ;-).

Part of what got Debt Kid and V through their experiences is they chose them. I’m not terribly sympathetic with someone who sticks their head in the sand and ignored their financial reality until this type of lifestyle is forced on them. If a train is coming down the track towards you, I’m not impressed if you turn and look the other way until you get hit. In situations like these, the medicine will probably be less bitter the sooner you take it.

People sometimes are amazed at how little I spend ($1200-1400 / month these days), but from a global or historical perspective I’m living a lavish lifestyle. I have time to spend with friends, a computer and Internet connection that lets me blog and read all day, I never go hungry (and I have the option of healthy food), I have clean water, a hot shower and a roof over my head, free government medical care, there’s a public library in easy walking distance I can read current newspapers and books at, there’s a subway stop 2 minutes from my door that gets me to any corner of our not-so-fair city for a couple of bucks and a wide assortment of tasty affordable foods when I have some extra cash and want to “splurge”.

Not too shabby from my perspective. I could stop eating out, get rid of my home computer, live with a few roommates or in a rooming house and still be living what I’d consider a very decent life.

In a western urban setting, what’s the minimum amount of money or amenities that you’d consider a decent lifestyle?

Categories
Real Estate

Mortgage Slaves

Toronto Life had an excellent article some time back on mortgage slaves. The Canadian Capitalist has linked to this article before, and I think its an excellent question: is it worthwhile being house poor?

My ex-girlfriend and I discussed buying a place together a few times, and her feeling was always that to live in the areas she’d want to live in, it would cost so much to pay for housing that her quality of life would dramatically shrink. She felt that renting in a decent area, then having extra cash to enjoy life made sense. Now that the real estate market seems to be changing, her perspective seems to make more and more sense.

In a wild market where property prices keep going up and up, it seems to make a lot of sense to stretch the budget to the breaking point, buy the most expensive house you can find and reap the benefits of appreciation. This strategy requires that the party keep going. If prices plateau (or drop) and you’re having trouble making payments, life gets a lot less pleasant in a hurry.

I’ve been reading Garth Turners “Greater Fool” at Indigo when I have time to kill, and he makes an interesting case that we’re coming to the peak (or just past it) of a real estate bubble. Of course, he’s been saying this since 2006, so I’m not sure *HOW* much credit he should get when we actually hit a crash.

When housing grows away from affordability, its dangerous territory. Consider Japan’s real estate boom and bust. Consider Toronto’s condo crash in the 80’s. Consider the US’s current sub-prime crisis. A money article from 1992 sounds like something people might be asking right now in the US. We’ve been here before, and we’ll be here again. I suspects its a continuous cycle of people viewing their homes primarily as shelter, then over time they increasingly view them as investments, until there’s a crash and the family home becomes viewed as shelter again.

I was predicting to anyone who would listen that the Toronto market was going to die once the property transfer tax went into effect. My rationale was that it would heat up demand in the end of 2007 to beat the tax, everyone thinking of buying would buy, then 2008 would be an immediate slump. I’ve been apologizing to people I made this prediction to, as the the media kept reporting that the market was still doing well in 2008.

Then they said there wasn’t as much sales volume in Toronto real estate because of bad weather (riiggghhht). Since then they’re saying that high end properties are dropping in price, and sales volume is going down, but prices are still high (which, supposedly, dropping sales volume is the first step of a real estate decline). When I’m out walking around these days, there seem to be A LOT of properties for sale.

Anyone shopping for Toronto real estate right now, I’d strongly recommend holding off for a couple of months. I have a feeling prices will be dropping soon.

Categories
Book Review

The Little Book of Value Investing

Mike won “The Little Book of Value Investing” (2006), by Chris Browne and a couple of visits ago I borrowed it from him. The author is a managing director of investment firm Tweedy, Browne who were the legendary Ben Graham’s brokers apparently. What Has Worked In Investing: A Tweedy Browne Case Study made the rounds of PF blogs a while back, so the author definitely has value investing “cred” (Mr. Cheap is in touch with his urban roots).

The basic idea of value investing is you figure out some way to appraise a company, then look for companies that are selling for valuations significantly below that. Graham used the idea of assets of a company and managed to find stocks that were selling significantly below the sum of its assets (e.g. the company could just sell off everything they owned and raise more cash than the total value of their company according to the stock market). This worked out quite well for Graham but, because its such an obvious arbitrage opportunity, its very difficult to buy companies at this sort of discount anymore.

Browne touches on quite a few of the big ideas of value investing such as “buy stocks like groceries: when they’re on sale” and Buffet’s famous “Rule number 1: don’t lose money”. He spends a couple of chapters outlining how to value stocks, but my feeling was that these were incomplete and would do more harm then good (if someone, using just these two chapters as their basis for stock evaluation, started buying stocks I think they would be very naive buyers). At one point Browne suggests that the book could be used to inform readers about value investing so they understand the concepts better if they’re talking to a paid advisor, which I think would be the best usage of this book. He also suggest it can be useful for DIYers, which I disagree with (unless the DIYers read more before putting any of his ideas into practice).

Browne is a big believer that value opportunities lie outside the US and suggests that global bargain hunting can be the best approach for buyers. He hedges this recommendation with concerns about limited oversight of corporations in some countries, which definitely does balance the extra reward in my opinion.

He attacked active trading and made a pretty convincing case against being able to profit over the short-term by stock picking. He was preaching to the choir with me here though, so he might not make as convincing a case to someone who is a believer in active trading.

I was a little disturbed when he dismissed asset allocation and index investing. His feeling was that a value oriented approach makes it trivial to beat the indexes, which I’m not totally convinced about. He presents research saying how low P/E stocks pretty consistently outperform high P/E stocks. From this perspective, an ETF that just tracks the low P/E stocks in a market should do very well – I’m not sure if such a beast exists and if it has had as good of a track record as he claims. He attacked asset allocation with the idea that when you rebalance your allocations you’re selling your winners to buy losers. However, he advocates buying out of favour stocks and selling them when they become fairly valued – so he’s selling winners to buy losers too.

Value investing makes a lot of sense to me, I just don’t seem to be able to get a handle on the whole process of evaluating stocks for purchase. If I got to the point where I had faith that the “under valued” deals I was finding would give me a strong return, I’d be delighted to go bargain hunting, but at this point I’m just not a believer.

I would recommend this as a great primer on value investing, but would caution anyone repeatedly not to make any changes to their investment strategy based just on this book (unless it was to move from actively managed funds to passively managed funds). If you like the concepts presented in this book, please do further reading.

Mike (who also read this) may do his own review – so encourage him in the comments to write it up if there’s any interest in another perspective on this book.

Categories
Frugal

Cross Border Shopping

I was down in Niagara Falls last weekend and decided to do a little cross border shopping. I’ve always been curious as to what the cost would be to exceed the exemption on alcohol. With this in mind I bought a 12 pack of beer and a 1.75 L bottle of bourbon.

The bourbon (my pal Jim Beam) was available in the U. S. of A. at an unbelievable price of $22. A similar bottle would be at least $40 or $50 at the LCBO. Coming back, I boldly declared to the custom guard that I’d bought a bottle of bourbon and a 12 pack of beer. My first hint that I was in trouble was when his eyes widened a bit and he asked for my receipts. The second hint was when he asked me what I thought the bottle would have cost me at the LCBO. The third hint (and at this point he was done hinting) was when he told me I’d be paying more than that in duty and instructed me to pull over to the left after exiting the custom booth.

All told, they wanted to charge me $36 in duty for the bottle, more than 150% of what it cost me. Part of this was an $18 “LCBO markup”. Outrageous! I decided in the end to abandon the bourbon and carry on with my trip (out of sympathy, the guy inside decided not to charge me for the beer). Truth be told, I think I would have been further ahead to pay the $36, since I this is still cheaper than what the bourbon would have cost at the LCBO. I certainly proved to myself is that the duty on hard liquor is VERY high. Apparently bringing across beer, even if you exceed the exemption, is reasonable, but you’ll lose money trying to bring across the hard stuff. Both customs guards asked me if I’d every paid duty on imported liquor before, and I think what they were implying was that I was a dumb-ass for trying to bring it across and it’s cheaper to just buy it at the local store.