Categories
Announcements

Interest in a Podcast

I was recently over at Mike’s house for dinner and, after I’d discovered and drank the beer he tried to hide from me, we got talking about the blog. One idea I’d had was a VERY infrequent 4P podcast (once or twice a year). For those of you living in 2007, podcasts are basically just audio files that you play on your computer or you can download to your iPod. You’d play it whenever you want (it wouldn’t be a “live” show) and it’d be like a radio show starring those wacky Four Pillars characters.

In terms of a general show format, Mike and I would convert our advertising revenue into beer, setup a microphone, then talk about finances while we drank. The show would end when we are intoxicated enough that I’m ranting about gender-specific, single-user washrooms (they make NO sense!) and Mike is talking about how much he loves cheese. Maybe we’d throw in a prank phone call to another Canadian PF blog while we’re sober enough to dial.

Mike wasn’t wildly enthusiastic about the idea and was worried that beyond the novelty of what we sound like there wouldn’t be much interest. If this *IS* something you’d be interested in, please leave a comment below to try to convince Mike. Say something about what you’d want to hear in the show (if you just want to hear what we sound like, make something up). Format or topic ideas would both be good or even just a “sounds good, you should do it” comment. Hopefully if there’s enough interest Mike may change his mind (or I’ll just wear a hidden microphone next time we hang out).

Categories
Personal Finance

Insurance Poor and Self-Insuring

I had a grandfather who would worry about the potential problems that might crop up in life, and bought extensive amounts of insurance to try to protect himself. He felt this was the prudent, safe way to navigate life. In part due to the extensive insurance coverage he purchased, he was never able to save very much money, had to work at an intensely physical job (he was the caretaker at a cemetery) well into his late 60’s (because he couldn’t afford to retire) and died from a heart-attack on the job.

Who says hard work never killed anyone? That’s why Mr. Cheap avoids work like the plague (and because of this has a pair of the softest hands around…).

An alternative approach to life may have been to purchase insurance to deal with catastrophes, save all of the other money that you may have spent to insure against minor emergencies, then dip into these savings if a minor emergency occurs. This is called self-insuring and it’s a very good idea.

A series of commercials out right now (in Toronto anyway) show an insurance agent going about their life when they’re approached by someone who enthusiastically starts asking them about all the things insurance protects them from, then starts brow-beating the reluctant agent to sell them some insurance. In real life (off the TV), insurance agents tend to be very hard-sell. People work hard to sell you things you don’t need. I rarely get the hard sell when I’m looking at bread and eggs in the grocery store.

Future Shop / Radio Shack / Best Buy type stores push their extended warranties hard. They do this because it’s a bad deal for consumers and is likely to be pure profit for the store.

Years ago a woman came to visit my parents and tried to convince them to buy life insurance on my father (who was the sole breadwinner at the time). My mom told the sales-woman that she’d completed teachers’ college and that her diploma was all the insurance she needed if something happened to my dad (she’d go back to work). The saleswoman didn’t have an answer to that and that was the end of that sales pitch.

Look over your insurance and see what you can live without. If your DVD player breaks, are you going to be in dire straits? No, then don’t get insurance. If your car breaks a headlight, can you afford to pay $75 to get it repaired? Yes, then raise your deductible. Are you a couple with two incomes, no kids and life insurance? Why would the surviving spouse need cash in case of death? Would the bulk of your wealth go up in flames if the family home burned down? Then maybe it’s a good idea to get insurance with a VERY high deductible to deal with that risk.

If your view of insurance is “wouldn’t it be nice to get a bit of cash if this happened?” then you aren’t purchasing insurance, you’re gambling. And much like casinos, the insurance company has a lot of very smart people working very hard to make sure they come out ahead of you. Sunlife and Manulife employ so many nice people (who will reluctantly sell to you if you beg them), maintain such large buildings and pay such a nice rising dividend because they take in more money then they pay out. An insurance company couldn’t operate if this wasn’t the case.

Categories
Frugal

The High Cost of Low Prices

NOTE: This is not a post about Wal-Mart. I like Wal-Mart and will preferentially shop there.

Obviously with a name like Mr. Cheap, I like to get a good deal. I understand other people who want to get a good deal. What I don’t totally get is people who want a cut-rate on a top-rate product or service. Champagne on a beer budget just isn’t possible.

Airlines get quite a bit of abuse about the low quality of service they offer. The seats are small, the service is surly, and the food is bad (and more recently, non-existent). The joke of this complaint is if you want top-notch service in the sky, you can get it. Just buy a first-class ticket.

Myself (and everyone I know) pick their ticket for a trip based on the lowest cost. Potentially I’ll pay a few bucks more for a direct flight, but I wouldn’t pay more for a “higher quality” airline. How can people blame the airlines when they rationally respond to this by doing everything they can to lower costs (and therefore price)?

I like to complain about phone service, Internet service and long distance. All of these could certainly be improved by enhancing their quality, but we all choose them based on price (and again, force companies to do everything they can to lower their price).

It would be reasonably straightforward to start a “high class” version of any of these services. Double the price and spend the extra enhancing the service. The fact that no such services exist makes me suspicious there just aren’t enough customers who are willing to support them (with their dollars).

Categories
Opinion

The Evil You Know or the One You Don’t

Since I got a good response to my last “Mr. Cheap Asks” post, here’s another (it’s nice to have a think-tank ready to weigh in on my challenges in life). For those who don’t like reading comments, the consensus on the last question was that corporations usually can’t borrow money unless they have a guarantor, many assets and low debt or a multi-year history of income and expenses. Mr. Cheap was wrong on this issue.

As I’ve posted before, I’m applying for a PhD. I got my first admission to a school a couple of days ago, and hopefully more will be in the pipeline. Ideally I’ll have the pleasant problem of deciding between two good choices.

At one school, I have a supervisor I know (I’ve had a class with him before) and who seems like he’ll be a great person to work with. I’ve talked to his current students, and they all rave about how much he invests in his grad students.

Another school is the number one school in the country for the area I’m interested in. I’ve never been to the town it’s located in, and I don’t know any of the faculty there (it’s University of Alberta in Edmonton).

My choice seems to be between a great supervisor at an ok school, or an unknown supervisor (maybe good, maybe bad) at a great school.

A comparable situation would be whether you’d rather work for a great boss at an ok company, or an unknown boss at a great company?

Any thoughts? For anyone who remembers going through a comparable situation, what was the end result and did you have any regrets?

Categories
Personal Finance

Corporate Borrowing

When my friend and I bought a building, we set up a corporation to purchase it. Our thinking was to have the limited liability that the corporation would provide, as well as get the preferred corporate taxation.

We’ve recently run into some cash flow issues (perhaps that’ll be a future post) and my partner set up a loan with one of the major banks. The bank wants us to fill out a form with our personal financial data.

My response, when I saw this, was that since the CORPORATION is borrowing the money, the lending decision should be made based on the CORPORATION as an individual, not us. To my mind, if we provide our personal details, we’re clearly going to be guaranteeing the debt (which seems to undermine a lot of the value a corporation is supposed to provide).

My partner insists that this is how things work for small corporations and that no lender will loan us any amount based on the corporate assets (which I believe comfortable exceed our current debt level). I think that the corporation should be able to borrow money itself (although obviously a smaller amount then it could borrow if we were acting as guarantors).

Do any of our hyper-intelligent readers know which of us is right (ideally with a link to “official information” so the victor can rub the loser’s nose in it)?

Secondly, if banks are perhaps more conservative lenders, who should we be talking to in order to arrange corporate financing without the personal guarantee? All the corporate lending websites that turn up on Google look pretty dodgy. I don’t think a mortgage broker would be the person to talk to, but I can’t really think of who else to contact…

Categories
Investing

Mutual Funds

A while back I was at a dinner with a bunch of people. A fetching young lady and I started talking finances (Mr. Cheap knnoowwwsssss what the ladies like…) and I referred to ETFs as “the thinking man’s mutual fund”. My father, who has been an avid mutual fund investor for decades gave me a bit of a hurt look, and I felt bad (I didn’t think he was listening to me).

I got talking to a buddy who, on the advice of HIS father, was hot-to-trot to invest in a Spectrum mutual fund. I told him to get a diversified group of ETFs instead – pointing him towards Canadian Capitalist’s “Tour of ETFs” and “Sleepy Portfolio” (as well as Money Sense’s couch potato portfolio). When I told him that a diversified ETF portfolio should average a 10% nominal return over the long haul (this is retirement money he’s looking to put away), he asked why he’d settle for 10%, when the Spectrum fund had averaged 36% over the last three years.

One of the best things about teaching someone something is that your fundamental assumptions are occasionally questioned. It can be a great way to expand your understanding in a direction that you didn’t even realize you were deficient in if you’re unable to answer their question (in which case you should probably go educate yourself until you can answer their question).

My response to him started with the idea that past returns don’t guarantee future returns. I talked a bit about mean reversion (the idea that often an area that has been recently hot may go into a slump in the near future, or an area that has been in a slump may take off). He agreed with this in theory, but then asked “isn’t the manager a smart guy who knows how to move in and out of areas to make lots of money, leading to an ongoing above-average market returns?”.

I agreed that this was usually the story mutual fund companies liked to sell, but I talked about how research had shown that mutual funds UNDERPERFORM the market on average. Since people aren’t just randomly chosen to run mutual funds (these are all professional investors), it makes the whole system pretty suspect if the average PROFESSIONAL can’t beat the market.

I followed this up with the problem of popular (high performing) funds attracting lots of money, and how its harder to get high returns once a fund gets too big. The basic idea is that if they find a good deal, they can’t buy as much of it (as a proportion of their portfolio) as a small fund could. It may be worthwhile for an individual to shop at garage sales for bargains, but it doesn’t make sense for Walmart to do this (they wouldn’t be able to find enough bargains to stock their shelves).

Following closely on the idea of big funds having trouble outperforming the market, I talked about how mutual fund companies start a large number of “incubator” funds. They let the managers of these small funds take whatever crazy risks they want. The hope is that some of their funds will wildly outperform the market (and, of course, if you have enough funds doing different things some will), they then promote that fund as their “flagship” product, promote its amazing returns in all the financial papers / magazines, roll over the poorly performing funds into it (and get tons of new investors in it). Since they know at this point they probably won’t keep getting lucky again, they then track the market as much as possible (so they don’t lose tons of money and annoy all the new investors), and prepare the next batch of mutual funds to create the “hot fund” of the future.

For some strange reason, these monsters funds tend to give you a return of [market – expenses]. Isn’t that curious :-).

At this point, ETFs offering [market – small expenses] look appeals, and that’s what I recommended buying. My friend still seemed somewhat hesitant, and I encouraged him to talk to his father further. I offered to buy him a copy of “Four Pillars of Investing” but he immediately told me under no circumstances would he read it. I felt kind of bad that I hadn’t been able to convince him of the value of ETFs, but the next time I saw him I asked him if he’d bought the Spectrum fund and he told me “No, I’m looking into ETFs”.

For those who used to invest in mutual funds and stopped, what convinced you to bail on them? If you’re a fellow ETF / Index Fund evangelist, what do you like to say to people to convince them to consider ETFs? If you’re a mutual fund fan, which parts of this post do you think I’m mistaken about (remember that “you’ve got it ALL wrong, mister!” is often a fair response to Mr. Cheap’s rants).

Categories
Opinion

Future Consideration in the Job Market

Apparently it’s quite rare for actors to get paid in the Toronto theatre scene. Every production basically says “work for us for free, you’ll get exposure, then you’ll be able to get good pay from the next production that hires you”. When the next production starts, they say the same things, and actors go through this until they demand to be paid (at which point another actor steps in and works for free).

I’ve had similar experiences in the tech field. Because technology is constantly changing, it’s very common to come across job postings that require technology you haven’t been exposed to. This used to intimidate me a bit, until I realized that employers are posting their “dream list” of experience and none of the applicants are coming in with the full background they ask for.

I had the experience where employers would say “start working for us cheap, learn the technology, then when you get up to speed we’ll pay you full rate”. This made sense to me, and I actually fell for it a few times, but inevitably what would happen is I would feel like I was up-to-speed and they would still want to keep paying me the original salary at which point I’d leave.

Once I stopped accepting lower paid positions, I was surprised that they’d then offer me the job at a competitive salary. The whole idea of “low pay while you learn” was just a negotiation technique, not anything they actually meant. ONE TIME a guy said to me “well, I’m not going to pay for you to learn on my dime”. His position was still posted 2 months later (and he e-mailed asking if I knew anyone job hunting with the required skills).

A friend of mine will be leaving a position soon where she went WAY beyond what she was hired to do. At the end of the year she asked for her salary to reflect what she was actually doing, instead of the subset of her work she’d been officially hired to do. After dicking her around, the company eventually refused to give her any significant increase in pay. They’re freaking out as she’s wrapping up the position, but they lost her rather than consider a large pay increase.

At many positions I’ve worked at, at some point the idea was thrown out that I’d eventually be moving to a higher ranking position in the company. Again, this was a free carrot for the company, as they didn’t have to deliver on any set timetable, but their hope would be that it’d be enough to keep me around as I thought I’d be working my way up the corporate ladder.

Sadly these days, the only way to get a significant raise or promotion seems to be to move to a new position in a different company. Loyalty in the workplace is dead.

I’m not sure why, but my experience has definitely been that once a company has a person in a set position at a set salary, they don’t want that to change. Even if the person is doing vital work for the company, keeping things the way they are seem to be more important that keeping that person. My only theory is that the companies don’t want to feel that they’re being strong armed by key personnel and would rather let those people leave the organization than give them the power to put the company over a barrel. Amusingly, while they refuse to give significant salary increases, they love to promise them at some indeterminate future time.

Some relatives of mine own a company, and every time business improves they have one key employee who then demands a raise. They’ve gotten quite sick of it (although he is vital, so they always give in) and recently have hired a junior person for the same position. Their plan is to say no the next time he wants more money (and they hope having the junior person will help them weather the storm if the senior guy quits). I definitely understand the issue from their perspective as the employer and how they don’t want to feel dependent on any one employee.

Craigslist is full of wanna-be entrepreneurs who will happily throw equity at anyone who can turn on a computer. They promise executive positions and lavish salaries once they’ve become “the next Google”. Sadly, every one of these people I’ve ever talked to is totally clueless, and doubtfully will even become the next Pets.com.

Future considerations have some value, but unfortunately it’s usually FAR, FAR less then what people want us to value it as. In any business agreement, I’d basically view future considerations as “sweeteners” and not enter the agreement unless it’s worth doing without those considerations.

Have you ever been promised future consideration in the workplace? How often do you receive it? Have you ever managed to come into a workplace in a position then get a dramatic raise or promotion on-the-job? How did you do it?

Categories
Personal Finance

Ponzi Schemes

Ponzi schemes are a broad category of scams that can be presented as virtually any investment (e.g. real estate, currency trading, or stock trading). They work simply by paying off early investors with their own money or with the money of other people who join later. It looks like the investment is doing fabulously well, and the person running the scheme enjoys all the accolades from “investors”. At some point the number of people joining will start to slow down, at which point the person running the program just leaves with all the cash.

Say I had developed a super lucrative currency trading system such that I offered you a return of 1% per day on your investment (an astounding 365% per year return). You give me $1000. I start paying you back $10 / day. As long as you don’t ask for your money back, I can pay you back with your initial investment for 100 days. This is unlikely to happen. Eventually you’ll:

  1. Want your investment back
  2. Will invest more
  3. Will tell your friends and family about this great investment

If you try 1, I happily return your money (and I’m out a bit of cash for the days I paid you). This reassures you that it isn’t a scam and will probably get you into position 2 or 3. At the very least you’ll hopefully reassure other investors that you were able to get your money back, “so it seems to be on the up-and-up”.
If I can sell you on the value of compounding, I may not even have to pay you out the cash each day (and can just show you a nice virtual account that keeps going up faster and faster until I leave town).

A woman was looking for a loan on Prosper and was talking about how she had their high pay off investment opportunity she was going to buy then pay back the loan with. It was a HYIP, which are basically all Ponzi schemes. I was really torn, because part of me wanted to warn her that she was in very dangerous waters, but another part of me was tired of having other people get angry at me when I tried to warn them in the past.

Since a Ponzi scheme can look like anything, you might think they’d be hard to spot. Thankfully, in order to get as many people involved as quickly as possible (to maximize the take when the con men leave town or the website) they tend to offer ridiculously good deals (like a 365% return). With any investment, there is a correlation between risk and return. There’s no way to get a safe, high return. If someone is offering you a safe, high return, you might be looking at a Ponzi scheme.

As the old saying goes “if something seems too good to be true, it probably is”.
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