Author: Mr. Cheap

Categories
Investing

The Problem With Patterns

I recently had a funny experience. In late October, financial stocks took another dive (at one point my BMO and NA were down about 10% from my average purchase price). The yield kept climbing, and I just couldn’t believe Canadian banks were going to go out of business, so I was tempted to buy more. Speaking with a friend, I quickly talked myself out of this (I’m not working right now, so the purchase would have come from a LOC, which probably isn’t the smartest idea).

Fast forward a week, and the stocks have almost gone back up to my average purchase cost (NA was $50.50 on October 23rd, and its $54.20 and climbing as I write this on Oct. 31st). I’m looking back, seeing that my feeling was correct, and that I missed out on some rapid increases over 8 days.

So next time, I’ll trust my gut and buy? No I won’t.

Humans has a remarkable pattern matching ability that helps us figure out what’s happening in our environment, and predict what will happen in the future. In many areas this is very helpful, but in a few it can cause weird behaviours or hurt us. Optical illusions play on our pattern matching to confuse us. Gambling preys on this pattern matching where we think we’ve figured out what’s going to happen (and trust the feeling as we lose all our money).

If NA had been guaranteed to make a speedy recovery and shoot up in value, institutions and other investors would have been buying it while it was dropping and would have never let it go as low as it did (they wouldn’t leave money on the table). There was some risk that it would drop further, or it would have stayed at its lower value for an extended period. Its price reflected all these possible future outcomes.

I was interested in my own reaction when it went up, because first I thought “I should have bought”, then I thought “I should buy in a similar situtation in the future (since I was right this time)”, then I thought “wait a second, this is the *EXACT* feeling that gets people into trouble!”.

Unpredictable things are unpredictable. Once you start feeling that you have an intuitive instinct about what’s going to happen (or worse, some arcane technical analysis formula that will predict it) you’re turning into a dangerous gambler. Beware that siren’s call, as it could lead you to your doom.

Categories
Personal Finance

Childish Misunderstandings About Money

I’ve answered a couple of memes in the past, so I’m at the point where I’d like to try starting my own.

What early (i.e. before you were 10 years old) ideas did you have about money or finance that turned out to be totally (and amusingly) wrong? Please tag at least 3 people when you answer this meme, and link or traceback to  https://moneysmartsblog.com/childish-misunderstandings-about-money/, or leave a comment with a link to your response at the same address (so we can collect all answers generated in one place). Feel free to cut and paste this paragraph into your response post.

To begin with, when I was a kid (like 5 or something) I thought that you had to buy jobs. I got the concept that there were jobs that were better then other jobs, but I thought you got them by paying more money for them (so if you wanted to be a doctor, you’d have to pay the hospital $100,000 but if you wanted to be a paperboy, you only had to pay the newspaper $500). I realized that you did get paid for a job, but I thought you needed to pay them first. I *think* I thought you’d be able to sell a job when you left too… So I thought people saved up, then bought a better job.

The funny thing is, in SOME ways this *is* a little bit correct (e.g. you have to pay for an expensive education to become a doctor or lawyer). In many ways families buy better jobs for their children. Dividend paying stocks, annuities, GICs and whatnot have always made sense to me, because that’s how I thought even employement worked (you paid a lump sum of money then collected the ongoing payments).

I’d like to tag Million Dollar Journey, The Dividend Guy, Wooly Woman and Krystal to continue this meme.

Categories
Investing

Deductible Borrowing

Now that I’m living off of savings, I expect at some point I’m going to have to dip into my line of credit. Since its always better for debt to be deductible (save you money on your taxes), rather than non-deductible, my plan is to start borrowing money to pay for my condo expenses.

How this will work is, I pay $126 every week for the mortgage payment (principal and interest) and $500 a month for condo fees. On the day the expense are paid, I’ll transfer an equivalent amount from my line of credit into my checking account (where these expense are drawn from).

This will put about $1000 / month (plus interest) on my LOC, while I should be able to live off of the $1300 / month that my condo is bringing in in income. I have a few thousand in savings which I’ll use for any unexpected expenses. Once I start my PhD (or bring in some coin from contract work), I’ll start paying down the LOC.

The benefit of doing this will be that I’ll get a tax deduction on the 9% interest I’ll be paying on this every month (since I’m using it to pay for investment related expenses). If I waited until I ran out of savings then started borrowing from the LOC for personal spending, it wouldn’t be deductible.

I’ve ran this past a couple of friends and I’m pretty sure that its valid. If anyone knows if this isn’t allowed (or can warn me of any potential pitfalls), I’d be very interested.

Categories
Real Estate

Silent Partner Real Estate Investing

Thicken My Wallet asked me a while ago to post more about the multi-use building that I was involved in purchasing as a silent partner, and my experience doing that sort of deal. Just to be clear, what I mean by silent partner is someone who puts money into an investment, but isn’t involved in the day-to-day management of it.

Some time ago a buddy of mine, who has been holding my hand while I learn about real estate, contacted me with info about a building he’d found in a small Ontario town he lives near. He sent me the general building info, and it seemed pretty good ($400K, bar and retail store on the main floor and rooming house upstairs).

My friend likes to be pretty aggressive with real estate, so he never has enough cash to buy everything he’d like to. He also likes to mortgage to the hilt so that he has as much possible cash for the next purchase as possible. Given this, he’s quite open to partnering with people (and has done so successfully in the past with his sister’s boyfriend).

I told him it looked interesting, asked for an income statement (which seemed too good to be true, but we verified it). We put in an offer conditional on a property inspection (and my buddy negotiated a vendor-take-back mortgage).

After the inspection was completed (and we managed to get $25K knocked off the purchase price due to some potential problems turned up by the report), we set up a corporation (my buddy took care of all this), and recently completed the purchase.

Originally my friend was planning to live there himself, so he was going to manage it in exchange for living rent free, but in the end he changed his mind, and what we decided would be fair would be that we’d pay him 10% of the gross rent to manage it (and treat this the same as any other property expense), then we’d split everything else 50/50. I live in Toronto so wouldn’t have been able to do any of the management duties.

I went to tour the building, but for the most part deferred to my friend’s experience. This isn’t necessarily a course I’d recommend to everyone, but I’ve known this guy for about a decade (we met at university) and I was in his wedding party, so I’m willing to trust is judgement.

There’s a fine line to walk between doing business with someone you’re close enough to trust, but not doing business with someone you’re so close to that it might jeopardize the friendship. Some people trust more easily than I do, and some people are more able to do business and keep the friendship out of it than I can. For me there’s a pretty narrow range where business and friendship intersects (and I’m always nervous when I’m in that territory).

As an example, I could see my brother suggesting him and I buy property together (with him as the silent partner). I’d be very uncomfortable doing this, as if anything went wrong with the deal, I could see it causing problem with the relationship (and I don’t want to lose my brother over money). On the other extreme, whenever you go to “real estate networking” events, you’ll find TONS of people who are very excited to partner with you on deals. I’d say if you’re that sick of your money, just send it to me instead of losing it to them.

We’re still in the early stages of managing the property, so I’ll post more details in the future once figures start rolling in (and mention if we run into any problems).

I’m writing this late at night the night before posting, so I may have left out important details. Please let me know if there’s any holes in the story and I’ll be happy to fill them in! 🙂

Categories
Personal Finance

Courses I’d Like to Take

Wooly Woman tagged me to post about courses I’d like to take if they were offered. My mind actually jumped to courses I’d like to teach, which probably doesn’t say anything too flattering about me (I’d rather have the chance to force people to listen to me then listen to someone else 😉 ).

Course #1 – The no BS course for landlording

$300 for 11, 6 hour sessions (over 3 months – 66 hours total), much like the H & R Block tax course. Would cover buying property (running the numbers), dealing with sellers and real estate agents, lawyers, renovating, tenants, etc, etc. Course instructor would have no hidden agenda other then providing information (wouldn’t try to sell the students anything). It would be the opposite of the popular (and scummy) guru crud.

Course #2 – The Pursuit of Happyness

Without any spirituality or cult stuff, a course that would investigate the meaning of existence, false paths people pursue attempting (and failing) to find happiness, and approaches that do lead to meaningful, fulfilled, happy lives (perhaps with psychological research backing it up)

Course #3 – Startups for Fun and Profit

A course that would provide the “Coles Notes” of a business education for techies that want to start up their own company. Present ideas from people like Paul Graham and suggest worthwhile books that present non-technical subjects using an approach that would make sense to techies (something like “Selling for Engineers”). Critique business plans and provide connections. Sorta like Y Combinator but easier to get into.

I’ll take Mike, Money Gardener, Growth in Value and Telly (in the comments perhaps?) to continue this meme.

Categories
Opinion

Changes

Still don’t know what I was waiting for
And my time was running wild
A million dead-end streets

After much soul-searching (and spending half of every other day fixating on how much I didn’t want to be there) I quit my new job on Monday. To be fair to them, they were an amazing group of friendly, smart people.

Every time I thought I’d got it made
It seemed the taste was not so sweet

My reason for quitting is somewhat hard to explain to non-technical people, but basically they had a very complex system they wanted me to work on, and I wasn’t able to get the other members of the technical team to provide me with information about how it worked. The other people there have been working on the system for years, and I think they didn’t realize (and I wasn’t able to convince them) that one sentence responses to questions aren’t enough to get people up-to-speed. I tried talking to the group and making adjustments, but it just seemed to stir up bad feelings (and didn’t get me any further to getting up-to-speed). In all fairness, this is probably a cop-out. I could have just started digging through the code-base and traced what they’ve done over the last 5 years and figure out how the system works from the ground up, but I suspected they’d get impatient with me going through this exercise (it would have taken months) and I wasn’t too happy to dive into that when there’s someone sitting next to me who could give me the information I needed but wouldn’t. Plus their system was built on custom hardware, which isn’t my forté (damn, damn serial communication!), so I was struggling even with this approach.

So I turned myself to face me
But I’ve never caught a glimpse
Of how the others must see the faker
I’m much too fast to take that test

I’ve hit the point where, given that it didn’t work out at what was in almost all respects a great company, that I’m really not cut out for 9-5 life. After a string of bad experiences, at some point I have to admit that the common element is me. People are amazed at how little cash I live off of, and it’s really not due to much beyond that I find standard employment far, far more painful than most, and therefore have had to figure out a way to get by on less. Paul Graham perhaps put it best, when talking about the transition from school to work, that “You’ve gone from guest to servant.” I don’t care how modest the house is, but I need to be master of it.

Ch-ch-changes
Just gonna have to be a different man

Given that I’ve failed at being an entrepreneur and repeatedly failed at being a good little worker (pity poor, poor Mr. Cheap! 😉 ), I’ve decided that I’m going to focus on moving for the rest of the month (I’ve found a new place, and I’m going to start trying to get rid of “stuff” before the move). Starting in November I’m planning to decide on areas that I’m interested in applying to for a PhD, then spend the time between getting the applications in and the start of the program on figuring out what makes me happy (I want to become more of a Tigger and less of an Eeyore), what I want to do with the rest of my life, and maybe the occasional short-term contract just to prevent me from going TOO deeply into debt (I figure I can probably last about 6 months before I have to get into my line of credit). My hope is that I may be able to find happiness as a researcher, academic or teacher (and failing that I’ll be a bum on the street hanging out in front of Mike’s house trying to scam grilled salmon and beer off of him 😉 ).

Ch-ch-changes
Don’t want to be a richer man

PhD programs provide a stipend for students to live off of (at least in Canada most do). It’s reasonably generous (around $24K), which is more than enough for me to live off of (and pay back whatever debts I accumulate).

And these children that you spit on
As they try to change their worlds
Are immune to your consultations
They’re quite aware of what they’re going through

I’ll apologize if any of my posts over the next few months get overly bitter or introspective (Mike, please pull anything too poisonous before it goes live – you’re too late for this one 😉 ). Obviously the “retire in 3 years” plan is off the rails and my cost of living is going to swing from a surplus to a deficit almost immediately.

With respect to the poet Bowie as popularized in the classic film “Shrek 2”.

Categories
Book Review

The Lazy Investor

I read and enjoyed “Stop Working” by Derek Foster some time ago, and was excited when I heard he had a new book (“The Lazy Investor”) coming out. After visiting Mike on Friday night, I drank all his beer and took the copy that he’d won (when you let Mr. Cheap come to your house that’s par for the course).

Lazy Investor main points

My take away points from “Stop Working” were

  1. Dividends are a more reliable, consistent way to make money off of stocks rather then trying to time buying and selling.
  2. Blue chip companies with long histories of uninterrupted, increasing dividend payments can replace income.
  3. The tax efficiencies of Canadian dividends make them very attractive while building and living off of your investment income.

STOP WORKING

What the book was about

Although it was quick, fun read, I definitely enjoyed his first book more. This one read like a series of well thought-out blog posts (perhaps a “best of” collection) then a book with a consistent theme.

It covers:

  • How to setup DRIPs.
  • General ideas about investing in stocks.
  • Specific ideas about investing in stocks (including a short list of Canadian companies to consider buying).
  • Investing in American companies.
  • Teaching your kids about investing.
  • Whether you should pay for a child’s university education.

All interesting stuff, but I had expected a bit more of a unifying idea behind the book which wasn’t really there (it was broken into 2 sections, basically: how to invest and how to teach your kids how to invest).This book, like his first, is targeted to the beginner investor, and perhaps *I’m* different rather than this book being weaker than the first (against my best efforts I may have learned a couple things over the last few months). It’s a easy read and it may (bundled with “Stop Working”) be a good text for someone trying to figure out the basics of investing in the stock market (or looking for a straightforward approach to achieving an early retirement). Unfortunately I don’t think you’ll find many radical new ideas in it.

If you want to order this book – click on the Indigo banner below.

STOP WORKING

Categories
Frugal

Becoming Cheap

As a reward for reading me all these long months (and following me when I upscaled and moved into Mike’s crib), I’m finally going to pull back the veil and provide 3 mind tricks to become cheap. I love little ideas that can give you a totally new way to evaluate the world (things like “Sunk Cost” blow my mind).

Keep in mind, knowledge can be dangerous if incorrectly applied. Luke Skywalker didn’t start trying to take over people’s minds until the *THIRD* movie (and even then, it got him thrown to the Rancor). If you apply these and your girlfriend / boyfriend / husband / wife dumps your ass (or if they turn into a Rancor) you’re not going to get any sympathy from me!

Mind Trick #1

Any time you’re going to make a sizable purchase (not a cup of coffee, we’re talking Canoe size purchase plus here), take 10-15 minutes (maybe in the store, maybe in your living room when searching on E*Bay) and imagine your life with that item. Imagine going out canoeing, or wearing the cardigan around campus (do kids where cardigans around campus these days? Did they ever? Does anyone know what a cardigan is?). Some times you’ll decide you can’t see yourself using the item much in the future, sometimes you’ll enjoy the idea of the item enough that you don’t need to actually purchase it.

Mind Trick #2

When you’re about to buy something (big or small), compare its purchase price to something you really enjoy. Say you like going to Mexico once a year to an all-inclusive for $2000. When you’re buying an extra-large double-double at Tim’s, ask yourself “Would I rather have the trip or 1300 cups of coffee? Say you like going to the movie on a weekly basis, ask yourself “Is dinner at a fancy restaurant really worth 4 movies to me?”

Mind Trick #3

Somewhat related to #2 (but different enough to justify being another point 😉 ), when you’re about to buy something, consider it in terms of your hourly salary (to take a trick from Ramit, if you’re paid an annual salary, your hourly rate is 1/2 it, so if you make $40K / year, your hourly rate is about $20). If you want to get really depressed, consider the price after sales tax AND AFTER INCOME TAX (e.g. reduce your salary by the tax rate you pay).

I saw a woman in a McDonald’s uniform coming out of Starbuck’s one day. She totally deserves a bit of a treat on her way to work (who doesn’t love a Mocha), and maybe its just the occassional indulgence (I doubt it though), but that drink would probably cost her the first hour of her shift. Who would ever trade an hour of labour for a bloody cup of coffee?!?!? Or even a cup without any blood in it???? 😉

Does anyone have other “mind tricks” they like for saving money or just getting more out of life?