Book Review

“Where are the Customers Yacht’s?” Book Review

I decided to read this book because I’ve seen it referenced in numerous finance books, one of which is the Four Pillars of Investing by William Bernstein. Canadian Capitalist has posted a list of the recommended readings from Bernstein.

This book written by Fred Schwed is a fairly light-hearted look at the investing game. The author, who worked in the industry as a trader, does not take the industry or himself seriously at all. Although it’s not a serious academic study, the author lays the groundwork for the efficient market hypothesis (EMH) although he never uses those words in the book. Interestingly enough, having read both “Four Pillars of Investing” and “A Random Walk Down Wall Street”, this book was clearly the genesis of those two books. Some of the same stories, analogies and even jokes are shared among the three books. Since Schwed’s book came out in 1940, obviously the latter two books copied some material from it.

Unlike most finance books which tend to have lots of studies, graphs and the like, this book offers no proof whatsoever of his theories. Schwed doesn’t even explain how he came up with his version of the EMH. What he does do is explain how various market professionals are more or less useless, with a lot of Mark Twain type comments mixed in. The book is somewhat dated which makes for some amusing reading, in particular the section about investors who sell short entitled “The Short Seller – He of the Black Heart”.

My favourite paragraph from the book is about speculators (traders) and how the only thing they know of the companies they trade is the stock symbol:

This inability to grasp ultimate realities is the outstanding mental deficiency of the speculator, small as well as great. He is an incurable romantic and usually egotistical. His mind is fast, active, and resourceful, and, in a peculiarly limited way, shrewd. That is, he is shrewd in everything save that he is constantly, day by day, laying himself open to the possibility of being ruined. He seems to believe, with Mother Goose, that a treetop is the proper place for a cradle.

Bottom line: This book is interesting, funny and easy to read. If you’re like me and like reading a lot of finance books then I recommend this one for a change of pace. If you’re just getting started as a DIY investor then I would suggest something more recent such as the other two books I mentioned earlier.

Personal Finance

A New Financial Product I’d Like to See

I’ve often thought that a really great financial product would be a combination high-interest savings, checking, mortgage and line-of-credit (LOC) account.

Basically you’d set it up, and could have your paycheck deposted in it or whatever. You’d get Prime-2% interest on your savings (4% currently, comparable to PC Financial or ING Direct). You could write checks out of it and pay bills and whatnot.

If you had been authorized for an UNSECURED, if your accont ever dropped below zero, instead of being charged overdraft or whatever, you’d suddenly go from being paid Prime-2% to PAYING Prime+1%. Just like a regular LOC, they’d expect $50 or 3% to be paid on it per month (or whatever) and you could keep paying bills and writing checks.

If you bought property, and borrowed money for it, you’d then have a SECURED LOC that would come before the unsecured. You’d get credit up to your equity (75% of the properties value) and the borrowed amount applied against this and pay Prime-1% (like a variable rate mortgage). If you ever exceeded the 75%, you’d switch into the unsecured and pay a premium on the “overflow”.

This would obviously be dangerous to people who can’t manage their finances, but the world shouldn’t be designed for the lowest common denominator. Banks profit on each of these products individually, so I imagine they’d do ok with them all combined (and have ALL of that customers business). It would be much easier for the customer to manage their finances with 1 account instead of three.

Any ideas on how I can set up my own bank and offer this? 🙂


Another week in the life

I’ve been tracking my daily spending (basically every time I buy anything I make a note in a notebook I carry around with me. As mentioned, I’m spending far more then I thought I was, especially on food.

I’ve tracked spending from May 7th to May 26th I seem to be spending on average $54.49 per day ($21.93 of that on food). My big purchase for the last few weeks was a plane ticket to New York (for $440). Adding in my monthly fixed costs of $695 (rent, internet and whatnot), it looks like I’m spending around $2,352.40 / month, or $28,228.85 / year.

My “annual” food spending of $8004.45 is about the same as the average Canadian HOUSEHOLD spending on food (8,035 in 2005 for Toronto), so I think there’s definitely room for improvement.

On the other hand, I’m very frugal in other areas (in the last 3 weeks I’ve spent $24 on entertainment).

In theory, if you accept that you can live off of 4% of your savings indefinitey in retirement, I’d need $705,721.25 to retire on, which seems awfully high. People often say they want 1 million to retire on, and that’s considered too high a sum (and I usually think my spending is lower compared to most people).

In a future post I’m going to try to estimate what my current “passive income” is, considering my investment condo (which arguably isn’t so passive) and my dividends. I’m also going to start trying to cut back on food spending (I shopped at “No Frills” today, and it acutally *IS* cheaper, at least for bananas, yogurt and no-name pop, three things I checked). If I can start making and taking my own lunches (and eat at home at night), I think I could dramatically lower my cost of living.



I feel like an often-overlooked perspective in life is why people do the things they do, that is, their incentive.

Quite a while before “Freakanomics” came out (great book, read it if you haven’t yet) I had the epiphany that Real Estate agents weren’t being paid properly to achieve what is generally thought of as their principle aim: to sell your property at the highest price. They are paid a percentage of the sale (usually 5% in Canada) and they get 5% of the ENTIRE sale price.

Say I had a house worth $100,000. Any chimp could sell it for $50,000. But I’m paying them 5% of the nothing-to-it, super-easy-to-sell first $50,000 of the sale price. It probably wouldn’t be too hard to sell it for $75,000 (in both cases the challenge would be reassuring people that there wasn’t some hidden defect). Again, I’m still paying them 5% of the entire sale price, even the majority of it that would be very easy to sell.

The incentive that *WOULD* encourage agents to get top dollar would be if you split with them however much they got above a certain price, or if they got to keep the ENTIRE amount above a certain price (e.g. if I said I’ll give you 50% of anything paid over $95,000, or if I said I’ll take the first $100,000 of the sale price, you get anything left over).

Since they’d have to work harder in these situations, obviously agents wouldn’t be interested (actually some agents would be very interested, and would probably do very well in such a situation, the challenge would then become haggling with the seller over the “low-end” price, and haggling with the buyer over the “high-end” price, the further apart these went, the more money for the agent).

Its true in many (all?) fields that how the person is paid determines how they do their job. Financial advisers who get paid on commission have an incentive to sell you the products that pay them the highest commission (note, they don’t make money for increasing your wealth, they get paid for SELLING you things), 9-5’ers have an incentive to maintain their jobs (and maybe get extra hours), not to be productive (greater productivity isn’t directly rewarded, it *MAY* get you a raise, but it just as easily might not, why kill yourself for an extra 2%?), teachers get higher academic qualifications to increase their pay not to be better educators (so you get gym teachers who have a Masters from a school no one has ever heard of), etc, etc, etc.

Joel on Software debunks the “Econ 101 Management Style” which tries to tie pay to performance, and I agree with him generally, but at the same time I think many professions are already “gaming the system” and that things could be improved.

Business Ideas

Starting a business

I’m always attracted to the idea of standing on your own two feet and running a business where your compensation is directly in sync with your productivity, and the only person your beholden to is your customers. I’ve tried starting a fair sized venture (a software company that I devoted myself to full-time for about 2 years, and part time for about 4 years) which unfortunately never reached the point where it was even possible to support myself on.

Thoughts are constantly bouncing around in my head about how to escape the 9-5 grind and live the lifestyle of an entrepreneur. I’m honestly not after a “get-rich-quick” scheme, but would rather just live life on my own terms and be able to do what I think is best/right instead of being told what to do by someone else.

Real estate investing has worked out well along these lines, however my approach seems to be quite capital intensive (especially in Toronto right now, the rent:price ratio just doesn’t work out very well for land lording). I would need quite a bit of cash to buy enough property to make even a meager living on (although as time went on I suspect my standard of living would shoot up).

I came across an interesting list of 20 things NOT to do when starting a small business. It prompted a bit of a debate in the comments. I think I agree with the original post, that for a small start-up business, keeping costs at the absolute minimum is a good idea while you test whether your business actually works or not. I think that might have been part of my problem, I kept rolling along with my business and didn’t test whether I was on the right track (and make corrections) enough.


DIY Investor Wish List

I was going to start a 97 part series on my investment portfolio today but Outroupistache had a comment on my first post where he suggested writing about investment related areas that still need improvement.

So without further adieu…

Financial Advisors – This is wishful thinking, right up there with world peace, but I wish that the financial advisory field was a regulated profession and not an industry group of commissioned salespeople. This may not be all that relevant to a hard core DIYer but there are a lot of other DIYers who would still like to use a professional for some aspects of their planning. Fee-based planning seems to be the answer although from what I understand it’s very difficult to make a living charging fees when all the other financial advisors are “free”.

Mutual fund costs – According to a recent study by some international academics, we have the highest mutual fund fees in the world. I’m not convinced of the accuracy of their measurements but I don’t doubt their final conclusion. This really is up to the consumer to change. As long as 99% of investors don’t know or care about relative costs then they will never come down. Investors need to shop around a bit for cheaper funds. As well, all the major mutual fund companies will reduce their management fees by up to 0.5% or so and the annual trailer fees paid to the advisor can also be reduced by up to 0.5% as well. You would need a fairly large portfolio (I would guess $300k+) to be able to knock 1% off the management fee but I would suggest that if you have at least $50,000 you should ask about a reduction, if you have more than $100k then demand it. It might only be 0.25% but that still makes a difference. If anyone out there has done this then please let me know the details of your situation.

Education – I recall some economics courses being offered in high school (which I didn’t take) but I don’t remember any personal finance or investing courses. These should be mandatory courses for high school students and should be offered to post-secondary students as well. It seems like most people are afraid to do any investing on their own because they don’t know the first thing about it. If they even had a basic level of understanding of investing and financial planning then they would be far better prepared to deal with financial advisors or to do it themselves.

Any other ideas on investment areas that need improvement?


Stock Watching

I was talking to a co-worker about sports recently, and I admitted to him that I couldn’t care less about any of them. The made the astute observation that you need to be invested in the outcome of the game to care about it, otherwise it was just people doing bizarre things on a play field that hardly anyone could appreciate on their own merits. You have to buy in to the concept that the Raptors winning a game somehow improves your life in order to enjoy watching a basketball game.

I’m not sure about sports, but that’s definitely been the case with dividend stocks for me so far.

I definitely agree with the idea of buying blue-chip dividend payers for the long term (they’re for buy-and-hold, not for day trading). If you’re the type of person who will lay awake at night worrying about share prices, you should avoid the stock market entirely. If however you can buy them, ignore them other then to occasionally tune or add to your profile, the common wisdom seems to be that its a fairly straightforward path to growing wealth.

Instead I’ve been watching my E*Trade portfolio multiple times a day and taking great delights in the tiny movements of Rothmans and Bank of Montreal. After making $350 on my first day of trading I wanted to call up Warren Buffett and taunt him. I was less eager to do so the next day when I lost $200. Suddenly these random numbers that had had absolutely no impact on my life and have been bouncing around many times a day for decades had become very interesting.

I’m *hopeful* that since I watched them raise and fall with equal interest and detachment (when I shared my good and bad news with indulgent friends I prefaced the news with “no this doesn’t matter in any ways, but…”) that I won’t stupidly sell at a loss if they ever take a big drop (I hope I have cash to buy more at that point).

Time will tell, but so far I’ve been enjoying investing in dividends. And as of 10 seconds ago I’m up $320.15!

If you are interested in discount brokerages then read my BMO InvestorLine review here.


Why did I start this blog?

Now that I’ve got the first post out of the way and participated in my first tour, I should probably introduce myself.

Name: Mike

Favourite investment book: Four Pillars of Investing – William Bernstein

I’ve had an interest in finance for at least 15 years, however in the last six months I’ve gained a huge interest in personal finance. I think having a fairly sizable mortgage along with not getting any younger, motivated me to try to take stock (no pun intended) of my financial situation particularly with respect to retirement.

During the process of assessing our rrsp portfolio, rrsp contributions, debt repayments, retirement lifestyle etc, I’ve learned about a lot of new things and the Canadian financial blog community has been one of the best sources of information for me.

In the last several months I have really enjoyed reading other financial blogs and leaving comments (some quite lengthy) on them and having discussions with bloggers and other commenters. I’m hoping that by having a blog of my own, I can provide another source of information and opinions for other people and I’m sure I’ll learn a lot in the process myself.

Soon I’ll be starting a series covering our investment portfolio and financial situation and going through the thought process that has occurred in trying to figure out things like asset allocation, specific investments, risk levels etc. The portfolio is still a work in progress but I’ll be providing updates on that as well. I don’t want this blog to be all about me, me, me so I’d like to mix in posts about items in the markets or news.

See you tomorrow!

p.s. I just put the blog together a few days ago so if you have any suggestions for improvements then feel free to let me know.

p.s.s. I’m not sure if the RSS stuff works so if anyone signs up then please let me know if it’s working or not.