moneyFYI
Financial Freedom Is Merely Organized Common Sense
Have You Framed Your Situation Optimally?
Things go badly wrong if you believe things that, while maybe not exactly true, are strongly held beliefs. One of the costly flaws in our society is that there are people who know how the frame is wrong and yet can make a good living feeding into other people’s wrong beliefs.
One example of this is our court system.
Ask a question
Suppose I ask you, do courts supply or help supply justice? If you answer yes, you are in the wrong frame and should you ever need to go to court for anything, you will suffer. The courts are seen to be part of the justice system, but justice is not their job.
Former Chief Judge and formerly Attorney General of Ontario, Roy McMurty, has explained it to me like this. “You don’t go to court for justice; you go to court to have the rules applied. Only the legislature can create a set of rules that might be just.”
While that highly objective idea of what judges and courts do works best, courts are moving away from it. That leads to problems because justice is really just a set of preferences, and that set of preferences is not universal. A judge can make very curious “just” decisions if they ignore the rules in favour of some preferred result.
Think about this
Suppose people went to Family court to get a just result. Most of the time, they will be unsatisfied, angry, and bitter. The lawyers will be well compensated, though.
On the other extreme, suppose the people know the rules that apply. They know the guidelines for dividing assets, for child and spousal support, and they know how courts have acted to deal with shared custody of children. Most civil court actions resolve easily as long as people know the rules and accept those as governing.
In family court, in the beginning, emotion rules. In some cases, it is the last chance to hurt someone who has hurt you. Eventually, people wear down and go bankrupt to pay lawyers to fight over things known in advance. As my father used to tell us, “Don’t fight if you don’t have to.” and in most cases, in family court, you don’t have to fight. Take the first deal you can live with. As a codicil to his first thought, he also said, “If you do have to fight, win.” If you have to fight, be sure you have a lawyer that knows how. Some lawyers fight; others negotiate. None do both well.
The bit to take away.
You can solve problems with the courts faster if you know how it is supposed to work. Sort that out before emotions overwhelm the process.
Going to court to have the rules applied is good frame. Know the rules and minimize the emotions.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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Can Potatoes Get Fat?
Many people are good at analytical thinking. While helpful, I prefer synthetic thinking. It’s more fun.
I like to be curious. I want to combine ideas from different genres to see if any new insights can come to be. The most recent one is, “Can Potatoes get fat?”
The development of the question
The meaning of this question relies on human health, animal husbandry, psychology, military theory, climate science, and plant biology.
What we know includes the idea that animals who are stressed do better. I know a little from being tangentially involved with raising deer for meat. In New Zealand, a leading deer meat producer, animals living higher on the mountain where pastures are less vibrant do better. The meat contains less fat and more vitamins and minerals. Infant mortality is lower. Animals require less veterinary care and live longer. Modest stress seems to be a positive life force.
Most physicians will tell you that being overweight is deleterious. I once had a doctor tell me he would like 90% of me to return in a year for another check-up. Body Mass Index (BMI) is a decent predictor of health and survival but only at the extremes. We could agree that if you are 5 feet 10 inches tall and weigh 400 pounds, you might not make it to age 90. Weight might not be the only issue. It could indicate another factor in your life that is working against you. In any case, people tend to work on weight management to inform and support overall health.
The psychology part, which I suppose doesn’t relate well to potatoes, is that we are problem-solving machines. We like to find answers. Stress is positive for our emotional well-being as well as our physical well-being. To some extent, we want stress.
Climate science tells us that the carbon dioxide portion of the atmosphere is increasing. It is now about 420 parts per million, while it was barely over 300 ppm 70 years ago.
Plant biology tells us that CO2 is a form of plant food. When it is more plentiful, plants grow better. That’s why you see nurseries with a greenhouse. Is it always good? We also know that plants change chemically as necessary. Organically grown plants, after several generations, have defensive chemicals in their fibre which are very similar to the chemicals you spray to protect them from pests. You can’t wash that off, either.
Military theory tells us that in an infantry war, many more soldiers will defeat fewer soldiers.
The questions that arise
We know that in deer, when food is plentiful, the nature of their bodies changes a little, but adversely. Does a different environment change all animals, plants, and people?
What is the equivalent of fat in a plant? When food is plentiful and cheap to acquire, do potatoes get fat and lazy? Is the fabric of their body different in terms of nutrients when they need not create better root systems and different foliage? In the simplest terms, is a potato in a high CO2 atmosphere the same as one where CO2 is lower?
If potatoes become different, is the change beneficial or harmful to us? How many potatoes with no nutritional value must you eat to be healthy?
Where it leads
Have you ever seen and consumed artisanal vegetables? If you have, you know they are unlike their modern cousins. They are more fragile, and their shape is different. I am old enough to remember when tomatoes were near spherical and had thinner skin. The changes made them easier to ship. More or less nutritious? I don’t know. The ones grown today from ancient seed varieties have an easy CO2 life, so they are likely nutritionally different from their old selves.
We should know more before deciding that more CO2 will make plant life more voluminous, and therefore feeding the world will be easier. Quantity is not the same thing as quality. There must be balance.
In an infantry war, you will usually win if you have five times as many soldiers. If your many soldiers are overfed and undernourished, you might not win.
The bit to take away.
Climate change will have many effects. We should learn and address all of them. We can mitigate rising sea issues but cannot as easily adjust to food changing its fundamental characteristics.
Beyond some level, the CO2 problem seems self-limiting. More plants consume more CO2 and thus limit its expansion. But, would that really help us? Maybe not, but I suppose there would be more hydrocarbons in the ground ten million years from now. Now that would be a long-term investment!
Should we deal only with ways to reduce CO2, or should we be finding ways to use the increase to our advantage? Why not both? Always have a plan B.
Maybe plants can create their version of a couch potato.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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Taxes Compound Just Like Interest
Part of understanding your financial context problem is the income tax. Noticing what comes out of your paycheque is one aspect, but it is just a snapshot. The cost of running the country today comes from your paycheque. It is severe but only hints at the problem.
Over a long time.
Let’s look at what happens to the accumulation of money you are setting aside for retirement. To simplify, let’s look at what happens to a single investment of $10,000 in a tax-exposed investment. Assume you can make 6% over a long time, and you pay tax on the income at 40%.
What’s the key? You make 6% but keep just 3.6%. That looks serious but really serious? Let’s look.
After 10 years, at 6% $10,000 becomes $17,908.47. At 3.6% it becomes $14,242.87 Of the $7,908.47 you earned, you keep $4,242.87. Your loss is $3,433.44. Your tax rate may be 40%, but your loss because of taxes is 43.4%. Not awful.
But it gets worse by the time you are into retirement, 40 years from now
After 40 years, at 6% $10,000 becomes $102,857.18, while at 3.6% it becomes $41,151.93. Of the $92,857 you earned, you keep $31,152. Your loss is $61,705. Your tax rate may be 40%, but your loss because of taxes is 66.5%. That’s awful,
What’s instructive is after tax, you have $41,151, and the government has $61,705. I doubt that is the right deal for you to use for retirement.
Everyone should understand income taxes on investment income.
The things you need to know
Your tax rate and your tax loss are not the same things.
You can and should seek ways to minimize the loss.
Some choices for defence
- Look at how a Tax-Free Saving Account works. Keep the whole yield.
- Look at how a Registered Retirement Savings Plan works. Keep the whole yield, deduct the capital, but pay tax when you draw it. Maybe at a lower rate.
- If you are saving for a child’s education, look at a Registered Education Savings Plan. No tax while growing, a grant from the government while contributing, and when withdrawn, it’s taxable to the child who has enough deductions and credits to minimize its cost. Maybe eliminate it.
I know taxes look very complex, and they are, but not for simple things like minimizing taxes on modest investment income. It is just organized common sense. You could learn how.
It might be more complicated.
If your situation is more complicated. With higher income, volatility of income and capital value, a business or rental properties, a corporation, or foreign investment, you might benefit from a tax specialist. You need to ask just one question of them, “Here’s my most recent tax return. Everything on it is accurate. How can I reorganize my affairs so that the numbers next year are better for me.” One caveat: the income cannot go down while achieving a tax advantage. You can always pay no tax at all. Just have no income.
The simple methods:
Defer – paying taxes later lets you get the benefit of compounding interest.
Divide – Two taxpayers, each with half the income, pay less tax than one taxpayer.
Deduct. – Examine the things you could deduct. There are not many for investment income, but it can be a little helpful at $40 in your pocket for finding a $100 expense you pay anyway.. Look for subscriptions to investment papers, investment advice, professional fees related to earning income, and even a safety deposit box to hold the securities. Be creative.
Startling but true
A 50% tax rate taxpayer, earning 10% for 50 years, is in a 91% tax loss bracket. No one sane invests with any risk or trouble to give the government 91% of the potential benefit.
The bits to take away.
The tax rate matters, but it understates your tax loss.
The government will eventually get almost all the money even at less than the top rate and with a low yield. You knew that before. Now act on it.
If you ever get a chance to own a government, buy it. It’s a very good gig.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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An Invessting “Event” Can Be Risky
Andy Martin, the author of Dollarlogic, posted an interesting chart from the Wall Street Journal on Twitter recently. It makes the point that no non-professional investor would have accepted even five years ago. Being offered stock in an Initial Public Offering (IPO) is no longer t a guarantee of fast wealth.
It appears that over the last two years winning with an IPO was a bet where the odds were 6 to 1 against. There is no gamble you can take in a casino that comes close to odds that adverse. Realistically, you should short every IPO that comes on the scene.
Will the drought continue?
That’s hard to say. Sure, the Covid thing seems to be passing, but will old ways return? I would not want to bet on that. People learn that losing events can happen and they don’t forget. The steely-eyed skeptic is easier to find today than is the dreamer who sees owning 2010 Tesla at a split-adjusted price of $0.090, currently $280, or 1997 Amazon at $0.075 per share. Currently $116.
Maybe those kinds of returns will be available someday, but for now, you might make money on the first few hours of trading if you have an IPO stock, but beyond the first day, enthusiasm often melts away and rational thought takes over.
IPOs are not always profitable on the first day. In May 2020, Uber was offered as an IPO at $45 and closed the first day at $42. It has traded near $20 since and is now at $27.
What to do instead
IPO traders are not, strictly speaking, investors. They are using the style “investing as an event” and it sometimes works.
The better way is the “investing as process” technique. Investigate and buy sound companies, reinvest dividends, and hold them until Mr. Market offers far more than your analysis says they are worth – after taxes. I know a fund manager who has well over a billion dollars under management and who owns between 35 and 40 securities. He has a simplifying preliminary analysis technique. “I read the president’s letter to shareholders in the financial statements. If I find the word challenge or challenging, I throw it away. I have only 35 stocks, most of which I like, so why should I invest in a company with challenges?” You would need to see the facial expression that accompanies “challenges.” Contempt is as close as I can come with a word.
If you see process, you automatically adopt a long-term patient approach. If you see event, you must have action. The old idea is, “The money is not in the buying; it is in the waiting.” Many investors cannot tolerate waiting. For an insight, farming is a process and hunting is an event. I am told that being a skilled hunter involves a lot of process too. I suppose a skilled and experienced person always gravitates towards process. It turns out to be the most efficient but far less spectacular.
Start with knowing your purpose.
When you know the why part of the problem, events can become your enemy. No one sane takes their retirement fund to a casino, even though the odds are far better than buying IPOs. When you have a long-term need, process will be your choice.
The bit to take away
No event-driven investment is idiot-proof. Be smarter. Get help if you need it and most of us do. Think process.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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What is the story FOREX tells us?
What can Foreign Exchange (FOREX) tells us about the state of the economy?
Over long periods the potential of an economy can be assessed by how people invest in it. Local investment matters but foreign investment tells its own tale. Why? Because foreign investors have to buy Canadian dollars to invest here. That transaction tells us how they feel about the economic future here.
If they are very optimistic, the price of the dollar rises against foreign currencies. Much like the price of copper or corn. If more people want it, the price goes up.
To some extent at least, the value of a local currency in foreign exchange transactions is an indicator of the perceived economic consequences of decisions being made within the country.
Is FOREX telling Canada to “Smarten Up!”
To be objective, the price of a C$ depends on two things.
- The strength or weakness of the expected Canadian economy.
- The relative strength of the purchaser’s currency.
It is possible that Canada is doing very well but every other country’s currency is doing better. That will never happen but it is worth noticing that the C$ to US$ exchange rate will not tell the whole story. It is the one you most often see, though and given the US$ position as the reserve currency for the world it is likely instructive.
Where has it been over the past twenty years?
Foreign exchange price trends reflect how outside investors estimate the future. There are many day-to-day transactions but in most cases, the people involved are price takers. Investors are different, their placement of money will be committed for a long time. So you must look at long periods and think about how the changes came to be.
C$ versus US$ September 2003 to September 2022
What’s obvious?
If we take the 85-cent position and assume above it, foreign investors are optimistic about Canada and below it, they are not, we can see that 2006 to 2015 is an optimistic period and 2015 to the present is not.
What does it mean?
Much of Canada’s economy relies on capital investment. The oil industry, mining, forestry, and farming are all capital-intensive. If the capital is unavailable or priced higher to induce investment, the growth slows.
Canada is a geographical monster and so needs far more infrastructure for transportation. Capital intensive.
Canada has few people relative to its size. That tends to produce cities that are proportionally very large. The Greater Toronto Area has a population of about six million people. Roughly 16% of Canada’s population is there. By comparison, the Greater New York area is three times bigger at twenty million people but is only 6% of the American population. The Los Angeles metropolitan area is smaller still at less than 4%. Cities are capital intensive.
Canada is a young country, and like a tall, uncoordinated 15-year-old, it needs to grow into its body. Canada requires more people to achieve its potential. People need opportunities and many of those rely on fresh capital.
Why is Canada relatively less attractive?
Investment optimism is a tricky thing to improve, but very easy to destroy. People are emotional and an uncertain future is at least mildly frightening. So less investment.
Governments and banks provide much of the incentive to invest. You might think the price of money, the interest rate, is determinative but no. The Bank of Canada and in lockstep, the Canadian Bbnaks offered very low rates in 2015 to the present and much higher rates from 2005 to 2015. To assume interest rates affect long term investment decisions misses the point. If an investment is good enough a change in interest cost of 2 or 3% won’t have much effect.
Government policy that destroys the industry’s ability to compete will change attitudes from interesting, to maybe, to a hard no. Money is very mobile and you must always consider that every investment is the one that meets the investor’s needs with an acceptable range of risk. If risk is high, the projected yield must be nearly infinite to make it interesting. Highest possible yield given a specific risk parameter is the goal. Expecting12% with little risk of the economic environment changing adversely is better than a projected yield of 50%, but you might be out of business in a year. Return on capital matters but so does return of capital.
Canada is not presently offering high predictability.
What can we do?
Recognition of reality matters. One reality is if you have problems that have a meaningful need for capital, like climate change, you cannot move ahead faster than your ability to generate the capital. You do the same in your household. You acquire what you must have as you can afford it, and you do not limit your future ability by borrowing excessively.
Our best move is to discourage governments from spending money they don’t have on projects that cannot pay their own way.
The defence of their spending is the long-run effect of the various catastrophes cannot be ignored. How valid are the damage assessments if we do little? The evidence is unclear and what we see seems to be aimed at political objectives. Certainly in Canada, reducing the 1.5% of Global CO2 we emit to zero would have no appreciable effect and predictably would make Canada near uninhabitable. A curious policy indeed.
The bit to take away
Governments cannot do economically destructive things within their country and have FOREX not notice. Governments can manipulate your thinking if you have no objective indicator. Just now people outside Canada are avoiding investment here. Pay attention.
All investment is a matter of selecting from an array of comparative advantage. Like a foreign investor, you should bend your investment decisions toward what is likely to work for you. That’s what meaning is about.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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A Tiny Minority Are Driving Social Thought
I have not tested this even a little, but it makes for an interesting thinking process. I saw three things in the past week that made it more clear.
- The parts between, a short article by Seth Godin
- There is lots of room between a video with Jordan Peterson
- In 1985, Antonin Scalia was approved by the Senate as a Supreme Court justice by a vote of 99-0
There is much social conflict now?
Take the current Supreme Court and their senate approval numbers as an example of partisanship
- 1991 Clarence Thomas 52-48
- 2005 John G. Roberts 78-22
- 2006 Samuel Alito 58-42
- 2009 Sonia Sotomayor 68-31
- 2010 Elena Kagan 63-37
- 2017 Neil Gorsuch 54-45
- 2018 Brett Kavanagh 50-48-1
- 2020 Amy Coney Barrett 52-48
- 2022 Ketanji Brown Jackson 53-47
Clarence Thomas is an outlier and showed what was to come. A clever smear campaign led by Joe Biden and a few others. What would you estimate the chances of a 99-0 senate vote in favour of Supreme Court justice would be today? My guess is it would be as close to zero as you can come in the real world.
You might wonder why?
If you read the article and watch the video you will get the idea. In Seth Godin’s article we learn that a Paul McCartney bass track played in isolation is quite forgettable. I suspect the vocal tracks, the drum track, and the lead and rhythm tracks would be similar. The point is it is the ensemble that makes the music what it is. Working together works.
Dr. Peterson points out that there is an entire distribution of political views and they range from the far and radical left to the far and radical right, with the moderate left, moderate right and center between them. The video is worth watching. It is about 8 minutes long.
What is the distribution of people?
I don’t know so I am going to guess
- Far and radical left. about 6%% of which a third or so are radical.
- Far and radical right. About 4% with 20% or so radical. The right is less emotional and less animated. To their detriment.
- Moderates of either persuasion total about 20%,
- Leaving the center at about 70% The center will necessarily include the indifferent.
If someone plotted it out, it would be a normal-like distribution with a high center peak and high kurtosis. (Kurtosis means the remote parts are over-represented.) In a perfect normal distribution about 68% would be within one standard deviation (1 sigma) of the mean and there would be 95% within 2 sigma. At 3 sigma you would have picked up 99.7 % of all the possible observations. My guess about the distribution will have far too many people in the far or radical positions. Kurtosis.
What could we learn from this?
If you fall into the centrists or moderate categories, who will ever hear you? The answer – beyond people you already know, no one. You cannot be heard unless you can get attention and you cannot get attention with any moderate position. Being in favour of peace, safety, opportunity, and justice is less exciting than crunchy peanut butter.
You must be able to be charismatic, controversial, or remarkably lucky to get attention at the national level. Like Donald Trump, AOC, Nancy Pelosi, Chuck Schumer, and Ted Cruz. Ron Desantis is sneaking in from the right just now and he is doing it by emphasizing common sense. Traditionally a moderate position. How odd.
Our reality is the noise is among a total of 10% or so of the people who are able to hit the interesting part of the news cycle. As the result, we have huge conflicts between very few highly motivated people amplified by their media helpers.
Why should we even pay attention to them? Most of the ideas they have do not stand up to any scrutiny at all. There are few facts on either side. It is all emotion and polarization. Drama as you may have seen in high school. With about as much value.
Your life will make sense if you let them rant and avoid becoming caught up.
The danger
Voters like to think they influence political outcomes, but they do not. As Twain pointed out, “If voting made any difference, they wouldn’t let us do it.” Politicians seem to have the power but not the ability to affect any outcomes. They stoke the conflict and skilled operatives drive the changes. “The Deep State” is the current idea. Just now it seems to be visible.
Clearly, Joe Biden is not influencing anything. We see agencies like CIA, FBI, CDC, NIH and many others laying down purportedly factual statements, rules, and directions without authority. The justice system in many places is barely worthy of the name. The people are confused but seem unwilling to learn more and become more expressive with their wishes. In the future, it will pay poorly to be an underinformed voter.
Canada makes even less sense.
Thomas Sowell has pointed out the malaise and its cause. “Much of the social history of the Western world, over the past three decades, has been a history of replacing what worked with what sounded good.” What is truly frightening, he said it more than 30 years ago. You can make sense of it if you ask yourself, “Who benefits?” That’s always a good question. In our current situation, you can be sure there are some doing very well indeed. You can be equally sure it won’t be people in the center to moderate camps.
The bits to take away.
Your future is impossible to plan if you don’t have any sense of what society will look like.
People cannot let untried ideas or worse tried and failed ideas, become dominant. Become informed, even if it is just at the local level. There are lots of opportunities to correct failing policies there.
It isn’t the radicals that are the danger, it is the uninformed voters who are the danger. Voting on emotion alone fails.
The radicals are a tiny and skilled at rhetoric minority. They have few rational arguments to support their ideas.
They won’t be defeated if we don’t try.
Accept their word for nothing. Demand proof. If they want to behave like they’re in high school, let them, but in high school, we had to show our work. They don’t seem to be interested in doing that.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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Do You Need To Own It To Use it?
The World Economic Forum made a pronouncement in 2016 and made some enemies in the process. “You’ll own nothing, and you will be happy.” In fact, the idea arose in a 2016 essay by Danish MP Ida Auken and became part of the WEF’s late 2016 video “8 Predictions for the World in 2030”
Number one in the video is the “you’ll own nothing” idea.
Owning nothing is likely a huge overstatement.
I think it would have made sense if the “own nothing” idea became, “You’ll own fewer things.”
Much as I think the WEF is overreaching, this thought is not as wrong as you might expect. People who own businesses are familiar with the idea, and what they have learned can be helpful for all of us.
As one client put it, “I don’t need to own it; I just need to be able to use it.” Ownership is one way to get that control, and until the 70s, there were few ways other than ownership to do so.
The criteria to consider are:
- If I don’t own it, is the asset available to me 100% of the time?
- Is it likely to become obsolete in the intermediate term?
- Is it specialized and difficult to get control without owning it?
- How much cash must I tie up to buy it
- If I borrow to buy, how much of my cash do I need now and in the future? What is the effect on cash flow to meet the financing costs?
- What is the effect on cash flow if I gain control in another way, like a lease with nothing paid upfront?
- What alternate uses do I have for my money?
Making the financing decision
Sometimes this decision nearly makes itself. For example, suppose you can earn 15% on money invested in inventory. You need a new delivery truck and can buy it for cash, or you can lease it. How hard would the decision be if the interest equivalent cost to finance the truck turns out to be 5%? That saves your cash to invest in inventory or some other way.
In your personal life
Ask yourself two questions.
- Can I use it without owning it?
- Is there an advantage to using my cash in another way?
Leasing a car is often a cash-efficient choice. Even when it is breakeven or so, other factors make it attractive.
Convenience
For some people, it is easier to budget with a monthly cost instead of a lumpy purchase every few years. When doing retirement plans, I use lease value monthly as the factor even if the client intends to buy for cash or finance with a large down-payment.
Forced Saving
Financing a house is different than a car because the house tends to have enduring value while the car depreciates. There can be a cost recovery when the house is sold, and that factors in.
The rent versus finance and buy decision for a house is not as easy as it looks because of the costs the landlord pays when you rent. It is easier with commercial situations because almost every commercial lease is triple-net, meaning the tenant pays all the operating costs, like municipal taxes, insurance and most repairs.
Guarantee of Use
A tenant has a guarantee of use during their lease, but what happens after? The owner may increase the price, or they may ask the tenant to leave because they intend to sell the building or provide it to a family member or even themselves. Even if the rent due is less than the cost of owning, there is an implied cost to a potential forced move. If you have a successful business that depends on the location, how long should the lease be? The loss of equity is worth considering, too.
Durable or consumable
Durable assets will eventually return to the owner. Consumable assets like cars, trucks and business equipment likely to become obsolete are usually the best choices for leasing rather than buying. The advantages are clear.
- Little or no cash committed to ownership
- Payment from earnings.
- No sunk cost thinking errors as the asset becomes less useful.
- No tendency to hold assets beyond their obsolescence date just because they work and are paid for.
Of these, if you own the asset, #4 is hard to overcome. No one likes to dispose of something that works.
Assessing acquisitions on whether I own the asset or just want to use it parameters is efficient financial management. It is easier to assess value in terms of the present value of net future cash flow when there are fewer variables.
The bits to take away
BY 2030, you will still own many things because you have analyzed your reasons and have assessed your best financial situation modified by convenience and alternative investments for your cash.
Some things we expect to own or have exclusive of will turn into timeshare or service contracts as with many computer programs. We already see vacation properties and private jets working that way.
In many large cities like New York, car ownership is a liability. Several hours a month of use might turn out cheaper even if the price per hour seems high. In other cities like Los Angeles, cars are still a necessity. The New York Public transit and Taxi service permits a different approach.
I know a person who has two small, 5-year-old, inexpensive cars for use within 15 miles of home. If they wish to go further, he rents a Lincoln.
Many non-intuitive decisions come clear when you assess the total cost of ownership.
Let usability rather than title drive some of your decisions.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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What Is Numbeo.com About?
I came on this site Numbeo.com by accident a few days ago. It addresses a question I have wondered about from time to time, and what I found leads to many more questions.
Its thesis is that there is a way to compare livability factors in one city to another city. I have friends from Albania, so I compared Tirana to Peterborough, Ontario for the cost of living.
Not surprisingly, Peterborough was higher. About 80% higher.
How it is organized
There are nine cost areas, each with several specifics. I tried to avoid things like domestic beer because I have no knowledge of the local beer in Albania, but examining imported beer in a restaurant, I find Peterborough is 180% more expensive. $8.00 versus $2.85. Again I don’t know if that is comparing Heinekin in each place or Heineken in Peterborough and some other bottle imported to Albania from Romania. The best assessment is restaurant beer in Canada costs more than in Albania.
In other areas of interest, I found apples cost three and a half times as much here, but bananas are 40% cheaper.
The local bus fare here is more than 5 times what it is in Tirana. Gas is less costly here, as you would expect, and monthly basic services for an apartment are more here but very hard to measure. Some things are included in the rent here, so it is hard to compare. Maybe the total would be worthwhile to compare.
The obvious flaws
Numero is a wiki which means anyone can edit it. Therefore the numbers are not necessarily meaningful as specific amounts. If you care, you would be forced to do more detailed research. Wikipedia, another wiki, claims the numbers are easy to manipulate and, given the relatively few contributors, possible. With many contributors, you could expect errors to correct quickly. Maybe in the future.
The numbers rely on observations, and there is no evidence for validity or a range of values.
Some terms are very broad. “Meal, inexpensive restaurant,” for example.
You can’t rely on precision but must think in terms of generality. The 80% higher cost overall is likely reasonable, although the details may be wrong. If you have many variables for each one, you are likely to be wrong but not necessarily in one direction. Some will be too high, others too low, and so if you have many variables, the generality will tend to be close.
The cost of living is not the only area of study.
You can assess the quality of life across many variables. Crime, healthcare, pollution, commute time, and housing.
Where it has value to people
There are two that interest me. Your interests are likely different.
- If someone wanted to move to a new place, what variables could they assess before deciding? The general overview is first followed by a more detailed study.
- A way to assess “social overhead.”
Social overhead
There is no such thing as free, so even if you don’t pay for something, it still has a cost. If you have a government-funded healthcare system in Canada, you must assume that cost will be passed on to you in prices or taxes.
I have often wondered whether some element of regulation or other costs spills over into everything. Wages are easy to see. If waiters earn $15 an hour in Canada and $3 an hour in Albania, it is reasonable to assume that a meal here will cost more. Labour is about 30% of the tab here. Same thing with the food. Health standards may be more here; refrigeration and other costs also add up. How much waste is there because of the rules? One way and another, food costs at least 25% of the tab.
The other 45% is overhead of one kind or another. Waste disposal is a big number, rent is much higher here, hydro, heat, insurance, municipal taxes, and a dozen others are more here.
The customer pays a fair price, given the restaurant owner’s costs. The question is, how much of the social overhead is necessary. Do we get our money’s worth? The restaurant can’t reduce the price if you get too little for your money. Look to the maze of government rules and mandates that add cost with little benefit.
I don’t know how to fix that, and I doubt anyone can even see the whole picture. I am reminded of an old thought.
“Nobody made a greater mistake than he who did nothing because he could only do a little.”
Edmund Burke
The bits to take away
Talk to restaurant owners and see what costs they have that provide little value. Think about your own situation. How much are your municipal taxes? Peterborough is a city of about 85,000 people and the city’s budget is nearly $300 million. About $3,500 per person. A family of four is a $14,000 item. You might argue that municipal taxes don’t pay the whole tab for the city. There is money from the province and the federal government. Businesses pay a big share too. The truth is people pay the bills. Governments have no money. They get it from you. Businesses pay no tax, they just handle the money. They include taxes in the price they charge you. You pay.
What can you do to help the government pay less for the things we need and avoid doing the things we don’t need. It should be easier in Canada than in some countries. The waste is easier to see. Elect people who understand frugal.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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How Compound Interest Works
I watched a clip from the Antiques Roadshow recently. It included an odd, even ugly, piece created by Tiffany and Co for the 1893 Chicago World’s Fair. The piece was evaluated as an auction estimate at between 50 and 100 thousand dollars in 2009 and updated to 100 to 150 thousand in 2021. Let’s guess it went from $75,000 to $125,000 in 12 years. That’s a compound rate of return of 4.35%.
Not so special as an investment, but 4.35% for a long time is very powerful.
Most people underestimate the value of time.
We know it was first offered for sale in 1893, and we have chosen 4.35% as a reasonable compounding factor. Here’s the test. What would it have sold for in 1893 to make all this work? That’s 128 years of compounding.
The price tag would have been $537. That may not be impossible. In 1893, $537 was a substantial sum. As Charlie Munger and many others have opined, “The money is not in the buying; the money is in the waiting.”
Everyone knows about patience.
That being true and easily proven, why won’t people wait?
The owner of the vase said it was ugly. That tends to harm the likelihood of being patient. Knowing this object this worth more than $100,000, can you see its beauty? Me either.
The problem of patience extends to things that aren’t ugly. We think linearly in an exponential world.
At 4.35%, money doubles in 16 .2 years. The linear expectation of value would be the gain after 16.2 years should be 16.2 years/128 total years of the $124,463 appreciation. That’s $15,752. Easy enough to wait another 16.2 years to get to $31,504 and so on until 128 years.
Reality doesn’t work like that. After 16.2 years, the object is worth $1,074. If it appreciates 4.35% a year for another 16.2 years (one more double), it is worth $2,148. Not exciting at all. Even after 111.8 years, it is worth just $62,500.
The problem – when you think linearly, your expectation early on is immensely different from what compound growth will deliver. It looks like you made a foolish investment. That is not an observation of yourself that makes patience easier. People are not even slightly intuitive about compound growth and so make serious mistakes with long-term investing. Learn to think about it and find ways to simplify the calculations.
One such simplification is the rule of 72.
The rule delivers an approximation of how many years it takes to double your money at a given interest rate. 72 divided by the rate equals the number of years needed. Or, if you know the number of years to double, the rate is 72 divided by the number of years. Remember, it is an approximation. Actually, a reasonably good one up to about 40%. In the example above, the rule would have produced 16.55 years to double at 4.35%. 16.55 years implies a real rate of 4.28%. In my experience, when you are projecting rates of return for a long time, the second number after the decimal is just pride. No one projects with that accuracy. Most of the time, the first number after doesn’t matter either.
The greatest enemy to an investment policy is a false expectation about what is possible or likely. Learn to do a little calculating before getting too involved.
Something to think about.
Years ago, I did an article on the compounding growth question and how yield, time and taxes affect the result. You can see it here.
The question it addressed was when the Dutch bought Manhattan Island for $24, who got the better deal? The Dutch of the Canarsie?
The numbers show important things.
- Longer time is your investing friend.
- Taxes are destructive; avoid them or a least defer them if you can.
- The original capital provides little information about what is possible in future.
Now, another 10 years have passed, so the accumulation is more than double what it was then.
The first thing you should notice is crucial. The last double adds more value than all the doubles before it.
The bit to take away
Play with numbers until you get the idea that time matters at least as much as the rate of return. Seeking high returns increases the risk of loss, while taking longer doesn’t. Start sooner.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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Is Air-Freight An Investment Opportunity?
Several decades ago, I helped prepare an industrial strategy for a remote community in northern Canada. They were 70 miles from the nearest hard-top road but had both water and air access. They wanted to create employment opportunities for their children, few of whom remained in the community after reaching adulthood.
The document’s summary was short, “Whatever you do must produce a product that is small, light, and valuable.”
Why?
If you are in the north, freight is a huge element in the cost of your products. If you go to a store and find a case of Coca-Cola, or a box of Tide, costs four times more than you are accustomed to, it is because of the freight. Large, heavy, cheap products become large, heavy, and expensive after flying a thousand miles.
Why does it matter?
There may be an investment opportunity here and now. Disclosure: I don’t own any securities in this industry, but I am going to explore them.
Sea-based transportation is in chaos presently and will likely remain so for at least a few years. The prices of sea-based transport have risen dramatically. In 2020 the cost was about $2,500 per 20-foot equivalent container. By 2021 it was $20,000 and has now fallen back to about $9,000. So, where’s the opportunity?
Air-Freight.
Traditionally it is too expensive to ship this way, but if you can meet the small. light, valuable criteria, it is not relatively expensive given the flexibility of the minimum shipment size, where it can go, and how long it takes to get there.
As an executive with a chip maker, to save on shipping, would you wait to accumulate a full product container and then wait a month to get it to a congested port far from its final destination? A simple question addresses this. Would a customer prefer a chip costing $100 plus $2 freight in a couple of months or $100 plus $10 freight tomorrow?
Micro-managing a component of the total cost is usually a mistake.
Once you see the size, weight, and value parameters, there are more goods than chips that make sense to travel by air. There is likely an ideal combination of factors, but most electronic devices will fit nicely. Designer clothing is possible, although recipient urgency is a lower value factor.
In support of this idea, you might recall that the insight to what became FedEx was noticing that a mailbag full of letters could travel on a plane in a first-class seat from New York to Los Angeles and still provide a significant profit. The five-day faster delivery benefitted both the sender and recipient. FedEx founder, Fred Smith, received a C+ on his business school paper outlining how it would work. Not all good ideas are obvious to everyone.
Who does it now?
You can see the top fifty expediters by weight of goods transported here. DHL, and Kuehne and Nagel, are the largest, and both have stock prices that have fallen significantly over the past year. UPS is 6th by weight shipped, at about half of what DHL ships.
For you to think about
Is bulk air cargo a thing? My first instinct is that shipping a parcel by air is not the same business as shipping a half-container of chips. Bulk cargo air freight might not be a thing yet. With a first search, though, I notice that in early 2022 Kuehne and Nagel charted the exclusive use of two Boeing 747-8 cargo planes from Atlas with plans to have them operational by the second half of 2022. A 747-8 sells for more than $400 million, so not an insignificant commitment.
A clue for a startup. You don’t need a 747 to ship a dozen boxes of video cards. You will notice in the picture that the load is not optimized to fit in a curved fuselage.
Is air-freight growing in viability? Probably, but work on the small, light, valuable triad is in order. What volume of air freight is possible. You might want to add the urgency of receipt and the nearness of an airport to the customer. Customers will gladly pay for convenience and speed.
Could anyone with enough money and an existing distribution system do it? Yes, they could. It requires modification, though. Parcel handling is different from a truckload-sized shipment. Specialized air containers like the ones FedEx and others use now will be loaded by the shipper and avoid the need for a collection center. They could, however, travel on the same plane as a container of parcels. A container is a container for logistics purposes. Existing parcel shippers have an advantage because half-filled airplanes cost the same to operate.
Could a startup compete? Maybe, but it would depend on having contracts with shippers who can fill the airplanes. Startups would not have the parcel business to help fill a large plane. If a startup was easy, the shippers themselves would likely buy the airplane. If you can fill a plane yourself, the logistics requirement is near zero. If you think about it a little, logistic systems are the heart of FedEx, UPS, and other conventional shippers.
The bits to take away
It is possible that large shippers may use their own planes and so there is no clear opportunity. However, less-than-load shippers will not, and existing cargo carriers may be able to create a new revenue stream by taking shipments from land and sea-based carriers.
Be careful. Logistics is a very difficult problem to master. The established entrants have a fixed cost to revenue advantage. Operational leverage.
All investment decisions are relative. There may be other things more appropriate in your own situation.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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