A Simple Way To Turn $1,000 Into $1,000,000

We are all looking for easy ways to accomplish useful things.  Well here is a way to be a millionaire without winning a lottery.

Take $1,000, invest it at 5% and wait 141 years and 7 months.  Only 73 years if you can get 10%.

If you have only $100 you can get there in a little less than 189 years at 5% and 97 years at 10%

If you are in a high tax bracket, 5% is what is left over after taxes are paid on 10%

The important lessons here:

  1. By having ten times more capital, you reduce the time by less than 25%
  2. By doubling the yield you can about halve the time
  3. Yield and time matter more than the principal amount.
  4. Be very conscious of things that reduce the yield
    1. Investment fund MER
    2. Taxes can reduce yield by almost half.  Avoid taxes
    3. Tax-free growth is good.  TFSA, RRSP, RESP, Life Insurance
    4. Be risk averse.  The money you lose is important but the time lost is not recoverable.

People are not good at intuitively understanding compound interest.  Do the arithmetic when faced with anything involving yield and time.

If you find these helpful, please tell others and subscribe to receive the daily MoneyFYI post by email.  Go to moneyfyi.wordpress.com
Contact: don@moneyfyi.com  |  Follow Twitter   @DonShaughnessy

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.



Howard Hughes turned $400,000 into $2,000,000,000 in 53 years.
What is his average compound rate of return?

Has Investing Changed?

On 10 October 2008, 11.5 billion S&P 500 shares changed hands.

For context, from January 1951 to December 1969, there were fewer than 25 billion shares that moved.

In the decade of the 2000’s four times more shares traded than in the entire history of the index to that point.  Prior to 2000 stock prices and volume were correlated.  .82 R-Squared in the 90’s.  In the 2000’s not so much.  R-Squared of .01.

We have learned that knowing things is nice, but knowing what they mean is better.

Knowing that volume and price are no longer correlated could mean that the old ideas about how markets work and how one should design a portfolio, may be defective.  If that is true, then passive investing may not be a good tactic.

Have you heard of “Project Express?”

It is a $300 million Trans-Atlantic fiber-optic cable that will exchange data between London and New York 5.2 milliseconds faster than existing cables.  A few electronic trading firms will have exclusive access to it.  The 5 millisecond speed difference gives them a huge advantage over their competitors in electronically traded stocks.  Enough to pay off the $300 million investment at least.

That makes me wonder two things.

  1. Is an index that is created by trades where a 5 millisecond difference matters, the same as an index built on the activities of people who were buying and selling, as investors, over a period of years?
  2. And if it is not the same, does Modern Portfolio Theory and its derivatives really make sense?

All of the indicators like alpha, beta and the Sharpe ratio might be misleading.  Does anyone know what volatility and risk mean in the electronic trading world?  Not likely.  Most of those trades are not speculative.  They lock in a price anomaly and keep the difference.

I don’t know the answers to the questions.

I do know that if you are basing your investment decisions on what you read in last week’s Forbes or yesterday’s Financial Post, and then executing trades through an on-line brokerage, you are not playing the same game as the people who are trading the bulk of the stock.  According to Tabb Group LLC, a market research firm, 55% of current trading volume comes from firms using high frequency trading tactics.  You are a cave-dweller who is more than 5 milliseconds behind.

Over the years, I have decided that it is not smart to play games when you don’t know the rules, who is on the opposing team, and how they keep score.  So, it could be that a common sense approach to investing will make more sense.  Pay less attention to statistical material and more to the businesses you are acquiring.

More on Monday

Know Where You Are Going Before You Set Out

When you are hunting, a dog is a wonderful asset.  Companion, scout, court jester and retriever.  However, you do not let the dog decide what, when or where to hunt.  Most importantly, when it comes time to shoot, you do not give the gun to the dog.

And so it should be with financial planners.

Most financial planners are good company and have a lot to contribute.  Their defect is that if you do not know what you want to do, they will decide for you.  It will make sense for a little while.

The error is missing the distinction between strategy and tactics.

Strategy is yours and tactics belong to the planner(s).  If you do not have a strategy, you cannot understand fully what a tactic is for and you cannot tell what to do if anything changes.

In simplest terms, strategy is the answer to all the “W” questions.  What am I trying to do, what do I have to get it with, what changes can I anticipate, what level of uncertainty will I accept, when do I need it, who is involved, where will I be and so on.  A planner can help you be complete, but they cannot derive the strategy for you.

The planner can help prioritize the strategic parts and set up a time frame to accomplish the parts that are not completely solved in the beginning.  Most clients do not have the unlimited resource needed to do everything.  10-Year Term life insurance is a good example of this.  You will not want it at year 11 so the solution is a temporized one.  It works when you must allocate your scarce resources to currently pressing matters.

Tactics all answer a different question.  “How?”

Do not get involved with tactics.  They exist in a complex and ever-changing world. Taxes, law, economic and investment background, politics, family law, various products that encapsulate several of the parts, and more.  You could not keep up to enough of the pieces to have a hope of getting it right over a long period.  Don’t try.  Buy help.

Tactics can fail in two ways .  One is that the product or technique does not work.  Markets fell for instance.  The second is that the tactic works but it is the solution to no known problem.  That happens when you have no strategy.

If you have a sound strategy you can easily say no to things that don’t fit.  If you know what you are looking for and have communicated it, it is likely that no one will ever recommend them to you.  An added time-saving bonus.

The world conspires against you.  You will see advertising that confuses rather than clarifies.  For example, I recently saw an ad that trumpeted “a unique RRSP strategy.”  There is no such thing as an RRSP strategy and anyone who uses the term does not get planning.  An RRSP is a Tactic.  The strategy is to have money to spend when you retire.  What and when, maybe who.  The RRSP is “HOW” you get it.

In the end, your job is to select among tactics presented by the planner.  You should not even look at one unless it is presented in the form, “Given what you are trying to accomplish with this decision, any of these three options can work for you.  Let me show you how they differ, the advantages and disadvantages of each, and how they may integrate with other parts of your plan.”

Your role is to decide and supply the resources.  The planner’s job is to help you cover all the strategic ground and discover tactical options to achieve your plan.  Eventually help you implement the options.  And even further down the time line, revisit the strategy and review and revise the methods.  It helps keep you on track if they are your conscience.

If you start with how, you will likely miss the reason you are doing it.  For all you know, the tactic does not apply to you.

If you do not know where you are going, any road is a good enough.

Distant Elephants

If humans are offered two similar rewards, they will usually choose the one that comes soonest.  If they have to wait, they will want a little more.

We know, or at least psychologists and economists know, how that happens.  Future events are “discounted” to the present and compared to the current value or cost.

There are several ways to do it.  Economists and psychologists assume “exponential discounting.”  Much like finding the value of a bond.  Use some constant rate to discount the future amount back to the present.  It is rational, easy and efficient.  In a 5% world, $100 today, should be worth $105 in a year or $127.63 in 5 years.  These are all the same.

Nevertheless, like many theoretical constructs, not everyone uses exponential discounting, and no one uses it all the time or in all situations.

People who study this subject find that oftentimes people use “hyperbolic discounting.”

In this method, the first delay attracts a very high rate and as the time gets longer, the discount rate gets lower.  Maybe 20% for the first year and 6% for the second and 3% after that.  It sounds complicated but we use it more than we think.  Essentially, it means we live in a short time envelope and things not in the envelope are rendered unimportant.

Saving pays off tomorrow, spending pays off today.

If we discount the tomorrow value at a very high rate then we will always spend today because the present value of the future benefit is too low.  At 20%, $105 a year from now is only worth $87.50.  Even the 5 year result is only worth about $92.

Similarly, the pain to do a tax return is high.  Everyone promises to organize in early March and have it done by 1 April.  They never do, even though they know that leaving it to the last minute will be harder.  Here the discounted value of future pain is much less than the pain of current effort.  Procrastination has an immediate payoff.

Hyperbolic discounting applies to more than saving, spending or avoiding procrastination.  It insidiously affects decision-making.  It allows us to commit, too easily, to projects that start far in the future.  It is the distant elephant problem.

An elephant that you can see 4 miles away looks pretty small.  Not a threat.  Not a problem.  When the same elephant charges you from 30 yards away, it is a very big problem.  Same elephant, different context.

Like agreeing to become the fund raising chairman for the United Way two years from now.  That is much easier to agree to than if it were one year away or, horror of horrors, starting tomorrow.  Same current pat on the back; different meaning for the commitment.

Under hyperbolic discounting our present self makes decisions that our future self would not.  That is true even though the same assumptions are used by both selves.  And therein lies the problem.

There is not a lot we can do about discounting per se.  It works and our brains are hard-wired.  We can still have the wit to recognize it and learn to minimize its adverse effects.

Until tomorrow (discounted at a high rate)

Small Expenditures Are Hard To Contextualize.

The Bank of Montreal today (25 September 2012) reported that Canadians spend $3,720 per year on impulse purchases.  Not so good for the savings plan but possibly they are mental health treatments.  Buying something just because you want it cheers up an otherwise bad day.

Besides, impulse buying may be among the least of the self-sabotaging financial behaviours.

A 100-foot fall will kill me, but a 1-foot fall repeated 100 times will have no effect.  The opposite of this is true with budgeting, which is an important part of financial planning.

If I had to buy a Starbucks or Timmy card once a year, I would likely relate to coffee shops differently.  If I spend $4.00 per day in coffee shops, I spend $1,460 per year.  The money drifts away without much conscious thought or effort.  If I were required to spend $1,460 in a single transaction (the 100 foot fall) or do without coffee shops, I would do without.  A walk around the block would replace the trek to the coffee shop.

The same thing happens with lottery tickets, cigarettes, magazines, cable channels, cell phones, chocolate bars, and many more.  Marketers have learned that people will spend a bit of money many times, far easier than they will spend a lot of money once.

People do not lose their money in a rush like water over a broken dam, they lose it drop by drop, like a leaky tap.

Why do you suppose people lease over 50% of all cars delivered?  Because $500 a month is less than $40,000 once.  If leases were unavailable, the $40,000 barrier would probably turn the purchase into a used car for $15,000.

In respect to small repeated purchases, how much do you spend annually?  That is the threshold for meaning?  It is different for each of us.  Some of us don’t like to break a hundred dollar bill.  Others among us don’t like to break a Toonie.   Establishing your threshold of meaning and deciding what to do about it is an important part of financial maturity.  Spend some time and negotiate it with yourself.

Just so you can pay for the time you spent reading this, check out your life insurance or disability insurance premiums.  (Except Universal Life.)  If you “conveniently” pay them monthly, the insurer is charging you about 1.4% per month on the deferred amount.  It is close to a month’s premium per year.

I will bet the interest rate on your line of credit is less than 1.4% per month.  Probably less than .4% per month.  Call your agent and use the line of credit to pay annually.  You will save about 6% or more of the premium.

Then take your savings and download some smooth jazz from iTunes?


Subscribe to receive the daily Moneyfyi post by email.  Go to moneyfyi.wordpress.com
Contact: don@moneyfyi.com  |  Follow Twitter   @DonShaughnessy

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

The Rebirth Of The Innocence

For years, I have told my children, partly tongue in cheek, that if I was humble I would be perfect.  I think I can see the next step.

We attended the christening of Egan, our newest grandchild, on Sunday.  It is easy to be thankful for grandchildren.  They give us insight into the meaning of life and church is a fine place for perspective.

The thought for the day is innocence.

Is the journey away from childhood innocence a one-way trip?

Consider this song.

Remember when the days were long
And rolled beneath a deep blue sky
Didn’t have a care in the world
With mommy and daddy standin’ by
But “happily ever after” fails

The End of The Innocence by Don Henley & Bruce Hornsby

Sounds one-way to me.  Or is it?

Jesus said, “Let the little children come to me and do not hinder them, for to such belongs the kingdom of heaven.”   Matthew 19:14 New International Version.


I tell you the truth, unless you change and become like little children, you will never enter the kingdom of heaven.  Matthew 18:3

Jesus anticipates a way to return to innocence.  However, it will not be and cannot be the same innocence as that of the child.  You cannot unring a bell or unsend an email, but maybe you can become a reformed cynic.

What do we mean by innocence?  Not naïveté, because you cannot recreate that once you know things.  The child’s innocence is “uninformed.”  You have no fears, opinions or biases about that which you do not know.

We must seek “informed innocence.”

That will not be easy because all, or at least most of what we learn, turns us to cynicism, fanaticism and arrogance.  Not to innocence.  There must be an intermediate step.  Perhaps humility.  Maybe wisdom.

As we become more aware, how is that we become cynical instead of humble and wise?  Likely because we do not carry our study far enough.  There is a process to learning and we need to go all the way through that process.

Consider the levels of experience.

The first level is data.  Random spots.  Blips without context.  They could be true or not or they could be the presentation of spin artist.  The internet is full of data that look important and useful, but are not necessarily true or fitted to a real world structure.  Especially not to mine.

The second level is information.  A random spot of data that is true and contextually appropriate.  Trusted data.

The third level is knowledge.  information that is in context, attached to other relevant information and weighted properly.  No exaggeration and no diminishment.  The information attaches to and adds to a body of knowledge.  It probably opens the way to learning more as the knowledge structure becomes larger.

The fourth level is meaning. What is the knowledge for?  How does it affect the real world?  How does the real world affect it?  Where is it going?

The fifth level is wisdom:  How do I relate to the meaning?  Something can be true, artfully fitted to a structure, and growing, but still say little about whether I should be concerned.  I can play and enjoy a CD with very limited knowledge of the quantum physics on which it depends.

Here is the stretch.  Will this wisdom lead to humility?

When I can see the world and its parts, I understand how I can contribute.  I can see what to ignore.  I can act constructively.  I can see the others and their fit.  I can be useful.  I can be respectful of others, the world in general and of myself.  I think I could be humble then.

I can do none of that if I stop at information or even at knowledge.  I need to find meaning if only for a few things.

Grandchildren deliver the opportunity to appreciate the things that matter.  Somehow, problems fade into the background when you consider their future.

Thank you Michael, Kathryn, Rory, Noa and Egan.  And their parents.  And Margaret too.  And Dad.  And more.

You fulfill my life.

Until tomorrow.

Do-It-Yourself Is A Trap

Tiger Woods shot 66 yesterday (September 20th) to tie for the lead at the Tour Championship.  Tiger is a golf polymath.  He is at least good at every aspect of golf and he is excellent at many of them.

Golf is the exception.  You do not need to be a polymath to run your business or your life.

If you wanted to beat Tiger at golf and could organize the game your way, you would do it by having surrogates for each aspect.  You become the strategist/leader of a large specialized team.

Standing on the first tee, you might pick long hitting Bubba Watson to drive to a distant target area.  He can do that but not necessarily every time.  About 60% in the fairway.  On the other hand, Bo Van Pelt hits it 20 yards shorter but in the fairway 66% of the time. Option A is Bubba because there is an advantage when right.  Bo as Option B because less chance of catastrophe and not a lot of give up on distance.  Maybe you need to consider who will hit the next shot.  Steve Stricker leads in proximity to the hole and he might not care if he hits it 145 yards or 165 yards.  Brandt Snedeker or Luke Donald will be putting.  Brian Gay or Ian Poulter is ready if we need to scramble.  (Maybe a Bubba miss would not be that horrific)  Jim Furyk is the utility guy.  Big team.  Hard to think about it.

Nonetheless, you could expect to beat Tiger by using specialists who come and go as needed.

In our lives and businesses, why then, do we insist on doing so many things ourselves?  Even things we know too little about.

Do-It-Yourself is a trap.  It is leftover from our agricultural heritage where a successful farmer had to be able to do most of the tasks himself because he could not rely on others in remote communities.  That is not how it is in our interconnected world.

You should not prepare your own will, do your own tax return, prepare your own financial plan, invest by yourself or perform a root canal on a molar.  Funny how the plan, the will and the investments are okay but the root canal is not.  Do you think the others are easier or it will not hurt if you make a mistake?  You might want to think about that.

Things are more complicated now.  Our experience and old knowledge might not be very useful.  A few years ago, a mechanic told me that I should not touch anything under the hood of my car unless it was liquid.  Saturday afternoon mechanics are not allowed.

Our European friends seem to know this instinctively.  An Italian bricklayer is not likely to do his own plumbing and a German plumber is not going to build a rec room.

Independence is not a blessing all of the time.  You will not get very good at the things you do only a few times.  Buy Specialists.  It is cheaper.

Last of all, you can be good at things but not necessarily best at them.  Hire help that can get the mundane done, and spend your time on your best best.  You will enjoy it more and you will earn enough to pay someone else to do the other things.

End of lesson.  Dismissed for the weekend.

What Should Students Learn?

Curriculum should consist of only two subject areas and one technique.  History and Language are the subjects.  Research is the technique.

What about math, music, art, physics, geography and biology you cry.  (I can hear you!)

To get along we need to know what humanity has already learned (history), a method to communicate that knowledge both as sender and as receiver (language) and a way to find what we identify as missing.  (Research)

Physics and biology, psychology and political science are all history.  What have we observed so far?  What lesson did we draw from that?  How can we expand or improve that?  How can we apply it to make our lives better?

Knowing about and knowing how you know about lasers is not fundamentally different than knowing about what caused the war of 1812 and what did we learn from that.  The action needed, as we move forward, is in the same general form too.  Build on it, improve it, and apply it.

Math, music, accounting and art fit into the general category of language.  Each communicates a particular idea in a stylized and efficient way.  You cannot say E=mc2 in words that convey the depth of its meaning even if you use more than five characters.

To be successful at math, you need to learn the vocabulary, grammar and syntax of the language.  Pity they do not “teach” it that way.  Maybe art and music tend in that direction.  Accounting does too.

Our spoken language tells us the idea of art as language, but we ignore it as cliché.  A picture is worth a thousand words.  Some are worth more.  A smiling picture of a grandchild conveys many more than 1,000 words.  The Mona Lisa has intrigued people for more than 500 years.  Even the nuance of a cellphone snapshot would be hard to describe using only a thousand words.

A symphony is impossible to convey in words.  Even a simple piece of music is indescribable.  Taps for instance!  Taps for bugle is composed of only the notes in the C Major triad.  Just three notes.

Thank You Wikipedia

You could not use words, however many, to represent the emotion.

Conventional languages, like English, talk about current events when it is conversation, about history when it is prose and about emotions when it is poetry.  A versatile tool, would you not agree?

The other languages are less versatile.  Math communicates ideas about our physical world.  Music and art communicate information about emotions.  Accounting describes business performance and its accumulated history.  P/E=20 will tell you quite a bit if you know the language.

Lastly, we need to learn ways of filling the blanks.  Research.  The internet is a wonderful tool.  Dramatically better than an encyclopedia on the dining room table.  The advantage of the internet is that the information you acquire often provides hints about what is still to be found.  Books do not do that as well and certainly not with hyper-links.

On a practical level, in addition to discovering, Wikipedia, the Kahn Academy, TED.com and YouTube, you could develop a network and ask questions.  Or apply to experts for their knowledge.

Back in the middle ages, I was helping a skilled trial lawyer with a commercial case.  In the second day of trial, an arcane point of law appeared and so he asked for a recess to attend the law library at Queens University.  He found the dean and asked for a bright commercial law student.  One happened to be in the library at the time.  The lawyer’s research consisted of, “Here is $50.  I need to know everything about the priority of a bank’s security under section ___.  We are going for dinner and will be back in a couple of hours.  If you need more money then let me know.”

Direct the research.  I need a fact and do not care much about its history (your address for instance) leads to research like what was done at Queens.  I need a fact to fill in a body of knowledge needs more.  Filling in requires that you know something about how the fact came to be, what are its limitations and how is it changing.  The search for the Higgs boson fits that model.

For students and their advisers, recast the problem of learning along the lines above and the process may develop in better ways.  Work at connecting the dots, not just acquiring the dots.

As the physicists point out, “A well-defined problem is half solved.”

That’s all I know today.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Should Teachers Teach?

Does anyone rationally believe it is possible to teach Steven Jobs to be Steven Jobs?  What do you think is teachable?  If anything?

For many years, at least 30, I have been complaining that the education system aims at the wrong target.

Our current system trains for the wrong skill set and is too concerned about how the students feel.  We are far from the path we need.  While self-esteem may be desirable, unearned self-esteem is deadly to a modern society.  It leads to entitlements, even entitlements for which there is no rational basis.

The Asian systems are still fundamentally the way ours is, absent the self-esteem issues.

The 3 R’s were exactly the minimal requirements you needed to work in a factory and if you notice, the rise of the factory coincided with the rise of public education as we know it.

The 3 R’s were the proclaimed important knowledge, but regimentation, punctuality, team play and obedience were the key skills to be taken away.  Factory skills.  In our world, these takeaways are perhaps the things you need to be a bureaucrat.  Or maybe someone else in a system that does not value personal measurement and accountability.  Emphasis on personal.

We cannot live forever in an environment where the team can lose but none of the players can lose.

With fewer factories and a smaller bureaucracy, the skills needed are more subtle.

  • The ability to find and describe opportunities and problems.
  • The ability to do research.
  • The ability to think critically.
  • The willingness to take risks and learn from the inevitable mistakes.
  • The search for creativity and innovation.
  • The search for objective reality and the ability to base your actions on what you find.
  • The ability to communicate.
  • The ability to build productive teams that disassemble once the project is complete.
  • The ability to fit easily into divergent teams.
  • The ability to lead and be responsible.

While I have little sympathy for the education system we have in place, I doubt there is any system yet that effectively teaches the needed skills.  Why?  The skills above must be learned not taught.

Somewhere about 50 years ago, teaching became a self-described profession.  Teachers teach.

But, do they really?  What if you cannot teach someone?  What if the best you can hope for is that you can help someone learn?

There is a big difference between learning and being taught.  Learning is proactive.  Being taught is reactive and easy to tune out.  Teaching can improve skills, provide order and discipline, and it can help the student avoid dead ends.  It cannot replace learning.

You can learn to play golf, you cannot be taught to play golf.  You need to hit a few dozen balls into the woods or the water to learn.  You cannot blame anyone else, so self-esteem is tied closely to performance.  Scariest of all, you can find out how hard it is to win a $1 bet with a six foot putt.  Especially when you have only 25 cents in your pocket.  (I played golf a long time ago so adjust the numbers to current reality)

There are many examples in conventional curriculum that are similar.  Public speaking, creative writing, research, debate, athletics of all kinds, and technical writing for example.  Success is objective.  Self-esteem must be earned. Fear is an issue.

I suspect, but cannot prove, that video games teach these skills to some extent.  You are never “given” a win.  You need to seek alternate methods to a given goal.  Sometimes bad things happen because you did not anticipate well enough.  Specific skills must be mastered but will not alone guarantee success.

The Khan academy demonstrates that people will learn if they receive the opportunity to do so at their own pace and with the ability to go back and pick up the pieces they have missed.  It works especially well if there is an organized program.  Like programmed learning used to be.  You could watch “Let’s use video to reinvent education” at TED.com for useful insight.  As tablets become more capable, no teacher will be able to compete solely based on their skill in delivering lessons.

It is time for teachers to get out of the way.

Google “Sugata Mitra” and “hole in the wall.”  It is plain that one of the biggest obstacles to learning is the teacher and I suppose, by extension, the administration and curriculum.

The system will not change on its own.  The status quo is too valuable for too many people.  In the interim, the parents and others must fill the gap.  You cannot wait or the children will be hopelessly behind.

You do not do it by teaching, you do it by creating situations where the children can fail constructively or can succeed in unforeseeable ways.  Succeeding in unforeseen ways is dependent on being willing to fail in unforeseen ways.

And that is the lesson for today

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

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