iPhone WTF?


In my little phone plan we have eight iPhone 4’s.  The oldest is 30 months old and the newest a bit over 24 months.  Of the eight, five are currently impaired to one extent or another.  One has a camera that has failed, three have a power button that no longer works, and another has no sound from the external speakers.  One of the other three has already been replaced at a cost of $200.

As upgrades came available, I asked myself, “Why Apple?”

Answer. Because they integrate well with the iPads through iCloud and because I like the FaceTime app.

That did not seem to make it for me so I explored Android.  I bought an HTC One to experiment and with the exception of FaceTime I have replaced all the apps that I used before.  I like the screen and the sound is superb.  So far it is acceptable.  If only I could estimate its durability.

I think any failure within 30 months is unacceptable, but I could live with perhaps one if it was repaired promptly, but that is not the case with Apple.  They know the way people use these devices and yet they fail.  Not huge issues but annoying enough that they are likely to lose some of their business.

Given the way the stock has behaved over the past 8 months, I may not be the only one who has noticed.

Unacceptable.

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@moneyfyi.com  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

The Intermediate Term Is The Killer


The Winklevoss twins came up in conversation recently.

As you may recall, Cameron and Tyler Winklevoss were the Olympian rowers from Harvard who claimed they had the seminal idea for Facebook. They may have been right too. They sued and the trial produced an award of $20 million cash and $45 million worth of Facebook stock. Not bad by my standards, but a tiny fraction of the ultimate value of Facebook. They were not happy.

Why did they go to trial again to appeal the award?

I don’t know, but I can estimate that they and their advisers made a common mistake. They did not fully understand that you cannot create business value, it evolves.

When valuing start-ups, people think about the new venture in two parts, while in fact there are three.

  • First, people understand the short term. It is made up of the idea or opportunity, the perception of markets, the capital requirements of time, skill and money. All of the other things that go into a plan for a new business. Exciting stuff.
  • Second they can imagine the long-term. Maturity. The self-completing entity. Market domination with a ready flow of customers and the skills and resources to deal with them. Peaceful wealth.

People can see the short term and they can imagine the long term, but they miss the steps in between. The third part, the in-between, is where most new businesses fail.

Business is a little like chess. Both the opening and the end-game are reasonably straightforward. There are few pieces that have moves and not many tactics that have value. The middle game on the other hand, is nuanced and complex. From a developed opening to the end game there are practically an infinite number of possibilities. Some good, some brilliant, but most mediocre to poor.

In a business, getting to the end game is a problem. There are many variables, most previously unseen, and none simple. Worse, their interaction is hideously complex. The easy opening and the inevitable winning end game seem not so connected any more.

A geologist friend once told me that finding gold was the easy part of the venture. Once you have gold, you need financing, a capable construction contractor, a mine, power to the mine, a workforce, perhaps a refinery, transportation to and from the mine, solid legal positions, good government relations, and management. With gold, there is a ready market as distinct from other minerals, but you still have to establish yourself. And the problems don’t stop there. For example, there will be unions, price fluctuations, environmental issues, or anomalies in the ore that may require amending your mine plan or refining methods.

In the Winklevoss versus Facebook trial, the judge pointed out that theirs was a good idea and that it had value, but the real value of Facebook was in the execution of the idea not in the creation of it. The intermediate term.

Smart judge!

Execution is key. Sometimes, the wild card is a death or disability of a partner or key person. You can insure those and you should. Unless you are a stress junkie, insurance is an easy solution to anotherwise difficult problem.

Build options. Avoid building such a way as there is a dominant customer, supplier, source of finance or key employee. Beware of leases for space that is special to you. Never let a machine know that you need it to work. Backup your electronic data. Building options is the ultimate control.

If you cannot understand the complexity of the intermediate term and know how you are addressing or will address it, you need not worry about the long term. If there is one at all, it will be much less than you hope.

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@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI

Quit Quick and Let The Winners Run


In November 1955, William F. Buckley Jr. launched the National Review. At the time, and forever after, it has been a voice that collides with most of the other media voices in society. It represents thought that opposes the popular liberal approach.You can read the Mission Statement here.

While it is 57+ years since this piece was written, it seems fresh. Perhaps that means we should worry.

I profess to be neither a Liberal nor a Conservative, but I am a big fan of things that work. Rather like the liberals of the early 1800’s or perhaps a “socially aware Libertarian.” Essentially, just leave me alone and allow me to affect the causes that I can and that I find worth affecting. I will measure the value, if any, of the contribution and that measurement will affect my future efforts. At the same time, you may do as you wish so long as it does not reduce my ability to do what I think is important.

I find nothing wrong with people helping people. I find nothing wrong with Liberal ideas of justice. I do however, find wrong that these justice ideas are being pursued by people who assume the necessary resources will be provided for them to pursue their goals. That is Fatal Flaw #1 in the Liberal agenda. The resources are limited and they choose to not recognize that.

I also find wrong the Liberal inability to stop. It has been said that goodness is more dangerous than evil, because there are limits to evil. Thus, any goodness seeking adventure cannot fail. It will work with more resources, time or people. That is a giant waste. Usually there is no cessation until all that remains are the rubble of the many failures and a cupboard bereft of resources. Catastrophic failure is certain in the long run. Fatal Flaw #2. The long term key to success is to stop doing stupid things quickly.

Success is a simple decision once you assume you cannot do everything. You have to decide what to do based on a number of factors. The need, the resources, the future need and availability of resources, alternative solutions, medicate the symptoms or effect a cure.

Once we begin a program, what should we measure? Intentions or outcomes. I think outcomes, but I could listen to the argument for intentions. I am not sure how their effects would be measurable though. How do we alter the emphasis of the program if the results do not meet the standard we establish? Hard questions, therefore seldom asked.

The last concern that I have is that of moral relativism.

It appears that if your intentions are good, your actions are permissible. You, of course, get to define ‘good’ in this context. In reality, the end, however good, does not validate the method.

What do you need to ignore in the pursuit of goodness?

  1. The resources taken to achieve a goal are, axiomatically, unavailable to achieve any other goal. Eventually “good causes” must compete for resources, perhaps overwhelm all others. Certainly overwhelm personal goals
  2. You cannot improve the life of one of us by diminishing the life of another and at the same time claim success.
  3. Society is not a zero-sum game. It is possible that a win by one of us does not automatically create a loss for another. Assuming we ignore envy as a loss producing condition.
  4. Problems and their known solutions are contextual. As context changes so does the appropriate problem/solution set. That is one of the problems we have with immigrants and people who have emigrated in place (Gotten older.) Their culture, while valuable, is based on a different context than the one where/when they now live. Their problem/solution set is at least partly obsolete. Cultural change and adaptation take generations to complete.
  5. Impatience and the resulting urgency oversell of the solutions arises from the inability to see the deep fabric of the problem/opportunity. That leads to politically expedient solutions rather than correct solutions.
  6. Motivation does not work like you think. I recently watched a Ted.com video by Dan Pink relating to motivation. His point is that people are not motivated by the things we think they are. Business tends to change quicker than governments and yet even they are not properly connected. Not understanding the context of the problem is dangerous and expensive. If you look at the video and relate it to government programs, you will see that much of what we do is antithetical to what would work.

It is time to take a deep breath and decide to act on the things that have a high probability of objective success rather than political success. It is time to kill off the programs that diminish society, the economy and eventually ourselves. Soon, please.

End of rant.

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@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI

Grandpa, What Was That For?


In the mid ’70’s I recall talking at the corner of King and Bay streets in Toronto, to one of my partners in the accounting firm. Pointing at the skyscrapers, I said, “Someday I will come here with a grandchild and they will ask me “In the old days, what did they used to use that building for?”

It looks like I might have my time frame wrong, but I don’t think the underlying observation is wrong.

How does it make sense to use high priced real estate to support mundane tasks?

Is there really an advantage to have many people in one place? If there is, why do it downtown? Why put support services here at all? It may be merely momentum or there may be non-business reasons. Like the chairman is here and he wants to be surrounded by “his people.”

What if a bank decided to clear checks on Mars, how would you know? Would it make sense to distribute that kind of function to the outskirts? Maybe the hinterlands. The currently preferred answer of course is that no one wants to live in the hinterlands.

That answer may not be as true as people profess it to be. Housing costs are very high in the inner city, so many already live in the hinterlands and further incur a cost to get to work. How hard would it be to distribute some services to where the folks are? Lower salaries with cheaper housing, lower transportation costs, and a couple of hours added to your productive day could well be a fair trade-off. If the work gets done, seems to me the corporation wins.

HR needs to be downtown? How about legal, finance, engineering and R&D?

The idea of people in one place so they can interact may have value, but it may also be an obsolete belief. Text, Facebook, internal networks and video conferencing may have already replaced spontaneity. These can be used when the recipient wants. There is no face-to-face urgency.

For knowledge workers, you may not want spontaneity. It is more efficient to leave some people alone. If someone interrupts you when working on a complicated question, how long does it take to get back where you were? Conventional wisdom is about 15 minutes. Sometimes far longer.

In the late ’40’s when Edwin Land was inventing the film for the Polaroid cameras, most of the film chemistry solution was developed in a single period of work that consumed 60 hours. In Land’s words, “If I had been interrupted, it could have taken me six months to get the collection of barely conscious information back into the right order.”

Land may be an exception in terms of the complexity of his work and ability to concentrate, but the point is clear. The spontaneity/interruption duality is not clearly cost beneficial.

I recall talking to an executive of a company based in rural New Jersey about why not be in Manhattan. His answer. “No one goes there except to talk to bankers, lawyers or advertising people, and how many times a month do you need to do that?”

Give it some thought. It could make profits and happier employees.

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@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI

The Bait In The Trap


I had coffee recently with my friend, Brian MacKenzie.  He was kind enough to comment on an earlier blog to point out that I may be being naive to believe that government can change their ways or even have the ability to cause change.  Part of a recent comment:

“Ah, my sage friend, I fear your optimism may be misplaced. Global warming requires only a flaccid, minimally-informed populace to produce the two life-forces of politics–money and power. The painful truth involves the admission that political power and money have no effect on the global climate, and would be best vested in individual responsibility, which to most people seems a little scary, and needlessly burdensome.”

I suspect he is right.  “Money and power” is at the root of the malaise.  He may also be right that individual responsibility is a nuisance.  The general sense is that there is somehow a way for the government to “give us things.”

Can it possibly be otherwise? Well, let’s check.

All actions and processes have readily observable general outcomes.  The details may vary but the essentials are there.

In this case, we the people, have at least these choices.

A) Find ways to limit the power of politicians and their civil service allies.  Term limits will work for the politicians and the demise of the civil service unions will fix the others.  Perhaps we need only amend more senior levels.  The loss of “experience” that results may not be a curse.  Sometimes the only valuable experience these people hold is the ability to work the system.  To paraphrase William F. Buckley Jr.  – I would rather be governed by the first 308 names in the Calgary phone book than by the 308 currently elected members of parliament.

B) Find ways to limit the spending.  Possibly sunset provisions in regulation and in legislation.  A law that prohibits deficit spending or permits spending no more than a percentage of the GDP. Anything that imposes rigor and discipline on spending decisions will help.

C) A requirement that people stop being seduced by empty promises and inefficient implementation of the few projects that start.  Essentially demand excellence from government.  Nurture the idea of an informed voter.

D) Maintain the status quo.

If you opt for D) then you will soon find that the only way the government can balance their budget, is to unbalance yours.

If you want to change that condition, then as Brian points out, you will need to accept personal responsibility, as in C), and that “to most people seems a little scary, and needlessly burdensome.”

Time to catch up with reality.  Something for nothing is the bait in the trap.

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@moneyfyi.com  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

I’ll Flip You For It


In 1980 one of my neighbors was a senior vice-president at Dominion Securities. He told me a story about how some people understand neither the stock market nor what stock brokers do.

On a Monday morning a young woman appears in his downtown Toronto office and says she has $200 and she would like him to invest it so she can come back on Thursday and have $400.

Being a curious and pleasant man, he asks her how she came to decide on this goal.

“I want to buy a sports jacket for my husband’s birthday on Friday.  It costs $400 and I only have $200.”

It appears that she may have not fully understood transaction costs, reasonable investment yields, and long-term planning.

If you were he, what would you have done?

My friend’s reply:

“I will make you the fairest offer you will get on Bay Street today.  I’ll flip you for the $200.”

I wonder if much has changed since.  With all the talk about financial literacy, it would be interesting to know what people expect the entry behaviour of the prospective students to be.

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@moneyfyi.com  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Good Accounting Makes For Easier Decisions


When you do not account for all the costs of doing things, you misunderstand the cues. When you misunderstand the cues, you think there are incentives to do things that in practice will not work or maybe miss things that will work.

For example, there is currently a conflict regarding the Metro Toronto Transit proposal, Metrolinx. Who should pay and how are the questions. When you do not know the underlying information and you have no established policy for cost sharing, you let the decision become political. Whose feelings will be hurt least?

For years the province and the city have not paid much attention to extensive public transit. Using public transit, Toronto is one of the most difficult cities in the world in which to get around.

Now the insight – public transit might be good. And then the problem. How much should it be subsidized?

If the system could make money, then subsidies would be unnecessary and it would probably already exist. If the users do not pay enough to make it work financially, they must not value it enough, so why should the others pay?

Of course that presupposes that there are other alternatives that operate without subsidies. The roads and highways are not free because the province collects a significant gasoline tax, car license fees, and sales tax on gasoline, new and used cars and repairs. Even sales tax on insurance premiums. The question is, do all these taxes cover the cost of the road infrastructure? Pretty unlikely although part of that may just be inept management.

Those who do not use public transit, car drivers, trucks, contractors and other businesses that need to move goods and people, seem to think that they should not have to pay extra for public transit. On the surface that looks right but what if there are subsidies already in the system for them?

There is no way to know. If the province manages efficiently and the revenues they receive exceed or at least balance their costs to provide roads and bridges, then the drivers would have a good argument. But no one knows.

The proposal requires $50 billion over 25 years. The problem for the province and the city is raising the money. Their concern is “Revenue Tools” which is doublespeak for “Taxes”, so you know it is a scam. If it made sense they could be forthright. Euphemisms are meant to deceive not clarify. See Maximally Demoted.

It would be a good idea for the province to come up with the information. Citizens are mostly fair minded and they would agree to a system that makes sense. But given the current government and their historic tendency to lie and produce doublespeak, there are few that would believe them, so let’s not waste money on a study.

We are in a quandary. Should we do it or should we not? Should only the users pay? Should everyone pay a little just for access even if not used often?

The unsolvable reality is that taxes and subsidies distort economic reality with the result that there is no objective choice remaining. Only emotions and feelings about what’s “fair” whatever that means.

You might as well guess.

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@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI

Living Out Of Your Bank Account


The sub-prime mortgage crisis in the United States points out several things.  We know many of them but there are two that are not often publicized.  Even now, they can give you an early warning of impending financial danger.

  1. When bad things happen, everything is correlated
  2. Sub-prime borrowers not only have a higher default rate, the default is based on things lenders do not consider.

Adverse Correlations

Everything is correlated means that in chaos everything behaves the same way.  The idea of diversification for protection does not work.  Bonds, stocks, commodities and real estate all move the same way sometimes and the theory says they should not.  Recall Q4 in 2008.  The problem then led to falling house prices, job losses, defaults on prime mortgages, falling stock prices and corporate cutbacks. Followed by bailouts, the guarantees, and government spending beyond their ability to pay from income. And then more of the same.  Things go from bad to worse, then the cycle repeats.

Investment correlation is not the only correlation problem.

People do some things that are really dangerous because they are close to the opportunity/problem.  For example, real estate agents tend to invest their savings in real estate.  Corporate executives buy stock in their own company.  What happens in bad times? Lose your income, lose your savings.  Not clever.

By behaving this way, you have correlated your savings and your ability to earn income.  Try not to have your career and your investments completely tied together.

Sub-prime is a different system

Mistake #1 – Lenders supposed that if there were a default that the underlying real estate values would make them substantially whole.  Defaults beyond some unspecified, maybe unknown rate, are correlated to prices.  A few defaults have no effect on price.  A few more than that have a disproportionately large effect on prices.

Mistake #2 – In the very beginning of the sub-prime mess, people thought assuming a default rate of 5% to 7% with not large value losses when the default occurred would be safe, because prime default was much lower.  That is a logic flaw.  No default number would be right until they addressed the fact that the underlying system of making payments is different.  Sub-prime is a different system entirely.  Apples and oranges.

Prime borrowers make payments from income.  Many sub-prime borrowers do not.  They make payments out of accumulated savings, if any, or from new credit card debt or new lines of credit debt.  The fundamental risk when people are making payments from increasing debt is not measurable or comparable to those who pay from income.

When the availability of new borrowed money disappears, as it eventually must, the mortgage goes into arrears.  Realistically the long term default ratio in this situation is likely closer to 100% than it is to 5%.

This trigger is the same as a prime borrower losing their job.  The source of new money disappears.  Except losing the job and not finding another is a small risk and the running out of ability to borrow is inevitable.

The Warning Sign

If you are consistently paying month-to-month expenses with accumulated and unreplenished money in a bank account or with new debt, you are at risk.  Notice and change your behaviour.  For an organized financial life, paying your monthly expenses in any way other than from cash flow is a fool’s game.  Do not play.

Have you noticed how many heirs and lottery winners blow their money?  They live out of their bank account until it is mostly gone.  You cannot judge the cost of your lifestyle when you draw it from a shrinking but not exhausted bank account or credit facility.  Monthly income provides a limit and some discipline.

If a business budgeted spending based on their cash balance or their unused line of credit, you would readily and correctly estimate that they would not survive.  They are making operating expenditures from the balance sheet instead of from revenue.  Operating expenses should be paid from operating revenue.  Seems obvious.

Attach routine spending decisions to cash flow, not to accumulated wealth.

If you find that you are living off the balance sheet part of your life, make a budget and try to change back to living out of operations.

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@moneyfyi.com  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

What Does Insurance Do?


An interesting question and if you ask 50 people, I doubt you will get 50 coherent answers. Maybe not 20. People often own insurance because they think they are supposed to, or because their spouse thinks they are supposed to, or because the government requires it, (car insurance) or because the bank requires it (fire insurance.)

While these may be true, and the motivator, for many, it is possible to rationally decide to buy insurance because it has value to you.

People usually think about insurance in two ways:

  1. Insurance protects wealth that exists. The fire insurance, the lawsuit for negligent driving, the all-peril loss of your 40 carat diamond, your errors and omissions coverage. or,
  2. Insurance creates wealth where none exists. Typically life insurance although some make the case for critical illness or disability income insurance.

While these are a little true they are very limiting.

First of all, 2) is almost always not the case. Life and other like forms of insurance protect an intangible asset. Your career value, the ability to earn income. Just because you cannot sell it to someone else does not alter its nature as wealth. Later on, these forms of insurance protect the wealth you have from being used to pay debts or taxes or medical bills.

So most simply, insurance protects wealth from loss. More true, but still not the complete reason that people should own insurance. Besides most people will not buy the proper insurance for that reason. It has no feelings attached.

With life insurance, there is nothing in it for them. It is like betting against the home team. There is a loss no matter the outcome. If the home team wins, (live a long time) then I lose the premiums. If I collect the benefit, I died.

Most people do not own life insurance for what it is. Actually that would be an odd reason to own anything. Value is in use.

Salespeople usually suggest that people own it for what it does. Create liquidity, protect assets from forced sale, liquidate actual and implied liabilities and in some cases a way to accumulate wealth. Again limiting although possible to explain.

People should not own insurance only for what it is, that is just silly, or only for what it does, that is just the adult decision. People should own insurance because it allows them to do things they can do only if they have it. It offers them choices previously unavailable.

For example, suppose I owe the government $2 million upon my death. I could own some assets specifically for this liability. Those assets have limits, principally they must be liquid and secure. That is a very restrictive start. They cannot be business assets because those are neither liquid nor secure. They cannot be things like development properties or personal real estate. Again not predictable enough. The limitations dominate.

Suppose instead, I set aside $1million in a secure and somewhat liquid account to pay premiums on a $2 million life insurance policy. Maybe even buy an annuity. Now my tax liability is liquidated, whenever I may die, and I have $1 million in my hand to do with as I please. Maybe educate grandchildren, or payoff mortgages, or make down-payments, or buy a nice Hennessey Venom GT Spyder like Steven Tyler’s, or invest in a very speculative, completely illiquid investment, like a farm 5 miles out of town. Maybe some seed money for the kid’s business or a nice condo in the Caribbean.

No matter my tastes, the insurance allows me to do something I could not have done without it.

With insurance done right and for the right reasons, the home team always wins.

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

Follow on Twitter @DonShaughnessy

Bewitched or Not?


For many, the idea of twitching the nose and achieving instant solutions to complicated problems seems a fine skill. In the ’60’s Elizabeth Montgomery as Samantha Stevens on TV’s Bewitched solved many this way. Fictional daughter Tabitha carried on the tradition.

The skill is not one that can be learned. You have it or you do not.

The leadership in North America and Europe seem to be believe there is a magical solution to complicated problems. Twitch – Iran becomes a responsible world citizen. Twitch – North Korea fixed. Twitch – Syria, Libya, Egypt all repaired. Twitch – European government overspending becomes innocuous. Twitch – the war on terror ends.

It would be difficult to assume they think otherwise if your only evidence were to be the bold, creative solutions they are putting forward.

Enough of the political level problems.

How many of us think that a lottery win is a rational part of our retirement plan? In the US about 21% do.

How many think they can afford housing at its current price because mortgage loans will stay at 3% or less? If mortgage rates became 7% tomorrow, could you still afford to own your home? Compared to a 20 year, $300,000 mortgage at 3%, the payment would be 40% higher at 7%. Want to know about 11%? Ask your parents. Almost double.

How many think their job is forever? Hopefully, not many.

How many think government benefits will survive intact? Government retirement benefits were designed when people lived less long and interest rates were higher. It matters. If you save for 40 years in a 6% interest environment with the plan to have $1,000 per month for 15 years, you need to save about $65 per month. If you earn 3% and might need the money for 20 years you need to save over $200 per month. If the cost of acquisition triples, the government must redefine the benefit. It is not magic to figure that out.

Magic is nice if you can find it. In its absence, persistence and discipline will probably work as well.

Could it be there is more magic than I thought, because persistence and discipline seem to be declining when they should be increasing.

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

Follow on Twitter @DonShaughnessy Enroll for email delivery at moneyfyi

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