Are You A Bird or A Squirrel?

There are two ways to reach your objectives.  Like a squirrel or like a bird.  Each has advantages and each has disadvantages.  You will do better if you can see both methods.

Think of a tree as the set of all possible opportunities.

A squirrel reaches a point high in a tree by climbing from the bottom.  Each step towards the objective puts him in a more vulnerable space.  The branch is weaker as he goes further.  However, he can understand the new environment before he enters into it.  If there is a problem, he can retreat to a stronger place and approach in another way.

The bird on the other hand arrives in the new place without a clear idea of what that place may entail.  Her first stop is the target and that is the weakest place.  If she finds the environment to be hostile, she can fly away.  She retreats to weakness, albeit a place where a predator is unlikely to follow.

When a squirrel reaches his objective, he is likely to be in an acceptable place.  But, there are places he cannot reach and he cannot reach any place quickly.

The bird, on the other hand, can reach anyplace and reach it quickly, but not all the places are safe.

Birds need to learn to quit quick.  Squirrels need to learn patience and persistence.  You cannot teach a squirrel to be impulsive and you cannot teach a bird to climb a tree.  But as humans, we can see the value and the drawbacks to each approach.

A good partnership will have both kinds of people.  The partnership will work if each appreciates that there are more ways to do a thing than the one they are good at doing.

Take your squirrels bungee jumping and see if they find it exhilarating.

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.

What Should I Insure?

Insurance poor is a bad idea. So is poor because I had too little or none. There is a way to think about it.

Future unknown losses fall into four categories. The defining elements are the cost of the loss and the probability of the loss occurring. Each of the categories has an implicit insurance strategy. The combinations are:

Low cost / low probability. Things like: Left my umbrella at the restaurant, ripped my shirt, damaged a rental DVD. Tactic: self insure

Low cost / high probability. Things like dental care, dents in your car. Tactic: Manage the costs. If you insure, have a significant deductible. Self insure the small stuff because all insurers have overhead to recover. On average the insurance premium is about $1.25 per $ of claim. Use a meaningful sized deductible.

High cost / High probability. Things like sending a ship full of product into a war zone, life insurance for someone with pancreatic cancer. No insurance will be available except possibly at a prohibitive price. Tactic: fuggedaboutit or better, avoid the risk.

High cost, low probability. The only area where real insurance exists. Things like life insurance for healthy people, most liability insurance and fire insurance, medical insurance for huge drug claims. Tactic: Define the loss you cannot afford and cover it.

Most people who fail to insure wisely share mistakes. The most common are to

  • overvalue the loss or
  • over estimate the probability of loss
  • or misunderstand the policy.

An accidental death would be unfortunate and costly but very rare. It looks like you get a big payout and a small premium. Most of the time the premium is multiples of its real value to you. I once had a client with a $1,000,000 “personal catastrophe” policy. The premium was less than $300 per year. Upon examination we discovered that the only likely claim would be if he were trampled to death by a rabid yak while mountain climbing in Tibet. Even then, he might only be able to stop paying premiums.

Accidental death is not as common as you would think. If an event that causes death is “reasonably foreseeable” then it is not an accident. Playing Russian Roulette for example. Walking on a bridge parapet. Climbing a high tree. Being stupid is generally not a covered condition.

Workers Compensation is an example of overestimating the probability. Only a tiny fraction of disabilities occur on the job. I have seen statistics that say as few as 1 in 30. In most cases, premiums are lower than individual disability insurance but not 1/30. You are a lot more likely to be in a car accident or fall off your roof or have a heart attack or get cancer than you are to be hurt at work.

Insurance is merely a financial tool. Figure out what you need done, figure out what insurance does, compare the value of the loss to the price to avoid it and get on with it.

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.

All ‘Round Like An Orange

GE is a company that understands management and they have systematized their knowledge.  They have developed techniques that help them.  Some are useful elsewhere.

Suppose you have a clearly defined opportunity or a problem that is large enough to affect the entire business.  How do you prevent the most persuasive managers from dominating the decision?

The GE way is to have a series of meetings with all of the affected areas present.  In their case these include manufacturing, finance, engineering, marketing, human resources, labour relations, legal, and general management.  Eventually the general manager will decide what to do, but in the interim, will only keep order and require participation.

The trick is that GE knows that things look different depending on where you look from.  Each meeting has a defined viewing point.

Today it is marketing.  Any question or opinion expressed from other than the marketing viewing point is out of order.  That allows everyone to get a clear idea of that viewpoint.  Tomorrow it is manufacturing.  Another time finance and so on.

When finished the general manager has a many slice representation that relates to the particular situation.  By combining them he can see a multidimensional opportunity and he can see the fit with GE.  The result is a better decision.

This method leaves the signal but automatically deletes the noise of particular people or particular specialties.

It is not the easiest thing to do the first time and it is not worth the time and trouble unless the decision has opportunity value.  Something to think about though.

I wonder what a family meeting would go like?

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.

Prophesy Is Difficult

Prophesy is difficult and it is especially difficult with respect to the future. Planning however, is possible.

I found the desktop model crystal ball to be too cumbersome. Now when someone asks for my prediction of the future at lunch or a party, I am prepared. I have acquired a laptop crystal ball.

laptop crystal ball

Despite my new treasure, forecasting and predicting is essentially a fool’s game. When the results matter, we must not take a prediction as a certainty.

Planning requires forecasting and if that does not work, what is the point?

First of all, notice that plans are useless but planning is valuable.

The purpose of planning is to discover the range of variables that will produce an answer that is acceptable. As a byproduct, this produces a range of values that will not work. These are the more valuable.

Once you know the values that don’t work, you can be alert for their occurrence and can act sooner to amend your plan.

A good plan is always evolving. It is a bit like driving a car. If you drive 30 miles, you will make many small adjustment with the steering wheel as you move along. If you do not pay attention to the small adjustments needed, or do not know they are needed, there will eventually come a large and dangerous adjustment or a catastrophic crash. Better a series of small adjustments.

It is not enough to review your financial plan once every few years. It is also not enough to review it unless you know the essential underlying variables and the list of values that will harm it. Compare what is happening to what you have forecast to happen. Be alert. The news is in the variance.

Too frequent looking is also a problem. Keeping things in perspective is sometimes difficult, but a single warm day in January does not indicate the end of winter. Similarly a bad day in the market is not a sign of impending doom. At least, not all by itself.

Having a feel for how your plan relates to the real world is the goal. Once you have that, the adjustments are instinctive.

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.

The Mindless Pursuit Of Perfection

Perfection is a costly objective. Perhaps it is time to accept good enough.

Suppose I suggested that you could solve 80% of any problem for a given amount of money. Call it $1,000,000. If you want to go farther, the cost to solve the next 80% of what remains will cost double $2,000,000. So for $3,000,000 total you can solve 80% plus 80% of what’s left – 16%, 96% solved. To solve 80% of the remaining 4% will cost $4,000,000. 99.2% solved for $7,000,000. 99.8% for $15,000,000, 99.96% for $31,000,000. We can come arbitrarily close to 100% but never reach it. Each step remaining has a huge incremental cost.

If we are to remain solvent as a society, it would behoove us to decide “how solved” we need a given problem. If someone tells me that I can solve 99.2% of a serious problem for $7,000,000 I doubt I would spend another $24,000,000 to get to 99.96%.

If the government spends that last $24,000,000, it came from something else. Maybe your vacation is gone because of higher taxes, or maybe some business did not expand. There is nothing for free.

There are two things wrong with with government problem solving:

  1. When the politicians introduce the problem and the solution, they tend to use the $1,000,000 estimate. Maybe the $3,000,000 if they are being responsible.
  2. Once implementation starts, they create a bureaucracy. That bureaucracy has a vested interest in the 100% solution and there is little to stop them from trying to achieve it. The cost for 100% approaches infinity.

Air quality is interesting. I love clean air. I especially love air that is invisible. When it come to vehicle emissions, I wonder if legislation has already solved most of the problem. According to the EPA in the US, since the legislation came into force in 1970, the actual amount of carbon monoxide and nitrogen dioxide emission has fallen by 75% and 61% respectively. In the same period the number of miles driven and the number of vehicles has more than doubled. This problem looks under control.

Given that newer vehicles are more efficient than older ones and the older ones eventually disappear, maybe we do not require more spending on new techniques to reduce emissions. Maybe the problem is substantially solved.

We need a discussion about what constitutes solution. We cannot afford perfection but we can afford excellent. We need to draw a line.

In a similar vein we might need to consider how much we will spend on regulation to protect life. Presumably there is some amount that is the most we would, as a society, spend to save a human life. I have no idea what society might agree upon, but I suppose it is a big number. Maybe $10,000,000, maybe even $100,000,000. I doubt it is a billion.

Cost per Life-Year of various interventions is an old study, 1994, from the University of California at Santa Barbara. I must admit that I have no idea how good it is (it is well outside my area of expertise) but I found it interesting nonetheless. It studied more than 500 interventions and estimated the cost of the intervention in terms of dollars per year of life saved. There are some interesting results in the appendix. Many interventions are clearly beneficial, some are actually cheaper than the old way. Defibrillators in ambulances cost $39 per life year. About $1,000 for 25 years of life. Good deal. I would be okay with ulcer therapy versus surgery at $6,600 per life year. $165,000 for 25 years.

I might quibble about $34,000,000 per life year for trichloroethylene at 2.7 micrograms per liter in drinking water when compared to an 11 microgram standard. Somehow 30 years of life for a billion dollars seems too expensive.

The pursuit of perfection is a failing strategy. We need to convince politicians and various interveners of all kinds that as a society, we will pay a reasonable price but no more.

Time for the debate about how much is too much.

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.

What Fiscal Crisis Will Be Next?

The Americans have survived the fiscal cliff.  Sadly for them, cliffs usually are found on the side of mountains.  What does the fiscal mountain look like?

There is a mountain of debt built on a foundation of undeliverable promises and reckless adventurism.  The mountain may be permanent.

You cannot tax incomes to get out of a fiscal problem, because you make the ability to pay weaker with each dollar you take.  Income tax to cure deficits and debt is self defeating.  A capital tax would be worse.  However, a sales tax that flows through businesses and only affects end-user consumption has a chance to work as long as the new revenues are not converted to new spending.

Government spending is insidious.  Every dollar the government spends is more than a dollar that was removed from the economy.  In some cases, it is money that would have been invested productively.  In most cases, it finances regulation or other limits that restrict business productivity and growth.  In all cases, there is overhead attached.  The conventional wisdom, is that government needs to extract $1.67 to spend $1.00 in the real economy.  All costs in, it likely worse than that.

Politicians historically have behaved like amateur salespeople.  They over-promise and under-deliver.  They promise in order to get votes and then hide the shortfalls.

Entitlement programs are generally unsustainable.  Not just in the US, but everywhere.  The problem will be how to explain to the folks that naively believed their representative,  that the promised benefits can never be delivered.  Politicians cannot hide forever, but perhaps hide until they retire is good enough.

I am fascinated by Social Security and the equivalent programs in other countries.  The trust funds holds huge quantities of government debt instruments.  Spending the cash and replacing it with IOU’s seems wrong.

Suppose I want a new set of golf clubs and decide that I cannot afford $3,000.  However, my retirement plan can afford it.  So I take the $3,000 from there and replace it with an IOU for $3,000.  Would you say my retirement plan had the same value as it did before the transaction?  If you think it does not, then you understand why some government retirement plans may not work out as they say.

I don’t pretend to understand Medicare but my general perception is there is a lot of overhead for each dollar of benefit delivered. The overhead cost just to bill the system is astounding.

Welfare is a problematic thing too.  We provide incentives to stay in the welfare system and wonder why people do not move on out.   People respond to incentives.  You need to be careful which ones you provide.  Especially careful to repair unintended ones.

It is difficult to imagine that the people who created the problem have a solution or would implement it if they had one.  I doubt there will be a solution until there is no more money to garner favour with the voters.

That may be unpleasant.  Problems grow slowly and collapse quickly, we may not know what the end looks like before it is to late to do something differently. Pay attention and be prepared to act in your own best interest.

While it is normally not good practice to panic, there are times when you must.  Keep this in mind.  If you must panic, panic first.

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.

What Every Client Needs To Know About Estate Planning In Sixty-Four Words

Everything you own now and every dollar you acquire in the future will end up in one of three stacks.  You will spend it while you are alive.  You will lose it.  You will give it or leave it to someone else.  Spend it, lose it, or leave it.  There are no other choices.

Can we agree that losing is not the best option?

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.

Price Cost and Value

Price and cost are not the same thing and anyone who equates them buys trouble in addition to whatever else they get.

Cost is what you give.  Value is what you get.  Price is just a part of cost.  Value is what you want; cost is how you get it.

You cannot get more value without giving up something to get it.  Be sure you know what parts of value will disappear when you reduce the inputs.  A cheap toaster may be missing something.  Like well grounded connections.

Sometimes do it yourself does not matter.  I could likely build a deck, but I would not believe that it would be as square, strong or durable as one built by a competent carpenter.  I might not enjoy it fully and I might need to replace it too soon, but likely there would be no real harm.  It is like cutting your own hair.  It will be okay eventually.

Other things might not turn out as well.  Would you try do it yourself root canal?  Not likely.  How about a natural gas hookup or a brake line replacement?  Not me, but some would.  All of these have serious problems attached if you do a bad job.  (That is what I mean by other cost factors.)  Recognizing serious potential problems, many people won’t try them.

There exist similar potentially catastrophic do it yourself projects that people will try:

  • Online wills.
  • Do it yourself powers of attorney and trust kits  are available too
  • Maybe a do it yourself financial plan, portfolio design, or tax plan.

Just because you cannot see the danger does not mean it has gone away.

Any of these can create huge problems.  They would be expensive or impossible to fix.  Prepare your will, your powers of attorney and your estate plan as if this might be the last time you do it.  Eventually one will be.  If it does not work, there is no mulligan.  How sure are you that the do it yourself version will work?

Financial and investment plans could be repairable but only after a loss of money and time.  You might get the money back, but you won’t get the time.

Preparing your own tax return is probably okay but then filling out a form is just putting numbers in boxes and doing some calculations.  Tax professionals add value.  You have an unseen cost if you don’t see the return the way they do.  They see what the return could look like with modifications to the way you receive income or in what you could deduct.

Do it yourself is okay for things that don’t matter much or are easy and cheap to repair.  You need to do something with your free time and you may not be able to do serious harm.  For things that matter, or for things that cannot be readily reversed, be sure you know the other cost elements before you decide to get something for a lower price.

Cheap is often expensive.  If you can afford to do it cheap and then fix it, you can probably afford to do it right the first time.

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.

Large Numbers Are Confusing

Million. Billion. Trillion. Similar right? Not so much! Numbers, especially large numbers, need context to make sense.

If you count one number a second you will reach a million in 1,000,000 seconds. That is not surprising really. 11.6 days.

A billion will take longer. 11,574 days or 31.7 years. That is a bit surprising. A trillion is 31,688 years.

11 days, 32 years, 32,000 years. Not so much alike now, are they?

Politicians throw million and billion and trillion around because they know most of us do not really pay attention. Maybe, they don’t either. There is an old joke about an aide approaching President Bush shortly after the invasion of Iraq. The aide’s message, “Ten Brazilian soldiers have been killed by a roadside bomb.” Bush’s reply, “That’s awful! How many is a Brazilian?”

For those of you who remember The Beverly Hillbillies, Jed Clampett sold his oil patch for $25,000,000. When Granny asked how much he got, he replied, “$25, but I’m not sure. I’ve heard of gold dollars and I’ve heard of paper dollars. They are paying me with million dollars.”

You will tend to understand how huge the numbers that governments spend if you think a million is 12 days and a billion is 32 years. A trillion is incomprehensible. 32,000 years is three times longer than the time since the last ice age. There is no reference point for that.

Another interesting large number is the population of China or India. 1.3 billion each give or take 50 million. For context, Mensa is an organization that requires you to have an IQ in the top 2% of the population to qualify for membership. Statistically, each of India and China has almost as many people who qualify for Mensa as Canada has population.

Let’s go further. Let us suppose one in a thousand of these Asian Mensa members has one important thought each year. 52,000 new Chinese and Indian important thoughts per year. That is 142 per day. About 6 per hour. I don’t know about you, but I think I will have a problem keeping up to that.

In China or India if you are a one in a million sort of person, there are 1,300 of you in each country.

There is something inevitable about large numbers. V.Lenin was once confronted with the idea that the Russian army was poorly trained and ill-equipped. His view, “Quantity has a quality all its own.”

What should we do about the inevitability of size? We need to be conscious of the Asian powers. We need not fear them, but we must devise plans to deal with their mass and momentum. They can do things we cannot. But, we can do things they cannot.

Jason Jennings and Laurence Haughton have the best idea I have seen. It is a book. Check it out.

It Is Not the Big That Eat the Small, It Is The Fast Who Eat The Slow

Big has its own set of problems. The Asian giants will need to deal with them. I wonder what medicare would cost in China. Workplace equality and air quality may be a little hard to deal with too. How about a minimum wage in India? These will make them slow. While they are dealing with those, we can be fast and agile.

When you look back, those skills were once our driving force. Time to emphasize them again. Bureaucracies may not provide the help we need. Fast and agile are not adjectives that come to mind when I think about bureaucracies. We may need to rethink them.

Governments need to make policy decisions that make it easier for us to be fast and agile. As individuals, we need to be adaptable. It is hard to hit a moving target. Get moving. Maybe duck and dive too.

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.

Cost Comparison Shoppers Win

You can choose a ready guide in some celestial voice.
If you choose not to decide, you still have made a choice.
You can choose from phantom fears and kindness that can kill;
I will choose a path that’s clear
I will choose freewill.

Chorus of “Freewill” by Rush

I have been listening to Canadian rock band “Rush” this afternoon.  They are a special  group.  The Rock’n’Roll Hall of Fame inducted them on December 11th, 2012.  You wonder why it took so long.  Rush’s music and the band musicianship are exceptional.  They rank third for most consecutive gold/platinum studio albums.  Behind the Beatles and The Rolling Stones.  Not bad for some boys from Willowdale.

Rush released “Freewill”  in 1980 and it contains important wisdom.  If you choose not to decide, you still have made a choice.

The idea of doing nothing somehow connects to the intuitive notion that doing nothing costs nothing.  Not even close!

To do nothing is a decision.  To do something is a decision.  You can analyze decisions.  You can find the cost of each, but few of us do so.  We should.  When we do, we usually find that doing something is cheaper than doing nothing.

We tend to carry the past forward in our decisions.  We know how we arrived where we are and somehow that makes it more right than any other place we could have been.  The past traps the future.  Doing something different in the future would somehow make the old decisions wrong.  Can’t go there.

A Martian would never have the problem.  Being perfectly objective has advantages.  One of them is that the do-nothing decision never happens unless it is the best choice of all available.  That is what Freewill is all about.  You decide.  You are not compelled to do anything.  You choose.  Your future is independent of your past.

Rule:  There is a cost to do something.  There is a cost to do nothing.  Choose the least costly.

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.

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