Archive for March, 2007

This and That

March 8, 2007

  1. It was widely reported in the press that the Canada Revenue Agency is experiencing glitches with electronic tax filing for individuals. The agency has posted a list of facts that taxpayers should be aware of on its website.
  2. While there is much hue and cry over high ABM fees, there doesn’t seem to be much protest over the high monthly bills for cellphones in Canada. The Globe and Mail reports on a new study that the high fees are discouraging widespread adoption of cellphones. Instead of regulation, the government should ensure a competitive marketplace by opening up the sector to foreign competition.
  3. This week, the Bank of Canada decided to keep interest rates steady and the prime rate charged by the banks stays at 6%. The wording of the announcement suggests that the Bank is likely to maintain the holding pattern at its next meeting.
  4. We could endlessly argue if a mortgage paydown is better than a RRSP but RRSPs become a clear winner if your employer makes a matching contribution. A recent press release from Sun Life Financial points out the many advantages of group RRSPs and says more than 50% of employees fail to take advantage of them. It is not clear how many employees fail to take advantage of a matching contribution but it is foolish to give up free money.
  5. Warren Buffett is not alone in advising investors to stay clear of hedge funds. A new study shows that investors are better off with zero allocation to hedge funds. The main culprit: the high fee structure.
  6. Rob Carrick writes about five ways to invest in China. James Daw writes in The Star about getting exposure to India, though he omitted mentioning IIF and IFN, the closed-end funds that are traded in the NYSE. I am not sure why investors would really want to risk exposure to individual emerging markets. A fast growing economy should not be confused with a rising stock market.
  7. Canadian Dream featured a guest post by Margot Bai in which she urges Canadians to beware of the conflict of interest inherent in financial advice given by commission-based advisors.

Smoke and Mirrors Myths, Part 1

March 8, 2007


I am currently reading David Trahair’s Smoke and Mirrors and instead of writing a book review, I want to comment on what the author calls “the big myths of financial planning”. There are five myths mentioned in the book and we’ll explore the first in this post and the rest in future posts.

Myth # 1: If I had a $1,000,000 … I could retire

Mr. Trahair argues that most people will only need a fraction of a million dollars to retire and that the financial services industry has a vested self-interest in telling people they need more. Also, he shows how a typical family only needs about 40% of their pre-retirement income, not 70% that conventional financial planning says you will need. If government programs like CPP and OAS were taken into account, most people would only need a nest egg of a fraction of million dollars to retire.

Mr. Trahair is not alone in calling the 70% figure a myth. Recent academic studies in the U.S. have shown that online retirement calculators overestimate retirement needs by 36% to as much as 78%. In my own case, even with a young family, we don’t spend anywhere near 70% of our incomes in our working years and I don’t see how we will spend that much in retirement. The fact that most people don’t know exactly how much they are spending makes it easy for the financial industry to convince us that we need 70% or more of our pre-retirement incomes.

The argument that most people aiming for a traditional retirement do not need a million dollars is convincing. Of course, those planning an early retirement need a larger nest egg, as they cannot count on OAS until they are 65 and reduced CPP benefits until they are 60.

Continue to Part 2…

Notes from the Berkshire Hathaway Annual Report

March 5, 2007


I do not own shares in Berkshire Hathaway (BRK.A), but I do eagerly read its letter from the Chairman religiously every year. After all, you don’t read too many frank and candid letters where the Chairman confesses that record earnings in the past year “benefited from a large dose of luck”. The bulk of the report deals with the myriad businesses of Berkshire’s subsidiaries ranging from insurance (GEICO) to underwear (Fruit of the Loom). The parts I am most interested in are Mr. Buffett’s opinions on Berkshire’s investment portfolio and his advice to investors.

Berkshire’s investment portfolio is a topic for discussion in a future post but it appears that Mr. Buffett is still expecting future earnings growth in the 6%-8% range. It would mean that future returns from equities are likely to be far more modest than in the past.

Mr. Buffett warns investors against chasing alpha while forking out ever-higher fees and advises against hedge funds:

In 2006, promises and fees hit new highs. A flood of money went from institutional investors to the 2-and-20 crowd. For those innocent of this arrangement, let me explain: It’s a lopsided system whereby 2% of your principal is paid each year to the manager even if he accomplishes nothing – or, for that matter, loses you a bundle – and, additionally, 20% of your profit is paid to him if he succeeds, even if his success is due simply to a rising tide. For example, a manager who achieves a gross return of 10% in a year will keep 3.6 percentage points – two points off the top plus 20% of the residual 8 points – leaving only 6.4 percentage points for his investors. On a $3 billion fund, this 6.4% net “performance” will deliver the manager a cool $108 million. He will receive this bonanza even though an index fund might have returned 15% to investors in the same period and charged them only a token fee.

The inexorable math of this grotesque arrangement is certain to make the Gotrocks family poorer over time than it would have been had it never heard of these “hyper-helpers.” Even so, the 2-and-20 action spreads. Its effects bring to mind the old adage: When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money.

Readers wanting to read the report for themselves can find it on the Berkshire website. The interesting parts are pages 15 to 17 (BRK’s investment portfolio), pages 19 and 20 (CEO compensation), pages 21 and 22 (warning against hedge funds and debunking the efficient-market hypothesis).


  1. Notes from the 2005 Report
  2. Notes from the 2004 Report