Archive for March, 2009

This and That: Baby bull or sucker rally?

March 26, 2009

  1. As equities bounce back from their lows in early March, investors will be wondering how long it will take for the portfolio to recover. Surprisingly, stocks have taken seven years or more to to fully recoup losses following severe bear markets such as the one we’re experiencing.
  2. Maclean’s magazine says that for all the problems facing the economy, some economists are making a cautious case for optimism.
  3. Apparently, pro-sports athletes could give lottery winners a run for their money in going from riches to rags. One reason, explains this Sports Illustrated article, is that the pros invest in dubious investments, such as an inflatable raft that would sit under furniture that consumers in high-rainfall areas can use to float their sofa and keep dry! (Hat tip to Market blog for the link).
  4. John Heinzl on the five tips not found in Derek Foster’s books.
  5. Canadian Financial DIY reviews and rates the web tax software for NETFILE. The surprising winner: UFile.
  6. Michael James on Money has a system for playing the 6/49 that has a long-term expectation of profit.
  7. Money Ning finds surprises lurking in his bank statements and has a useful tip: always check your bills and statements.
  8. Blunt Money wonders if it is a good idea to pay your kids for grades.
  9. Million Dollar Journey answered a reader question on how self-directed RRSPs work.
  10. Clever Dude explained why everyone needs an emergency fund and offered some advice on building one.

Have a great weekend everyone!

Book Review: Money for Nothing and Your Stocks for Free

March 25, 2009


“Isn’t there a problem selling snake oil as vitamin tonic?”
— Jon Stewart to Jim Cramer, March 12, 2009

Despite misgivings on whether dividend growth will be as rosy as recently experienced, there was nothing fundamentally dangerous in Derek “Canada’s-Youngest-Retiree” Foster’s first two books (review of Stop Working and The Lazy Investor). With his new book though, the author is treading on dangerous ground with options and leverage, the risks of which the author seems to underestimate and which could land even experienced investors in a heap of trouble. It is disconcerting to think that relatively novice investors might be buying into this snake oil.

A large portion of the book is devoted to explaining how writing puts can earn “free” money. I’ve already posted why a strategy of writing puts isn’t without any risks. But Derek doesn’t stop there. Another “money for nothing” strategy suggested is leveraging to invest in income-producing securities. The distributions should cover the interest payments on the loan and after some years of rosy distribution increases, the income trust can be owned free and clear. If only investing were so easy! The book does carry warnings about the risks of leverage but claims that the risks can be reduced:

With my strategy, I focus on the highest quality companies that have been in business for decades — or even over a century in many cases. I further reduce risk by focusing on companies that offer recession-proof products or services. To add diversification and reduce risk even more, I invest in a number of companies from a variety of different industries.

The interesting parts of the book (at least for me) are the ones in which Derek talks about his own investments. It turns out his early retirement was achieved through a generous dose of leverage. And we’re not just talking about his all-or-nothing bet on Philip Morris:

In 1999, I borrowed money at 8.5% and invested it into Riocan. I paid $9 per unit and the distribution at that time was $1.04 per share. So the before-tax income from this investment was:
($1.04 dividend by $9) = 11.55%
So by borrowing at 8.5% and earning 11.5%, I was making free money using other people’s money (the bank’s money–which is how they usually make money).

It makes me wonder: how much of the Derek Foster story was achieved through unrepeatable, high-risk gambles and not through the sensible strategies advocated in the first two books?

Other reviews of the book:
Four Pillars
Michael James on Money

The cost of harmonization

March 25, 2009


The provincial Ontario budget is usually a sleepy affair, except in the odd years when new taxes are introduced. 2009 appears to be one such year. Major newspapers are reporting that Ontario is planning to harmonize the province’s 8 percent sales tax with the Federal GST. Ontarians can expect to pay extra taxes under harmonization for:

  • New homes over $500,000 (partial HST rebate applicable on new homes between $400K and $500K).
  • Mutual fund management fees
  • Natural gas
  • Heating oil
  • Hydro
  • Books
  • Children’s clothes and shoes
  • Meals under $4
  • Diapers & feminine hygiene products
  • Accountant fees, lawyer fees, consulting fees etc.
  • Updated from The Ottawa Citizen:

  • Television, phone and Internet services
  • Auto, life and health insurance premiums
  • Footwear selling for $30 or less
  • Taxi, train and airplane fares
  • Services such as hair cuts, gym memberships, drycleaning

Feel free to add to the list in the comments. Canadians in other provinces will be affected by this move as well because mutual funds will now pay extra taxes on their MER. If a mutual fund charges a MER of 2 percent, harmonization will add 0.15 percent in extra taxes. I’m not sure if mutual funds passed along the 2% cut in the GST to clients but you can be sure that they will pass on this extra tax to investors.

[Update: The original post listed “Used cars purchased privately” but as Al points out in the comments private car sales attract the PST; not the GST.]