The Blog

Stop smoking or blow up a Porsche?

Posted by Preet on May 9, 2012 | 2 comments

As a teenager, I remember seeing a commercial which showed a smoker blowing up a Porsche 911 cabriolet as a high-impact visualization of the opportunity cost of smoking from an economic point of view. What a bunch of hog wash. They should have blown up a few more Porsches to make it realistic.

According to the Smoking and Health Action Foundation, the average carton of cigarettes costs between $70.18 and $106.09 depending on the province or territory you live in. If we average those extremes, we end up with a cost approaching 45 cents per cigarette since a carton contains 200 cigarettes.

I’ll make some simple assumptions for my own high-impact analysis: our smoker starts smoking a pack a day at 15, pays $9.00 for a pack, and the long term, after-inflation rate of return of a moderately aggressive portfolio that they could have directed their money to is 3%. That works out to over $375,000 of opportunity cost in today’s dollars by the time he or she reaches 65.

If you want to play with the variables, you can download a copy of the “cost of smoking calculator” here. If you want to figure out the value with today’s purchasing power of a dollar, just subtract an estimate of the long term inflation rate from the portfolio’s annualized rate of return.

But even this analysis is too simple. What other costs do you incur as a smoker that you wouldn’t if you were smoke-free? How about insurance premiums. Not only does life insurance cost more because your risk of dying is higher, even your home insurance costs more because you are more likely to set your house on fire.

Your home value can be affected too. Either you take a hit on the home’s value for smelling like smoke, or you spend money getting rid of the smell for when you put it on the market. Ditto for your car. We haven’t even discussed health costs which not only affect you financially, but more importantly, physically.

They say quitting smoking is harder than quitting heroin. Well, I say blowing up a flat-six powered German automobile is sacrilege, and you could effectively being blowing up a small fleet of them the longer you smoke.

Why are companies pleased to announce crappy earnings?

Posted by Tusk Trader on Apr 18, 2012 | 0 comments

This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader

I am very pleased to announce my blog for this week.

As earnings continue to be announced this week, I am reminded of a funny small item that makes me laugh during this common quarterly routine. I always have a little chuckle when reading the first paragraph of earnings reports. Every company starts off with the same line, “We at ABC corp, are pleased to announce our 1st quarter results”. It always brings a smile to my face the fact that every company is pleased announce their earnings.

The report can go on to say that the firm is almost bankrupt and has no chance for a future or that pigs will fly before they can meet their debt obligations; it matters not. Every firm is pleased to announce regardless of what they are announcing. Being pleased to announce a wonderful takeover offer makes it appropriate to use ‘pleased to announce’. When the news is grim or negatively revealing, it is still used. The firm could be reporting deep internal struggles that make RIM look like a walk in the park. It never seems to matter as everyone is apparently pleased (except the shareholders they are reporting to). When the earnings are bad, just once I want the report to start off with, “Terribly sorry. We have finished the calculations and we see that we suck. Here is the math behind the fact we suck.”

They can still finish it off with a plan to do better next quarter. I am all for being pleased to announce positive future plans. But when the quarter sucks, start off with something more creative.
Many of these firms should be embarrassed, upset or at least hesitant. Alas, that is never the case, they are always pleased. Maybe some people are just pleased the quarter is over?

Thanks Tusk. Make sure to check out the site: www.TuskFund.com or follow Tusk Trader on twitter: @tusktrader

Buffett and Gekko both recommend index investing

Posted by Preet on Apr 17, 2012 | 0 comments

Warren Buffett said that “a very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money”. Gordon Gekko was about 20 years ahead of Buffett when he said “Ever wonder why fund managers can’t beat the S&P 500? ‘Cause they’re sheep, and sheep get slaughtered.”

(For those not familiar with Gekko: Gordon Gekko was the slick haired, insider trading villain in Oliver Stone’s movie, Wall Street.)

While both gentlemen are known for their active investing prowess (in the case of Gekko, perhaps over active investing is a better term), they both essentially espoused index strategies for the masses. Paradoxical, isnt’ it?

Perhaps even more paradoxical is this anecdotal video I found on YouTube which shows Michael Douglas being interviewed on the radio about his portrayal of the brilliantly written character of Gordon Gekko. In the clip, he mentions that drunken investment bankers would come up to him all the time and profess their admiration for Gekko. Some indicated that Gekko was the inspiration to end up on “the street”. Email subscribers: click here to watch the video (approx. 1 minute).

Douglas and the host go on to agree that the seduction of power and the expensive suits are partly the cause, and perhaps not the outright villainry itsef. Gekko’s fortune was estimated at roughly $8.5 billion dollars, which placed him fourth on the 2008 richest fictional character list published by Forbes, but note since “Wall Street: Money Never Sleeps” was released, that has changed to align with the plot development. His suspenders showed off the colours of Eton College which counts eighteen former British Prime Minsters as graduates. Of course, I wouldn’t put it past Gekko to lie about actually attending Eton.

Buffett, on the other hand, is the model of restraint. He lives in the same house he bought in 1958 and one of his few reported indulgent expenses, a private jet, is named “The Indefensible”. His wit is legendary as is his ability to distill seemingly complex concepts into easily understandable ones. His investing methodology is described as boring, but the results speak for themselves. Click here for some of Buffett’s rules to live by for investors (approx. 3 minutes).

Given what’s happened on Wall Street over the last few years, one could make a pretty good argument that Warren Buffett is more of a fictional personality than Gordon Gekko.

Note: This is a republished column I wrote for The Globe and Mail.

Investors took Instagram from $500 million to $1 billion in one week

Posted by Tusk Trader on Apr 11, 2012 | 0 comments

This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader

We might have seen the trade of the month this week or even the trade of the year.

The markets have been a buzz these last few days about the 1 billion dollar takeover of Instagram by Facebook. Facebook has paid $1 billion to acquire the high growth photo sharing app. Other than the shear magnitude paid for a company with no revenue, what has really captivated traders is the small group that actually doubled their money in that transaction in a very short time frame. Less than a week before the takeover, Instagram had just closed on their series B financing and that valuation was at $500 million. The investors involved were Sequoia, Thrive Capital, Greylock and Benchmark (as reported by AllThingsD’s Liz Gannes). Within a matter of days, these venture groups turned an investment into a trade most traders would be drooling over and bragging about for years. This group doubled a very large investment in a very short period of time with little risk. Most venture capital firms are about the investment, longer-term strategies, guidance and loads of risk management. The Instagram deal ended up bringing these venture firms loads of cash and some Facebook stock.

Like many traders, these investors could say they knew the offer was coming and that was why they got in when they did. There could even be some truth to that. A popular company with a large bank account does attract much more aggressive takeover bids and can prompt quick moves by potential acquirers. Something tells me however, that they had little idea that the valuation would end up that high or that it would happen so quickly. Either way, good for them, well done and they deserve a pat on the back. It’s a bumpy month in the markets and it’s nice to see someone making money and knowing that the gains will be likely pumped back into more start-ups to foster more growth in the industry

Thanks Tusk. Make sure to check out the site: www.TuskFund.com or follow Tusk Trader on twitter: @tusktrader

Tunezy – The Future of Music? I’m betting YES.

Posted by Preet on Apr 10, 2012 | 0 comments

Apologies for the off-topic post, but I think many readers will find this of interest.

I’m very pleased to announce that earlier this year I made a private investment in a company called Tunezy (www.Tunezy.com). Tunezy is a social record label led by a phenomenal group of entrepreneurs who are looking to revolutionize the music industry with a platform where independent musicians and their fans can remove barriers created by record labels.

Today, musicians who sign with major record labels might be selling their souls. In many cases, musicians with a gift of song may not be well versed in business. Here’s a story about how you can sell 1 million albums and owe your record label $500,000.

With Facebook, Twitter, and YouTube, independent music is exploding. Today, talented independent musicians can generate a loyal fan following by creating and recording music and posting it for the world to see. For free. Tunezy will empower independent musicians and fans of great music. It will soon be possible for more great artists to further their careers without selling their souls.

I’m thrilled to let you know that it was announced today that Intertainment Media Inc. has also made a significant investment in Tunezy. You can read their official press release here.

Tunezy will be launching their private beta in the next few weeks. I would love for you to check it out. You can visit the site and sign up to get an early invite. During the private beta, you’ll be able to use the site to discover great music and we would love your feedback on the usability of the site. The public beta will launch after we get feedback. Then, the official launch will follow towards the end of this year.

I also wanted to note that the people behind Tunezy have impressed me to no end. Their creativity and professionalism is inspiring. I’m the old guy in the room at 34 (see the pic below). I tried explaining the relation between a pencil and tape recorder to a few of them and was met with empty stares. (For you young ones, you used a pencil to wind up the tape when it occasionally got pulled loose when removing it from the tape recorder.) Yeah, they make me feel old. But they also make me feel I should be working harder. They are all exceptionally talented and driven like few people I’ve ever met. And they are all under one roof.

Their talents have not gone unnoticed. Recently 80 North American startups entered a competition at the National Business Technology Conference in March of this year. Tunezy placed first overall as judged by a group of venture capitalists, entrepreneurs, and executives. They took home additional funding, lots of prizes, and many business cards from private investors looking to get in on the next round of financing.

If you would like to get an early invite, please visit Tunezy.com.

You can also follow Tunezy on twitter and Facebook.

Preet

We’re teaching stock picking and leverage to students. (W)hat (T)he (F)rance?

Posted by Preet on Apr 10, 2012 | 3 comments

Everyone knows a family that has a long line of “somethings” in their pedigree. Five generations of police officers, four generations of doctors, or even mutliple generations of trapeze artists. There certainly is pride in many family traditions. One tradition that isn’t so revered however, is the passing down of bad financial habits.

For some people, the environment they grow up in is all they have ever known when it comes to money management. It might also be all they ever will know because we don’t really teach it in school. I know there are some facilitators doing a great job, but they are in the minority.

Those stock picking competitions we occasionally hear about in primary and secondary schools only encourage reckless risk taking and short term thinking about money and investing. I’m not against stock picking. I just think it would be more prudent for more people to start with indexing and asset allocation as the base case. Academia and practical experience suggest so. If people want to stray from that after learning the fundamentals, I have no issues with that.

Perhaps you’re thinking that it gets better later in your child’s school career? Perhaps not. I had the chance to audit a personal finance course at a Canadian university. The particular lecture I sat in on focused on portfolio management. Part of the day’s lesson was to figure out your nest egg requirement at retirement, determine if your portfolio’s rate of return was sufficient to meet your target given a set savings rate, and if it wasn’t, simply take out a loan and leverage your portfolio until the equation worked. I’m sorry, but the better answer would be to simply save more. Especially given the lack of discussion on associated risks. I’m paraphrasing, but theory and practice are the same, in theory. In practice they’re not. To compound the problem, now the students are setting up their own stock picking contests through the investing clubs on campus. Stock picking is certainly sexier, and sex sells.

With little formalized, practical personal finance education in schools, where does one turn? To family tradition? If your parents lived paycheque to paycheque, you’re more likely to find that acceptable. It follows that your children may use your financial habits as their benchmark as well.

We were supposed to have a Financial Literacy Czar appointed last November. There are multiple financial literacy groups and programs operating independently right now, but I’ve yet to see real progress across the board, coast to coast.

What is the hold up?

Bay Street fisticuffs over the penny?

Posted by Tusk Trader on Apr 6, 2012 | 2 comments

This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader

According to the new Federal Budget, the death of the penny is upon us. The penny has a completely different history and future in the trading world.

It was not that long ago (but before I began my capital markets career) that a new trading system thrust the legendary penny on to a bunch of traders who wanted nothing to do with it. Trading currently happens in pennies and fractions of a penny on some very inexpensive stocks. You can buy ABC at $25.34, right down to the penny. Trading actually used to occur in fractions of a dollar. Back then, when the spread was as close as it could be, it was more than a penny a part. About 6.25 pennies apart actually. Each $1 was divided up in to 16parts and the stocks would trade in 16^th’s. Previous to 1/16^thspreads, trading happened with a minimum of a 1/8th spread. A dollar was divided up into only 8 parts and the spread was 12.5 cents. Trading the spread alone was exceedingly profitable.

This fractional system changed in 1996 when the TSX embraced the penny and went from trading with fractions to trading with decimals. This change introduced the now common practice of being able to “penny” the guy in front of you in the trading book. That is when you bid a penny higher or offer a penny lower than the best bid or offer in the book. To “penny’ is also referred to as ‘chiseling’. When there was an actual trading floor and this was done in person, it was rarely done twice. This move could prompt anything from a dirty look and dirty language to an elbow or even a punch.

Since trading occurs in firm offices all on computers now, only rarely does a trader in the same room, working for the same firm penny an actual colleague (yes, there are traders that are that rude/stupid), and thanks to HR, even rarer does this action result in the old school trading floor threat or action of physical violence.

Many older traders still hate the decimal system and trading in pennies. Most traders hate being ‘pennied’ and that type of behavior, but even with demise of the actual penny, I do not see the penny leaving the financial community. It is here to stay. Sorry old boys.