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.

Related posts:

1. Smoking a Pack a Day Can Cost You Millions
2. Bear market = More insurance sales
3. Learn more about Life Insurance than your Insurance Agent knows Part 2

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

Related posts:

1. Is this week a sign that we will have a Santa Claus rally?
2. The Truth About Insiders’ Buying and Selling
3. What is a trading floor like on a day when a big market swing occurs?

(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.

Related posts:

1. Warren Buffett Exists Because He Has To Exist?
2. Why Warren Buffett Is Not A Poster Child for Active Management
3. ANOTHER Contest: Win Warren Buffett's New Biography

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

Related posts:

1. Facebook IPO: Should you try to buy it?
2. Is this week a sign that we will have a Santa Claus rally?
3. What is a trading floor like on a day when a big market swing occurs?

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

Related posts:

1. Facebook IPO: Should you try to buy it?
2. Should MFDA advisors be allowed to sell ETFs?
3. Highly Paid Government Workers

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?

Related posts:

1. 2011 stock picking contest results and 2012 picks
2. 2011 Bloggers’ Stock Picking Contest Q3 Update
3. 2011 Bloggers’ Stock Picking Contest

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 16 parts and the stocks would trade in 16^th’s. Previous to 1/16^th spreads, 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.

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

Related posts:

1. The Truth About Insiders’ Buying and Selling
2. What is a trading floor like on a day when a big market swing occurs?
3. Trading in Thin Markets

Also, I wanted to see how many times I could use the word “alleged”.

What’s the charge?

The CFTC (a US regulator of futures and options markets) is alleging that RBC conducted a series of wash trades on futures markets in the US between 2007 and 2010 to the tune of hundreds of millions of dollars in order to capture tax benefits associated with holding dividend paying companies while not being materially exposed to price changes in those companies. A wash trade in this context means you are trading against yourself by buying a security in one account and at the same time selling it in another. What money is lost by one account is offset by the money gained in the other account. Further, it is alleged that the overall strategy was conducted using Single Stock Futures (SSFs) and Narrow Based Index Futures (NBIs) with two foreign subsidiary companies in a manner that was non-arm’s length in nature.

What is an NBI?: A Narrow Based Index future is a cash-settled future on a custom index. Upon expiration, one party of the transaction must pay to the other party a cash payment depending on whether or not the underlying index outperformed or underperformed the contract price. These contracts can be rolled over to future settlement dates if the parties so decide.

What is an SSF?: A Single Stock Future is the same thing, except the underlying investment is not an index, it is simply a single stock, and the settlement can be handled with the actual stock, OR a cash payment. If you are short the SSF, you deliver the stock to whomever is long the SSF contract at expiration.

The Basic Breakdown

It’s alleged that a few key senior RBC employees controlled the trading behaviour of three units which they argue are distinct, but which the CFTC argues are acting in a consolidated matter. That means the view of the CFTC is that the transactions were non-arm’s length in nature since one group within RBC allegedly directly controlled the trading of all three units in an orchestrated manner.

Now, the exchange on which the trades were made permitted two parties to enter into pre-arranged block trades (large trades essentially) as long as they were at reasonable prices that were mutually agreed to and subject to “The Rules of The Exchange”. The exchange did NOT have a rule that explicitly permitted block trading between affiliated parties. This is the crux of the whole thing. Everything up until now would’ve been fine had the two trading parties not been affiliated with each other within the SSF or NBI trades.

Essentially, the charges are that RBC 1) Engaged in wash trades and fictitious trades to limit market exposure to underlying stocks (for the purpose of capturing tax benefits associated with holding the underlying stocks in two of the units), 2) Engaging in non-competitive transactions – which means that they did not seek non-affiliated trading partners who would presumably help set prices through an open market system (think open bids and asks like you see at your retail discount brokerage account) and 3) Made false statements to the CFTC during the investigation into this trading activity.

What are the tax benefits alleged to have been sought?

As per the CFTC document:

1. Canadian taxpayers are entitled to an offset against their Canadian taxes equal to the US taxes they pay on dividend income from US securities.
2. Canadian companies are entitled to an offset against Canadian taxes equal to Canadian taxes paid on dividend income from securities issued by other Canadian companies, so long as the securities are held for one year or longer.

The Technical Breakdown

NBI Side

On the NBI side, this was conducted between the RBC Canadian Transit group in Toronto and the RBC Europe Limited group in the United Kingdom (London). This is a four legged strategy in which offsetting positions are held in the underlying stock (Toronto was long, Europe was short) and Toronto sold NBIs to Europe. The gain or loss on one side of the futures contract were offset by the other side since profit/loss between these two groups were consolidated. RBC Canadian Transit captures the tax credit (the end goal) while overall, there was no material market exposure to the underlying investments.

SSF Side

The SSF side is basically the exact same thing. The only difference is the use of SSF contracts which are timed to expire just after the dividends are collected, to ensure capture of the tax benefit for the offshore Canadian account at the RBC Caribbean unit. These trades were executed, allegedly, in coordination with the RBC Capital Markets Arbitrage group based in Luxembourg (with offices in New York). Again, the offsetting trades ensured that there was no material market exposure overall, but one of the groups captured tax credits that increased the consolidated groups’ bottom line.

Also of note is that the Central Funding Group (CFG), which oversaw both the NBI and SSF sides of these wash trades, was based in the Caribbean, but “Member 1″ of the CFG was a member, and then later Chairman, of the board of directors for the Capital Markets Arbitrage group (the other side of the SSF trades from the Caribbean).

Final Note

As mentioned, this post is simply to explain the details of the scheme as alleged by the CFTC. The point of debate is whether or not the groups acted independently in a manner that would provide proper price discovery of the futures contracts had there been other trading partners (i.e. non RBC affiliated trading partners), and whether the trades were of a wash or fictitious nature.

Hope that helps clear things up.

Related posts:

1. High Frequency Trading Explained
2. After-Hours Trading Explained
3. Managed Futures

I’m still the guy who doesn’t take it seriously. Still nice to meet you.

So far, my “shoot from the hip” picks have done very well. I’m leading the competition with a +35.91% return in only the first 3 months. I don’t know about you, but my gut reaction is that this may not bode well for the final year-end results! :)

Here are my four picks for this year, the original rationale and a refresher of the rules for the competition. The overall rankings and links to the other competitors follows.

Top 2012 Stock Picks

The criteria is to pick four securities in equal dollar amounts listed on a Canadian or American exchange (not including derivatives) to just sit on for the duration of 2012 with no changes allowed. We are to provide updates every quarter and the contest ends on the last trading day of 2012. The initial prices will be based on the closing prices on December 30th, 2011. The final prices are based on the closing prices on the last trading day of 2012.

1. Starbucks @ $46.01 (NASDAQ:SBUX) – I just had one so it’s top of mind right now. NOW: $55.89, +21.47%

2. Apple @ $405.00 (NASDAQ:APPL) – iPad 3, iPhone 5, and Apple might re-invent the TV this year. I also understand Steve Jobs and Tupac will release a collaborative album in 2012. NOW: $599.55, +48.04%

3. Research in Motion @ $14.50 (NASDAQ:RIMM) – Perhaps they got beaten up too much, perhaps they get bought out. Then again, perhaps they have further to fall. NOW: $14.70, +1.38%

4. Bank of America @ $5.56 (NYSE:BAC) – Bit of a contrarian play… and that’s about as much thought I put into it. NOW: $9.57, +72.12%

This Doesn’t Sound Like You

Regular readers know that I don’t normally talk about specific investments. For the first year’s contest I initially hesitated since I was worried that some readers might take some of these picks to heart and actually buy them themselves as part of their investment portfolios. However, I decided to participate anyways deciding that I’ll just disclaimer the heck out of it. To that end:

This Is Just For Funsies

THIS STOCK PICKING CONTEST IS JUST FOR FUN, IT IS NOTHING MORE THAN GAMBLING. DON’T EVEN THINK ABOUT BUYING THE STOCKS LISTED HERE OR ON ANY OF THE OTHER BLOGGERS’ SITES WITHOUT FIRST CONSULTING A PROFESSIONAL FINANCIAL ADVISOR. IF YOU BUY THEM ANYWAYS BASED ON THIS POST, YOU MUST RAISE YOUR RIGHT HAND BEFORE PLACING THE ORDER AND REPEAT, “I AM A NUTBAR”.

What The Other Guys Are Picking

Here is a list of links to the other participating members’ performance:

WhereDoesAllMyMoneyGo.com +35.91%

Intelligent Speculator +16.37%

Dividend Mantra +13.71%

Wild Investor +11.78%

My Traders Journal +11.17%

Beating The Index +10.87%

Million Dollar Journey +7.84%

The Passive Income Earner +4.77%

Dividend Growth Investor +4.43%

The Financial Blogger +0.10%

Related posts:

1. 2011 stock picking contest results and 2012 picks
2. 2010 Personal Finance Bloggers Stock Picking Contest Q2 Update
3. 2011 Bloggers’ Stock Picking Contest Q1 Update

I was just goofing around and put together this spreadsheet to play with Google’s motion charts. I took the annual returns from one of Libra Investment Management’s spreadsheets and created a “growth of $1″ simulation for a bunch of asset classes as well as a diversified portfolio. I’m embedding two things: a YouTube video to explain how to use the chart, and the actual chart for you to play with.

FYI: The diversified portfolio in this version is 30% Canada, 15% US, 15% EAFE, 30% CDN Long Bonds, 10% Gold. I’ll make the full spreadsheet available another time in which you can change the asset mix of the diversified portfolio to anything you want and see the new visualization results.

First the explanation video:

Then the chart to play with yourself:

Related posts:

1. If you believe in diversification, don't invest too much in Canada!
2. The Virtues of Asset Allocation [Chart]
3. Global diversification of S&P 500 increasing