Archive for January, 2011

Continuing on from my previous post, I have some problems with Dave Ramsey’s advice.  The bullet points here restart at (1), but it is really (3).

  1. The asset allocation is risky.  The choice of funds – growth, aggressive growth, growth and income, is highly geared towards growth.  So what is a growth fund anyhow?  Well, he kind of alludes to it in his book as a company that is growing quickly and doesn’t normally pay dividends.  That’s fine except that it is abstract.  Growth companies usually are not very big.  Ken Fisher, who in 2006 was #397 on the Forbes 400 list of richest people in the world (or possibly Americans, I am not sure where he rates now) defines a growth stock as one that is higher than the market’s average P/E ratio.

    (Side note: A P/E ratio is roughly how expensive a stock is compared to how much money it makes.  If a company trades for $100/share, and makes $100/share, then it’s P/E ratio is 1.  If somebody hires you for $5/hour and you deliver $1/hour in value, then your personal P/E ratio is 5).  Growth companies usually have high P/E ratios because they are growing quickly and investors expect them to be worth more in the future than they are now.  Apple has a high P/E ratio because its iPhone sales are off the charts.  IBM has a low P/E ratio because investors expect it to largely maintain its sales but not grow that much.

    Ramsey defines aggressive growth in the back of one of his books and says that it is mostly small cap stocks (small cap stocks are risky but man, can they ever explode forward).  So, Ramsey’s preferred asset allocation is growth stocks with a bias towards small cap stocks.

    I used to think that this was a good idea, but reality and research has changed my mind.  Growth stocks do make big gains, but when the market corrects they correct very hard.  When you get your statement you’ll say “What the?  What happened to my money?”  That’s what happens when you buy growth stocks, especially small cap stocks – they experience wide swings.

    Furthermore, as I said in my last post, no style of investing leads forever.  We have gone through periods of time when small caps led, and we have gone through periods of time when large caps led.  If you can read global trends and interpret the yield curve and the bond yield, then you can sometimes forecast which ones will lead.  But you (personally) cannot do this because you are investing in mutual funds.  Therefore, there are periods of time wherein if you pick a particular type of fund, it will lag.  Sometimes this can be for years.  Your best bet is to pick an index fund that tracks the entire market (doesn’t have to be weighted equally).  That way, you participate in the ups and downs of each sector and style of performing.  You won’t outperform the market, but you won’t lag it, either.

  2. Who gets 12% return these days?  Ramsey makes the claim over and over again that a good fund gets 12% return.  That’s nonsense.  From the 1940’s through until 2006, the average rate of return on the market was about 10.5% per year (40% of that return was dividends and growth stocks usually don’t pay them).  It is likely that Ramsey was looking at a period of time when funds returned abnormally high returns, such as the period of time between 1980 and 2000 (his book was written in 2003).  So, most likely, his book is out of date.

    Abnormally high returns are always followed by subpar returns.  If there’s one thing in the market that is a fact, it is mean-reversion – the market’s uncanny ability to return to average.  If something is hot, eventually it gets cold.  If something normally gets 10% per year and then shoots up to 12%, eventually it will return to 10%… but first getting 8% for a number of years before reverting back to the mean.

    Warren Buffet has predicted that during the 2000’s (he made the prediction in 2003 or 2004) that he expected something like 7% return per year for the next decade.  I think that is reasonable.  So, make sure you pick funds with low fees and pay dividends (for a nice extra bit of return) because your funds certainly will not average 12%.

That’s my view on Ramsey’s investment advice.  He’s not completely wrong, people should invest as much as they can, but what he says to invest in is not correct.  Or rather, it is under-optimized and can be much improved upon.

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I’ve been reading more of financial advisor Dave Ramsey and he has a lot of good advice:

  • Don’t get into debt for things that go down in value
  • Get a 15-year mortgage because you can pay it off sooner
  • Only buy big ticket items like houses or cars if you can get a deep discount
  • If you have a big emergency fund in savings, raise the deductible on your car insurance

I don’t have any issues with these.  And while I don’t plan to cut up my credit cards, I may be more cautious about what I put on them going forward.  There is, however, one piece of advice where I think that Ramsey gets it very wrong and is dispensing bad advice, and that is his advice on mutual funds.  Ramsey’s advice is that mutual funds are an excellent way to invest and that people should get involved in them and follow his portfolio as per the following:

  • 25% of your money into Growth funds
  • 25% of your money into Growth and Income funds
  • 25% of your money into International funds
  • 25% of your money into Aggressive Growth funds

According to Ramsey, you should look for funds that have a strong track record of outperforming the market, at least 5-10 years, and don’t worry too much about fees.  If I have a fund that gets 16% per year and you have one that gets 9%, then 2% management fees in mine doesn’t matter because I’ll still outperform you.  A good mutual fund returning 12% per year is great for investing your money and will quickly pile up over the long term to give you a million dollars.

I agree with Ramsey that you don’t need to invest in CDs, annuities, or real estate, the advice on mutual funds above is incorrect.  Here’s my view:

  1. Mutual funds are not great ways to invest.  They are merely okay.  The advantage of mutual funds is that they are passive; the average investor like you and me doesn’t have to do anything, we just put our money in and the fund does the rest.  It’s a way that ham-and-eggers can participate in gains and the general economy.  In addition, they are fairly liquid so it is easy to get into and out of. However, mutual funds are not going to get you the best return on the market compared to other types of offerings.  They are just the easiest.  They are not great, they are okay but probably the best of a limited set of options that most people have.
  2. Fees do matter.  A lot.  This is the part that I have the biggest problem with, and that’s the statement that you shouldn’t pay too much attention to fees.  You must pay attention to fees.  If you take nothing away from this blog post, it is that you must pay attention to the fees a mutual fund charges.

    Why?  Because almost nobody can outperform the market over an extended period of time year-in, year-out after fees.  Morningstar is a ratings agency of mutual funds and they rate the best performing funds and managers, and almost nobody that is on the list one year is on the list the next year.  The market changes and a manager that did well one year will probably not outperform the next year.  The fact is that index funds, funds that track the general market, will outperform 80% of funds from year to year (index funds are not actively managed, someone buys a bunch of stocks in every company and then doesn’t do anything).  Index funds have very little fees and while a mutual fund may perform it at first, fees will deduct those gains and cost you money.  So, the fees that you pay will lower your performance and while you might get lucky one year and outperform an index, you probably won’t the next year or the year after.  And if you bought an index fund, you have an 80% chance of beating the other mutual funds year after year so you don’t even need to worry about picking the best fund at the onset, nor will you have to pay the management fees as an added bonus.

    Most managers can’t outperform consistently because the market is always changing.  If small-cap stocks were always the best investment, then everyone would buy small caps.  If everyone owned small caps already, there would be nobody left to buy them and push their prices upwards (i.e., no demand).  Leadership in the market rotates.  Sometimes growth stocks lead, sometimes they don’t.  Sometimes (usually) international stocks lead, sometimes they don’t.  And so forth.  A fund that participates in one particular style is pretty much guaranteed to underperform at some point.  Index funds will never underperform because they are the market.

    But you say “Wait!  Aren’t there managers who do consistently beat the market?”  Yes, there are.  But they are hedge fund managers and their funds are not open to the general public.  They are not mutual funds and you can’t buy them unless you have a certain amount of money (How much? More than you have if you are reading this).  For a mutual fund manager, as your fund gets bigger and bigger, you have to buy more and more stocks.  As you buy more and more, you end up buying pretty much the whole market anyhow (like an index fund).  So if you’re going to buy every stock, why not buy an index fund and save on the fees?

    I was reading a book last night called The Dick Davis Dividend and in it, he quotes a financial analyst who says that if you have Fund A which is rated amongst the top 25% of all funds for return and the top 25% of fees, and Fund B which is rated amongst the lowest 25% of all funds for return and the lowest 25% of fees, you are more likely to do better with Fund B then Fund A.

    How do you like them apples?  You must take fees into account because that is what is going to affect your total return along with your asset allocation (what funds you actually pick).

More in my next post.

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My next brilliant plan

I have a plan.  My girlfriend doesn’t like this plan, but I think that it is an awesome plan.

For my next vehicle, I want to pay for it in cash (or a check). The important thing is that I pay the price of it in full (minus some negotiation).  However, I don’t want to pay the entire thing.  I want to pay cash for the entire thing, minus $1.  That way, if the cost of the vehicle is $14,000, I will offer them $13,999 and not a penny more.  Even better, I would like to finance the remaining $1 over four years.  If they won’t do it, I’ll walk out.

My guess is that they’ll let me have it for $13,999.

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Last night I had a dream.

The dream was that I was back in Winnipeg and I was invited to play for my old sponge hockey team.  I initially protested that I didn’t have the right set of shoes, nor even a jersey, but they insisted that I take to the ice because they needed the extra player.  So, I agreed.  I mentioned that due to my chronic hip pain I would be limited in what I could do, but secretly I thought to myself that since I have been exercising regularly for the past several months I could make up for it in other ways.

Well, I got onto the ice and on my first shift there was action down in our end of the rink.  There was a turnover and I picked up the puck, leading the rush down the other side of the ice with another one of my teammates, with another close behind.  I got down to that end of the ice and took a shot where the goal stopped it but kicked out a rebound.  Someone else took another shot and the goalie stopped that one, too.  There was some hacking and chopping in front and then I got the puck and stepped forward but I was facing away from the goal, so stepping forward meant I was looking back towards our end.  I then took a shovel-like backhand shot at the net and it kind of raised up a bit, hit the goalie on the back of his leg and trickled into the net, barely crossing the goal line.  It was close, but it was in.  I had scored the opening goal on my first shift!

Everyone cheered and I pumped my fists in celebration!  I had been out of the game for nearly four years yet I proved that I had still had game!  It was awesome!  I went back to the bench and then on my next shift, I got the puck and beat one defender and was on a breakaway with another player to the side of me.

And then I woke up.

Dang it!  I wanted to finish off that rush towards the net!  But even more than that, after I awoke, I looked around and saw that I was not on the ice, but instead was at home in bed.  I sighed and lay back down.

That was a pretty good dream, though.

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Over the past month or so, I have been pretty consistent in exercising and writing stuff down of what I have done.  I don’t do something every day, but I do get something in probably 5 or 6 days out of 7.

One thing I have been working on is strengthening my stomach.  There are several exercises that I do and here they are with their relative frequency:

  • Myotatic crunch – this involves lying down on a (half) exercise ball and extending backwards and touching the ground, and then sitting up such that your hands are parallel.  I do this holding onto some weights.
  • Cat vomit – it sounds gross, but that’s what it looks like.  This works your transverse abdominal muscle.  Go on all fours on your hands and knees and exhale fully throughout your mouth, forcing all of the air out.  Your stomach should be compressed a bit.  Next, holding your breath, lift your stomach towards your spine like you were sucking in, as if trying to squeeze into a tight pair of pants.  Hold for a count of 8-10 and then exhale.  This is more difficult than it sounds because when you suck in, you have no air and your lungs will want to burst.  Exhale through mouth, inhale through nose, and repeat 10 times.
  • Planks – geez, I hate these.  Prop yourself up on your elbows, extend your feet all the way behind you, and keep your back flat.  Don’t raise your buttocks to the sky.  Hold for a count of 30-60 seconds (I’m currently at 40 seconds).  Repeat on your left side (i.e., balance on your left arm and hold yourself straight) and then do the same on your right side.  I do it for 40 seconds, do some other stuff, and then repeat for a total of 80 seconds.  I do these 5 times per week.
  • Flying dog – go down on all hands and knees.  Extend your left arm and your right leg, and then switch.  Repeat 30 times.
  • Glute lifts – Lie down on the ground and raise your pelvis to the sky and hold for a count of 2.  Lower and repeat 30-40 times.
  • Bicycles – Lie on your back and do a partial sit up – touch your left elbow to your right knee, hold, and then do the same with your other elbow and knee.

These are what I do, not necessarily every day.  The key is to not do it fast.  Do not rely on momentum to carry you, and keep good form.  I’ve been tracking my progress and my goal is to do planks for 1 minute, twice for each side (i.e., a grand total of 6 minutes).  I hope to have this conversation one day:

[At a friend’s party] “Hey, Terry, I thought you were said you were bringing a case of beer?”

“No, I said I was bringing a six-pack!” I then tap my stomach.

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Random science stuff

One of the topics that I have started following recently is earth science, specifically around geology, anthropology and climatology.  I like this stuff because I like history and I like to get insights into how the world formed.  It’s cool to see where all of this came from and it also leads me to some interesting conclusions (well, more like theories).

Recently I had the chance to learn a little bit about the ice age.  There’s so much of this stuff that I learned in Junior High, but I’ve forgotten most of it and never picked it up again.  When most of us think about the Ice Age, we think about periods of time when the earth was covered up by ice.  That’s not entirely accurate.  Technically, an ice age is when the earth is covered by a permanent sheet of ice that never melts.  We are currently in an ice age right now because both the Antarctic and the Arctic are covered by permanent sheets of ice.  Indeed, the periods of cold when glaciers appear are called interglacial periods.  We are currently in a warm period of time between interglacial periods when ice will appear.  In addition, glaciers do not actually cover the entire earth; the last ice age they covered much of North America and Asia (Russia and Europe) but not the entire world.  For the purposes of this post, I will refer to the interglacial cold periods as ice ages.

There have been several ice ages in our past history but they have not been constant.  The last one ended only about 15,000 years ago (give or take 5000 years).  Ice ages occur when the earth cools in winter and doesn’t heat up enough in the summer to warm the earth to melt all of the ice.  This builds up layers and layers of ice, forming a glacier.

Why do these ice ages occur?  There are several causes, but basically, we all know that the earth is tilted on its axis at about 23 degrees.  This is what causes seasons – the sun’s light is more direct in winter and less direct in summer.  However, not only is the earth titled on its axis but it also wobbles a bit on its axis.  Thus, at some periods of time it isn’t at 23 degrees but instead is 24 degrees.  This shift in the axis changes the angle of sunlight enough such that parts of the hemisphere receive much less sunlight and therefore do not melt the snow every year.  The wobble then wobbles back and the snow begins to melt again.  It is not just this wobble that creates ice ages (atmospheric conditions and continental drift do as well) but over the past 200,000 years or so, this is what has happened.  There will be another ice age in the earth’s future, it is just a matter of time.

One of the consequences of the ice age is that it changes global sea levels.  When water freezes, it expands.  Thus, if you take a glass of water and freeze it, it will take up more room in the glass when it is frozen then when it is in liquid form.  As a result, with these ice ages, water levels receded and connected various land bridges.  The United Kingdom was connected to the rest of Europe, Japan was connected to Far East Asia, and Alaska was connected to Siberia.  This was the land bridge that native American ancestors crossed and populated the western hemisphere down all the way into South America (the last continent to be populated, other than Antarctica which doesn’t count).  When the ice melted, these land pathways resubmerged beneath the waters of the oceans.

What strikes me is how rapidly climate patterns can shift.  Researchers have measured carbon dioxide levels in ice and have been able to detect shifts in global temperatures.  It doesn’t always take a century or two for rapid shift to occur, but sometimes can occur in a couple of decades (!).  I’m not sure how accurate that is or if I am misremembering, but it does give one pause to think.

However, what struck me even more about earth geology is how opportunistic life on the planet really is.  Weather patterns change and life takes advantage of it (we move continents).  Ice forms and creates massive topological changes in the face of the earth and people move around.  But more than that, life is also very fragile.  There have been several mass extinctions that have occurred in the planet’s history.  There are at least 3 – the one that wiped out the dinosaurs (if memory serves me) wiped out 70% of all species.  However, there was an earlier one that wiped out 96% of all species.  But in each case, the large species are eradicated but a remnant survives… and life starts all over again.  It doesn’t always look the same as before as geological conditions allow different kinds to survive and evolve.  Notice any dinosaurs around?

Finally, what also struck me was the thought that we humans as a species are (probably) screwed.  The earth’s climate is going to change again.  Since the Industrial Revolution, the earth has been warming up and we have been accelerating it.  However, even if we moved to stop global warming, all that would happen is that we are postponing the inevitable (kind of like how I resisted moving into my condo but in the end that is what I ended up doing).  The earth is going to warm up whether we like it or not and when it does, the climate will shift.  History has shown that when the climate shifts, larger species don’t handle it very well.  Now, we are intelligent primates so maybe we’ll have a shot, but it’s a long shot.

The good news is that by the time that happens, everyone reading this post right now will be dead so we don’t really have to worry about how it will affect us in the here and now.  Maybe by that time we’ll have invented technology that will allow us to survive in very warm environments or we’ll have evacuated the planet.  I guess I’ll never know.

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For months I have been thinking about canceling my cable TV subscription and just getting Netflix.  But I have never done it.  I figured I would do so as soon as I moved.

Well, I moved apartments and when I got to my new place, I plugged in my cable box from Comcast and tried it out.  I had canceled my service at my old place a few days earlier and had scheduled a technician to come down 5 days later to put it in at my new place.  Why is it with these cable guys the target window that they could arrive at is anytime between 9 am and 5 pm?  How useless is that?

Anyhow, I reluctantly scheduled an appointment.  However, when I got to my new place earlier in the week I plugged in my cable and internet and to my delight, everything worked!  Hooray!  My account was still active!  Well, if everything is still active then there is no need to have them come down and activate it.  It’s already active.

So, I contacted them on their phone line and talked to a technician.  I told them to cancel the appointment to come down and activate my service.  I did not tell them to cancel my service completely, only not to come down.  They wanted to reschedule but I said I didn’t want to.  Just don’t come down.  Comcast interpreted this as “Cancel my service.”  I got home that day and turned on my TV.  It worked.  However, the Internet did not work.  Lame.  Next up, I made a critical error – I gave my girlfriend the TV remote control to fiddle around (this is why guys don’t surrender the remote).  She pressed a button on the remote and then it went into the “On Demand” section and the screen went blank.  We could not get it to reset no matter what we did.  We unplugged it and plugged it back in, but after we did it did not come back up.  It showed we had the screen channels but no signal to show any of the TV shows.  We had lost everything.  Whereas 10 minutes before it was working, not it was not working.  I ended up having to contact their technician using their web portal.

That was a complete waste of time.  Obviously, somebody at their side had flipped a switch and disabled my Internet access and TV.  They had to have.  Why else did it work before?  Anyhow, I spent 30 minutes typing back and forth to the associate trying to explain to them that they had turned it off and that all they had to do was turn it back on.  But no, they wouldn’t do it.  They insisted that a technician come down and install my service.

“Let me get this straight,” I asked.  “You want to come down and install a service that I already have that works and give me equipment I already own?  And you want to schedule that a week out?  And you cannot just re-enable the service?  Am I getting that right?”


During this conversation, for about 3 seconds the signal did come back! And then it went out.  This was during their insistence that they had to come down and install something when clearly they did not because it was working earlier in the day!  What the heck?  Finally, I gave in and allowed them to schedule an appointment to install whatever it was they needed to install.

“Okay, for this I need to create a new account,” they said.  “Give me your name, address, phone number and social security number or driver’s license number.”

“Are you serious?” I asked.

“Yes,” they replied.

No way was I going to give over either of those last two pieces of information which they already had on file!  I shook my head.  “You know what?” I said.  “Just consider my account canceled.  Thanks for your time.  Have a good night.”  I was in no mood to fight with Comcast any longer.  I have never had an issue with Comcast (other than their high prices) but the service has always been fine.  But fighting with what I thought was a ridiculous battle had worn my patience thin.  I was done with Comcast.

The next day they phoned me up to confirm I wanted to cancel my service.  I said yes.  They asked why and I said I was traveling for a while, which was a lie (technically).  I didn’t want to argue with them about how they were planning to win me back.  They then called me up again and tried the same tactic, trying to woo me back three times by offering me more and more.  I stood my ground, and that was made easier by the fact that am going to try out DSL from Verizon for my Internet, and forego television altogether and instead get Netflix.  I don’t watch that much TV anyhow.  Alternatively I am looking at getting Roku which also allows me to watch Internet.  Verizon internet is only $40/month for the highest tier service whereas Comcast was costing me $116/month for cable + Internet (not sure of the split between the two but I think that Internet was at least $45/month).  So, this is cheaper (Comcast’s web site is very vague about how much it would be after their introductory price).  I also plan to get Netflix for $8/month so I am saving $50/month by going to Verizon.

Hopefully Verizon’s service doesn’t suck.  I’m not a huge bandwidth hog so it should work out alright… knock wood.  Otherwise, I need to go back to Comcast and that would suck.

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