Blessed by the Potato

Out on the Island there’s a minor fad in putting giant decorative stars on the sides of houses, and more recently butterflies/dragonflies. We asked around to try to see if there was a reason why people had these stars on their houses here, if it was some kind of local tradition, superstition, or signifier. It’s apparently a common question from tourists, and there’s no real answer. The stars don’t signify anything in particular (though one person suggested it may have started as an Acadian thing), they’re simply decorative. It’s just a fad that happens to have caught hold here, but not back in Ontario.

The vacation was very much needed. Very much. I didn’t take my full vacation in 2010, and the week I took off I didn’t go anywhere, so it was good to just get out and sit by the ocean and read some books completely for pleasure, as well as play through some video games and watch the Game of Thrones mini-series. I can’t say that I’m fully, completely de-stressed from the thesis/future career uncertainty stress, but I no longer find my heart seizes and jumps 3 inches higher in my chest every time my email goes “boo-woop.”

Even on my vacation I had a to-do list. Some of it was merely playful: the top few books/games I wanted to read/play through (Girl with the Dragon Tattoo, Leviathan/Behemoth, Portal 2, Assassin’s Creed), some of it was things to do out east (garlic fingers, biking, visiting relatives, and garlic fingers), and some was to be somewhat productive in a non-thesis related way (enter a short story competition, draft a few posts to have a backlog for when my time is precious for the thesis, write some cover letters). While I got through most of the reading/playing list (didn’t get to a few books or Assassin’s Creed), I didn’t even touch the writing part of the to-do list.

I’ve already burned through many of my reserve drafts, and that was with a nearly complete shut-down of posting while I was gone. I expect then that I’ll only post once or twice a week at most for the rest of the summer, unless someone says or does something stupid that I can’t resist commenting on. Oh please say something stupid! Anyway, this post will have to last you a while. Fortunately, it’s long. Also, the comments have been re-enabled now that I have a stable internet connection to clear out the spam folder every day or two.

Speaking of internet connection, tethering to my BlackBerry was reasonably useful. For most of the trip I could access the internet, and it was reasonably fast to load (often a long latency time before it started, then the page would snap in pretty quickly). But as the trip went on, it got more and more screwy: taking longer and longer to resolve DNS requests, and often failing at that. It would give me a message about a hardware error in the modem and disconnect (i.e.: lost connection between PC and BB). Then one night the internet just went dead completely, even on the handset itself, though the signal meter still showed one bar (down from 3/4). Then, mysteriously, my BB displayed the red message light on solidly and shut itself off. I thought it was dead, but it came back to life not too much afterwards and I could connect again with the handset, but with less luck on the PC. So except for those last few days, it did work quite well. Haven’t received the bill yet to say how much Bell ended up deciding to charge me for the tethering.

Book mini-reviews:

Spoiler warning start!

A Game of Thrones: A Song of Ice and Fire: Book One: A fantasy book, with undead creatures and dragons present in the universe, but not making much of an appearance, so mostly court intrigue and betrayal. Knights and war and honour and blood. A very large set of characters seemed really well laid out, with depth to every one. In particular though, George R. R. Martin has no qualms about who lives or dies, or where the plot may take us. He is ruthless, and I have to say I was genuinely surprised at the plot twists (last chance before spoiler-ville!): for most of the book he seemed to be building up the Dothraki threat, even giving Drogo a good reason to get good and mad and charge across the narrow sea. I was so sure that that was what the book was building towards… when all of a sudden he’s felled by a common infection. The HBO min-series was also great: very true to the book, and in the few places where it wasn’t, I thought the show offered some improvements. For example, Catelyn Stark wasn’t as mean to Jon Snow in the show, which made her more likeable off the bat, and I much preferred “white walkers” to “the Others”. Who uses such a vague term as “the others” for a menace? I hated it in Lost, too. Very well-cast all around, too.

If you’re a fan of fantasy, or even just fictional political intrigue (and can at least tolerate swords and a fictional medieval setting), then I recommend it. And I’m highly looking forward to finishing the rest of the series.

End of spoiler warning section!

Girl with the Dragon Tattoo: This has been a pretty popular book, with two movies made of it now (a Swedish-language one, and a Hollywood version). It’s a murder mystery thriller, and it was pretty good, though I’m not sure I’d have even bothered to write about it if it weren’t already popular (and perhaps sadly, it’s popularity means my opinion matters even less). There are definitely some points in the book where you can tell it’s a translation. My favourite was the “and he was up for the Big Journalism Prize” — presumably translated from a named Swedish prize that English readers wouldn’t recognize. But it does read well. I liked the main characters, and the suspense built, making it a real page-turner. However, it’s not for the faint of heart: the crimes involved are vicious and graphic. The sex scenes are plentiful, and the morals are loose. Indeed, if it weren’t for the fact that it was already an international bestseller with lots of publicity, I wouldn’t feel comfortable recommending it: though it was a good murder-mystery novel, it wasn’t spectacular enough for me to want to come out and recommend it in light of the subject matter. If you have a sensitive personality, you may want to give this one a pass, despite the hype.

[Note, the above links are to my affiliate link at Amazon, and at the moment, Game of Thrones is on a pretty good sale. I do get a small kick-back if you buy via that link, but it doesn’t affect my enthusiasm for the books.]

A site I hadn’t seen before, Metal Augmentor put up a thorough look into some of the background issues with Sino-Forest, including the confusing terminology. Indeed, quite aside from any fraud issues, MA points out that I made one of the mistakes mentioned, over-counting the amount of owned plantations (where seedlings are planted and money is made by patience and silviculture) based on the company’s confusing use of terminology.

I was just having an off-line discussion about the Sino-Forest issue, and how the MW report had at least a few mistakes, while the company’s response was lacklustre, so it was hard to say what the truth of the matter was. Though I had a passing interest in the many hunters of Chinese frauds, and had heard of MW before the scandal broke, MW wasn’t one of my most esteemed detectives. The person I was talking to was interested in making a small bet on SF, and I said that if one were in a gambling mood, perhaps this could be the one sketchy-looking company that was indeed real. But, I warned, while I might bet on MW getting this one wrong, I wouldn’t bet against Hempton. Wouldn’t you know it, the next bloody day Bronte Capital has weighed in on the side of shenanigans in a series of posts. John says:

“As for analysis of the accounts – the Sino Forest accounts contain enough red-flags to make any eagle-eyed observer cautious. I am sympathetic to making an investment without looking at the accounts at all because limited time and shortcuts often make that an efficient way of behaving. […] But if some analyst really did a detailed look at the accounts and did not spot the red-flags then they are incompetent. For that I have no sympathy at all.”

Well, I guess I have to publicly admit I’m incompetent. I’m an amateur and lack experience, granted. But before I bought I was looking (albeit with a much more limited time budget than a full-time professional fund manager) specifically for signs of fraud. I’ve been up on my game enough in the past to avoid a few doozies (though never gone short), and to follow along with the analysis of some other alleged frauds, but totally missed this one. Indeed, I still can’t see it as clearly in TRE as these guys allege. I’m merely confused, as I was before, which is how I ended up making an investment based on a weak heuristic.

This post also happens to come at basically the half-way point of the year, so I figure I’d update my spreadsheets and see how I was doing. I thought it would be absolutely dismal: I took a bath on Sino-Forest, and lost nearly as much on TEPCO. I’ve been holding Yellow Media since 2008, and it’s had yet another bad year — down some 60% (not including dividend). Was it really just a few months ago (when it was trading around $4.50) that I said you couldn’t get much more contrarian sentiment? Yikes. Though I mercifully kept my positions in TRE and TEPCO small, I can’t say the same for YLO, so I figured that those three big losers would pretty much sink me here.

Indeed, I did underperform my personal benchmark (50/50 TSX/S&P500) by a noticeable margin, but not as badly as I feared. I was saved by a few good moves: Canadian Helicopters was up ~50%, TD was up 10% YTD, and up 16% at one point (where I sold half so locked in some profit). A few other positions had modest returns, in particular Canexus and Veresen — though the moves weren’t big, the positions were (and I’ve since trimmed them both down, trying to not let any one position get over 10% of the portfolio). My Freddie Mac preferred shares are up nearly four-fold in the last six months, but since it began as a small position and was down 65% in the first place, that big percentage gain was small in absolute terms, and just barely balances one of the TRE/TEPCO losses. Overall I’m down less than 1%, compared to the TSX up about 1%, and the S&P500 up about 5% in CAD (I’ve estimated the dividend yield since I don’t know of a good site for total returns stats, though in the past I took the time to create a model portfolio with XIC & XSP). So a miss of about 3.5%. Not terrible for having made some truly godawful investment decisions recently, but not the kind of performance I can keep up if I’m going to continue attempting active management. Unfortunately I don’t see any catalysts for outperformance through the rest of the year, so I don’t think I’ll be making it up this year.

One thing I did do right was my rabbit analogy for the way the TFSA works. Someone even called it “perfect” in a recent CMF thread, which is a nice ego boost :)

Oh, and finally: I have a defense date! Just another month and a half, and I get to run the Gauntlet of Science and prove myself a true doctor. Or you know, fail miserably or whatever. Either way, it’ll be done before the end of August!

What a crazy couple of weeks. This last week in particular featured back-to-back all-nighters as I tried to finish my thesis revisions. The crazy thing is the revisions weren’t even that bad, I just have enough trouble writing the fluffy bits that go around the sciency bits the first time around, and re-writing them seems to completely drain me. Since this week was largely fuelled by my discovery of delicious home-made onion rings, I’m afraid to even step on a scale to see where I’m at now. Anyway, it’s over, the latest revised version is out of my hands, and I just slept 24 of the last 30 hours; feeling much better now. I’ve got the penultimate exam to study for now, and hopefully a week of working out to make up for the weeks featuring dozens of hours in a chair per day…

On with the links!

The Neurologica blog has a few neat posts, including a follow-up to the CBC Marketplace report on homeopathy. A homeopathy advocate complained to the CBC, but their review found that the report was fair. “The achievement of balance does not mean mathematical equivalence; rather, the important principle is that different views are, in the words of the CBC policy, “reflected respectfully.” Also, a post about human echolocation.

A pair of articles in the Financial Post on condo speculators and using the housing bubble to sell out and fulfill your dreams. I know a few people my parents’ age who realized in the last few years that they could sell their house and retire off the proceeds if they moved even just a little ways outside the GTA. I’m surprised it hasn’t been more.

Google’s using its search data to discover interesting trends, such as uncovering the spread of flu-like symptoms. There are a lot of other possibilities for the correlation of search terms with real-life events, like getting a leading indicator of unemployment.

The CDC has created a clever page to use the threat of a zombie plague to inspire disaster readiness for more mundane emergencies.

Via BoingBoing, an interesting case in Texas on radiation in the drinking water, and the implications of margin-of-error. On the one hand, I can see the rationale for using the most liberal interpretation of the stats: who wants to tell a bunch of Texans that there’s slightly elevated levels of radioactivity in their drinking water (less than the margin-of-error above the limit), especially if the regulatory thresholds are set conservatively anyway. But, it’s not proper to consistently subtract the margin of error like they did. That’s the most optimistic interpretation of the data, but not actually the correct one. If it was a one-off reading, you could perhaps make that argument, but when it consistently happens then no, you know that the “true” value you’re measuring is indeed above the threshold.

Germany has decided to shut down nuclear power by 2022. I find that surprising: that’s a big shift to make in a deceptively short time period. According to the article, 23% of Germany’s power came from nuclear prior to the Japanese tsunami. In the wake of the fear that followed, Germany promptly shut down its 7 oldest reactors, and I’m surprised to see that sentiment following on for so long to have this much impact even on their newer reactors. 23% is a lot of power to have to find elsewhere. For comparison, roughly 8 years ago Ontario vowed to shut down our coal plants within 5 years, and it was a challenging goal to meet — indeed, the goalpost was moved to 10 years down the road pretty quickly (2014). We’re pretty close here in 2011: 8 of 19 units have been shut down, and the remainder are seeing less utilization. And coal was just about 20% of our energy mix before the phase-out. So the Germans have some pain ahead of them, and some hard choices: what on earth are they going to use to replace that much baseload power? Or will they have to pick one fifth of their things to turn off when the brownouts and rolling blackouts threaten?

Today is the 50th anniversary of JFK’s speech at Rice.

My favourite part of the speech — I’m sure the favourite of many — is in the title. There are many situations where those words apply, from choosing worthwhile courses over electives with easy marks, to bike routes for your daily work-out.

My second-favourite part:

We have had our failures, but so have others, even if they do not admit them.

My neighbour, who lives in the other half of the duplex here, moved out a few days ago. He left a bag of garbage on the front porch. I don’t know what happened to his garbage can (I’m 90% certain the landlord left a can with a locking lid specifically to deter the raccoons for his half), but bags are simply not an acceptable container for food waste in this area, especially not in the summer. So of course, now I’ve got a raccoon outside my front door, frolicking in half a loaf of stale bread. I tried to shoo him away, but apparently I’m not terribly frightening on the other side of the glass. He’d only run as far away as the bottom of the steps, and be back in less than a minute. I don’t really want to risk opening the door to become more menacing, in case I’m not.

So I decided to get creative and try deterring him with my laser pointer. I banged on the door and shooed him off the porch to the steps, then as he was about to put a paw down on the top step, started waving the laser dot in front of him. He seemed to bug out the first time, afraid the porch was protected by an evil glowing raccoon-demon-equivalent or something, and after the second time he went around the side and came across the railing. There, I spun the dot around right where he was planning to land, which stopped him 4 or 5 times from jumping down. But I guess he’s hungry — and he already knows that garbage has food in it — so the little light bug couldn’t keep him off for long. I kept playing with the laser in the hopes that he’d get distracted and chase it like a cat. That’d be fun for me, and also keep him from making more of a mess of the garbage. Unfortunately, though I’ve seen that behaviour on youtube, he quickly lost interest in the laser dot once he figured out it wasn’t a serious threat to his dinner.

Garth Turner is a very polarizing figure. He was a controversial politician, and was one of the early voices to raise a warning about a Canadian housing bubble, getting a book and blog out of the deal. Indeed, I have to credit him for first bringing the idea to my attention; of course, I went out and did my own homework to come to the same conclusion, a step that is not to be skipped. I read his blog Greater Fool pretty much every day, but yet I don’t have it linked in the blog roll on the sidebar. That’s because it’s hard to recommend him: he’s crass, vain, evasive at times, confrontational at others. I read it, but it’s certainly not for everyone. Often, I find myself providing Garth-to-English translations as he glosses over crucial details or makes up his own slang that accumulates after years of daily posts.

Garth is not a personal financial blogger, out to rationally lay out the details of a plan and analyze the ways to optimize it. He’s not some student out to cheerfully converse and debate with the denizens of the internet all hours of the night. He provides brief glimpses of possibilities, and then tells people to go get a qualified financial advisor for details. When pressed, he’s fond of various terse two-word answers: get lost, get real, grow up, come on. I remember about two years ago he had one of those open forum sessions with the Globe where readers send in questions and he answers for an hour and the whole transcript goes up on their website, and he answered someone’s question with a two-word brush-off and I was appalled: it’s one thing to do that on your own site, quite another in a Q&A with the Globe!

But that’s just who Garth is. He talks about the housing situation in emotional terms, and provides some good anecdotes from his readers, but he’s not a details guy. So earlier this week Garth suggested to one reader that he borrow against his paid-off house to invest in a “balanced portfolio (my fav is 40% fixed, 60% growth) making 8% or so […] This is called diversification. It mitigates against having the bulk of your net worth in one asset alone. […] And it’s something nine in ten Canadians would never dream of doing. Which is why only one in a hundred of us have a net worth of a million, while seven in ten own houses.”

Others jumped on this particular advice, the most prominent being Canadian Capitalist saying “This advice is so bad that I don’t even know where to begin.” In the comments, Michael James (who by now you show all recognize as another PF blogger I link to a lot and have great respect for) said: “I’m tired of hearing recommendations to leverage a house for “diversification”. After borrowing against a home to invest in other assets, the home represents exactly the same percentage of net worth that it represented before borrowing. Changes in the home’s value affect net worth in exactly the same proportions whether you have a mortgage or not. The only difference from a risk point of view is the added risk from the new assets. This may or may not be a good strategy, but it is not diversification in the sense of reducing risk.”

And that’s well said. It’s not diversification in the usual sense of reducing risk: borrowing against the house is not the same as selling it, you still have exposure to it if the price goes down. But, as he says, you do get exposure to the new assets, which is part way towards diversification (but with increasing risk because you’re leveraging to do it). I don’t think it’s bad advice in Al’s case, but the issues of leverage — and other details like what a balanced portfolio should be and the issue of whether it makes sense to hold bonds when borrowing to invest — are lacking from Garth’s post. It’s harsh, but not entirely unwarranted criticism.

Then in today’s post, Garth comes out swinging: “Which brings me to this. It’s a column trashing me on the wimpy MoneySense site, written by a young father of three brave enough to be anonymous.”

That brings up a very good question of what it means to be anonymous these days. Is Lady Gaga anonymous? Madonna, Mark Twain, Prince, Robin Hobb? Canadian Capitalist, first off, isn’t anonymous: Ram has had several articles written about him (which are not hard to find on his website), his actual face is his forum avatar. But even if that weren’t the case, is “Canadian Capitalist” anonymous, in this sense? Is “Potato”? Sure, we don’t use our real names, but how much would our “real names” mean, anyway? There’s definitely a distinction between the fleeting anonymity of user213 leaving a comment on Garth’s blog with a dummy email address and then disappearing into the ether never to be seen again, and the pseudo-anonymity of CC or Potato, Gabe or Tycho, Yahtzee: established personas on the intertubes, with consistent messages, accountability (at least as much as if I was blogging with my real name), the ability to be contacted and engaged in dialog with. I publish under both my real name and Potato, and I daresay I’m better known and more widely read as Potato, with a longer track record (going on what, 13 years now of BbtP?). I would be more anonymous if I used my real name.

A name-brand source of information, opinion, ranting, and hilarity.

So I don’t think the “brave enough to be anonymous” ad hominen is warranted or fair. The internet seems to be growing up and moving away from pseudo-anonymity, but it’s still there (just as it is in “real” publishing) and I think it’s important to distinguish between actual anonymity and a nom de plume.

As for the debate itself, I think by now you can see I’m somewhere in the middle: I think that with what we know about Al and his interest in leverage and diversification, borrowing against his home to invest is perhaps a good plan for him (though if he wants to move up and is concerned about a real estate correction, selling and renting a larger place would be an even better plan). Expecting 8% on a diversified portfolio is maybe a little optimistic (and past returns are no guarantee of future outcome), being able to secure a HELOC at 3% will require some good negotiating skills, and it may not make sense to include the safer spectrum of bonds while also borrowing at the same time, but nothing is out of the ballpark there. However, Garth didn’t fully discuss the risks, the limits of the diversification, what he meant by balanced portfolio, etc. Greater Fool is where you go to get the kernel of an idea, an emotional appeal about not shunning risky assets entirely for the illusory safety of a house, or a fun cautionary tale about a couple with ridiculous exposure to real estate. It’s not the place for a detailed financial plan and a rational discussion of the trade-offs involved.

And a final note: I’m generally slightly opposed to leverage, and the bizarre case of holding low-yield fixed income like a savings account or government bonds while also having debt. But it can make sense in some cases. For instance, recently one poster at CMF wanted to try to find a way to maximize her mortgage over-payments to finish it off, but noted that income could be unpredictable and needed a long amortization just in case. To me, that’s an excellent case where it’s safer to maintain the leverage of the mortgage and keep some money in a savings account: if you do run into a rough patch, it’s very difficult to get that overpayment back, you still have to make your regular mortgage payments to keep from facing foreclosure, and you can’t eat your principal. An emergency fund, even if it costs you a bit in interest spread, can be a very handy thing (and in this particular case, she was looking for an open mortgage to really go nuts with the prepayments, but a closed mortgage is so much cheaper that to keep the emergency fund and just pay it at the end wouldn’t cost anything).