Blessed by the Potato

Right up the street here is the Ivey School of Business, which has the Ben Graham Centre for Value Investing. I’ve never been in person, but they do have some good presentations by renowned value investors up on their website.

I like the most recent appearance by Prem Watsa:

“If you ask 10 chemical engineers to design a refinery. If you took the average of their designs, you’d get a pretty good refinery. If you were building a bridge and had civil engineering, or any human activity, and took the consensus, you’d get a good… whatever you were designing. But if you asked 10 oil company analysts for their opinion, and they were all positive on oil, you would not want to buy an oil stock: you’d be very disappointed. Because their opinions are already in the stock market. If one of them changes his mind, the prices come down. All of what you do in human activity, in terms of going with the consensus, does not work in investing; it works just the opposite.” [Transcribed quickly, not exact]

Just because you’re a financial blogger doesn’t necessarily mean you’re purely rational with money: Krystal from the very popular and successful Give Me Back My Five Bucks just bought a townhouse (in Vancouver at 260X rent!!), and had a 20% down payment ready to go, but then decided to pay off her 0% car loan and had to pay CMHC insurance with the smaller downpayment. As one commenter put it: she just turned a 0% loan into a 3.75% one, and paid $5k for the privilege. I’m of course more concerned by the extreme price: her own spreadsheet of costs shows that she’s spending about $200 more per month to own instead of rent, and that’s with an interest rate below 4% — what’ll happen in 5 years at renewal?

Similarly, Echo grapples with the decision of whether to take an offer of 3% below ask on his house, or turn it down and hope for more, putting at risk his ability to close on the next house (that’s already lined up). In all fairness, it is a very tough decision, and for such large amounts, a few percent here or there (indeed, if houses typically go for 1-2% under asking as he suggests in the comments it may be only a percent) can be serious money: up to $8k in his case. But I think of equities a lot, and there, a 1-3% move is just a rough day, nothing to go changing plans over.

Mike at Money Smarts gives us a walkthrough on how to optimize your PriceLine bids.

Patrick describes some of the ridiculous reversals of causation spouted by realtors. I also like the comparison at the beginning: high prices in anything but shelter are met by outrage.

Larry MacDonald questions some housing bear logic in a Canadian Business Magazine article. As you can guess, I disagree. In particular, rent control largely doesn’t distort the price-to-rent metrics in Ontario because rent control goes away upon vacancy (and the rental amounts I use are taken from listings). All it does is strengthen the case for renting when the price-to-rent gets out of whack because you don’t need to worry too much about that measure correcting via skyrocketing rents (vs falling prices). “I must confess to feeling somewhat dismayed at hearing others trash what is one of the most important components of my and most other Canadians’ net worth.” That “most important” part is where some of my dismay comes from: real estate is too much of the balance sheet for too many Canadians these days. It’s not sacred, and it’s not risk-free. He then mentions the affordability indicator is not very out-of-line. Unfortunately, affordability indicators are to a large extent interest-rate indicators, and yes, interest rates are low. Will they stay low? Is that a bet you want to lock-into for years to come? Larry suggests that they will stay low, but that argument is based on “the Bank of Canada likely will only allow rates to rise as long as the economic recovery is progressing” i.e.: that rates will stay low as long as economic growth is poor and we’re in a near-recession state. But that contradicts the other part about previous corrections occurring in periods of higher unemployment: if our economic growth remains poor enough to keep rates low, we can’t really count on a strong economy to counter the high price-to-rent readings. Plus I highly recommend taking a look at Barry Ritholtz’s trashing of the US affordability measures: what good is a measure that, even in the midst of one of the worst housing bubbles ever, never indicated that there was an affordability problem?

A Wired sciblog entry on a measles outbreak in the US, with some requisite preaching about getting immunized.

Just days after deciding to continue to pass on RIM, it lowered guidance and plunged 14%. I’ll be watching it a little more closely now to see if sentiment gets negative enough for it to become truly cheap.

Penny Arcade linked to Good Old Games today: a direct download service offering old games at reasonable prices with no DRM. They also include “working on Windows” as one of their selling points, which is tempting: I haven’t put much effort into trying to make it work, but I can’t seem to get my MOO2 to work on Win7, so that could be tempting.

And finally a question: do you have any tips for cheap science demos for high school students in electricity? I may be doing an outreach activity in a few weeks…

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).

It’s tax time again, so discussions about the tax system are bound to pop up, indeed, here’s a thread on CMF. This time last year I covered the big problem with the flat tax system: that it severely compromised progressivity/fairness for simplicity, and that unless it also dealt with the other bits of the tax system, it wouldn’t really help the complexity issue. But, the people who espouse the flat tax idea do generally share a desire to simplify* the tax system, which I can get behind.

Indeed, I think three guiding principles for our tax system should be: effectiveness, fairness, and simplicity. Simplicity, in my opinion, should come last: it’s nice to have, and helps ensure fairness if people can actually wrap their heads around how it all works, but we should only try to make it as simple as possible and no simpler.

Where to start? Well, first off, look at the problem. As I’ve said, the problem is not that we have tax brackets.

My tax return is 29 pages, and most of that is just focused on figuring out what my “taxable income” is to begin with — later splitting that up into brackets is trivial. And the fairness it adds is certainly worth the tiny complexity there. But the length on the page belies some of the more complex issues, for example, Wayfare bought a computer for her self-employment business, and there are at least four different categories for claiming depreciation for a computer. There are two different ways to enter rent as an expense, depending on whether you rent an office/commercial space for your business, or are claiming a portion of your home rent. Do these fine distinctions really matter that much in the end? Then there are smaller issues that add to the complexity needlessly: as a student, I get a T2202A form from my university, and enter in the amount of “eligible” tuition I paid from there and the number of months I was enrolled, and then do two more calculations: multiply the number of months by $400 for the “education amount” and again by $65 for the “textbook amount”. They’re not hard calculations, but a) why couldn’t I just multiply once by $465, and b) why couldn’t the university do that and put it on the T2202A so I just have to put in one number to the return itself? I don’t actually mind, since the computer does the heavy lifting these days anyway, but it does go to show that the tax return was not designed or closely reviewed with simplicity of completion in mind.

Plus the government seems to like making the return more complicated by needlessly throwing things on there that they could be funding directly. Like the transit pass tax credit: wouldn’t it be just as easy to directly subsidize the transit systems? This ties into some general psychology and misunderstandings out there: I know a lot of people who have a bizarre hatred of taxes. That desire to save on taxes can help drive behaviour far beyond the economic incentive of the dollar-value saved. Look at the home renovation tax credit last year: how many people scrambled to get work done to take advantage of the tax credit? How many people would have done the same if the government had directly subsidized things by <13%? Or better yet: how many people happily engage in money-losing activities for a tax break? I’ve even seen “gurus” on TV recommend buying a money-losing “investment” condo because the money lost gives you a tax deduction! So despite the complexity, it appears as though our array of tax credits does create behaviour-changing incentives that cost the government less than direct spending might.

So, we have many different issues leading to complex/difficult tax returns:

1. Inefficient form design (of the form multiply X by 400, then, multiply X by 65, then, add those two). Very easily fixed with computerization (letting the tax program handle the multiple steps), or shifting some of the burden around to providers of forms, or just fixing the tax return design in the first place.

2. Inefficient/confusing segmentation of expense classes, often for arbitrary reasons (computer equipment purchased on certain dates are treated differently, “network equipment” is different again from computers, cars over $30k are different from cars under $30k, buildings purchased before 1987 are treated differently from those purchased after, which are again a different beast if made of frame or stucco-on-frame or corrugated metal… expensing a portion of the rent you pay for your home to have a home office is different than expensing rent for an office office).

3. Confusing wording (“Include general purpose electronic data processing equipment (commonly called computer hardware)” vs “computers and electronic equipment”). This may go away if expense classes go down to 2-3-4 (in my mind, buildings vs all other equipment — I don’t really see how it matters that much whether your filing cabinet or car or computer are depreciated on different timescales, just pick a few increments of years, like 3, 5, 7, 10, 50 and run with it).

4. Different treatment of income from different sources. I understand why dividends are taxed more favourably than regular income, and I agree with it, but it does add complexity — especially with “eligible” and “ineligible” dividends and the whole gross-up plus credit issue. Same for capital gains – tracking ACB (especially with RoC distributions) and carry-forward losses can get tough over the years; though making capital gains tax free would blow the Fraser Institute’s minds.

5. Special deductions: everything from transit passes to your kid’s fitness programs or your home renovation gets a tax credit these days, and each comes with receipts to keep. Perhaps some of these aren’t worth bothering with.

6. Special treatment for sectors: I said two posts ago that “drilling for oil and gas is its own reward”, yet there are special (and confusing) tax breaks for flow-through shares and other activity. Likewise, farming, forestry, fishing, and I believe “Quebec” have their own set of rules and forms, expenses and incentives.

7. Stuff for low income people. There are a lot of different social programs out there to support low-income Canadians, and even more for seniors. GST/HST rebates, property tax rebates (though that’s provincial), GIS for seniors, OAS for seniors, age credits… can this be streamlined?

8. RRSPs. I’m a huge fan of the TFSA – it makes everything so much simpler, there’s much less tracking to do, etc. I think we could just bump up the TFSA room to $20k/yr and do away with RRSPs entirely going forward. No more trying to figure out your tax brackets and deduction/refund, no more losing contribution room when you need to withdraw, no more pesky HBP or LLP, no more confusion over the difference between tax liability and tax withheld on withdrawal. The RRSP is a huge cause of complexity in the average Canadian’s tax return (for those that don’t invest outside of a tax shelter or have self-employment income, it’s pretty much the only amount they have to track year-to-year and carry-forward). But because they’re stricter for long-term savings, they’re better for encouraging average Canadians to save (and also because they come with a refund which people like beyond all rationality). I don’t seriously expect anyone to say we should scrap the RRSP to simplify the system, because there are many people who might not save for the future at all, were it not for the structures of this device. But it does serve as an excellent example of the trade-off between policy and simplicity: it’s complicated, but we can’t very well get rid of it.

9. Labour-sponsored funds. I don’t even really understand fully what they are, but everything I’ve read about them suggests that maybe they shouldn’t exist at all.

10. Carrying expenses. A lot of column space is spent on people discussing how to structure their borrowings so that they become tax deductible (google “Smith Manoeuvre/Maneuver” for example). But why is interest an expense for borrowings at all? Yes, it’s a legitimate cost of making money with leveraged investments, but making it so encourages leverage. After the financial crisis, perhaps the government should be asking itself if that is something it wants to create incentives for. High amounts of leverage lead to wild booms and perverse risk avoidance — find a “safe” thing to invest in, then lever the hell out of it until it yields like a risky investment… but that process invariably turns the safe thing into a risky thing (see: real estate, ABCP, etc). Getting rid of interest/carrying cost deductions would also help simplify the tax return. Though it would create a disconnect between people and corporations, since it would be pretty much impossible to get rid of leverage in the corporate world. Perhaps another example of irreducible complexity.

11. Donations, especially political.

Of course before getting into simplification we need to consider the other guiding principles for a tax system:

Effective: Is enough money raised? If the tax system is used for policy (e.g.: targeted tax credits/deductions), are these effective at what they do (and worth the hit to simplicity)? Is the system actually collecting taxes, or is evasion too easy (cf. Toronto’s vehicle registration tax)?

Fairness: is it fair? Does it meet with the Canadian sensibility of progressiveness, the notion that the poor should pay less and the rich pay more (within limits) because of their means? Does it otherwise tax everyone fairly?

The way I like to think of that one wrt progressivity is that life taxes you on the first bit of income: just meeting your basic needs like food, shelter, etc. The government, which explicitly provides these basic considerations for those in need, shouldn’t be taxing income that would go there. As you get more income, more of it can be spent on wants (including upgrades to shelter/food/security needs) and savings for the future, which means that income is more able to be taxed.

Anyway, simplification is, somewhat ironically, not a simple topic: the tax system is in part as complicated as it is because of all the different competing interests it has to serve.

* – some of them just don’t like the idea of a progressive tax system where the rich pay proportionately more than the poor, so the flat tax is as much about ideology and their idea of what’s fair as it is about eliminating complexity. To some extent, this fits in with the biblical notion of tithing — 10%, no matter what you make. That of course raises many debates from those of us who think about taxes in a progressive way, since at some point (e.g., when you’re trying to feed yourself on a buck a meal or less) you should probably become a recipient of the church/state’s largess, rather than paying into it.

Nothing’s really been jumping out at me in the stock market lately, but RIM and Cisco keep coming into my consciousness as things to look at. Largely because there’s been much wringing of hands and concern that these stocks might be toast, which is sentiment that usually gets my attention, and partly because they’re mentioned in the news and it sticks in my brain.

I did a very quick look at Cisco back in December when it was in the $19-$20 range, and after spending just a few minutes on it, I decided that it wasn’t cheap enough, and made a note to look more deeply at $17. Well, now it’s fallen below $17, so I suppose it’s worth taking a deeper look. Since then the stock price has fallen, and they’ve instated a dividend to finally put the excess cash to use. But the projections for earnings have been flattening out, and while it looks fairly valued to me at this point, I’m not keen enough on it to settle for fair, and will wait to see if it’ll come at a discount later.

RIM has been all over the place the last few years. I have a BlackBerry myself, and though I was not a heavy cell phone user before (a few minutes/month of talk time, and I never did figure out the allure of texting on a numeric keypad), I find that I do use BBM and the web capabilities fairly regularly. I see my mom, who can’t really figure out the mouse on the laptop we got her for xmas, using her BlackBerry to email people, check the weather, and share pictures. It made me a real believer in continued growth of the smartphone sector. Though RIM’s share of the smartphone pie is undoubtedly shrinking as Apple becomes a cult and Android picks up steam, it is still a growing pie on the whole, and the net result is that RIM has still been growing. Yet despite that, they’re trading at only about a P/E of 8, and with a clean balance sheet.

In the medium term, I find it hard to see how their earnings start to shrink rather than grow. Even if they just stay flat from here, that’s a decent valuation. There’s some noise about the PlayBook sucking as it’s released now, but I don’t really care: it’s gravy if it works, and it shouldn’t hurt them as a business if it flops, as long as BB smartphones keep rolling off the lines. One of the big complaints seems to be the size: why go for 7″ when the iPad is 10? I’m not a tablet user, but that seems weird to me: at 10″, why not just go for a netbook and get a keyboard? 7″ seems more appropriate for a portable tablet.

Long-term though, I have worries. As smartphones become commodities, will their profits drop? Will RIM become just another entry in the tech stock history book? Their moat is pretty thin: BBM has a nice network effect, especially in regimes with high per-text-message costs (which BBM sidesteps), and they have a strong reputation for security (which is apparently counting for little as more and more corporations allow iPhone/Android handsets to access their email servers, and foreign governments try to get access to the servers, etc.).

My dad says it’s a broken stock — the company may be fine, but so many (US) analysts are against it that you just can’t touch the stock. Even on good news it goes nowhere. That advice has wisely helped keep me out of RIM when it looked cheap at 10X P/E and 9X P/E… but at some point I’ve got to say come on, how cheap does it have to get? However, I’m still not sure that it’s cheap enough now to take the risk.

Though these names may be coming to mind, that doesn’t mean I have to buy in: there are lots of ways to make money. Even if RIM looks quite undervalued now, if I’m not assured of their long-term (beyond the next 5-years) success, then I can just let the opportunity pass. There will be others — hopefully ones I can understand and project better.

One that just cropped up as a tech company is Indigo Books & Music. Not really a tech company: the Chapters/Indigo/Coles bookstores are the dominant bricks & mortar stores in Canada. They also have the chapters.indigo.ca web store, but physical store revenues dwarf online. And oddly enough, physical store earnings have been growing, while online shrinking the last few years.

What makes them a tech company (at least for the purposes of this post) is that they have a majority ownership of Kobo e-reader (which is both a device, very similar to the Amazon kindle, and also a software reader for the blackberry, ipad, playbook, and other devices). This is the part that’s really getting me interested: the Amazon kindle is the leader of course, but with a few exceptions (unlocked books) you can only buy books for the kindle from Amazon, and can’t move your library from device-to-device. Most books you buy from Amazon for the kindle are locked to it forever. The Kobo is supporting not only Chapters/Indigo but other booksellers as well, including the public libraries (in several countries). AFAIK, you can take your library with you to other platforms (with a software Kobo reader). Indeed, I’ve heard that if you have a Kobo reader and the Kobo smartphone application, it will track your last page read between them, so not only can you copy your library to multiple platforms, you can read on multiple platforms without losing your place (catch a chapter on the subway on your blackberry, then automatically pick up where you left off on the Kobo at home).

Kobo just had a stock issue, diluting Indigo from 58% ownership to 51%. If I’ve done my math right, that values Kobo at over $220M, or about $110M to Indigo, which from what I can see of their balance sheet is “hidden value” — the notes suggest that it’s carried as an asset at only about $4M.

Earnings haven’t been fantastic: they don’t break it down in the quarterly statement, but in the last annual report it was the bricks & mortar stores that had all the growth, and online actually shrank a bit. Should be ~$0.90/sh this year, and I’m assuming that stays fairly stable. That’s a big assumption: the looming threat, the big question is whether Amazon can threaten their bricks & mortar business, and if it hasn’t happened yet (SSSG was positive), they may be fairly safe (though that’s in part because they’ve been moving from just being a bookseller to selling stuff like wrapping paper, gifts, etc). Gift cards are surprisingly profitable for them, and may be a large part of what’s keeping the bricks & mortar business afloat (indeed, basically all their profit seems to come from the x-mas quarter, and the rest of the year is just break-even).

The balance sheet is good: Tangible Book Value (assuming inventory is worth 100%; current assets-total liabilities) of $4.25/share, total stated book value of $11. But, if Kobo is worth another ~$4/share and isn’t recorded in there (total goodwill is only $1/share), then that could make the balance sheet even stronger, and that’s my main source of interest here. As I write this, IDG is $13, so a slight discount to book value in that case, and if Kobo keeps growing as a company in its own right, it might be worth more than IDG in the not-too-distant-future.

The risks: one word sums it up: Amazon. Bookselling is a low-margin business, and they are still essentially a bricks and mortar company, while the world has been moving towards internet-based shopping (either for physical delivery or ebook readers). That does speak poorly that they haven’t managed to take the chapters/indigo brand and turn it into a strong electronic store as well. Another negative point is that there’s been a large amount of insider selling (both President and CFO), over $4M in the last year.

No position in RIM or CSCO, just bought a small position in IDG today.

I’ve mentioned TD’s e-series mutual funds a few times in the past. They’re the darling of the passive investing community: no fees to buy or sell, low $100 minimum transactions, and MERs that are nearly as low as ETFs. Easy tracking of broadly diversified indexes, what more could you ask?

But, that low-cost comes because they are self-directed products. They’re also not really money-makers for TD, so they have basically zero promotion, even within the ranks of TD staff. So yet again I see another case of someone running afoul of this aspect with TD Mutual funds.

So to help everyone out, here’s my little TD e-series tip sheet:

1. (The very most important point) TD Waterhouse discount brokerage is much more on the ball than TD Mutual Funds. Self-execution of transactions goes much more smoothly and obviously over Webbroker. Setting up an account is also much more straightforward: just set up a Waterhouse account (non-registered, TFSA, RRSP, or all 3). Sign up for electronic statements (“e-services”) to save on annual fees if you have < $50k. [As of 2012, this is no longer needed: there are no admin fees for the TFSA] You generally don’t need to bother with that silly little investment profile sheet either: it’s a self-directed account for grown-ups.
2. If you do go with TD Mutual Funds, you can’t just buy e-series funds in your existing Mutual Funds account: you have to “convert” your account by sending in a form.
3. If you do go with TD Mutual Funds, you can’t hold cash in your account: you have to have it set up to buy something when you deposit money (like the money market fund TDB164) and then do a “switch” transaction once the money’s in the account. [Or, do multiple contribution transactions for each fund you wish to buy]
4. For both routes, but especially the TD Mutual Funds route, the reps generally have no idea that e-series funds exist. The branch salesfolks in particular will try to sell you other mutual funds with higher MERs. Bizarrely, they may tell you that an all-equity index isn’t aggressive enough, and suggest a balanced fund instead (??), or all other manner of strangeness. This is a reminder that you’re on your own for transactions. Assisted transactions may land you in the i-series (MER: 0.86%) and not the e-series (MER: 0.32%).
5. A corollary to that is that the branch staff cannot help you with e-series transactions, even transactions that require branch staff assistance: making RRSP withdrawals for the home buyer’s plan (HBP) or lifelong learning plan (LLP) are the prime examples, and the same applies to pulling money out of an RESP. Before going into the branch to make a withdrawal under the HBP/LLP/RESP, you have to “switch” your funds to something like the TD money market fund (TDB164) which the branch staff can then manipulate for you.
6. If you use a TD Mutual Funds account, you will have to have on file an “investor profile”: a questionnaire about your risk tolerance, etc. If you answer anything other than the options that allow for the very riskiest investing, you risk having your transactions denied until you go in-person to fill out a new one that allows such a transaction (or phone in to make an exception).

Once you get past the little eccentricities, TD e-series mutual funds really are the hands-down winners of passive investing, particularly for small portfolios and where you have many transactions through the year (e.g., regular monthly savings). Particularly on the TD Mutual Funds side, there are quite often road-blocks and mix-ups along the way, but every case I’ve heard has ended with TD (eventually) making it right in the end, so have faith. And remember the magic word: Waterhouse.

Though I am a fan, an e-series user, and a shareholder of TD, I don’t get any kickbacks for promoting them.

Interested in do-it-yourself investing with index funds? Then you may be interested in my book, The Value of Simple, which is an introductory guide to the world of investing for Canadians, with a focus on index investing including using TD’s e-series funds as the way to go about it. In 2017 I also launched an online course that goes into much more detail on how to become a do-it-yourself investor, with TD e-series as one of the methods I walk through.