Blessed by the Potato

It is an eternal debate: do we live for today or save for the future? Some kind of balance needs to be found, as living a hedonistic, spendthrift lifestyle only to end up spending your autumn years on government assistance is no good, but neither is playing the miser through your younger, healthier years just to die and leave it all behind.

I always thought I managed to walk this line fairly well: I work hard and save for the future, with a plan to retire earlier than 65 (after all, who knows what kind of shape I’ll be in by 60), but still enjoy the moment. I’m aware of the power of compounding, and have internalized the math that saving & investing a dollar today means I can spend three in retirement. Inversing that, taking a year off from work now might mean I’d have to tack on 3-5 more working years at the end of my career before retiring.

That’s pretty simple logic on the opportunity cost of taking time off — and it gets even worse when you consider the potential damage of a gap to my career. So I’ve never really considered taking time off without a damned good reason to. Heck, even on my vacations I tend to find side projects to work on, even if they’re not the most profitable post hoc (e.g., book). But now that Blueberry is on the scene I start to wonder.

I missed my daughter’s first steps today. That’s not such a surprise, as even Wayfare has missed some of her firsts (she seems to show off for grandma), and I’m at work all day. Yet it kind of puts a sharp focus on something that’s really been bugging me about my job: I spend so much time commuting and working that I hardly see the whole reason I’m going through the whole mess. A few months ago when she was into her “stranger danger” phase, I went a full week without seeing her, and when I finally did she freaked out and cried because she didn’t recognize her dad. So missing her first steps is a moment that does make me — for perhaps the first time — step back and seriously consider taking some time off from my career.

It’s also a bit of a timely issue because Wayfare’s mat leave has run its course, and yet Blueberry is still too young for daycare, leaving us searching for childcare options. It is heart-wrenching to even think of handing over our little girl to some stranger to watch over, yet it is also difficult to get by on just one income, particularly in this city. I know eventually she will have to go off to spend more time being raised by strangers than with us — at school if not daycare — but it doesn’t stop me from wondering if taking a year off now and draining my savings might be totally worth it. It sure seems nicer to spend some time at home taking care of my baby than to be able to take more time off at the end of my career, when the house will be cold and empty.

And this is the age when I want to be there for her: at 12 she won’t want to see “Da”, she’ll be at school for most of the day and then want to disappear into her room with a book or video/holo game when she’s not. Right now she’s thrilled to have me around, and the world is a magical wonderful place full of adventure and discovery. I want to be there to see her point to a bird singing in a tree and exclaim “Bir!” or to a passing jet and do the same*. I want to watch her dig through her bag of toys until she finds a match for whatever’s already in her hand, and then merrily bang the two similar items together. When she’s a teenager she’ll likely just infuriate me if I see her at all.

But the cold math is the same: Wayfare and I make more than a nanny or daycare service, so Blueberry goes off to the strangers’ arms while we work to keep our heads above water in this crazy world.

An alternative to quitting or taking a full leave of absence — indeed my preferred solution — would be part-time work: ideally I’d work 3-4 days a week, Wayfare would work 2-4, and with one of us having the flexibility to work weekends plus occasional childcare from the grandparents we’d be set. But unfortunately it’s tough to find part-time work — I doubt I’d be able to swing it at my current job, the HR system isn’t really set up for it. Indeed, a 9-day bi-weekly work option (adding ~1 hr to each day and then taking a day off every other week) is a recent experiment there, and that plan’s only around for the summer. Plus there’s too much for me to do to just cut back (though they could almost use another 0.5-0.8 FTE, so perhaps hiring a full-time person and dropping me down to 4 days a week would work for everyone if only the money in the budget could be found).

Health insurance is another hurdle: I get it, Wayfare doesn’t, so it made and continues to make some kind of sense for me to try to keep a stable full-time job while she gets to take the mat/pat leave and spend all the time with Blueberry, even though she’s actually the higher-earner in the family. The value of group insurance for someone so sickly nearly covers the spread in gross pay.

Taking time off would be an easier decision if I had more freelance experience and could use that as essentially a part-time career. Part of what makes me consider it so closely is that I do have some margin of safety in my planning: pushing a planned retirement age from say 60 to 65 is not so bad, not like moving it from 65 to 70 — it’s not like I’d be cutting things so close as to be taking major risks on my ability to work later in life (health, etc.).

Though really as I get more comfortable (even as I write this out) with the idea of sacrificing disposable income and retirement savings to spend time with Blueberry, the big remaining fear is the gap on my resume. It took months to find a decent non-academic job in the first place, and that included accepting the dreaded subway commute. It did kind of backfire on me: part of the reason I went for a non-academic job was to have more stable hours to spend time with my family, and here I am a year later lamenting how little time I manage to spend with my family. Part was for better (short-term) pay: it would have been a lot tighter on a post-doc’s salary, yet here I am considering throwing the financial plan out the window for shits and giggles (literally). With such a gap on my CV and publication record I doubt I would have the option of trying to pursue an academic career now — will it be the same for a non-academic career after a year of being a homemaker?

I just don’t know what to do. I suspect that all my considering and weighing will lead me back to the default choice: keep working, let the woman take the mat/pat leave, and after that let her work part time with hired help to cover the rest of the childcare. It’s kind of sad, but I don’t really see another path…

* – It is apparently babies who confuse birds, planes, and Superman.

Behold bath toys:

On the right is the ducky I have (and let us not now get into the issue of why a grown man with a PhD has a rubber duckie of his very own). It is an “evil duckie”, yes, but it has been built from the traditional, recognizable form. On the left is a new duckie that Blueberry has.

I do not understand this duckie.

Frankly looking at this thing just freaks me out. It sits there on the bathroom counter at night, watching me brush my teeth.

The wrongness of it gets under my skin and gives me the willies. The strange spiral markings, the hyper-dilated pupils, the weirdly-shaped beak, the centre-line seam, and the tiny head positioned in the middle of its body, with just a bit of off-kilter attitude evokes a sense of being amongst the alien other that the red tint and horns of mine do not come close to doing. There is a part of me that does not want this evil thing to be anywhere near my child, though her abstract amoeba bath toy is totally cool with my subconscious as would be the red duckie with horns (which is supposed to evoke evil).

This is not the only toy of hers that I find to be creepy — just the other day I came home to find a creepy stuffed horse in my bed, and wondered if the baby mafia was out to get me — but this is the one that turns my stomach the most.

I’ve mentioned speculative holding before as something that underlies a bubble, but haven’t really gone into any depth on the subject. Basically, it’s a speculative behaviour that isn’t as obviously speculative as buying something purely in the hopes of future appreciation: instead you hold something you may have bought for other reasons on that hope.

One of the more typical examples is to hold on to an old property to rent out after you buy a new place to live in. The purchase you make at the time may not be speculative, but often the decision to hold on to excess property is — if you weren’t counting on large future gains, you would have sold off the old place, rather than take the risk and hassle of becoming a landlord.

Less obvious is buying preconstruction while owning. Even if you plan to sell as soon as the new place is finished, you have double the real estate exposure for the duration of the construction, which could be a few years. When people are advised not to time the market, that means they should be selling a their old place as soon as they buy a new one — even if the new one isn’t built yet — in order to limit risk. Many may chafe at that advice, in which case they shouldn’t speculate in the preconstruction market unless they have the capacity to take on the risk, and instead shop around for homes that are already built.

One of the more subtle effects on supply is the decision of whether to buy first and then sell, or go the other way around. Deciding to buy first then sell has a small effect on supply and is like a minor version of buying preconstruction (for a time you are exposed to double the risk). It is a small effect, and the market adapts to whatever way is accepted as the norm (or even some mixture of methods). But when the shift happens from one scheme to another en masse, it can sway the supply. Take the case where everyone considers that the way to transact in real estate is to buy your new place first, then go out and list the old one. If then everyone changes their mind, perhaps deciding that the market is softening and the old way was too risky, and sells first, it could shift months of inventory over all at once: suddenly new houses are coming on the market while inventory sits. If “the” way to transact is different in a “buyers'” market than in a “sellers'” market, then once the shift is proclaimed, it could lead to a short-term swing in inventory and put pressure on prices.

I think one of the largest effects of speculative holding is the shift that occurs in the supply curve under the influence of rising prices, the holding on in the face of steady price increases. Imagine if someone comes out of the blue and offers you $1M for the house you paid $500k for just a few years before. Many of you would be all over that deal, telling your neighbours about it who would rush out to list their houses and take advantage of the opportunity. You’d think the buyer was nuts and that it was a one-time, not-to-be-missed opportunity. Hey, you could go move to the next town over (where houses were still $500k) and practically retire on that kind of money. But if you got to the $1M offer via a succession of offers: one at $550k that you turned down, then again a bit later the buyer comes back to you offering $600k, then again a few months later with an offer of $650k… by the time you got to $1M in a few years, you would have been expecting that price, and possibly even projecting out to the $1.2M offer you were sure was in the works for you. The price itself was still just as insane, just as much of a windfall, but because of the path to get there you’re less likely to actually put your house on the market and take it. You were inoculated against the crazy, so it seemed right.

And finally, the incarnation of speculative holding that made me think to write this post: taking the house off the market for “when it recovers in the spring”. Sales in Toronto and Vancouver dropped double-digit percentages over the past year, to the lowest levels since the financial crisis. Prices barely budged, but were down a bit in many sectors. Thus it’s quite common to hear on the subway, in the restaurants, the newspaper articles and the chat boards that famous idea of trying to relist later when the market looks better. That is perhaps the baldest speculative holding of all: the person wants to sell, but will hold on in the hopes of higher prices later.

There is a legitimate reaction of fear and disgust when a dividend-paying company cuts their payout. The cut can often just be the first of a series, and after all, companies that are growing with steady profitability don’t need to cut so it must be a clear sign of trouble. However it’s far from a certain sign: sure, Priszm and Yellow Pages went through a series of cuts before becoming worthless, and investors who bailed at the first cut (or earlier) were in the right — there was not just one cockroach. On the other hand, many companies have a clear plan and future path to follow with a dividend cut, and an over-reaction to the news can be a great buying opportunity.

Superior Plus was recently featured in the Globe and Mail with a very bullish article, yet just after cutting their payout nobody loved it despite the attractive price (indeed, it’s almost doubled from that point). The business was not growing, but it was not crashing at the time of the cut, either. The problem had been too much debt taken on in the past, and no wiggle room with a 100% payout ratio to get it paid off. By slicing the dividend in half, SPB laid out a plan to start paying that debt off in a meaningful way. This was in my opinion the wiser use of their cash, especially given the interest rates they had to pay on the debt. It shouldn’t have been the first cut of many — just a one-off cut, that would likely last for five years or so before going back up. Investors liked the company at $10 before the cut, then even though the underlying business hadn’t changed, were only willing to pay $6 for it after the cut (and now, back to $12).

Similarly, HR.UN had to cut their dividend when capital markets froze up in 2008 and they were caught with their pants down and a half-finished building. They used the cashflow they would have given to unitholders to fund the construction, with a plan to reinstate the dividend at the conclusion of the project. Partly due to this, and partly due to general market uneasiness, there was a point at which you could have bought H&R for roughly a quarter of where it is today. Even if you factor in that the overall market was down roughly 50% at the time, H&R had shed an additional $3/unit. So there might be some value to looking into companies that have recently cut their dividends in case there is an over-correction in the price.

I think Extendicare might fall into this category now. I bought some a few months ago on the thesis that their payout ratio was near the edge: they had refinanced some debt into low-interest long-term form, which is good, but profitability concerns with Medicare cuts left them dancing around the 100% payout mark. I figured they could go either way on a cut, but it would likely be shallow (to get them down to an 80% payout ratio), and that the US and its insurers were likely done trying to squeeze care homes for additional savings. Now clearly I was wrong on the depth of the cut, and possibly on the rounds of cost-cutting coming to an end, but I don’t think this is just the first of many: in the conference call they say that basically they can now fund the payout entirely from the more stable Canadian operations. That should make EXE a pretty decent buy at these levels (<$6). I wouldn’t be too surprised if 2 years from now it’s back at $8 and that‘s when all the bulls come out of the woodwork to exclaim in the press about what a great buy it is at that price.

Any other potential over-corrections to look into out there?