Blessed by the Potato

I love CinemaSins, and when you watch a few episodes you start to pick up on the recurring jokes. One in particular is the Prometheus School of Running Away From Things, when a character runs in a straight line away from something instead of just ducking to the side, with that stupid scene in Prometheus being the ridiculous over-the-top example that gave the meme its name.

After seeing one movie sinned for that recently, I got to thinking that it’s not entirely fair: our flight responses evolved for perils (like wolves, dire rats, and frost spiders) that can turn in a chase, where moving at right angles just gets you eaten faster. So in some cases doing something like that can make sense from the character’s point of view — they shouldn’t do that for many inanimate movie perils, because physics, but it makes sense why they did anyway, because evolutionary psychology. And running at least with a vector component away from the thing does give you a bit more time to get out of the way, so running perpendicular might not be optimal, either.

So I started to write up a little blog post to explore the idea further, maybe do some math to find if there were cases where there was an optimum angle to run away from something, and started by stopping off at TV Tropes to see if they had a list of the times the Prometheus School of Running Away from things appeared. And wouldn’t you know it, they already made that point above (along with other examples like The Temple of Doom). So this is an invitation to just go ahead and get sucked into TV Tropes for a while because they have already covered this ground.

A rare post these days on active investing. Perhaps a good object lesson in why indexing is so much easier.

I just got some mail from Dundee. Apparently with all the Star Wars excitement they wanted to play a little Darth Vader. “I am altering the deal, pray I don’t alter it any further.” Seriously, this is a kick in the pants for the series 4 preferred shareholders. It’s out of left field, too, which makes me wonder how bad things are behind the scenes that they need to pull these shenanigans.

A step back for some context: Dundee Corp. is a large holding company. They have a number of preferred share classes, including this weirdo series 4 that trades under the symbol DC.PR.C, which is one of those rare cases with a maturity date the shareholder can stick to: in June 2016, you could (before this proposed change) make the company buy it back for you at the face value of $17.84. I got the idea from Nelson and Divestor, and watched it for a while, and one week it was available at $17.10. I had no other ideas for some cash in my active portfolio (in large part because I’ve had no time to do any research), and thought it was a good place to basically park some cash for a few months and get a ~8% return (which would be even better annualized because it’s not a full year until June 2016).

Well, here comes Dundee saying they don’t want to have to commit the cash to redeeming those preferreds. They had a number of options in that case, including creating a new class of preferreds, and incentivizing series 4 holders to roll over into those early rather than taking cash in June. But instead they set up this weird forced roll-over to try to catch everyone up, and claim they have the support of many holders to push it through.

And it’s bullshit. Sascha at Divestor has already gone in to how the scheme does not adequately pay the investors for the increased risk of holding these for an additional three years (as you can plainly see by the ~15% plunge in price), and how scummy it is that so much of the consent fee goes to the intermediaries rather than the holders.

But right on page one is the thing that made my blood boil and also made me wonder if they were in so much shit that they needed every last dollar: the deal will convert your old series 4 (worth $17.84 in 2016) into a shiny new series 5 preferred (worth $25.00 in 2019), at a conversion rate of 0.7136 — so far the math works out. But then they added the kicker: any fractional shares you would be owed of series 5 will be forfeit. It’s not big bucks, but the proper thing to do would be to pay out the fractional shares (or even pay out any amount that didn’t make a board lot of 100 series 5 preferreds). It’s just so obviously unfair and petty that I can’t believe they went there. I personally hold 200 shares of series 4, so if this goes through I’m going to have those fairly convert to 142.72 shares of series 5, but that 0.72 fraction will be thrown away. Yeah, it’s $18 so it’s not exactly breaking the bank, but fuck them. It’s *my* $18 and they could have paid it to me in cash (or just not converted me) as would be fair and customary, but in this already-terrible deal they said why not just screw people out of a few bucks here and there — which is what makes me think they must be truly desperate for cash to burn this kind of reputation capital. Because 0.7136 does not evenly divide into most reasonable size board lot amounts of preferreds, virtually every holder will be giving up a few bucks. (If you had an odd lot like 625 shares of series 4, you could evenly convert into 446 series 5, but it’s harder to end up with odd lots like that on an already illiquid stock). And for small retail holders like me, with just a few hundred shares, the consent payment ($44 for me if I vote yes) is only a bit higher than the fractional share taking (100 shares: $9; 200 shares: $18; 300 shares: $2; 400 shares: $11; 500 shares: $20).

To me, this whole thing — extending the terms of a nearly mature preferred, with no minority opt-out, relatively large consent payments to third parties, well below current market spreads, plus stealing the fractional shares — is a reputational mess. I would never do business this way unless I had no other choice, and I have to conclude that this is going to cost them on the spread of every future preferred share they try to issue. So to me, Dundee must be very desperate indeed. Are they facing bankruptcy or a liquidity crisis?

What should I do now, though? I can’t just hulk out and smash stuff. Unfortunately, these sleazy consent payments do set up some nasty game theory situations. I believe that I, and other series 4 holders, would be better off rejecting the deal, getting paid out in June 2016, and then having the choice of buying a new preferred series then (which, given the prices on the other series even before this desperate move, would have offered a higher yield). However, if I vote against the deal and it goes through anyway, I lose out on the consent payment (as rage-inducing as it is). My individual vote of 200 lousy shares is not going to influence the final outcome, especially if management is not bluffing when they say that “the Company has received substantial support for the Arrangement based on confidential consultations with representatives of significant holders of the Series 4 Preferred Shares,” suggesting that I should do the whole Prisoner’s Dilemma thing and vote for the bad deal just to secure my own personal consent payment, while hoping that the other holders vote against it. Or, I can eat the loss and sell into the open market (current bid: $14.65 for a 15% loss). The final option is to try to exercise my rights to dissent.

I have to admit to being confused by the dissent rights section. There is a bold section that I have to get my broker to exercise dissent rights on my behalf or transfer ownership into my name, which sounds like a paperwork nightmare right there. But the main thing is that I can’t find the calculation that will be used for the dissent rights, just that it will be based on the “fair value” determined on the day the Arrangement was adopted. But there’s a lot of ways to interpret “fair value” — it could be the $17.84 face value (yay!) or it could be the market price ($14-ish, or where ever it ends up in January — boo). If I knew it was the former I would likely look into what’s involved in dissenting, but I can’t find a definition or formula for fair value, and nothing else about this deal suggests that what I consider fair will line up with what they will put forward as fair.

And of course I was in this in the first place largely as a stalling tactic because I’ve been stupidly busy and neglecting my active portfolio, and was just looking to park some cash until the summer. So there may be a good argument for taking the loss now and redeploying into some other opportunity, but I haven’t had the chance to look for said opportunity, let alone having one at hand.

Yes, I am also building up my index portfolio, with new money going there. And after the last two years of terrible performance I have already heard plenty of “I’ve heard there’s this good book on index investing by this handsome devil you might like…” Which is totally fair. But for stubbornness or history or family tradition or whatever, I do still have some of my money “actively” invested (scare quotes due to lack of trades and tracking and analysis, etc., particularly over the past two years).

A Conference Board of Canada report on PhD graduates and careers came out (“Inside and Outside the Academy: Valuing and Preparing PhDs for Careers”). Much is being made of the economic implications, especially the grad students made terrible life choices angle, with this quote from the report seeming to get more play than all 135 other pages combined:

“Earning a PhD typically takes 8 to 12 years of study (or more) after completing high school, giving those with lower educational attainment an earnings head-start and initial advantage, which takes some time for a PhD graduate to catch and pass. To illustrate, compare a PhD who takes five years to finish his or her degree to a master’s graduate. If the PhD student had no paid employment during that time (which is unlikely given the nature of PhD funding), the master’s graduate will have earned $282,935 more than the PhD graduate by the time the PhD is earned. (See “Funding for PhD Students.”) With an average annual income of $69,267 or $12,680 more than the master’s graduate—it will take the PhD graduate just over 22 years—a substantial part of his or her working life—to close the cumulative earning gap. As such, while PhDs do see positive returns over master’s graduates, these returns are modest and, on average, the earnings of PhD graduates will not surpass master’s graduates until the later stages of their career.”

This is actually not pessimistic enough. The average PhD-holder will NEVER make up the earnings difference if you factor in the time value of money — worse if you make it more apples-to-apples. That is, if you consider that not only do you earn less for much of your working life doing a PhD, you also have to live like a grad student for many of those years.

One of my professors did this calculation years ago, showing that despite doing quite well in his career outcomes (one of the few to become a high-ranking professor), if he wanted a job working with MRIs he could have got his MR-technician certificate and lived like a grad student and post-doc for the first few years, banking the extra salary, and even earning considerably more at the end of his career would never allow him catch up to the compound growth of those initial savings. The opportunity cost of doing a PhD is huge (and this is for a STEM PhD).

Imagine a 22-year-old graduate from a bachelor’s program finding a job that makes $45k pre-tax. They decide to match their lifestyle and spending to their grad-school-bound friend (solidarity!), who lives off of $17,000 between a stipend, odd jobs, and volunteering in research experiments. They pack away $19,000 in just their first year, and invest it wisely, and keep that up all through their friend’s graduate degree. By the time the PhD student gains an honorific and finds a higher-paying job at age 30, the guy who just got a bachelor’s degree has a net worth of $273k¹. They then both start living large, spending $47,000 per year on lifestyle expenses (which the bachelor’s holder can afford thanks to raises over the intervening years), and the PhD-holder socks away 15% of their new, higher income, building wealth to retirement.

But despite making more while living the same lifestyle, the doctor comes well shy of breaking even at age 65, with $989k less in retirement savings than the bachelor’s holder. Even with minimal (risk-free) time value to money and no investing, the doctor’s extra earnings are too marginal over the working types to surmount years of earnings and savings and compounding.

In real life there is only one person who lives that frugally when they don’t have to (and that was newsworthy) so the loss is somewhat illusory. But even saving just a few thousand per year straight out of school and banking their raises will let those who get straight to work get to enjoy higher quality of life earlier and still not lose out on lifetime savings relative to those who make terrible life choices.

(The peak of education appears to be a master’s degree — only two years sacrificed, and with enough earnings oomph that you pass the bachelor’s holder in 7 years).

However, not everything in life is about economic optimization. I could have made way more money if I had pursued business out of undergrad, or gone into a professional program instead of grad school, but I’m not exactly starving. And I do like science and what I do, and job satisfaction is not exactly value-less (just hard to value).

This article in University Affairs has some good discussion on the report, including this quote:

Not one person I know who has a PhD did it for the economic returns that they calculated in advance. Maybe the argument implicit here is that this is what we all should have been doing? That we should be rational actors in a market for the credential that will provide maximum returns.

I don’t know what to say. Yes? Economics shouldn’t be the sole reason to pursue a degree, especially not a doctorate. But the sacrifice and lack of payoff for doing one should not be totally ignored either, and we do need to raise a bit of awareness on that point before people start grad school. I did not know about the economic trade-off when I enrolled (at least, not the magnitude of the difference), and I was a relatively money-savvy undergraduate student. I think there is a need to get the message out there that doing a PhD is a labour of love that mostly likely will not produce any economic benefit.

That UA article references this one in the Post: “We’re letting a bunch of 17- and 18-year-olds dictate our labour market composition, and they’re not given a lot of advice to make decisions about what might be in their best interests.” It’s not much better at 21 when you have to decide whether to be awesome and go to grad school to unlock the secrets of the Universe, or be lame and go make a big pile of money and happiness and social adjustment and have kids while you’re still fertile and shit.

Anyway, the common belief amongst 3rd and 4th year undergrads contemplating grad school is that it’s the path to take to eventually have more money and to get a secure job teaching at a university. Both notions are mostly wrong — grad school opens that path but it’s still a low-probability path. Unless working years start getting a lot longer², most PhDs will not come out ahead financially; the awareness machine is already cranked to 11 telling us that most PhDs will go into non-academic careers. There are other good reasons to go to grad school, but that trade-off should be made with eyes open.

1. Assuming a 5% return on their investments and 4% annual raises.
2. Which if they do, will be thanks to longevity and brain research done by PhD students.
Final note: I believe that many people would still go on to grad school even with eyes fully open about the costs and trade-offs because they’re just wired for research and hopelessly optimistic about being in the minority that become faculty.