Years ago, I read or saw something that the price of goods in a supermarket depended on where the good was located- if it was at eye level, it would be more expensive than if it was on the top or bottom shelf. My recollection on this is hazy at best (comes with age, one supposes!). Two years ago, a client of mine told me that Canadian Tire charged wholesalers and distributors “stocking fees” on products and the price of the stocking fee depended on where the product was. This makes perfect sense since a product at eye level at the front of the store is going to move faster than on the bottom shelf at the back of the store. I went shopping earlier this week and I noticed that the snack bars at the top of the shelf were cheaper than at eye level.

Based upon the above, I have decided to start an experiment to see how much, if any, money I can save by working counter-intuitively from how the supermarket industry wants us to buy. I am going to pick 5 types of goods I usually buy and see what, if any, price difference there is on goods placed at eye level and those placed on the top or bottom shelf. This will allow me to see if I can really save money by using product geography to my advantage in a supermarket.

To compare apples to apples (pun intended), these are my ground rules (please add more if you think my results will help you save money):

1. Only non-perishable goods will count- no yogurt, ice cream, milk etc. etc., prices on these goods change based on a lot more factors other than location of product such as seasonality, gas prices, supply and demand etc. (non-perishable good prices also change on these factors but because they are produced so far in advance of consumption, my assumption is that the effect isn’t as great);
2. Goods have mutliple competitors and there is choice. For example, no one else makes pop like Coca-Cola. Pepsi has a distinct taste and if there was no Coke in the store, I do not buy Pepsi; whereas if there are no Kleenex Tissues, I buy another brand.
3. If the product does not have an ideal and non-ideal location, I will look at non-indeal and even more non-ideal locations.
4. I have to compare at the same store (Soebys in Toronto);
5. I have to compare on the same day (Sunday);
6. I have to compare brand name to brand name-no generic goods allowed; and
7. I am having a real debate on whether to factor in coupon specials and sales into this experiment. Your thoughts would be appreciated.

Here are my 5 items:

1. Snack Bars (like Quaker Chewy Bars)
2. Baked Beans
3. Olive Oil
4. Tissue
5. Shampoo

(1 food staples, 1 food preparatory item, 1 food discretionary item, 2 household goods)

I’ll report once a week on my findings for 4 weeks. The purposes of this experiment again is to see what, if any, money consumers can save by selecting goods at places where the industry prefers you do not buy.

If this goes well, my next experiment is to compare shopping for staples at “ethnic” supermarkets (of which there are a lot in Toronto) with “mainstream” supermarkets. Any suggestions to make this experiment worthwhile for all would be appreciated.

Savings Journey posted a series of question in Monday’s post about condo fees. In particular, he wanted to know how condo fees can get so high and what to do in order to control it (note: you can’t stop the increases, just control it). Maintenance fee price increases are especially deadly to real estate investors since it is a factor that you do not have a lot of control over and it reduces your rental profit over time. I am going to try go give some real life examples I have seen in the Toronto condo market.

Firstly, condo fees can increase over time for several reason. For anyone thinking of purchasing a new condo, please be aware that condo fees are kept artificially low in order to induce you to buy. One common way of keeping maintenance fees low in new condos is for the developer to absorb some of the maintenance costs in the first couple of years. After that, condo fees go up without the subsidy. A friend of mine lives in a condo whose’s fees went up 49% after the developer stopped subsidizing fees at the end of year 2. Maintenance fees also increase as a function of age: older condos need more repairs so the reserve fund portion of the maintenance fees begins to increase (as a result of the 49% increase, the condo corp. did a fee study and found that the condo with the highest fees per sq. ft. in Toronto was directly across the street in a 1970’s era condo). Finally, fees go up if there are a lot of bells and whistles with the condo; the previous condo I lived at, the neighboring building had a virtual golf simulator; pretty nice but how many times will you use that machine? Investing in a building with a lot of amenities may make it easier to rent out but, on the back end, you may be absorbing a lot of maintenance fees.

There are several ways to avoid uncontrollable condo fees: buy or invest in mega-condos (over 250 units)- the costs can be spread out among many unit-holders, avoid small to mid-sized condos with a lot of bells and whistles (24 hour concierge, pools, state of the art gyms and multiple party rooms are expensive), don’t buy into older buildings and try to buy into a building with a lot of owner-occupied units since owners are very conscious of fee increases and they understand what the building actually needs; a renter heavy building generally experiences more wear and tear as well. You can put as a condition of purchase that you want to see the “status certificate” of the condo corporation which has the financials and owner-occupied ratio (in Toronto, any condo with over 50% owner-occupied is good).

The worse condo you could buy or invest in would be a new, “boutique” (marketing spin for small) condo with a lot of amenities and a lot of renters or an old condo (1970’s era) regardless of size. The best condo would be a large building which is neither old or new (so between 5-10 years) with a fair amount of amenities.

Savings Journey also had a good suggestion of being active on the board of directors. Costs are one of those things that spiral out of control if not checked. Because costs are spread out among many different unit holder, there is always a temptation to pay for wants and not needs in a condo. My previous condo (where I was a renter) had a strong lobby for more exercise equipment and a better games room. All fine and good but someone has to pay for it. Finally, also look for a condo where there isn’t a huge turn-over in the board of directors or the management company- this indicates stability. Good luck.

If you ever read business and/or investment publications on-line, you are often advised to purchase some investments in international stock or mutual funds to mitigate against risk. This is considered conventional investing wisdom- spread your risk but not placing too many investments in one geographic region; if North American doesn’t do well, at least you have other regions to rely upon and vice versa. Additionally, most investment advisors recommend that you take advantage of the rise of the Chinese and Indian economies by purchasing investments in these regions.

However, the reasoning behind this investment mantra may be becoming an urban legend. Merrill Lynch recently found that that the MSCI EAFE index (which tracks Australian, Asian and European stocks) has a 95% correlation with the S&P 500 over the last 5 years- in 2002 the correlation was only 32%. In plain English, stock performance outside the United States are increasingly following the United States almost exactly and vice versa. Or, to put it another way, if you purchased an Exchange Traded Fund which tracks the performance of the S&P 500 (such as the Vanguard 500 Index Fund), it will rise and fall in a similar pattern as Exchange Traded Funds which track the MSCI EAFE or or other similar international indexes. This is a little worrisome given the amount of ink spilled recently on the over-valuing of the Shanghai stock market and how it may be time for a real correction in the Chinese markets (not the 2-3 day one earlier this year). It would appear that there is a 95% chance that a correction in China will affect investments domiciled in North America.

If this patterns holds true, the lesson I come away with is that one should invest in international equities to access new markets and different industries rather than as a risk allocation strategy.

I just received notice that my condo is having its annual general meeting in two weeks’ time. As part of this notice, all condo owners have been presented with the audited statements for the last fiscal year. I bought my condo last December and one of the reasons why I purchased my particular condo was the fiscally prudent manner in which the condo corporation runs the condominium. A well-run condo financially helps the resale value of the unit whether as a principal residence or as a real estate investment. A poorly run condo hurts the resale value of the unit because the carrying costs of the condo monthly (known as maintenance fees) will most likely be quite high or, the owners are so unhappy with management, there is always a supply of units in the same building for owners that want out (high supply= lower resale value).

If you own a condo as a real estate investment, most landlords include the maintenance fees in the rent (at least where I live). If maintenance fees are high or increasing year over year over and above inflation, those fees are cutting into your return on investment. This is doubly so in a rent control jurisdiction since your costs are increasing but you are capped in how much you can raise rent/revenue (which is why many shrewd real estate investors avoid purchasing condos- you have no control over the cost side of the business of owning real estate).

From a financial perspective, my condo has a very well-funded reserve fund. A reserve fund is a fund which is used to maintain or replace the common elements of a condo (such as the roof, HVAC system, exercise room- anything all the owners use or can use). When I was shopping for condos, my real estate agent deliberately screened out condos with under-funded reserve funds. An under-funded reserve fund may result in the condo being unable to pay for repairs and having to levy a “special assessment” on the owners. If the repairs are quite significant (for example, leaky roofs in Vancouver condos), the assessment may be great enough for the owners to borrow money to pay for it. I am lucky enough to know that, short of a huge disaster, my condo will have enough money to replace the common elements.

Thus, if you are looking to buy a condo, always look at the reserve fund or ask your real estate agent about how well the condo is run financially. Even if it is in a great location, poor management may ruin your living/investing experience.

I attended a seminar last week aimed at credit-proofing and tax savings for self-employed individuals. One of the presentation’s themes is the insurance industry increasing pitching insurance as an investment product. In particular, the presentation addressed universal life insurance as a tax sheltered investment product (Million Dollar Journey has an article about segregated funds which is also another insurance product being pitched as an investment product). I’ll give you the 10,000 foot over-view on universal life insurance and my thoughts (universal life insurance is an extremely complicated product so please take this as merely an overview on the product).

Universal life insurance is a dual product- one part life insurance and one part investment vehicle- with flexible premiums. Your premium is divided between the two portions. Anything excess of your life insurance premium is placed in “cash value” which can be used to invest in mutual funds, GIC’s and other investments. Any tax-free gain from the cash value may be applied to the cost of the insurance so that the policy can become self-funding over time. Universal life is also creditor-proof (in Canada, insurance products, subject to some exceptions, cannot be seized by creditors; RSP’s still are not exempt from creditor seizure).

As a simplified example, look at universal life insurance this way (numbers are hypothetical and for ease of reference only):

1. For every $1.00 invested, 50 cents goes to fund the insurance portion and 50 cents goes to cash value which you invest in a mutual fund and/or other products (there are minimums funding requirements for the insurance portion so you cannot fund the cash value entirely).
2. Over time, the cash value portion of the policy makes 5 cents (again, hypothetical return only to make the math easy) which you can apply towards the insurance portion of the policy so that you are only allocating 45 cents of every $1.00 towards the insurance policy since the other 5 cents is being dervied from gains in the cash value.
3. You can either reduce your premium by 5 cents to reduce your premium or increase it so that a greater portion of the premium is in the cash value so you can invest more money with the gain being tax-free and creditor proof.

How do you get your money out of the cash value? You borrow against your policy (think of your universal life insurance as an asset to borrow against just like a home) and the interest is tax deductible assuming you are using it for investment purposes; this is why universal life is pitched to the self-employed. It becomes a readily available collateral source for their business. If you simply withdrew your cash value, you will be taxed.

What are the advantages of this product?

1. As a product which gives you tax-free gains which are credit proofed, universal life can be a good tax shelter which is audit proof (since the product is approved by the government).
2. The cash value of the policy allows you access to some investments products not available to most. For example, holders of universal life policies can purchase ABC Fundamental Value Fund (compounded annual return of 17.67% since 1989 vs. 9.98 of the TSX 300) which normally has a minimum purchase of $150,000 if you purchased it outside of a universal life policy.
3. Leverage and collateral. In most small business financings, life insurance of the owner manager is used as collateral. If the policy is quite valuable (i.e. cash value is very high), you have access to a greater amount of money.

These are the disadvantages of this product:

1. Costs. Premiums are higher than a conventional term insurance policy. Fees can be quite high on the cash value of the policy. Sales commission is quite steep and add at least 1% (more like 2%-3%) to MER’s usually charged on mutual funds you purchase through the cash value of the policy. Thus, if you do not invest the cash value portion wisely (i.e. you aren’t getting 17.67% per year), a lot of your cash will be used to pay fees rather than returning real gains on the cash value.
2. You have to keep your premiums up in order to borrow against the policy.
3. If you no need for the cash, borrowing against the policy may not be much of a selling feature.

Weighing advantages and disadvantages, this product should ideally be purchased by the self-employed since, if structured properly, the premiums are tax-deductible as a business expense (in a corporation only), excess cash in the business can be used to increase premiums to top-up the cash value (again, tax deductible if structured properly) and the creditor proofing advantage and leverage opportunities are ideal for businesses. An ideal client would be an owner of a manufacturing company (high liability risk with need to put surplus cash out of creditor’s reach but the policy can be used as collateral).

However, if you are not self-employed, the high premiums and fees most likely serve no one by your insurance broker and you had best to explore conventional term life insurance.

(this post is in the continuing series about building a financing company that I am the President of)

One of the issues that any investment company faces is how much money do we invest? For every dollar invested, some of it has to be factored in for overhead, salaries and other fixed expenses. Once those deductions are made, the fundamental question is how much money do we hold back in cash? This is no different of a question than any other investor faces- do you put all your free cash into stock, real estate, exchange traded funds etc. or do we hold some of it back?

If you look at the holdings of a lot of successful mutual fund managers, you will notice that some of the more successful managers are holding a lot of money in cash recently (I am not running a mutual fund). For example, The Chou Associates Fund, managed by noted value investor Francis Chou (annualized return of 15.1% over the last 10 years), has 40.5% of the fund in cash as of December 31, 2006. Peter Cundill, another well-publicized fund manager, also has large cash reserves in his international equity funds. The argument against any investment vehicle holding excess cash is that they are still charging fees to hold your cash; thus, in many ways, you are paying a manager de facto interest to hold your cash- you may as well keep your money in a high interest account if only 60% of your money is invested at any time.

However, the opposing argument is that all investment vehicles require sufficient cash on hand to: (i) take advantage of buying opportunities (the argument of the Chou’s and Cundill’s are using who believe the market is over-valued); and (ii) to hedge against downside risk, mainly being: (a) investors redeeming their investments and having money on hand to pay for such redemptions; or (b) having emergency funds in case the investments do very poorly. This is no different than banks having sufficient cash to fund operating losses (see my post last week on this topic). As a benchmark, and as a gross simplification, a well-operated bank hold 10% of its assets in cash.

I have no intention of keeping 40.5% of cash on hand; it is a new vehicle after all and it must establish a track record quickly to build a reputation. However, how much less than 40.5% in cash is becoming the big question. I will keep you updated.

One of my favourite sayings in life is: “offense wins games but defense wins championships” (yes, I am a sports nut) and its really time to play some defense. I made my last trade for the foreseeable future today by buying shares in RBC. See my previous posts for reasons why with one addition; I picked up an interesting analysis of banks from the May 14 issue of Fortune Magazine- there are banks with large retail operations (i.e. Wells Fargo) and banks with large investment bank arms (i.e. Citibank). The former is having a tougher time relative to the latter after the subprime mortgage crash (higher loan loss provisions and small loan margins). The latter is doing well because they have large investment bank arms which are making fees on all this private equity madness. RBC owns RBC Dominion Securities- one of the larger investment bank shops in Canada- and, as Veritas Investment Research notes in their May 9 report, RBC is “in the market leadership position in full service brokerage and mutual funds…” Thus, I may gain some upside from RBC being advisor or underwriter of all of these M&A deals. However, RBC is also a good defensive play being a blue-chip dividend payer.

Having said that, I am, frankly, quite worried about the market. As my investment advisor says, the market is “tired” and there hasn’t been a sustained correction in a long time (the Shanghai flu of Feb/Mar was a mere blip). Combine this with gas prices hitting new record highs (which may mean an interest rate hike to ease inflationary pressure or consumer and business spending being squeezed out to pay for rising fuel costs), the Bank of America CEO basically saying the private equity industry has entered the silly season (my phrase not his), and continuing fall-out from the subprime mortgage crash, its time to look around and be prudent (as a complete side-note, please remember what they called private equity in the 80’s- “corporate raiders” -and remind yourself why they were called that).

My priorities have shifted to three things for the rest of the year- gold (to hedge against inflation), increasing cash positions (cash is king) and accelerating mortgage payments (if in doubt, pay down debt). I’ll pass along my thoughts on gold later.

Many financial blogs have written about piggy-backing on what mutual funds buys in order to invest wisely and to profit from free financial advice (please see Investoid’s post and NonyMous’ post as two excellent examples on this topic). Last week, the Globe and Mail published an article on the limitations of this strategy; I agree with many of the points. However, what about piggy-backing on pension fund holdings as an investment strategy? Pension funds are not public so the pressure to deliver short-term results is not as great relative to mutual funds and hedge funds. Additionally, pension funds are supposed to deliver long term, consistent results which are more in-line with conservative and/or value investing strategies.

Finally, a recent study by the Rotman International Centre for Pension Management at the University of Toronto found that pension funds beat the performance of a mutual fund by 3.8% per year. In other words, a pension fund may be a better vehicle to copy than a mutual fund for long term performance.

So what exactly are pension funds purchasing? Utilities. The Ontario Teachers Pension Fund has purchased in the last month two water utilities in South American and a stake in the Birmingham International Airport in England. Utilities are a cash rich industry with high barriers of entry; as a result they provide consistent returns. Last time I check, most of us could not afford to buy a water plant but Rob Carrick had a recent summary of some ideas if you are considering investing in utilities. I would also consider looking at stock which have large infrastructure holdings as well (GE and Macquarie- the stock itself and not their products- come to mind). As usual, please conduct your own due diligence but hopefully this is another investment source for all to use. I know I track what pension funds are doing.

Microsoft announced last Friday it was acquiring AQuantive Inc., a company which buys, sells and creates online advertising for websites. This acquisition may be in response to Google purchasing DoubleClick Inc., another online advertising company, for $3.1 billion! Let’s not forgot Google purchasing YouTube as well. Combine that with the purchase of 24/7 Real Media Inc., another online advertiser, and the Thomson-Reuters merger and there is a lot of technology stocks and companies being purchased especially in the content provision/online advertising field. What is leading normally conservative companies like Microsoft and Thomson Corp. to buy up tech rivals like it was 1999?

It looks like technology stocks are back but with a big difference- Google, Microsoft and Thomson Corp. are targeting online advertising and content providers rather than e-commerce providers (does anyone remember boo.com- one of the more infamous tech flame-outs). It appears that online advertising has surpassed e-commerce as the new Internet business model and, as my techie friend put it, the North American economy will be driven by the exchange of content in the next 20 years (since all our manufacturing jobs are disappearing).

I am personally very nervous about technology stocks given that my biggest investing mistake was buying a technology mutual fund in the late 90’s (the only real benefit was a tax loss). But, if you really want to go into this industry, I suggest looking at Thomson’s business model and finding businesses just like it. I am an occasional user of Thomson products. Basically, Thomson sells information whether in a loose-leaf service (you buy a big loose leaf binder which has information on financial, legal or medical related fields which is updated regularly), on DVD’s, on-line or on their terminals. Their business model works because most of their products require payment upfront, there is an on-going revenue stream (either as licensing fees or fees to update loose-leaf binders), most of their clients are institutional (which means lots of licensed users and almost guaranteed payment) and their authors are typically paid last (royalties are usually paid last; even the advance is an advance against royalties). Compare that with some other tech plays where revenues are speculative, the service is provided for free or the market is retail (where pricing power is non-existent).

I am going to stick to the sidelines on technology and focus on financials, health and utilities. Last time I checked, these industries sell to everybody- not just those who know what web 2.0. means. Best of luck to the technology stock hunters.

As usual, I am ending the end of the week with something fun- here are the craziest things investment adviors have ever said to me (fortunately, not mine):

1. “I only disseminate information; please don’t ask me anything too technical.”
2. “Why would you need to see any documents? Everyone is buying it.”
3. “Headquarters says to push this product.”
4. “Well, this one has a nice name. Do you want to buy it?”
5. “Just trust me…”

Have a fun and safe long weekend.