Men’s Health has an excellent article on negotiating the best deal for a wide variety of goods. One of the broader lessons in the article is that good negotiation requires both sides to feel some pain whether its buying food in bulk with a short shelf life or spending 45 minutes chatting up a salesperson to get a discount on luggage.

Yet, when Four Pillars writes about negotiations, the comments to the posts often take a tone of a zero sum game: negotiations are only won if you have the other side completely defeated, ethics and context be damned. I find in most contexts this is a limiting strategy for several reasons.

Good things don’t come cheap

Certainly, in an one-off transaction or in industries where ethics are rather loose (see buying a new car), going into negotiations with your guard up is recommended but, as a white-haired lawyer once said to me when I began practicing the law, “a good deal is a deal where both sides are unhappy.”

In other words, every good thing in life comes with a price. If you really place a value on something but you have finite resources, you are willing to give up a little more than you want but, given you have finite resources, the seller probably thinks you are giving her less than she wants for it. Something that is of intrinsic of value to you means you may end up paying a little more than you want for it. If you live in your dream home, you probably know what I mean.

Clearly, my analysis has no application where the subject of negotiations is some commodity. But where the negotiations are for something more personal  it is important to distinguish between paying for value and being cheap. As Buffet once said about investing: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Take the long-term perspective

An often voiced complaint about the legal industry is that the lawyers seem so chummy with one another.  At the end of the day, and to be blunt, clients come and go but the legal bar is community based and small so you have to maintain your reputation for being a good advocate without engaging in all those “dirty lawyer tricks” you see on television.

Some lawyers do certainly engage in a win at all cost mentality but they get such bad reputations that their clients are being done a disservice by retaining them. The other side has its back up so much that they tend not to yield an inch on anything whereas more reasonable lawyers may be granted indulgences from the other side (see below for an example). If you are reasonable, it helps you in the long run.

For example, I was once involved in a file that went into the silly season. But I actually ended up being referred files from opposing counsel subsequently since he thought I managed to maintain some reasonableness and practicality through the entire back and forth.

Payback- its a bitch

An unreasonable lawyer once scheduled a motion during opposing counsel’s parental leave and refused to change dates. The lawyer on leave attended. Stored it in memory banks. Waited 5 years and got the lawyer back. Poor client got rail-roaded that had nothing to do with him.

Bears Stearns was the only major investment bank that did not participate in the Long Term Capital Managment bail out in 1998 in which everyone lost money. When Bear Stearns began to implode in 2007, no one lifted a finger to help it initially. Some  conspiracy theorist believe the stock was universally shorted- its ultimate downfall- as the street’s delayed payback (no one quite knowing what this would start).

The morale of the story being it is a small world and people end up being in weird places at weird times. Just be careful that your scorched earth negotiating tactics doesn’t end up costing you down the road.

I am honored to have been included in the annual Globe and Mail’s Best Money Blogs. Special thanks to Canadian Capitalist for nominating me. If you are a first time visitor, please feel free to check out the blog and, if you enjoy the content, please subscribe to my feed.

I am pleased to start a new series today entitled “how to invest series” which looks at how to invest in stocks in various industries. The inspiration for this series are from reader questions asking me why a certain stock in an industry performs better than their industry peers or, regardless of whether you are an active or passive investor, what all this jargon means when stock analysts talk about a stock.

I am starting with investing in banking stocks; an industry which, obviously, is under a lot of attention lately. My next post in this series will be on REITs. Let me know if you have any other suggestions. Thanks.

Banks- how does it make money?

Originally, we lend it money through deposits and they lend it to borrower. The spread between the interest payable to you and I and the interest received from borrowers is called the net interest income and a profit center.  Most banks now divide their personal banking (you and I) from their commercial or wholesale banking (loans to other banks or businesses).

Over time, banks have branched out into other business lines like investment banking (earn fees on advisory services or underwriting a business going to market), trading (using deposit and shareholder equity to trade in the market), insurance (earns money between premium paid and premium paid out) and selling product (earn management fees on mutual funds).

Banks- what are important factors to consider?

Banks are in the business of risk management. Thus, on a non-exhaustive basis, you need to look at how it manages its risk by looking at:

1. Bank’s capital base: In other words, if the banks manage their risk poorly, do they have enough assets to weather the storm? If the bank lends out a $500,000 mortgage which defaults and only recovers $300,000, the $200,000 loss has to be paid out of retained earnings or shareholder equity. Multiple this loss by hundreds of thousands of times and you understand why a bank could be in trouble if it doesn’t have a lot of cash on hand. Typically, one looks at equity (usually common shares plus retained earnings plus preference shares) over assets to determine how strong a capital base is. This is known as a tier 1 capital ratio. A tier 1 one capital ratio in the high single-digits (8-9%) is considered healthy; recently, some banks have a tier 1 capital ratio of 10.  All banks provide tier 1 capital ratios so it is easy to look up.
2. Loan loss reserve. This is a portion of money set aside to cover losses on loans due to partial or full loss. A low loan loss reserve is desirable. A high-reserve relative to competitors tells an investor: (i) bank is not good at risk management; (ii) less money can be used to make new loans, slowing the growth of the business.

Assuming the bank is managing its risk properly (the defensive side of the equation), then you shift your analysis at how effective a bank is at making money (the offensive side of the equation). In addition to the usual net revenue and earnings growth, you are looking at some bank specific metrics as well:

1. …A note on return on equity (“ROE”). This is a ratio is calculated by dividing net income over shareholders equity and shows you how much profit the bank has made with shareholders’ money. ROE in banks have been around the mid teens to mid-twenties for most of this decade but banks are already warning investors that this is unrealistic going forward giving the risk taken to achieve this type of ROE. Some banks have  already talked about ROE of high single digits when the dust settles fully on the credit crisis.
2. Efficiency ratio. In plain English, this ratio measures how efficient the bank is at running its operations by looking at operating costs/net revenue (in other words, how many cents on every dollar made goes to costs). The lower the ratio the better. A ratio in the 50’s is great (Wells Fargo’s ratio is approximately 56 as of Q2 2009; Bank of America is 49.62). Having said that, you have to be cautious about efficiency ratios. A business can decrease it quickly by laying off a lot of employees which is good for the short-term but may slow growth long-term.
3. Deposit growth. A bank’s life-line is growing its deposit base. What you are looking for is growth in total core deposits year over year (a core deposit is a deposit considered to be long-term). In a large bank, core deposit growth of 4-6%  year over year would be considered a good growth rate.
4. Net interest margin. As discussed above, this is the spread between the interest received from borrowers and interest paid to deposit-holders. A margin between 3-4 is considered ideal for investors. For example, Wells Fargo’s  net interest of margin of 4.16 in the last quarter is the highest among all the large banks.

Banks- the common sense approach

Finally, I would highly suggest investing in a bank you use or that operates in your area. You can make some sense of the bank’s future prospects by simply seeing how well the bank runs and treats you. For example, CIBC is not a name you hear much of in personal and small business banking and, from professional experience, my dealings with their front-line bankers do not exactly inspire confidence. Thus, it is not surprising that the market considers this bank to trail its peers.

Ever consider buying a house with a friend to flip? Starting a hobby or full-time business with a colleague?  Co-coaching a children’s sports team with a neighbor? We often are presented with opportunities to partner with someone whether it be a formal business venture or something a little more recreational. No matter what you want to do, who you do it with is as important as what you are doing. After all, in some partnerships, you spend more time with your partner than your spouse. So, how do you chose wisely?

I have had good, bad and indifferent partners. I left one partnership after a month because it was a bad fit. We had another partner leave us before we even launched after making the unreasonable request for him to actually work. I had one partner who was almost a complete stranger who ended up becoming a great mentor.  A friend of a friend once had a partner who refused to obtain key-man life insurance for fear his partners would kill him for the money (I am told, in the part of the world where this partner grew up, this is not an unusual occurance). In other words, I am learning, through a lot of mistakes, on what makes a good partner. Here are few things I have learned (painfully):

1. Think twice about partnering with anyone. Think three times about partnering with a friend. Colleagues tend to show you more deference and respect in a partnership than your buddy who you got plastered with during a stag in 2003. Most partnerships need to have some professional distance- both in how you respect the other’s opinions and spending time apart after hours. It is harder to maintain that distance if you partner with a good friend especially if…
2. How your partner runs their personal lives says a lot about how they will approach the partnership so observe carefully. We (not the royal we) once had a partner that was terrible with finances in his personal life. We quickly learned not to trust him with any financial decisions. You obviously need to partner for skill-set but also observe how a partner or potential partner runs their lives- are they good with money, do they deal with their own personal issues constructively (trouble at home equals trouble at work), are they healthy body, mind and spirit? I had to paper over many corporate divorces as a lawyer- typically, what does lots of partnerships in begins as personal issue spilling over into the business (substance abuse issues, money issues at home, marriages falling apart) so watch your partner’s behavior in their personal lives.
3. Have the “what do you want out of this?” conversations before you partner. At some point during the dating cycle, you typically give out a direct or indirect indication of what you want  (“I want something long term” or “no names in the morning please…”) and, if the person you are dating wants the same thing, you continue dating.  Same thing with a partnership. You both have to want the same end-goal. You can’t have one partner wanting to build a leisure business and the other one wanting to go public with the business. With such differing goals, it will not end well.
4. Everyone has to have skin in the game. Some people may disagree with me on this but every partner has to put some money in. It is not enough to say: “my contribution to the business is my contacts or skill set in and I have no money to put in.” It doesn’t have to be $50,000 or some large amount. It has to be, relatively speaking to each partner, enough that if the business fails it hurts everyone’s wallets.  When people put no money in, there is no real sense of loss so how motivated will a partner be when you hit the first bump in the road? If you have no money in, you can always take your contacts or skills elsewhere when trouble arises. The aversion of a lost investment is a great motivator in business.
5. There must only be one chef in the kitchen/partner with someone who has a different personality than you. This typically becomes an issue when type A personalities get together on something. Everyone wants to be the boss but everyone can’t be the boss. So, you have to make sure you partner with someone who is ok with one of you being Batman and one of you being Robin (if you have a large group, find yourself a “glue” person to keep the entire thing from flying apart). Similarly, too much of a good thing can be bad. If you are outgoing, find a more wallflower-ish personality. It will keep everyone sane and certain personalities tend to gravitate towards certain functional roles (most super outgoing people go into sales and marketing over, say, accounting) so you end up with skill-set balance as well.

You will probably notice I did not concentrate on skill set. Conventionally, in every business, you want someone who understands the technical end of the business well, someone who can sell it and someone who can build the business. But, if you have worked in a toxic work environment, you know no amount of talent will make up for the fact no one is motivated to help the group succeed. Thus, start with the soft stuff first since you can always buy the skill-set later on. Good luck.

I have been asked several times in the last six to nine months about investing in some down and out company (Citigroup, GM, Nortel) on the thinking of  “what’s the worst thing that happens? I lose a few pennies/dollars a share. If the company turns around, I can double or triple my investment!” What scares me is that half the people who ask me this question are deadly serious.

I tend to think of this type of stock investing as being in the hail mary school of thinking- named after the hail mary pass in football where you heave the football into the end-zone in some low percentage, high reward play made in desperation.

It is, in many respect, the flip side of penny stock investing. Put your money in a business who’s salad days are in the rear view mirror in the hopes that there is still enough goodwill in the market to effect a turnaround with smart management. Think of Apple. Nissan. Puma.

But is this an effective way to invest?

First and foremost, remember Buffet’s first rule of investing: never lose money. As much as we all want to cheer the underdog (and it is weird thinking of GM as an underdog), these are long shot bets and the chances of losing money are greater than the chances of a turn-around.

Second, another Buffetism is that “cheap is not good.” There is a reason why these once large businesses are trading at such a discount. Management ruined them. The market moved past them (Nortel). They got arrogant (GM). They engaged in illegal conduct (Enron). The market tends to be efficient over long periods of time and there is a reason the stock price is so low. You can only be mediocre for so long before everyone notices.  Buffet always believes you invest in good businesses that have moderately higher valuations than bad businesses on discount.

Third, many down and out businesses have a de-listing and restructuring risk attached to it.  How do you exit if the stock gets de-listed? In most restructurings, the shareholders get crammed down as well (typically, they are greatly diluted- see most airline restructurings). Thus, even if the business re-emerges from restructuring, an investor may not be in the same position as it was when you invested.

Apple is one of the few great turnaround stories in business history but it was never in such dire straits as some companies now and, as Job’s illness has proven, it is a business partially built on a cult of personality so it remains to be seen whether Apple can be a longer term success story (anyone find it odd that Manulife is taken to task for tardy disclosure but Apple is not for hiding the fact their CEO had major surgery? Last time I checked, Apple is not above the law- unless they made an app for that too).

In other words, successful hail marys are the exception rather than the rule so invest accordingly.

One of things that drives me crazy is how we give businesses mountains of private information about ourselves and ask for relatively little in return. Many retailers now have loyalty cards that give you discounts in return for your personal data and the ability to track your purchasing patterns and, in return, you get $20.00 off your next purchase- when you reach 10,000 loyalty points. Are we selling our own personal details about ourselves too cheaply?

My friend used to work for a marketing department of a large retailer. He could tell based on consumer purchasing patterns, what type of prescription drugs you were buying, the day a woman would most likely menstruate and when you may go on vacation. Think about how massive this invasion of privacy is- all for a small discount on our next purchase.

If this was not bad enough, social media, despite all of its wonderful advantages, is the ultimate Trojan Horse to a self-assisted invasion of privacy. Let me partial demonstrate.

On Twitter, there is a search option on the right-hand side of the home page. I typed in the keyword “vacation” and I get everyone’s feed, regardless of whether I have subscribed to be a follower or not, who has tweeted a message with the world “vacation” in it.  The number of people who publicly announced they are on vacation and post the current city they live in on their profile is scary. Without going into specifics, someone could cross-reference where that person lived and, presto, one has aided in the burglary of their own home.

This is an extreme example but, like any other website, Twitter and Facebook are buggy and the privacy controls may not always work (google “twitter privacy bugs” as an example) so don’t trust someone else to protect your privacy- especially if that third party’s business model depends on selling information about you to others.

The medium is fine. But the consumer warning being, carefully how you use the medium. I have put together some best practices in relation to social media and your privacy:

1. Think of who may read this assuming the privacy controls fails. Your employer, your future potential employer, the girl you are trying to impress, strangers with ill intent. Do you want to give them anything they can use against you?
2. Pictures- you control who takes them and who posts them. Never allow yourself to have your picture taken in compromising positions. Your employer can use it against you. Your insurance company can use it against you (there is a growing body of law on what an employer can use or not use against you posted on social media). Your spouse can use it against you. If the pictures include children, you fill in the worst-case scenario.
3. Set ground rules on how your children use social media. Let’s face it, they will get on it. Give clear ground rules on what they can and cannot do. Kids don’t know any better about protecting themselves. Set up your own account so you know what the applications do and set out ground rules to protect themselves and explain why those rules are in place (you may not get that summer job because employers now reference check through Facebook). No pictures, no personal info, no specific addresses, no announcing of too much information etc.
4. At the end of the day, use the “subway car test.” Pretend you are in a subway car with your friend. It is full and everyone can hear your conversation.  Do you bad-mouth your employer, tell someone when you are going on vacation, strip down to your unmentionables in this subway car knowing that everyone can over-hear you or see you? Of course not. Think of social media as the same thing; it is a quasi public-private forum.
5. Do a full review of your social media presence and cull accordingly.

Now, I am not a heavy social media user so I would like to hear your thoughts on how to protect your privacy on social media?

Household debt is the amount of debt any household carries and typically comprises of mortgages and consumer debt. As an absolute figure, it does not mean much. However, household debt measured as a percentage of disposable (i.e. after tax) income gives a good perspective debt loads; the easiest figure to keep account of is 100%. If household debt is 100% of disposable income, it means debt is equal to 1 year’s worth of disposable income.

There appears to be two contradictory trends occurring in connection with  household debt that has potentially negative consequences for the consumer, investor and the economy as a whole. While financial obligation ratios (which is defined as mortgage debt + consumer debt + property tax + insurance + rental payments if a renter) has been relatively stable, household debt as a percentage of disposable income has risen dramatically and to unsustainable levels.

In Q4 1998, an average American household’s financial obligation ratio was 17.44% (i.e. it spent 17.44% of after-tax income on debt servicing). In Q4 2008, an average American household’s financial obligation ratio was 18.97% (household debt data courtesy of the American Federal Reserve Board). Thus, for the last 10 years, our average carrying cost of debt has remained relatively stable.

BUT, in 1989, household debt as percentage of disposable income was 84.6%; in 1999, it was 103% and it is now estimated at 170% in the U.S. (an equally eye popping 140% in Canada; 150% in Britain and a more tolerable 90% in Europe). In other words, an average American household carries 1.7 years of its annual disposable income in debt.

What do we make of this?

1. Rising household debt combined with stable debt servicing ratios can only occur if there continues to be cheap credit. As the Bank of Canada noted last week, this situation has arisen because credit growth has outpaced income growth. If income growth stalls (a real possibility) and credit growth slows (a real possibility), does the whole deck of cards come down and the W shaped recovery occur (a double recession)?
2. Rising household debt combined with falling household net worth means the ability of leverage will slow down. Household net worth fell 6.7% year over year in Q4 2008 according to the Bank of Canada. Assuming that most households were continuing to service their debt load by continuously leveraging appreciating assets, what happens if falling household net worth becomes more than a short term trend?
3. Assuming both of the above result in negative outcomes, what happens to the banks? Bank of Canada ran a stress test, assuming a 10% unemployment rate, and estimated that banks would lose 10% of their Tier 1 capital due to defaulting loans (in simplistic terms, tier 1 capital measures a bank’s financial health and is a ratio consisting of shareholder equity plus retained over its assets; a tier 1 capital ratio of 10% is considered healthy).

What are the consequences of all this data for the investor?

1. For investors of financial institution stocks. We are not out of the woods yet. If one of the following happens: (i) interest rates rise; (ii) unemployment continues to rise; (iii) it takes longer for the unemployed to return to employment (Stats Canada estimates it typically take 15-26 weeks to find another job based on historical data), the banks could be in for another shock as losses from bad loans mount.
2. Non-financial institutions are in decent shape especially if they are in business to business industries. In Q4 2008, the U.S. Federal Reserve estimated that non-financial industries had a debt to equity ratio of approximately 75% while Canadian non-financial industries had a debt to equity ratio of 50%; both respectable levels of corporate debt, especially given the fact that this ratio has been declining since the 1990’s. In other words, it appears the banks lost the plot but most other businesses cleaned up their balance sheets. Assuming it will take years for household debt to be controlled, it appears the industries in the best shape are those who sell to other businesses (railways, pipelines certain types of teleco and tech companies, engineering firms) and not to the over-leveraged consumer.
3. It may take a while for the economy and stock market to recover. If one assumes the consumer is entirely over-leveraged and approximately 70% of the American economy is based on consumer consumption, it could take a while for the consumer to retrench and this could mean a long recovery. I am also a big believer that people in China will not suddenly become American and spend like Americans circa 2005, no matter how much prodding,  so there is no white knight coming to rescue the global economy.

If you are a consumer wrestling with debt, remember these key ratios:

1. The size of your mortgage should NOT be more than 2 times your household’s income. Since the biggest rise in the absolute and relative percent of household debt in the last 20 years is attributable to an increase in mortgages, one should watch mortgage size carefully.
2. You should have sufficient financial assets (cash on hand, line of credit, emergency funds) to survive a 15-26 weeks of unemployment (assuming historical data holds true and depending on your industry).
3. The Federal Reserve found that if you are in the 90th percentile and above in income, less than 10% of your disposable income is used to service debt. In other words, if you want to be financially secure, control your debt.

Good luck.

One of the theories emerging about the bailout is that the Obama administration is trying to reshape American industrial policy towards an economy that makes stuff again, as opposed to merely trading securities, and to make it greener and more environmental sustainable. The real litmus test will be market reaction to the launch of  GM’s electric car, the Volt,  which can either save GM or be the final nail in its coffin.

With the market stabilizing somewhat, many companies which have business models built on environmentally friendly technologies are bubbling up again looking for investors, having had the capital markets abruptly shut on them in September 2008. Thus, we are seeing the return of penny stock companies  or companies raising money by private placement looking for investors to develop clean coal technologies, bring to market lithium-ion batteries or refine heavy oil etc. etc.

Should you take a chance on these types emerging companies? Everyone wants to invest in the next Research in Motion but there are a couple of things to remember.

1. Invest in what you understand. One of the fundamental rules of investing is only buy what you understand. If you last took science in grade 10, how would you know if the penny stock that was in the agricultural fuel business actually had a viable technology or a distribution channel behind it? It is hard to call someone on techo gobbledygook if you can’t spot it.
2. Investing in growth stocks are not a great way to create wealth. Seymour Schulich ran a Morningstar screen that showed 2,214 publicly traded companies with 20% sales growth declined to 669 one year later then 349 then 179 then 87 (or 3.9% of the original class) in year 5. In other words, it is difficult for growth companies to continue growing.  If you invest in the downside of their growth curve, you may have over-paid for your investment.
3. First-mover advantage can be eroded quickly depending on context. First mover advantage is the business theory that the first to the market gain an advantage over its competitors. It has both its supporters and detractors. In highly regulated industries with large capital costs, it can be a huge advantage to be first to market since you can set the rules of your industry and consume finite resources (see how traditional teleco’s moved into the cellular space). Where the industry has a low barrier to entry, investing in a first to market business may not be the most prudent move since subsequent competitors can reverse engineer the product or out-business model your business model. This is one reason why tech start-ups die a terrible death or why Amazon.com beat books.com even though it started 4 years later. The key for a potential investor is to do your independent homework and understand the industry well.
4. Invest only what you can afford to lose. Many emerging companies are high risk, high reward plays. Be prepared to lose it all.
5. Exit strategies can be problematic. Penny stocks listed on a OTCBB or a private placement investments can be highly illiquid or can have trading prohibitions on them for a period of time. It may be difficult to exit this stock even if the share price is up given a lack of trading volume. Combining 4 and 5 together, only invest your silly money which you do not need access to in the short term.

There is a certain excitment of being in on the ground level of an emerging company but just be aware of the risk as well as the potential rewards. Good luck.

With the summer right around the corner,  some employers are thinking of shutting down their businesses and going dark since it is a slower season. A reader in a such a situation was given the choice of either taking leave without pay or being forced to take a vacation (I understand that this is a non-unionized work-place) and the question was what would happen if the shut down was for so long that you had a negative vacation balance.

The question raises a much larger issue of what an employee’s rights are in these types of situations. I ended up calling the Ontario Ministry of Labour help line to get some answers; because there are exemptions to certain industries (for example, the hospitality industry and construction industry have particular rules), I asked as a plain old white-collar office worker. Just remember that every jurisdiction has a different set of laws about employee rights which are sometimes superseded by an employment contract or collective bargaining agreements. As usual, obtain independent legal advice about your situation.

Here are some tidbits from the Ministry:

1. A temporary lay-off is a layoff of not more than 13 weeks in any consecutive 20 week period or a layoff of more than 13 weeks in any consecutive 20 week period if the layoff is less than 35 weeks in any consecutive 52 week period. In plain English, the employer cannot lay you off for more than 13 weeks without be considered under the law to have terminated your employment, triggering the appropriate notice/payment in lieu of notice/severance provisions. If you are never recalled, the temporary lay-off period is calculated within your notice/payment in lieu of notice/severance payment. The employer cannot give your position to someone else during this time and it must pay for your benefits.
2. If your job has changed significantly and negatively without your consent, you are deemed to be constructively dismissed (which includes “quit or be fired” demands). In this case, the employer has to pay you the appropriate notice/payment in lieu of notice/severance based on your previous salary before you are paid at your new lower salary (the theory being you have been terminated in one job and need to be paid severance before you commence the new job). Constructive dismissal is a very tricky area of the law; as such, please consult a lawyer if you think you may have been constructively dismissed.
3. In Ontario, the employer shall determine when an employee shall take his/her vacation (unless you have a contract that states otherwise). In other words, the employer can force you to take vacation. If you have worked full-time for more than 1 year for an employer, you have an entitlement to 2 weeks vacation per year. Thus, to answer the original question, you cannot be legally penalized for taking more vacation than you are entitled to by having the employer deduct it from next year’s vacation entitlement if you only have 2 weeks vacation.  If you have more, the more practical consideration is that the employer is probably triggering a employee revolt if this try this stunt.

What I have heard a lot this year is some employers are resorting to the temporary lay-off route to free up cash. What also makes this move attractive for the employer is that if you find another job during the temporary lay-off period, you are deemed to have quit and the employer most likely does not have to pay you severance.

Depending on the situation, one may be better off negotiating a severance package if you are informed of a temporary lay-off rather than sticking it out and waiting to be recalled. Factors to consider include: likelihood of the business surviving long-term, your job prospects, the benefits your employer gives you during the lay-off period, how much you like your job etc.

As usual, the above is informational without reference to context, specific to Ontario and there are always exceptions to the general rule. Of particular note, the situation may be different if you have an employment contract (look there first then look at the statute).

Most jurisdictions have employee informational hot-lines. I would encourage everyone to call and ask questions about your rights.  They are typically very helpful. Good luck.

For many months, investors have debated whether stocks are still a good investment. After all, at the nadir of the credit crisis, an investor who invested in the S &P 500 10 years ago would have received negative return. For some, it appeared that the Siegel-esque belief that investing in stocks for the long run was dead.

Although the economy has slowed its decent since then, some believe that the better empirical data to predict future performance of stock is to look at stock market returns for mature economies (for some reason, Germany is used as an example) since the period of time analyzed by Siegel (1802-2006) coincided with America’s ascendancy as an economic super-power and now it is levelling off or declining into a multi-polar economic framework.

The debate has slipped into the main-stream media as Time Magazine asks “Are Stocks Still Good for the Long Run?” and considers whether one would be ahead investing in fixed income instruments.

How the question is answered takes a puritanical “either or approach.” When this topic has been broached, the basis of comparison is typically 100% equity vs. 100% bonds. While there are people who have this type of asset allocation (see Let’s Bond as an example from the bond side), most retail investors do not invest fully in either 100% equities or 100% fixed income. In fact, many who are either pure equity or fixed income investors are professionals, or DIYer who understand their niche well. It is improable that these investors would invest only in the S & P 500 or buy a 10/30 year treasury and wait for it to mature.

Thus, the examples used to measure performance comparisons tends to be in the extremes and not reflective of the reality of the daily investing lives of most investors.

More to the point, there are some practical things to remember about looking at any asset class:

1. One of the points of an ideal  asset allocation is to reduce risk. A proper mixture of stocks, fixed income, cash and real estate should ideally be hedges against the short and medium term risks of the other asset classes. An under-performing asset class in a portfolio with proper asset allocation should not destroy an investing strategy.
2. As the Time article indicated, long term means different things to different people. The debate about whether stocks are still good investments is contextual. For those with long investing horizons (20 years plus to retirement), an ideal portfolio should contain some element of risk.
3. To quote the Time article, regardless of asset class, “…The main message… to John and Mary investor is, Pay attention to the price you pay for an asset.” In other words, its the classic, buy low, sell high advice.
4. Finally, moving from one investing extreme to the other is, in normal times, a sure way to lose money. In uncertain times such as this, one is only adding to their own stress.

Studies  show that the number of people starting businesses is largely insensitive to economic cycles even though the circumstances of why people start businesses tend to change. For example, recent studies of entrepreneurship reveal that the largest demographic starting businesses are in the 55-64 age group, perhaps suggesting older workers would rather control their own economic fate than go back to an unforgiving job market.

If we assume that new businesses start everyday by new and old entrepreneurs alike, whether voluntarily or involuntarily, what essential questions should every entrepreneur answer?

1. What problem am I solving? Mr. Cheap from the blog Four-Pillars runs a series he calls “Wacky Business Ideas.” I have often thought Mr. Cheap would be a great entrepreneur. If you read his posts, he is always answering the question “what problem am I solving?” in these posts. Thus, although his ideas come from problems arising in his life, they are ultimately about solving other people’s pain as well and people more often buy on the avoidance of immediate pain rather than the promise of a better future.
2. How do you make money off of it? In other words, what is your business model in ten words or less (to paraphrase Guy Kawasaki)? The Millionaire Next Door summarized the 10 most profitable sole proprietorship businesses and their business models are easy to describe: coal mining (people pay me to mine coal), dentist (people pay me to fix their teeth), bowling center (people pay me to have fun bowling), vet (people pay me to make their pets feel better), lawyer (people pay me to listen to my own voice…kidding- they pay me to solve their legal problems) etc. etc. If you can think of a problem to solve but can’t make money off of it or can’t describe your business model easily, chances are no one will be buying.
3. Who are you selling to? Not everyone will want to buy your good or service and, even if they did, at business formation you could not possibly serve them all. As a small business owner, answer this as precisely as possible.  Niche is good. You are not GE, you can’t be all things to all people. For example, google “fee only financial advice Toronto” and only one firm shows up on the first page (with a series of pages asking where to find said service). The point is that the firm is not the only fee only financial advisor in town but they have found their niche and stick to it.
4. When do I launch? Life-long employees are always appalled when they speak to entrepreneurs. There are no status meetings, products are launched with bugs in it (if Mircosoft has made billions launching half-*ssed products, why can’t you?) and the entire business seems to be stuck together with duct tape. True, true and true. But a good entrepreneur is launching and making money while endless meetings may mean you sit and talk rather than do. Set a launch date and stick to it come hell or high water.
5. What’s your exit strategy? Should be the first questions really but why are you doing this? To solve a problem until an employer hires me to do the same as an employee is a perfectly legitimate answer; the only wrong answer is not being true to yourself.  But if you know what the exit strategy is, it will help guide a lot of big decisions along the way.

Regardless of whether you want to start a full-time business, create some part-time income or are providing support to friends or family who are entrepreneurs, it is helpful to answer these questions as a guide to launching or running a good business. Good luck.