Yahoo! Finance recently ran an article on why most self-help books “stink” based upon research conducted by Christine B. Whelan (the long-form abstract can be found here).  As Whelan’s research indicates, self-help books have exploded accounting for 1.1 percent of all books in print in 1973 to 2.4% by 2000.

The increase in self-help books has corresponded with criticism of the self-help industry itself from the book I’m Dysfunctional, You’re Dysfunctional, which criticized the dogmatic approach to those in the industry, to the more recent entry, Sham: How the Self-Help Movement Made America Helpless (Sham cleverly stands for “self-help and actualization movement” in the book), which explores how lowering the reader’s self-esteem is good for business.

As a subset of the self-help industry, do personal finance books fail on the same grounds as other self-help books- mainly, promise of the easy and painless solution based on the generalized narrative- or are they the exception rather than the rule?

The answer is, as always, it depends. I suspect I come across more than my fair share of personal finance books through the course of the blog. As a gross generalization, I would lump the personal finance self-help industry into three groups.

I can see the future….and, if you follow me, you will make tons of money. I call this the Harry Dent school of financial self-help books. Harry Dent is best known for using demographic trends to predict the future. There’s one problem. No one can predict the future accurately. Backtesting and creating narratives/spin to explain away past events one missed does not make one a predictor of the future.

As Canadian Capitalist once commented about Dent (to paraphrase), if Dent had known that random events in the past were not so random, then the past would be predictable. This is tantamount to saying if you knew the answers to the quiz beforehand, you would have scored a perfect score.  But because you did not, you scored less than perfect… BUT accounting for the fact you now know the answers, you should be credited with a perfect score. Oh, and Dent himself, has a spotty track record as an investment manager.

As a genre of the personal finance self-help industry, the utility of predictive books is limited given that the authors tend to view life as a series of perfectly sequential events rather than in parallel and it fails to account for utterly random occurrences which characterize our daily lives.

The second group I call the step-by-step investment guide. The Wealthy Barber is a good example. There are three main pitfalls about this genre of books. First, and most importantly, many of these books deal with tactical issues (how to be a dividend investor, how to invest in gold, how to make money on-line etc). The issue is that tactics should always follow strategy and the books do not make much sense, no matter how good, if you have not figured out your financial plan.

The second is contextual. The “how to become a successful real estate investor” books fall squarely in this issue. Many of the authors made their money in real estate before the bubble started escalating prices. This is not the fault of the author per se but the reader should be mindful of the context of the author. A book on how to invest in Florida real estate published in 2005 would look a whole lot differently than a book on the same subject written in 2011.

The third is the creditability of the author. Some authors support some ethically suspect tactics or make the system seem far too easy (see Financial Blogger for taking Tim Ferriss’ 4 Hour Work Week to task; the E-myth by Michael Gerber deals with the same topic but without the over simplification and over-sell characteristic of selling in the web 2.0 age).

Similarly, some self-help books read as commercials for seminars or workshops. One of the reasons to read self-help books is to create some self-reliance and not to become a crutch to someone else. You don’t need to pay a “real estate guru” to help you become a good real estate investor (or have him/her use your money while they control the project). You need an understanding of cash flow, patience with people and control over your emotions.

The third group I call the “think successful” books which is admittedly an amorphous description but describes anything which asks you to think like a successful investor without necessarily going into a step-by-step program. This whole genre is filled with anything from the spiritual (The Secret being a good example) to more analytical (The Millionaire Next Door). The primary point is to engage the reader to think about personal finance a certain way.

The best works in this genre are the ones that do not sell an easy answer but prescribe a methodical approach to thinking about personal finance and how to be good at it. For anyone interested in personal finance, a good starting point should be to read something this genre of books followed by the more tactical “how to” guide since it is hard to implement any system without the right approach.

The above is a over-simplification of the personal finance self-help books but, as the research indicates, the ones that work best ask the reader to think the right way (not just thoughts but in values), offer a step-by-step approach and stay away from the easy solution. Best of luck.

Severance pay: what am I entitled to?

Severance pay in bankruptcy situations.

If you are a contractor for a business which is insolvent or bankrupt, the unfortunate situation is that generally there are no special provisions helping unpaid contractors as opposed to employees in a similar situation; the assumption being, as a private agreement negotiated between sophisticated parties, the business providing the service would have taken sufficient steps to protect themselves from non-payment (deposits, with-holding work, trade-credit insurance coming to mind) or commence legal proceedings to collect.

The situation most likely affecting many employees recently is constructive dismissal. Constructive dismissal occurs when the employer makes a large change to the employee’s job- whether the roles and responsibilities, hours (for employees not working on call or an as needed basis) or salary (a turn for the worse in working conditions can also be a ground for constructive dismissal). Assuming the employee resigns in protest not soon after such a change, the employee may have grounds for severance. Given the law of constructive dismissal is so complex, qualified legal advice should be sought immediately.

As employee rights differ from jurisdiction to jurisdiction, qualified legal advice should be sought regardless. For those in middle management, employers will sometimes compensate (either in whole or in part) reasonable legal fees in connection with reviewing severance packages. For those in unions or a part of a large layoff, pre-paid legal services or a group hiring a lawyer may be cost-effective ways to go. Many law schools will also offer legal advice through legal aid clinics.  Good luck.

None of the charges have been proven in court. Without speaking to the case at hand, it does raise a larger question whether the same apparatus of state used to deal with “conventional” crime can deal with white collar crime.  It requires an expertise and skill-set (forensic accountants, Crown attorneys who understand how financial crimes work etc.) which many police forces, crown prosecutor and judges do not have.

I once commented on Larry MacDonald’s blog, who has run several great posts on white-collar crime, that it may be time to set up a specialized white collar division of the court just as there is a “Commercial List” in Toronto to handle large and complicated commercial disputes. Judges and crown prosecutors would have specialized training in white collar crime just as judges on the commercial list are typically former commercial lawyers and are more familiar with the concepts in dispute.

Of course, the downside is that it will strain resources of an already over-burdened system. But, with governments so intent on preserving the wealth of its citizens (see Japan buying ETF’s tracking the Tokyo Stock Exchange in order to keep confidence up in equities), it would seem odd that there may be a gap in this goal.

For those who invest in telecommunication company stocks, it is difficult to tell what the effects will be. Unlimited data plans are revenue capping while a move to lower entry points on data may entice a new group of customers but with potentially lower margins- call it a passive aggressive race to the bottom. One also wonders if AT & T is pursuing greater quantity of customers, it ends up in the exact same place now- lots of customers overloading the network.

Mobilicity and Wind, 2 of the 3 new cellphone companies in Canada, have unlimited data plan but at more expensive rates than AT & T’s former plan (par for the course for all Canadian cellphone carriers who are at least a year behind the U.S. which, in turn, is behind Europe/Asia).

But, given the trending the U.S., it appears unlimited data is neither profitable in the long run or helps network reliability. If you have unlimited data plans in Canada and use it to the max, it may be another 12-24 months before the ride is over.

There has been a lot of focus on stock allocations and risk in the last few weeks arising from Greece and the larger sovereign debt issues but the fundamental issue continues to be the same.

People are not saving enough. Household debt levels continue to rise while personal savings rates continue to fall (although household debt levels include both mortgage and non-mortgage debt which raises the question of whether real estate valuations can support our debt- a subject of another post).

But what exactly is enough savings? The figure of 10% of take-home pay has been often used as a nice round number as an ideal savings rate. The only issue with the 10% rule is that it lacks context. Studies have shown that household savings rates are influenced by factors such as interest rates, inflation, the government’s fiscal position and ratio of household net worth to personal disposable income.

When all these factors are aligned positively for the average household, the savings rate can fall and is generally seem as acceptable. Whereas when these factors are affecting households negatively, household savings by necessity must rise.

For example, during the 1960′s, a low inflation/high growth period, the savings rate for Canadians was 6.7%. In the 1970′s and early 1980′s, a high inflation/stagnant growth period, the savings rate for Canadians was in the teens and peaking at 20% in 1982 when mortgage rates were regularly between 15%-20%.

The particular issue facing all of us is that we live such economically anomalous times. Typically, savings rate tend to shot up in down times as a defense mechanism (this is why government in the past could safely increase debt- there was enough domestic personal savings to purchase the debt but if the government and its citizen are broke…). This does not seem to be happening based on recent data. Only one factor- low interest rates- seems to be aligned for consumers which would mean household saving rates should be going up but its not.

Thus, looking at savings rates today and using it as a peg, may not be very helpful and given no one knows what will happen when government turns off the taps, it is hard to predict what exactly an appropriate savings rate should be.

In such uncertainty, the only safe rule seems to be: (i) save; (ii) make it automatic; (iii) save more than you think you need since it is easier to go backwards than forwards.

In that vein, rather than buy an iPad, you can win one at Where does My Money Go. Enter now to win an iPad. Good luck.

We sometimes do not realize being a happy shareholder also means being an unhappy customer. If it becomes harder to make a dollar for many businesses, things could get worse as businesses attempt to squeeze more out of customers while giving less- all in the name of meeting shareholder expectations.

What’s a poor customer to do?

1. Beware the problem industries. Gym memberships,  gift cards, travel, extended warranties, gift cards and cell phone contracts all have specific sections of various consumer protection acts addressing these  products or industries for a reason; there are many unscrupulous people in these industries- watch out. There are also industries which are unregulated or unlicensed that need to be licensed- home contractors comes to mind immediately. Be very cautious and detailed about dealing in these products or industries (if you are wondering about consumer protection and cell phones, the Province of Quebec’s revised Consumer Protection Act (Bill 60) prohibits punitive penalties from being charged for early termination of long term contracts. There’s a possible constitutional issue in that telecommunications are federally regulated and this provincial act may be challenged. However, if it survives a possible legal challenge- this could be a huge win for consumers if adopted by other jurisdictions).
2. Verbal Agreements mean nothing if you are dealing with big business. As Mike from Four Pillars found out, a verbal agreement with a cell phone provider is not worth very much. Run if someone says “trust me” (as I have written many times, someone who is trustworthy doesn’t say “trust me”). In the world of big business, rely on the paper which brings me to…
3. Read the fine print. If the salesperson will not let you read the fine print (a very common tactic in car dealerships), it is being done a reason. The fine print is not very favorable to you. If you don’t understand the fine print, ask.  The larger the purchase, the more the salesperson should know the terms and conditions. If they try to blow you off pre-purchase, well…we know what post-purchase life will be like.
4. Do your research. Sounds simple but in an age of information over-load it is easy to gloss the details. This is the fundamental advantage of the internet. There’s always a fanatic who will review a product or service in-depth.
5. Do not allow yourself to be brow beat or bullied into a deal. The best answer a salesperson can get is “yes.” The next best answer is a “no”. The worst answer is “let me think about it.” Good salespeople understand this and will engage in a variety of tactics (create the illusion of scarcity of supply or time being a common one) to get to yes or no quickly. If you are buying something which you don’t need but want and you are feeling rushed into a decision, step back and sleep on it.  Look at it this way, if the salesperson is rushing you to buy, what do you think the post purchase service will be like if they had so little time for you before you parted with your money?

I also pause twice when things are super cheap. In order to turn a profit on a super cheap product, the business has to either (i) make an inferior product which won’t last; or (ii) provide no after purchase service. This is how the cell phone business model works. They give you the phone for cheap or free and, in return, you are not supposed to bother them with problems (at least that’s how many customer service departments are built).

Finally, I am not very Obama-esque that government is the solution to consumer protection issues. Elections are not won or loss on consumer protection. The issue is that it is easy to pass laws for show but are there any resources to actually enforce them? For example, several years ago, many jurisdictions passed franchise protection laws. The problem is that there is no department of franchise protection and franchisee had to sue to enforce their rights.  The practical issue is that most franchisees who have been victims of sharp business practices of franchisor’s have no money to hire a lawyer.

Thus, don’t rely on anyone to protect your rights other than yourself.

Apropos to this approach of being loud and opinionated, if not necessarily right, Canadian Capitalist recently took O’Leary to task for confusing gross domestic product (GDP) growth with stock market growth. The concept makes for a great sound-bite. For an average investor, equating the two is analytically easy but most average investors also buy high and sell low.

Is there a link between GDP growth and stock market growth? A rising tide raises all boats but one does not necessarily equal the other. Why?

GDP is the market value of all goods and products produced by a country in any given period of time. To state this another way, GDP is a measurement of all public and private sector production. It does not measure profitability. Thus, a country with a large public sector or who controls a lot of the means of production, so much so that the western concepts of private property do not apply (read China), can experience rapid GDP growth without showing any profitability.

A share price is an expectation of future profit. If a publicly traded company is doing well presently, its share price tends to go up since the market has expectations it will continue to do well, if not better, through the reinvestment of profits to build the business. In other words, share price is a function of profitability and not necessarily production.

Thus, it is possible for GDP to grow while stock prices decline. The growth could be all in the public sector, at the expense of the private sector (think Venezuela seizing private property) which sends a chill throughout the entire market or simply inefficient growth making it harder for private enterprise to succeed (if you study modern Chinese history, most would be hard pressed to argue that GDP growth during the Great Leap Forward was efficient or effective).

In fact, corporate profits, the pillar of how share are priced, play a very small role in total GDP production. Charles Ellis, author of Winning the Loser’s Game, wrote that corporate profits consists only 4-6% of total GDP growth historically.  Since corporate profits represent such a narrow slice of total GDP, it is analytically lazy to think GDP growth = stock market growth automatically.  In fact, at such a small percentage, it is possible for corporate profits to flat-line and not effect GDP growth significantly.  Certainly, there is a connection between the two but its strength tends to be overstated.

As a final note, it is important not to be seduced by GDP growth when investing in emerging markets. Many emerging markets are growing through centrally planned economies (China), with heavy government involvement and ownership (Brazil) or regulated by an expansive and byzantine bureaucracy (India). The more practical issue is that with wealth not as evenly distributed in emerging markets as mature economies, it may be more advantageous for a few to horde the profits privately than the many publicly (Russia). Thus, there must be special attention paid not to confuse GDP growth with stock market growth in this context.

For some, the paperwork that is our financial lives gets paid or dealt with and promptly disposed of. How dangerous is this practice? Consider the following pitfalls:

• the obvious example is returns and exchanges are usually not honored without a receipt even if you bought a store made brand. After all, how does the retailer know you purchased the good within the time allowable for returns and exchanges?
• product warranties usually will not be honored without proof of purchase. For those relying on extended product warranties offered by credit cards, the card holder is typically required to show both the proof of purchase and the credit card statement in the month the product was purchased.
• if you are claiming capital gains or losses and you bought the same stock at different prices, you need the transaction records to calculate your adjusted cost base. This is particularly important if you are enrolled in a dividend reinvestment program.
• disputing your cell phone bill, gym membership or lease on your apartment? How can you stand up for your rights without the original contract? Given the other side will not give it to you, its like fighting blind.

What should be some key items to retain?

1. Receipts for large ticket items. I staple the receipt with the warranty and put all of the warranties and instructions in a file folder.
2. Financial statements. Statements setting out your investment portfolio and transactions of what was purchased or sold is important for claiming taxes. Even if you only trade in tax deferred accounts like RSP or 401(k), the statements show a pattern to your stock purchasing behaviour which can be used to adjust accordingly.  I put all of these in a large folder with tabs (one tab for non-registered, one tab for registered).
3. Credit card statements. See above for claiming extended warranty protection. I also keep them to track monthly spending patterns month over month. They are compiled annually and stored. Receipts are stapled onto the credit card statement (especially important for claiming business expenses).
4. Bank Statements. They should be read for a reason- failure to do so within a period of time means you agree to the statement. If there are errors you do not spot, you are liable for them. They should be kept for another reason- to reconcile your cheque book and to track spending.
5. Contracts.I usually put these in a large folder.

There is a lot of planned chaos in my financial record-keeping. I keep all my receipts in a large black clip and I staple them to the credit card statements when I receive them. Then I put all my credit card statements in a folder every other month or so. There’s a folder simply labeled “tax”. I put anything related to taxes in there over the course of the year and only look at it around this time of the year. Finally, I have a filing box which is just all the odds and ends that have no easy classification for me (credit card terms of use tend to die quiet deaths in this box).

In other words, one does not have to file meticulously every single item in a separate folder or have a degree in library science. The key is to know where to find something quickly if need be.

Am I missing any important documents which need to be filed?

1. Budget

Have a very candid conversation before you send your kids to school on what you are willing to spend. Stick to it.  It will teach your child to live within your/their means if you stay disciplined on a budget and it will be a good life-learning lesson on personal finance. Better yet, have the both of you sit down and prepare a budget together. If there is a shortage in the budget, your child can always look for part-time work to make up the short-fall.

2. Think  prepaid

Instead of giving your kids a conventional credit card to spend at university or college, think about providing a prepaid credit card instead. Prepaid credit cards are like debit cards in that a certain amount of money are stored on the card and when the prepaid credit card runs out of cash it can no longer be used without it being topped up with more money (paid link).

Prepaid credit cards also avoid the issue of high interest rates and teaches someone to budget properly.

Similarly, instead of arming a child with a conventional cell phone, think prepaid cell phones. The concept is the same as the prepaid credit card. You preload a certain amount of time on the phone and once it is used up, the cell phone cannot be used without topping up more minutes; it will teach your children that nothing is free in life. Best of all, most prepaid cell phone carriers do not require you to sign a long term contract.

The issue with conventional cell phones is that roaming, SMS charges, long distance charges do add up (you may be better off buying a  long distance phone card if you are sending your kids away from home rather than get a long distance plan on a conventional phone).

3. Think second-hand

I used to like buying second-hand books simply because someone highlighted all the important sections for me! Text books also go out of date very quickly (how else is a professor to make side income then to put out new editions every few years) so there is no real value in buying new.

Refurnished computers are also a good bargain (and, really, a new computer with massive amounts of memory will be used to download music and movies and not for school-work).

4. It is a dorm room, not a hotel

My regular columnist, Mom2KG, gave me this tip (who, incidentally, I went to school with so I witnessed this first-hand when we went to school). Every orientation week, vendors attempt to rent/sell mini-fridges to people. These tend to be used for nothing more than storing booze, water and more booze. They tend to be luxuries more than anything else so skip the bells and whistles.

Also avoid buying a lot of items for the dorm room (lamps, posters, book shelves etc. ) at the university book store. They tend to be more expensive. One is better off making a Costco or Ikea run beforehand.

5. Do not forget free money

There’s a lot of grants, bursaries and scholarships that most people don’t apply to. People tend to focus on the large entrance scholarships and forget the smaller grants, bursaries and scholarships. Most universities are dying to give this money away. Encourage your child to apply early and apply often. In my last year of law school, they were dying to give money away. I remember people who could afford to cover their own way were still receiving bursaries because the University had to give it away.

At its very core, unemployment rates and stock market indexes are lagging and leading economic indicators respectively. A lagging economic indicator is a snapshot of the past and may not be necessarily reflective of the here and now. For example, businesses tend to engage in massive lay-offs after the financial results are in for the previous quarter; management may have a feeling it is doing properly but until the bean-counters consolidate the financial statements, it is a feeling only. Thus, a lagging indicator tends to merely validate past events.

A leading economic indicator estimates future economic activity. Stock indexes are basically a measure of future expectation of profit. Building permits issued are indicators of potential upcoming real estate activity (there is a difference between an issued permits and a built permits; the former predicts the future, the latter measures the past- if you are a real estate investor, look for built permits not issued permits when conducting your due diligence; it is a truer measure of real estate activity). Leading indicators, because of their speculative nature, tend not to be accurate all the time so take leading indicators with a grain of salt.

Thus, you are not actually measuring apples to apples when you look at unemployment rates and stock market indexes. One looks back, the other forward.

However, more specifically, why do stock markets react positively to rising unemployment numbers? The answer may be two-fold. First, massive spikes in unemployment may signal a quick descent to the bottom and an imminent recovery, meaning a quick bounce back in stock prices. Second, from a quantitative perspective, lay-offs mean lower expenses which means a company can maintain the same level of business but make greater profits.

Both factors, despite a certain cold-heartedness to the analysis, tend to warm the hearts of traders who take this as a sign things will get better for the economic performance of a stock (although not necessarily for the common working person on unemployment insurance).

If you subscribe to the theory that the worse of the credit crisis is over and we are entering into a plain-old recession (a hunch to be sure in such unpredictable times), one factor to look for to validate this theory is to see if we are going to see the early 90′s behavior again of a parallel rise in unemployment rates and stock market indexes. A long and sustained rise in unemployment rates accompanied by a long and sustained fall in stock market indexes (think years for both) may validate the depression theorist out there. It may take the rest of 2009 and early 2010 for anyone to call it.

Have a safe and fun long weekend.