There is one problem. Here is CP’s railway network. Here is rival’s CN’s rail network (CN is the most efficient railway in North America and often cited as a model for CP to emulate). See a problem? CP’s railway network tunnels through the Rocky Mountains. CN’s more or less avoids it. The British Columbia to Alberta part of the rail network is important because of the amount of goods being shipped to and from the ports of Vancouver and Prince Rupert to the Asian market.

Perhaps growing frustrated by Pershing Square’s criticism that CP is not efficient, CP admitted last week that there are “structural makeup[s]” of the two railways that make CN an easier railway to run from an efficiency perspective. In other words, CP was basically saying “hedge fund, please meet reality.”

Can CP become more efficient? If you looked at its financial statements and industry metric for efficiency, known as operating efficiency, the answer would be yes. This is the type of information that a hedge fund or average investor would have access to. But, financial statements do not disclose issues like a structural disadvantage of a company compared to its competitor, company morale or corporate culture (judging from comments from friends who have worked at RIM when things were going well, never has the saying “culture eats strategy every single day of the week” been more adapt).

The passive school of investing often talks quite rightfully about the statistical inability to beat leading indexes over time. However, the other issue with active management is that “soft” investing factors which often do not necessarily show up in a balance sheet affect stock prices.

Here is the hard truth. 99% of us, including hedge fund mangers, cannot accurately measure the impact on these types of soft factors on stock performance. I wish Pershing Square well. CP is certainly an industry laggard and needs an external push to make it more efficient.

However, I am perplexed that a hedge fund can believe that management should literally move mountains in order to make it more efficient. Then again, hedge fund managers believe themselves to be gods so re-shaping the earth shouldn’t be so hard right?

A full review of this book is up-coming. In looking at the concept of willpower and personal finance, the authors make at least three observations to help those who want to save more (or spend less):

1. Goal setting is important but so is monitoring your goal. Using a sample size of 2 billion transactions, the authors noted that users of the website www.mint.com slowed their upward trajectory of spending with such effects amplified if the users used the budgeting tool. It appears the act of monitoring spending slows it.
2. Look at the glass half full if you want to keep motivated. A University of Chicago study found that advertising agency employees who were asked to reflect on their successes were more content but less likely to move on to new challenges. Those told to focus on what they had planned but not achieved scored higher in motivation.
3. Peer scrutiny works. A group of Chilean entrepreneurs were divided into two study groups: one group was given a savings account and the other group given a savings account and an opportunity to speak about their savings goals. The second group- those forced to put their savings habits under peer scrutiny- had a savings rate double the first group.

It would appear that savings is simply not an exercise of making it automatic (although a very good and important start). Instead, good savers tend to be those who monitor, stay motivated and subject themselves to peer scrutiny. I have written on this before but it may be beneficial for those struggling with personal finance issues to have an accountability buddy to help them meet their goal.

Since many large media companies also have stakes in group buying sites, it has been noted by some, including yours truly, that criticism of the downside of group buying has not been as forceful given the inherent conflict of interest/editorial bias (Wagjag,  Swarmjam, Lerenard are three examples of local group buying sites owned by media outlets).

However, the risks and consumer protection issues in group buying is the same as in any “normal” consumer purchasing relationships and, in some instances, amplified. Specifically:

Bankruptcy risk doubles. Group buying requires two parties- the group buying site (the modern day equivalent of the middle person) and the supplier (the retailer and/or service provider). If either goes under (which, in such an explosive industry, is bound to happen as function of a pure numbers game), the consumer either many not redeem their voucher or have recourse against the group buying site (a double edged risk since the retailer/service provider may not have collected all their money from the group buying site).

Retailers change the terms of the deal. Given its novelty, some retailers have not figured out how to price the deal properly or cannot handle demand. So they change the rules on the fly. Some retailers also will treat consumers with group buying vouchers poorly (more a bad customer service issue than group buying issue).

Be careful of limitations of the vouchers. Many vouchers can only be used in set times (weekends only, nights only, lunch time etc.). The other practical problem is if the voucher is for a service provider, there are only so many hours in a day to book a spa, get your nails done etc. A colleague who is a group buying fan advises me to avoid deals where you have to book a time. It may be difficult to get a convenient time (who really wants to get their hair done at 8:00 am Monday?). The lesson being read the fine print in every offer.

Refunds can be difficult. Who do you ask for a refund? The retailer and/or service provider or the group buying site directly? The larger players have, laudably, taken the position that they will accept all refunds (which many new sites do copy to the benefit of the consumer) but refer back to bankruptcy risk.

Blatant consumer protection offenses. Group buying sites have already been cited for such deceptive sales and marketing practices as bait pricing (goods/services priced at low prices but offered in small quantities), non-supply of services and misleading size of discounts (in one example, a 60% off dinner offer failed to mention the discount was only valid if another diner paid full price). Like any other industry, there are good players, bad players and charlatans.

Group buying is a great tool to get discounts- if used properly. The moral of the story is group buying is no different than any other purchase- the same amount of diligence should be applied to ensure you protect yourself.  Good luck.

Instead, having met many successful business owners, I would suggest that a more accurate means of examining why some business owners do so well, and one readily translatable to employed people, is to examine some of the habits that contribute of successful business owners.

I am particularly struck by the following habits:

An acute appreciation for cash flow. I have met many business owners in many life. Usually, you can tell by a short conversation with them who are the successful ones and who are not. The successful ones do not spend an inordinate amount of time taking about sales (good, bad or indifferent). Instead, they either talk about how to free up cash flow or they spend good money hiring someone who understands cash flow if they do not (I have often remarked that the first hire for a start-up company should be a good book-keeper).

Cash flow is the oxygen of finance- business or personal. Without positive cash flow, one’s range of options diminishes. I have often believed that real estate investors do well not because of the assets itself but because the nature of the asset forces the investor to analyze cash flow every single month. It is a discipline a stock investor only has opportunity to do once a quarter.

An understanding there’s only two sides of a ledger and you can only control one. There is only two sides to the ledger- income and expenses. The running joke for those who have experience in the start-up community is that the revenue forecasts for the bank or investors are really just guesses (and they know this but have to play along in the game). The only side you can control is expense side so you pay attention to that side of the ledger.

A healthy attitude about debt. Ed Rempel is a regular columnist for Million Dollar Journey. He elicited a lot of comments in his last post about financial independent people not paying off their debt. I would not describe debt as an either or proposition in that you either have lots of it or you have none. Instead, the question for business owners is whether: (a) the debt is being incurred for revenue producing purposes; and (ii) whether the revenue being returned is contributing to positive cash flow.

It is, unfortunately, an analysis which is harder to apply in our personal lives since the largest sources of debt are to purchase depreciating assets (auto) or for shelter (unless it is an investment property or one is renting part of their principal residence).

They know the exit strategy before they play the game. I once met a real estate developer who does not buy land without actually lining up a developer or anchor tenant for that land- even if the commitment is not for another 3-5 years. By doing this, every single decision they make while they own the land is premised on the exit strategy already entered into when they signed the offer.

On a personal perspective, the question to be asked is “why am I buying product X and how does it fit into my strategy” rather than “product X yields 9%, let’s buy it” since the yield may throw off the risk tolerance one is willing to incur as part of a strategic plan.

…If the government is truly serious about solving the financial literacy problem, a good starting place may be to teach how students how to run businesses in school rather than run stock picking contests which only encourages needless risk taking. If this all sounds daunting to you, I would focus on the cash flow habits. Monitor it religiously and, to quote Seymour Schulich, use a simple metric- if there is more cash in your bank account month to month, you are moving in the right direction.

The problem though remains the same. Essentially, one is investing in a trend and what may be popular may not be right. Groupon, for example, has never turned a profit, burns cash like it was run by the United States Congress (its operating expense is more than double its revenue growth suggesting large inefficiencies as well as lack of fiscal discipline) and the executives have a disquieting habit of using the business as their own personal piggy bank (as this writer notes, Groupon raised nearly $1 billion in venture capital money and used substantially most of it to cash out their own holdings).

Here’s the more fundamental problem with tech stocks in general. My business colleague invited me to the launch of a group buying site last week which featured a panel of group buying experts (here is a the definition of group buying in a nutshell). The group buying story locally involves a store called The Butchers which basically sold too many vouchers and now has a customer relations nightmare on its hands (Ellen Roseman has summary of the issue).

Many people in the audience kept asking questions about The Butchers and the group buying sites’ role in creating the problem. One of the panelists said (to paraphrase): no one knew how to harass e-commerce 10 years ago, no one understood how to commercialize smart phones 5 years ago, we are still trying to figure out how to commercialize social media. Group buying is a very young industry and the industry is going to go through growing pains and make mistakes.

So, essentially, the investing public is being asked to fund the business experiments of publicly traded social media, group buying and other tech start-ups. Not exactly confidence inspiring when put this way is it?

The second larger issue to note is that many tech companies are built to be sold. The barrier to entry is low and the window to commercialize technology so small that many founders are building to sell. This is all fine and good if the investing public understands that a tech IPO may be, in priority, a liquidity event for the founders (and fees for the underwriters) and a value building proposition for the investing public.

If one understands this game going in, then the risk is understood and processed accordingly. If this risk is not understood then history may repeat itself 20 years later.

Aided by the relatively unimpaired flow of capital and boxed in by the more or less tapped out Canadian market, each of the Big Five banks are pursuing diverging corporate strategies, eschewing the traditional strategy of staying local (as an editorial note, the Competition Bureau’s refusal to approve bank mergers in 1998 was, in hindsight, a smart move; rather than allow the banks do the easy thing, they forced them to be competitive globally).

For example, TD has become Well Fargo east: a bank with a large retail focus. In the last fiscal quarter, 88% of net income was from retail banking operations. Meanwhile, RBC’s ambition is to become a global capital markets player. It has publicly stated it wants to derive 25% of its revenue from its capital markets segment.  BNS is pursuing a Latin America and India strategy.

There are obviously investing implications which flow from these corporate strategies. As investors learned last week, a bank with a heavier emphasis on capital markets, such as RBC’s,  sometimes has volatile returns although only in the stock market do you get punished for being profitable and raising your dividend. A bank with a heavier retail focus, like TD, has lower margins and much more sensitive to the financial vulnerabilities of households.

In other words, it is not like yesteryear where one picked a Big Five bank and knew stock market performance was more or less would be in line with its peers.  If one assumes that the Big Five banks continue to be a relatively safe stock play, the implication of this development would be to abandon picking one or two Big Five bank stocks and purchase an exchange traded fund which tracks the Big Five banks or financial institutions with a large weighting in bank stocks (for example: XFN: TSX has over 70% of its holdings in the Big Five plus National Bank).

The days of thinking one Canadian bank was like the others as a stock picker are over. It may be time to readjust investing strategies accordingly.

(for full disclosure, I own all Big Five bank stocks directly or indirectly through stocks and ETFs).

But has the truck already hit us? Food inflation, which is not included in the calculation of the consumer price index, was 6.5% in the U.S. in Q1 2011. Anyone who shops weekly knows this.   Of course, we all know about gas price inflation as well.

The problem with food and gas inflation on personal finance is two-fold. Having an over-allocation of cash lying around produces a de facto negative return since purchasing power is declining (if you hold a lot of USD, you have a double whammy of a declining USD against other currencies). Secondly, the normal response to inflation is to increase interest rates which solves one problem by increasing nominal yield but creates  two others in creating a greater tax burden (assuming the cash is not in a tax deferred or tax free account) and squeezing the over-leveraged.

The specter of inflation, not seen since the 1970′s, points out the essential issue of having too much cash in one portfolio. For those with long investing horizons, an over-allocation in cash is typically a sign of aversion to market risk but one has merely substituted that risk, which is unknowable in its time and degree, for a certain risk in taxes (again, if cash is held outside tax deferred and tax free accounts) and a almost certain risk in expanding economies of inflation and declining purchasing power.

Although we often do not look at it this way, the largest risk to any nest egg is taxes and inflation. By holding an inordinate amount of cash on hand, one is almost willingly walking into that risk (to be clear, you need cash on hand, I speak of over-allocation).

What to do? Unfortunately, inflation is like a serial killer in movies. You cannot kill it with one single product. There are certainly inflation protection products on the market but they are not magic bullet solutions. Instead, a more multi-prolonged approach is often cited, combining a mix of inflation protection products, short-term bonds and dividend paying stocks. My own approach is usually to bulk up on cash in times of uncertainty (remember we went from fears of inflation to deflation to inflation in the span of 18 months) but when patterns emerge to reallocate accordingly.

I would add, as the often over-looked factor, focusing on human capital and retraining and/or working in industries who’s pay increases can keep up with inflation (oil/gas, tech, health care to name a few).

Pre-social media research tends to say no. Its findings, on some level, reveal that some investors may act like the very mutual fund managers they hate.

Among the many grips against mutual funds is that they turn-over their portfolios too often, resulting in detrimental tax effects and higher than required fees for the investor.  One school of thought is that mutual fund (and, by extension, all active managers) are not necessarily poor stock pickers.  Instead, the poor performance of mutual fund managers may be attributed partially to improper asset allocations and too much turnover.

But when researches look at estimated turnover of investors, they find that they have just as itchy fingers as mutual fund managers. Investment Company Institute estimated that the average mutual fund investor had an average holding period of2.78 years based on redemptions rates from 1985-2005, DALBAR’s “Quantitative Analysis of Investor Behavior” estimates a hold period of 2.48 years. John Bogle estimates a hold period a little under 3 years.

It gets worse. In a study looking at the turnover and returns of day-traders from 1991-1996, the authors found a stunning 75% turnover of a portfolio annually with less than impressive results. These investors underperformed market indexes by 6%.

With technology significantly improved and costs lower for discount brokerage, it would be interesting to see if technology has merely amplified the best and worst of investor behavior.

Having warned of the itchy finger, my next post will comment on one asset class you cannot sit on too long.

The “experts” believe stock market declines were specifically due to economic growth; mainly, the Chinese government had to keep taking measures to rein in inflation and cool perceived asset bubbles. The divergence between economic growth and stock market declines in China brings to mind two points.

The “economy” is an aggregate of all economic  activity in a country but with specialization, free trade and free flow of capital cross borders, it is hard to describe the economy as a monolithic entity in this day and age. For example, high oil prices reward resource sectors but punish manufacturing.  If you were in social media in 2009-2010, you would describe the economy as good to great but the opposite is probably true if you were in traditional retail. As such, it is a little simplistic these days to ask how the economy is doing since, depending on where you sit, it could be the worst of times or the best of times.

Just as the economy cannot be thought of as a monolithic entity, neither can the stock market be thought as a perfect proxy for a country’s economy. Stock markets do not have stocks in every single sector of the economy (when was the last time you heard of an analyst covering the education sector?) and, even those stock markets with good sectoral coverages, tend to have larger clusters in certain industries. For example, most exchanges will be over-weight in financial stocks even if the economy is not as heavily dependent on the same sector.

Accordingly, the stock market may only be tracking certain parts of the economy which are doing better or worst than other parts of the economy. While there is a connection between economic growth and stock market gains, it would be analytically lazy to think economic growth in a country must automatically lead to stock market gains in that country.

This is the type of thinking that would lead one to buy an ETF tracking the Chinese stock market based on its economic growth and finding out the market was down 14%. The better approach would be to analyze the sectoral coverage of the local exchange and see if there is a strong correlation between the sectors it is over-weight in and the economic strength of those industry.

Have a great long weekend.

To deal with the easy question, all accountants are not created equal. If they were, the corner store accountant would have the same skill-set and expertise to prepare the tax returns as the accountants preparing GE’s tax returns. Clearly, this is not the case.

The difference between good accountants and bad accountants is that, in some cases, bad accountants are not accountants at all but book-keepers who file tax returns or tax preparers who use the same software you and I could get. To be clear, this is not to disparage book-keepers; in many respects, valuable book-keepers are worth more than good accountants. My point rather is to highlight you may not be getting value for your dollar. Let me explain

Professional advisory firms work like all businesses. You either work in quantity (lots of clients, low to modest pricing and small profit margins- think Walmart) or quality (fewer clients, higher pricing and high profit margins- think Saks Fifth Avenue). Professionals who charge by the hour have an additional wrinkle: you can either leverage your time, working 18 hours a day, or leverage your staff’s time, by working them 18 hours a day or both.

If you work in a quantity professional practice, you tend to fall back on leveraging your staff’s time given, with low profit margins, you want to push down the work to the lower paid employees and devote your resources to pushing more numbers through the funnel. What ends up happening then is that accountants who operate a quantity practice tend to push all the work down to his/her staff. The issue is the staff may not be: (i) qualified; (ii) experienced; or (iii) could not care less since it is not their professional license on the line.

(Signs you hired a quantity professional: late returning calls (if at all), calls are very short and curt, you always deal with staff, office is more retail than office tower, everyone seems disorganized…).

The potential result is that their staff, who may not be trained to prepare taxes properly, may be missing deductions and credits or simply overlooking tax planning opportunities since they are not accountants but tax preparers (Jim Yih has a good blog about the difference between tax preparation and tax planning).

Even if your taxes are simple to prepare, it begs the question of what value one is deriving from an accountant who runs a factory operation (slips in, tax returns out)? Would one not be better buying a tax preparation program? This is a personal choice based on comfort, time and expertise.

How can you tell if your accountant is good or bad? The size of the tax return is not the end all and be all since this is not necessarily the best indication of talent; after all, a large tax return may be a function of you simply over-paying your taxes and if your accountant allows you to do this year over year without stopping the pattern can they really be that good?

More often than not, to use a well worn phrase, look for accountants who take a holistic approach to your finances. Will they sit down with you and explain what tax deductions and/or credits could have applied to you but you missed? Do they actually do some tax planning with you (even a cursory comment like “I noticed you are not maxing out all your tax deferred accounts” falls within good tax planning)? Will they refer you to other advisors and/or resources to help with your personal finances?

At the end of the day, good advisors are like good friends or family members. Do they actually spend time with you? Even if they cannot spend that much time with you, do you actually feel like they care about you in that limited period of time as opposed to seeing you as a dollar sign?

(To be clear, accountants are like everyone other industry. Some accountants’ business model is to simply crank out thousands of returns a year. In that case, all this warm and fuzzy will not matter since you will not fit within their business model).

When is it time to switch accountants? Again, it is not because the tax returns are getting smaller. From a practice management perspective, look for perceived indifference. From a professional perspective, look to see if your tax planning needs are beginning to outgrow the tax planning needs of her other clientele.

Often, you may have simply outgrown your accountant. Accountants niche like everyone else. If you become self-employed, you may have an accountant who specializes in employed middle class families and cannot provide the same amount of value as they previously did.

Finally, there is one final thing to consider. Accountants are only good as their source material. If you wonder why your returns are small or the tax planning advice poor, perhaps look at how you gave the underlying paperwork to your accountant. If its all in boxes and a mess, your return may mirror the state you brought the work product in.

I geek out and write a cover letter to my accountant stating what I am enclosing, receipts which I think may apply and some odds and ends about my life goals (for example, I am buying a house soon, please plan accordingly).

Good accountants are to be valued. Bad accountants are to be replaced like every other bad advisor. When you see your accountant next, please assess whether they are good or not. Best of luck this tax season.