The good folks at Intuit have provided to me their QuickTax tax preparation software (standard version). The software includes up to 8 returns and allows for importing of data from Ufile and other tax software. Retail value is $39.99.

If you want to win a free copy, simply post a comment. Canadian residents only are eligible for this giveaway.  I will draw a free copy on Friday March 5 at 6:00 pm (EST) and announce the winner next Monday. Email addresses will only be collected for the contest and for no other purpose. Intuit has provided the blog no monetary consideration for the giveaway.

Good luck.

Mariusz Skonieczny asks a question that many pondered in late 2008: why are we so clueless about the stock market? Written during at the height of the great recession, Skonieczny dissects the fundamental problem with most unsuccessful investors: they fail to understand the difference between stocks and businesses. Stocks are evidence of ownership but such ownership is only worth something if the underlying business is healthy and growing.

Taking this difference as a starting point, Skonieczny walks the reader through the basics of financial statements and the characteristics of a what makes a good business, quoting Pat Dorsey’s 4 factors that economic moats consist of intangible assets, switching costs, networking effects and cost advantages.

Every good investing book has one $10.00 moment. This book’s is found in advice on when to buy. Observing that most money managers are inherently short-sighted, the author notes that many institutional investors will pass up good long term deals if the short-term price movement does not play to their advantage. Money managers measure success in financial quarters whereas the retail investor should measure success in years. Therefore, a good investor should pursue opportunities with short-term uncertainty but long term certainty. In other words, avoid the noise and concentrate on the longer term.

The book is divided into short, easy to read chapters addressing issues such as how to value a company, diversification, investing in IPO’s (the short answer is don’t) and determining when to sell. This is also my criticism of the book. Some complex concepts are addressed very quickly to move onto the next topic. Some chapters could have been fleshed out a little better; for example, the diversification chapter is only 2 pages long- that’s one heck of a short free lunch. The case study chapter, arguably the juiciest portion of the book, was thoroughly educational and it would have been ideal to flesh out this section even further.

There is a little bit of math and finance in the book but it is presented in a straight-forward manner without too much reliance on complex financial equations.  Other than a brief boast in the beginning about the author’s return during 2008 and 2009, the book avoids the two big narrative cliches of investment books: the “look at me” syndrome and the “let me tell you a story” format (this format probably jumped the shark multiple books into the Rich Dad, Poor Dad series). It is to the point and concise in its writing style.

The ideal audience for this book would be someone who has mastered their budgeting and is interested in learning how the stock investing works with no fear of some simple math.

I have noticed lately I am receiving a lot of credit card offers. The offers are for new credit cards or cheques to be drawn down on my existing credit cards. When I pick up the mail in my condo, there are recycling bins by the mailboxes. My first instinct is to toss the offers into the recycling bins. However, I end up taking them to my condo and shredding them.

Identity theft can occur in many different ways. Someone steals your wallet and becomes you. Someone hacks your computer and steals vital information. However, identity theft can also occur as simply as going through your garbage or recycling bin and taking your credit card offers and applying in your name but with a different address. It is so simple yet so effective.

As a practical tip, please make sure you shred all your personalized junk mail. Offers from your existing financial institution, credit card companies or investment advisors provide key insights into where you keep your money to strangers.  These solicitations are both junk mail and insights into your life so guard your privacy accordingly.

I am on a business trip for the remainder of the week so no more posts this week. Have a great week.

Happy New Year. I hope your holiday was a safe and fulfilling one with family and friends and the best of the new year to you. The topic of new year’s resolutions, especially as it pertains to personal finance, has always been a bit of a head-scratcher to me. If you need to make an immediate change in your life, why wait until the new year (doubly important if the change is health related)?

Regardless, there is a certain symbolism of the turning of a new year and new seasons bring new opportunities for change. But are resolutions for change bound for failure? What exactly are the chances that your new year’s resolution will succeed? Dr. John Norcross, a professor of psychology at the University of Scranton, estimated on NPR that 40-46% of new year resolution makers will be successful at six months.

While not particularly encouraging, as the professor indicates, that is better than 0% of those who opt not to attempt a positive change in their lives. There are a myriad of reasons why new years resolutions fail. In the context of personal finance, there are several large ones:

Personal finance resolutions are made without creating or updating your budget

It is encouraging to resolve to pay off credit card or student debt or increase your savings rate but is it actually grounded in the reality of your personal budget?  It would be prudent as a mini-resolution to create or update your budget to determine where you stand at the end of each month  (if you are a newbie to personal finance, setting a budget and following it would be a great foundation to build upon). In this manner, your resolution is grounded in the reality of your particular context and numbers and goals are not being picked arbitrarily.

Personal finance resolutions attempt to accomplish contradictory goals

Saving more money or paying down debt as individual goals are both laudable. But most people cannot accomplish both; if you devote more of your take-home pay towards debt reducation, it is difficult to increase your savings rate at the same time especially if your salary is fixed every month (while not impossible, few can pull off both at the same time). In other words, make sure your goals are not contradictory or very difficult to accomplish at the same time.

Personal finance resolutions ignore the reality of the market

Statistics consistently show that most mere mortals have a hard time matching, much less beating, the market over medium to long term regardless of their education, occupation or skill set.  Over the long term, equities on equity should be in the range of (dividend yield + increase in dividend annually expressed as a percentage- aka the Gordon Equation).

Similarly, if you are interested in being a real estate investor, it would be difficult to achieve a capitalization rate over the range of 6-8% since most REITs have trouble exceeding this rate.

To set as a resolution some goal which ignores the reality of the market is an invitation to set oneself up for failure. In other words, be realistic.

Personal finance resolution ignore your past tendencies

Since a new year’s resolution is supposed to correct some undesirable behavior in the past, this seems like a strange factor to cite. However,  tackling the problems of the past using the same methods often lead to the same results. It is one thing to try to correct a behavior, it is another to use a different approach to solve the problem.

Personal finance resolutions are dropped at the first sign of trouble

This is pretty self-explanatory but loss or failure should be used constructively rather than as a reason to give up hope. Analyze what happened and make the proper adjustment. Perhaps saving 20% of take-home salary is simply too unrealistic but 10% is realistic, reasonable and attainable.

Personal finance resolutions attempt to reinvent the wheel

If you are paying down your mortgage, building up your retirement savings and funding your child’s education, there is nothing wrong with setting as a new year’s resolution doing more of the same. Taking what works perfectly well and moving away from it to achieve change for change’s sake may not necessarily be a good thing.

Best of luck with your resolutions.

__________________________________

A quick thanks to Larry MacDonald for quoting me in his Globe and Mail article about climbing the financial ladder.

2009 was truly an extremely strange and trying year. As someone self-employed, income tends to fluctuate at the best of times. Insert global credit crisis and a larger crisis of collective confidence in the future and you have an environment which, to state the obvious, is difficult for anyone to make a buck. Having said that, failure and adversity are the best of life teachers and success, paradoxically, a very poor one.

As my second last post of the year, I wanted to share a few things lessons learned from 2009.

Personal Finance is a process and not an outcome.

If you are a long time reader of my blog, you will notice that I have ceased really to review individual stocks or companies. This decision is conscious on my part since: (i) many other bloggers do it so well; and (ii) after 500 posts, I see personal finance as a process and not an outcome.

What do I mean by this? An outcome is product. An outcome is a ROI calculation. An outcome, devoid a thorough and analytical process, is often a search for the magic bullet solution.

Seeking outcome means you ask the question: “what should I buy to return me 10% per year?”- a product allocation question- not “how do I need to arrange my personal finances to protect against downside risk and make a moderate amount of money”- a strategic question which only answers the question “what product” at the end of the process and not the beginning.

To frame this distinction another way, think of the tried and true maxims of investing: buy low, sell high, buy companies with economic moats, buy what you understand. These are questions of process and not of outcome. We tend to focus more on what Warren Buffett is buying rather than the thought process behind it.  One would do better not tracking what Buffett is buying but how he arrived at his decisions.

I will give you a recent example of a process versus outcome analysis. I have, as have many of you, been to enough investment seminars where the speaker announces that our government’s fiscal policies (or lack thereof), demographic trends and depleting resources will result in a dark future ahead. What ceases to amaze me is that often the first or second question asked by the audience is “What should I buy?”

That question speaks to outcome without the underlying process (and it also abdicates to a mere stranger one’s decision making). Assume that the economy will have a rough ride ahead. Take stock of your life and determine where you are at and the steps you want to take will result in some favorable outcome.

The process vs. outcome lesson really comes from spending time with some very successful people. When you have a difficult year, you attempt to seek answers from those you consider more successful than yourself. What I noticed when I asked or observed those who I respect is the rigorous process they went through before they actually came to an outcome.

The old saying of: “give a man a fish and he will eat for a day, teach him to fish and he will eat for a lifetime” is ultimately a process vs. outcome saying.

Use the media exceedingly carefully

The Tiger Woods story, in many respects, broke the final barrier between tabloid reporting and traditional journalism. When traditional media outlets engage in tabloid type report-its about speed and not accuracy, no one is fact checking, the story is constantly changing and, quite often, just plain wrong- you know the traditional media is now engaging in the business of screaming at the top of its lungs rather than reporting.

However, caught in a pincer movement between the internet and tabloid reporting, traditional media has probably played the “if you can’t beat them, join them” card. On the personal finance front, this has lead to the Jim Cramerization of the entire medium.

I was in Las Vegas earlier this year and turned on MSNBC. I thought I was watching football commentary. There were 4 panelists and a host just rapid firing information on the price movement of commodities, writing numbers on the screen and going all John Madden on the viewer (“price of gold goes- POW- up and look at the inflation numbers going down- THUMP! Let’s see that again in slow motion…”).  I changed the channel quickly. Personal finance is about your life which I hope is a long one. Life decisions should not be made based on jolts of information on tv.

There are many great columnists out there in personal finance but the medium itself is succumbing to the worst of excesses. Certainly, absorb the information but take everything you see or read with a grain of salt. Things will get worse. The media is fragmenting into specialty niches and the only way that the powers that be seem to know how to get our attention is to increasingly jump up and down and scream the loudest most often.

Avoid dogmatic approaches to personal finance

I blogged earlier this year about attending an investment seminar. What I did not mention was a gentleman in his late 50’s who insisted the only way to make money was through real estate and that the entire stock market was a ponzi scheme. He was willing to tell anyone this that listened.

I encountered this a lot this year. Some people think the stock market is the only way to make money and blame the crash on the bursting of the real estate bubble. Others insist that real estate is the only way to make money and cite the stock market crash as Exhibit A. Some entrepreneurs I know, looking at the masses of unemployed, declare building a business is the true path to financial independence.

I build businesses and I invest in stocks. The former was a real learning lesson for me since, in down times, your margin of error is small and you have to discipline yourself to be great and not just good. As a stock investor, I similarly learned from my investing mistakes (over allocation of financials in my dividend portfolio being the biggest one this year).

I do not believe because I did not experience the success I wanted to in these ventures that they are inherently “bad” approaches to personal finance. My speculation is that dogmatic thinking tends to come from people who experience success in a method and then think the method is the only way to go because of such success (again, success is a poor teacher).

I would suggest the opposite. If you have failed in a method (however one defines failure) but the method is fundamentally sound (have other people of the same age, skill and experience succeeded?), the lesson to be learned should not be the method is bad and give up but one has actually been given important knowledge on how to employ the method properly (knowing what not to do is sometimes more important than knowing what to do).

To answer the question of what is the best method achieving personal finance, I believe the right answer is to find something that works for you (whether real estate, stocks, businesses), learn it and perfect it. Use the mistakes as learning lessons and use those losses to improve on your skills. Most of all, use your energy to make yourself better at it rather than convince everybody else of the rightness of your thinking.

(part 2 tomorrow).

I am honored to be included in Triaging My Way to Financial Success’ best of blogs 2009. There are lots of good articles and tips from each of the bloggers and I would encourage people to read through all of them. With the year ending about Tiger Woods alleged ability to, ahem, multi-task on and off the golf course, 2009 is truly about exposing the life of celebrities trashy tabloid style. After all, with the economic picture so dark what are people to do but to be noisy about the lives of others?

Amid all the scandal through, there are actually personal finance lessons to be learned from the rich and (in)famous this year. A few examples immediately come to mind.

Jon and Kate Gosselin. The craziest parents ever to raise 8 kids taught us a valuable lesson this year about joint bank accounts when Jon emptied their joint bank account of $200,000. But for a court order freezing that account prior to the withdrawal (and Jon having to return the money lest he be found in contempt of court), Kate would have had no recourse. The morale of the story is truly trust the co-signatory of your bank account since there are few controls over one party withdrawing money against the wishes of the other. Having said that, what you can do is have the bank notate that any cheque or withdraw over a certain amount of money requires dual signature.

Miley Cyrus shut down her twitter account this year. Supposedly, she figured out if you tell people the most intimate secrets about your life on the internet, they actually become public knowledge and can be used against you. Like, this is so shocking! O-M-G. Tell your BFF!

With tale after tale about people losing their jobs or insurance benefits over improper use of social media, let us remind ourselves that social media, despite its utility, can be an invitation into your private life and all the consequences, good and bad, that come with it. Parents- please do have a conversation with your kids about social media; it is the Trojan Horse to your privacy.

Glenn Beck, voice of the American political right, is getting flack for alleged conflicts of interest in promoting the purchase of gold on his shows. His reasons, as I understand it, to buy gold is that gold is the only true investment when the economic system collapses. There’s two interesting lessons here.

Glenn Beck may be great at being a media personality but I am not sure he’s the best investment expert out there.  But there’s a certain strain of personal finance that worships the cult of the expert (self-declared or not) over prudent strategy. If 2008-2009 taught us anything, experts are just as fallible as the non-expert; they are just better at getting attention. Strangely, this lesson does not seem to be sticking. Secondly, when main street starts telling you to buy gold, it may be a sign that a gold bubble is forming. Answering the question “when” is just as important as “what” in personal finance and life in general.

Michael Jackson and Ed McMahon both passed away this year. Both made literally millions over the years. McMahon died broke and Michael Jackson died a lot poorer than he should have been. The lesson yet again is it is not what you make but what you keep that matters.

Finally, Tiger Woods crashed his GM SUV while going for a drive/escaping from his enraged wife/under the influence/insert own TMZ inspired story here. Now there are whisperings the sponsors may be leaving the Tiger Woods brand as stories circulated that Tiger may have allegedly kept 10(!) mistresses. The lesson once again is character matters first and foremost in life since money comes and goes but character is forever.

On a lighter note, after Tiger crashed, the air bags failed to deploy. Onstar did not switch on and the front door was jammed shut. This all despite the police reporting the crash was at low speeds. Is this the final confirmation that the GM bailout was not a good idea? No wonder the CEO of GM quit soon thereafter.

If you want another reason why a reliance on regulatory solutions alone will not fix what’s wrong with our financial system, take the case of the U.S. Securities and Exchange Commission (SEC). In a stinging rebuke by the Government Accountability Office, a non-partisan audit arm of U.S. Congress, an audit of the SEC found  the regulatory “struggl[ing] with material weaknesses and significant deficiencies in internal control that we [GAO] have reported at various times since 2004.” Furthermore, the GAO found that SEC measures to fix internal controls issues were not sustainable; initiatives to fix the problems could not, in one case, even last more than one year.

In plain English, arguably the most famous securities regulatory in the world cannot even manage itself. More critically in a climate of regulatory reform, the GAO found that the SEC really had no follow through in its own attempts to reform itself. The reforms always start off with good intentions but whether through cultural indifference, resistance to change or no real incentive for change (regulators have no bottom line and are typically unionized environments), the GAO found that such noble beginnings are followed up with much less enthusiast effort and resources.

Practically speaking, even if you amended the SEC’s powers to be more responsive, the GAO report tends to indicate that, as a corporate culture, the SEC would not embrace the change since it appears to have a pattern of reforming for show but reverting back to the mean- a much criticized mean- over time. Now one understands how the SEC missed Madoff so many times. If it is lax in its own management, it is not exactly looking at every file with a critical eye.

As a comment that has neither positive or negative connotations, the prime motivation for any entity is self-perservation and self-perpetuation. Governments and regulators operate to ensure their own survival which may not necessarily align with the interests of the stakeholders it is mandated to serve.

In a personal finance world awash in taxpayer money, we tend to forget yesteryear’s lessons quickly. Please remember that no one but yourself is responsible for your personal finance fate and relying upon financial literarcy programs funded by government and regulatory reforms to save the average investor is a passive approach which is similar to the same passive approach that lead so many to ruin last year. Those who do not learn from history are bound to repeat it again.

Yes, it is not even December but I thought I would get in a holiday gift giving post before everyone started planning their holiday spending (if you have not already). My family has an easy rule when it comes to gift-giving: cash only please. I believe this policy was born out of the fact we are terrible gift-givers to one another and this policy was requested, politely but firmly, by my Mom some years ago (clearly, she did not like what we got her that year). Requesting cash certainly makes holiday gift-giving easy but what do you get your boss? Your girlfriend of 6 months?  Your assistant?

I would not take anything below as remotely definitive since context trumps all but here are some thoughts:

1. Gift giving to co-workers. Most offices with human resource departments tend to have written rules on what constitutes an appropriate holiday gift in terms of price and/or item.  This alleviates the need for setting a budget.  If your office has no rules, or it has a budget but no rules on what constitutes acceptable holiday gifts, the rule of thumb is be bland rather than unorthodox. A picture frame or plant for the office goes over much nicer than a joke gift or something really personalized (unless your co-worker is also your good friend).
2. Gift giving to the boss. Unless everyone is doing it (whether voluntarily or involuntarily) or your co-workers are pooling money, my inclination is to give nothing rather than something to your boss. There are so many opportunities for your boss to misinterpret the gift. If you buy him a bottle of wine, are you saying he’s an alcoholic? If you buy your boss a gift certificate for a spa, are you saying their combination skin is looking really bad and they need a facial? Don’t give your boss ammunition.  The other issue is if you buy a gift for the boss but everyone else does not, are you showing up your co-workers? If in doubt, ask a very senior member of the office what the etiquette is for gift-giving for the boss since this is such a political landmine.
3. Gift-giving for your new significant other. I am going to defer to the December issue of Men’s Health (I don’t want anyone to blame me for sleeping alone). It suggests setting a common spending limit and “most women say that puts the focus on the thought and not the cash.” The article suggests a $50 holiday gift if the relationship is 6 months and $100 if the relationship is a year as a general guide.
4. Assistant/superintendent/concierge. Most condos I have lived in ask us to pool money to divide among the super and cleaning staff. Considering we often do not see these people much, it is better to go unpersonalized. When we use to have paperboys, we use to give an extra big tip during December for the same reason. Gift-giving for assistants typically works the other way; generally, you should ask what they would like.

As a money saving tip,you can always buy your holiday gifts by redeeming your credit card points. The issue is that the items, if you bought them retail, are not exactly cheap and the categories are relatively narrow.

I also noticed that my Avion points can be redeemed for a gift cards to a wide variety of retailers. While the conversion rate is not great (for example, 3,000 points for a $25 Starbucks gift card), it can also be another way to buy presents for people, either giving the gift-card directly or using it to buy a variety of presents from the store that issues the gift card, without cash out of pocket.  Just remember your legal rights concerning gift cards.

Anyone care to share any holiday gift giving tips?

Imagine you invested in a mutual fund several years ago. You received dividends and, on sale, capital gains. Not soon after the sale of your units, the mutual fund is put into receivership or goes bankrupt. A few months after that, you receive a letter from the receiver or trustee asking for your profits back to help compensate the existing investors.

Hardly seems fair doesn’t it?

Yet, this is what is happening in the aftermath of the Madoff ponzi scheme being exposed.

The Securities Investor Protection Corp (SIPC) is a not for profit corporation which protects investors if broker-dealers fails. It has jurisdiction of the Madoff matters. Under Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan), the liquidator appointed by SIPC has begun clawback lawsuits against investors who made a profit from “investing” with Madoff.

Yesterday, it was revealed the owners of the New York Mets baseball club made a profit through the scheme and speculation is that SIPC will also initiate a suit against the owners (whatever the profits, it sure didn’t buy defense or pitching this season).

A clawback suit is analogous to fraudulent conveyance in which individuals are paid out of order to defeat certain classes of creditors (think of  a parent who sells their house to their adult child for $1 to avoid a tax judgement). If proven liable, the typical remedy is to rollback the transaction or, in this case, the return of profits.

The particular issue in the Madoff case is that the liquidator can reach back 6 years and the clawback suits have been initiated against insiders who allegedly knew it was a fraud and cashed out (the intention of these kinds of laws and, if proven true, a just decision), persons who allege they knew nothing about the fraud and where fortunate in their timing (giving rise to some type of  good faith dealing defense) and charities (who have a moral defense at the very least). As I understand it, no allegations have been proven.

The liquidator is in a very tough position. If he does not initate clawback suits, he will expose himself to charges that he did not carry out his fiduciary duties. By initiating suit, he’s now subject to charges he’s being overly broad in the application of the law and costing innocent people time and lawyer’s fees to defend themselves. Of course, he’s been sued too.

Some have questioned if ponzi scheme victims should be compensated for their losses. If you believe they should, should it come from  the unknowing “winners”  (those in on it and cashed out should return money if proven to be so)? You could construct a university level ethics course on the Madoff moral quagmire as it pertains to compensating its victims.

All I know is that some lawyer is going to retire on this matter alone.

Anyone care to share any thoughts about this?

I am breaking my union rules by posting on a Friday. But with the one year anniversary of the Lehman Brothers collapse this week, I thought it would be an opportune time to reflect back. Jonathon Chevreau had an interesting post last week about seven lesons from the meltdown which should be required reading. One of the more eye-opening pieces on the fall of Lehman Brothers comes from an article in Esquire outlining the fight between Barclays and JP MorganChase over the salvageable parts of Lehman Brothers and how the JP MorganChase attempted to short Barclays, oh, $7 billion (best quote from the article: “JPMorgan doesn’t want to save the universe… JPMorgan wants to profit from the destruction of the universe.”).

Watching a bunch of capitalist titans battle it out over billions of dollars is interesting but not very practical for our day to day lives.  Thus, on this most surreal of anniversary weeks, I suggest something more manageable. We, collectively, have short memories which makes us bad investors. So, here’s an exercise for you. Write down the 3 things you learned from this past year investing in turbulent times. Post it somewhere where you can see it every single day until the lesson is not lost to you. I picked 3 since it is a number you can wrap your head around. You get to 5 or 10 and its too daunting.

Here are mine:

1. Be cautious but don’t be a downer. I missed Saputo. Again. Thought about buying it at $19/share and blinked. Again. Worried about the other shoe dropping on the economy. Worried about cheese prices. Worried about the lack of cash on its balance sheet having acquired a bunch of companies. It now trades slightly over $26. The lawyer in me keeps seeing worst case scenario but there’s a different between being a prudent investor and Little Mr. No Upside.
2. Stop checking prices ever day. This is self-explanatory. It will give you an ulcer.
3. Focus, focus, focus. This is more to do with running a business but it is easy to be distracted and not finish something you started. For personal finance, if you wish to pay down debt, then do it. Don’t stop halfway and then change course.

Have a great weekend. As a heads up, I giving away stuff next week in celebration of post # 500.