Rob Carrick recently reported on the integration issues of Bank of Nova Scotia with E*Trade which has caused several issues with account errors and periodic access problems. Carrick’s article highlights are larger point. What should be the role of technology and financial innovation- mainly in the investment of newly created investment vehicles- in personal finance?

To use a crude analogy, technology and financial innovation should be seen as gasoline in a car. If you don’t know where you are going, it does not matter how high the premium of gas you buy, you are still driving in circles and wasting resources. If you have a very clear destination in mind, premium gas accelerates the voyage in a fuel efficient manner. The gas, in and of itself, does not make the decision for you. It only makes the journey easier.

Jim Collins, in his book Good to Great, studied what divided the merely good from great companies. In commenting about the role of technology (contextually significant since his research was conducted at the height of the tech boom in the late 1990’s), he writes “…When used right, technology becomes an accelerator of momentum, not a creator for it. The good-to-great companies never began their transitions with pioneering technology, for the simple reason that you cannot make good use of technology until you know which technologies are relevant…”

The same analysis applies in business management as it does in personal finance (as a side-note, Collin’s book has applications not only to business but to many other aspects of life). Technological change and innovation are occurring rapidly; 15 years ago, few retail investors would have heard of ETFs, hedge fund, asset-backed commercial paper, low-fee trading accounts, do-it-yourself futures trading platforms etc.

The temptation for some investors is to ignore the hard question- why am I investing and what do I want out it this- and follow the herd by using the latest technology or purchasing the latest financial product to solve their problem. More often than not, this is a strategy (if it can be called that) bound for mediocrity and characterized by mismatching products, lack of vision and below market returns over the long term.

Certainly, employing technology and financial innovation is necessary in utilizing your strategy. But it should not be a strategy in and of itself. As  issuers are facing a harder marketplace to sell into, new financial products with innovative twists and new technologies will be used to entice investors to invest. The question to be asked should always be “how do these fit into my strategy?” before deciding to buy.

This is my last week of blogging for the year. Thus, although there are still 10 shopping days left until Christmas,  I wanted to share a few final holiday shopping tips and holiday scams to avoid.

Holiday Money Saving Tips

Cash vs. Gift Cards. It used to be considered tacky in North American culture to give cash. Hence, many people have resorted to purchasing gift cards. However, as CardSwap points out, anywhere from 10-20% of all gift cards are never redeemed. Alternatively, gift cards issued by malls, as opposed to individual retailers, tend to have various restrictions on what stores you can redeem the card at.

Gift cards are certainly useful presents if you know the person frequents that particular store. However, if you are buying a gift card from some large chain that the person may not necessarily shop at, your money may have gone to waste. I am of the school of thought to give cash with a nice card suggesting they use the money to their heart’s content if you are trying to buy something for someone who has everything. Obviously, don’t give your boss cash (“I really don’t need to give Johnson a raise this year.  He’s so loaded, he’s giving me money!”).

Use your credit card points for more than just travel miles. I wrote about this several weeks ago but I am cashing in my Visa Avion points to buy a wide variety of presents. I end up saving a lot of cash that way.

Ask for the boxing day special. Although many retailers have already priced their goods to liquidate, it never hurts to ask for a boxing day special now. Retailers have had an extremely rough run this year and anything that converts inventory into cash will be a welcome offer (as long as it is not insulting).

Ask for a rain check at the holiday sale price. Even though the item may be out of stock, you might as well lock in a lower price by asking for a rain check.

Holiday non-deals and Scams

The holiday non-deal. I received a mailer from Bell promoting that “Boxing Day comes early this year” by offering high speed internet for $26.95 per month with a little “1″ footnote beside it. Flip to the footnote on the back page.

Here are the actual terms and conditions: (i) the cost is not $26.95/month but $41.95 less a $10 credit for first year and a $5 Bell Bundle discount; (ii) the offer only applies if you sign up for the “Bundle” (which I am assuming is television, cell-phone and internet) so add the cost of canceling your cell-phone or cable if you are not a Bell customer; (iii) a customer must pay the following extra fees: (i) $29.95 one time activation fee (waived if you are a Bell TV subscriber), $3.95/month modem rental, $2.00/additional GB above $25. I am not picking on Bell per se since their mailer is typically of many holiday non-deals.

As lawyers say, the big print giveth, the small print takenth away. It is easy to be fooled by the holiday non-deal simply because there is so much happening that you do not focus on the details. Remember always to read the fine print. Many businesses will extend deals past their expiration date if you ask nicely. The key is to sit down in a quiet place and understand the deal if the offer is some type of long term commitment (like internet or cell phone).

Fake charities canvassing for money. A common scam during the holidays. The FTC has a very useful list of signs that the charity approaching you may actually be part of a charity fraud. It is unfortunate that people would stoop to such depths but just remember a few bad apples should not taint the good work many legitimate charities do all year around.

The free sample online offer. Ellen Roseman has an article on the pitfalls of the free sample on line offer.

eBay and CraigList fraud. Be extra careful on eBay purchasing from a vendor who has little to no history on eBay. They are either out to make a quick buck (legal but they will attempt to extract a punitive price- I remember trying to buy a Wii Fit last year and people were selling a $100.00 item for upwards of $500.00) or are fly by night operations who never intend to sell you anything and are engaged in fraud.

How we react to many day-to-day situations is instinctive. When we run for the bus, our body sends oxygen to our legs. If we feel stress, adrenaline is produced to bring about a fight or flight response. If we disinterested in the conversation at hand, we cross our arms and avoid eye contact. Given that much of our day-to-day existence is hard-wired by instinct, does it stand to reason that our financial decisions are often unconscious and driven more by chemicals than economic data?

The study of neuroscience into our decision making, especially in the personal finance context, fundamentally opposes the traditional economist’s assumption that economic units (individuals, groups, businesses, government) act rationally. Instead, even if it were possible to strip out personal experience from our decision making process, behavioral theorists would argue that our “reptilian brain,” the oldest part of our brain concerned utmost with self-preservation, would over-ride the rational part of our brain if you allow it to. The result is often short-term decisions without any rational basis other than for us to survive to live another day.

This all makes for some fine academic debate but how does this help you?

David Krueger and John David Mann’s book The Secret Language of Money attempts to boil down hard science into an action plan to deal with money in a constructive and healthy manner. Part science text for the masses and part work-book, the authors enlighten readers by first discussing what meanings we abscribe to money (love? power? freedom?), build upon this base by outlining how many of our decisions are not rational and, recognizing  our irrationality about money, sets out an action plan on tame ourselves.

Does the Secret Language of Money give you the secret sauce to success? The answer is no simply because the underlying assumption to the question is incorrect.  A silver bullet solution would presume that one step could wipe out a life-time of meaning given to money or to over-come centuries of human instinct. What the authors recommend instead is “story busting”: a conscious examination of why we do what we do and using self-reflection to make decisions consistent with what we want rather than allowing ourselves to be in the comfort zone (as an added bonus, a study which subjected its participants to changing their daily routine consciously- think of the Seinfield episode “The Opposite”-  resulted in the participants losing weight even though the study was about changing routine and not weight loss).

The book succeeds by reproducing a pattern popularized by Malcolm Gladwell; find social science studies, summarize it concisely and draw a lesson from it. The authors one-up Gladwell by proposing possible solutions (true to his journalist training, Gladwell likes to explore the problem more than provide the solution). If nothing else, many of the studies poke yet another hole into the assumption that highly-educated managers of money have an inherent edge over you and I; in the first chapter, the authors tells of a study conducted at Harvard where investment specialists and economists bids over the face value of a $20 bill repeatedly.

If you are not a big believer in money/life coaching, certain sections of the book, filled with personal reflection by the authors’ clients, may feel a bit like an Oprah episode. The target audience is not the folks who wake up and read Standard & Poors’ reports; rather, the approach is much softer. Thus, be forewarned. Having said that, this is an eye-opening read for all investors.

Michael James on Money and Million Dollar Journey have also recently review the book.

FREE STUFF! If you have not won in either of their giveaways, I have one copy to give away (the 2nd copy was awarded as part of my 500th post). All you have to do is provide a comment to this post by the end of this week. Good luck.

TMW has reached 500 posts! A special thanks for all of you who read daily, the other bloggers who link to my posts, advertisers and people who have given my tips and suggestions.

As a token of thanks, I am giving away one copy of Kerry Taylor’s (aka Squawkfox to the blogging world) 397 ways to Save Money showing you ways to save money on your home, insurance, pets and other simple and effective ways to make your dollar go further.

Prize #2 is David Bach’s Fight for Your Money. As the by-line says:  The bestselling author shows you how to protect your money and put thousands back in your pocket every year by taking on the “corporate machines” who are taking you to the cleaners.

Prize #3 is David Krueger and John David Mann’s The Secret Language of Money: How to make smarter financial decision and live a richer life; a book which explores our subconscious meanings to money and how we can change our habits. I will be reviewing this book in a future post.

All you have to do is post a simple comment. I will do a random draw at 5:00 pm (EST) next Tuesday and announce three winners on Wednesday. The first winner to respond gets to make their pick, the second winner to respond chooses next and then the third winner gets the remaining book.

Back to regular programming tomorrow.

Just a reminder to enter for the draw by posting a comment on my Nuru Personal Finance card review. Thanks.

I usually don’t post on Fridays given my tendancy to be wantonly lazy on the last work day of the week but there’s always a surge of new readers in the new year and I wanted to systemically highlight some blogs which I read but perhaps do not comment or link to that often- not for lack of quality content but there’s just so much good stuff out there. I am hoping that they speak to you.

Squawkfox is a blog on frugality which celebrated its one year anniversary recently and, as an added feature, she shows her unmentionables in her blog.

For those into quantitative analysis, there’s Triaging My Way to Financial Success.

For beginners to personal finace, there is ABC’s of Investing which is a spin-off of the Four-Pillars blog.

I hope you subscribe to those you like and learn something from them.

Next week, I am running a theme which, for lack of a better term, I am calling “how to be good at anything” (maybe I’ll iron out the branding issues over the weekend). Enjoy the weekend.

This week is my last week of blogging for the year. I am taking the last two weeks off to, well, do nothing really. Sometimes getting couch ass is good for the soul. I wanted to spend the rest of the week as a year-end wrap-up beginning with the top 10 investing mistakes as so prominently displayed by the professionals all the way down to the average Mr. and Ms. investor.

1. The cure all to life and money lies in a magic bullet solution. At least Obama had the good sense of telling the nation that the recovery will be long. I don’t know why the media and the executives going to Congress hat in hand think that a bailout will solve everyone’s problems over-night. Even if all the governments in the world gave $5 trillion each to everyone, it won’t solve issues overnight.
2. Wall Street and Congress know how to manage money better than us. Hahahahahaha…
3. Trust other people with money- they’re professionals. A lot of poor souls who got caught up in the ABCP mess relied too heavily on their advisors. When the financial crisis hit, too many people opened up their statements to see that the advisors didn’t carry out proper asset allocation or made trades without authorization. Take control of your finances. No one cares about your money more than you.
4. A decline in net worth = a loss. Unless you sold money-losing stocks, you actually haven’t lost money. You are worth less than you once thought but unless you have some situation where you have to liquidate everything, its a paper loss at this point. And the decline of your home? Well, you buy a house to live in. Last time I checked, there wasn’t a lever on the side of your home that printed money.
5. The market is at the bottom/catch the falling knife. Guilty, guilty, guilty. I have bought on two different occasions this year where I thought we reached the bottom only to see the stock fall two or three more levels. As “amateur” investors, we are better to win the race to second than attempt to guess when the bottom has hit.
6. Head in the sand is the best approach. I am going to paraphrase the author Po Bronson who I once heard speak: if we showed our kids how to solve problems as opposed to shielding them from it, we would end up being better parents for it. Same thing with money. We will always have money issues of one kind or another. We have to learn to deal with it constructively.
7. The best product in the room wins. Did you notice that everything that cratered was some exotic financial instrument that, perhaps, 2 out of 100 people could explain? Simple wins the race.
8. The media is the best source of financial information. Bullocks. The media is feed stories by their sources who have an agenda which may not be the same as yours. Use your eyes and ears and to see what’s happening (…and read financial blogs…). An avid shopper could have told you years ago that the Gap had its day before the media ever picked up on it.
9. If in doubt, flee to cash. …which is ok if one didn’t liquidate all one’s position at a loss to get into cash…If you save money and put it in cash that’s find but if you panic and flee to cash from other positions then you’ve made the situation worse.
10. Its different this time. My Dad and I were watching the history channel one night and he turned to me and said: “Good channel but its like watching re-runs after a while. Every person in history seems to make the same mistake.” We have short memories and forget that this downturn is going to play itself in the same way as other downturns (although the scale may be different…). Remember the past since it is a blue-print for the future unless we change our behaviour.

Fortis Inc. (not to be confused with the merchant bank of the same name) is a publicly traded utility with gas and electricity plants across North America.  As with most utilities, its profits are predictable since the rates they can charge customers are mostly regulated and it sells a good which is a necessity of modern life. In short, Fortis should be a recession proof stock.

However, lost in all the hoop-la of the last several weeks, Fortis quietly raised over $300 million by way of a new common share issue to close on December 19 but initially announced December 2 which is troubling in certain senses. Primarily, two interesting facts immediately pop out:

• Debt is dead, long live equity. In its public release, Fortis stated that it is using $200 million of the raise to pay off a debt of a subsidiary maturing on December 1. This is the reverse of the last several years were debt raises were easy and used to pay out equity via share buy-backs (witness GE with its easy access to capital and an ambitious share buy-back program now scuttled). The supply of large and readily available debt is gone for now (to state the obvious).

• Welcome to the new reality of valuations. The purchase price of the Fortis issuance was $25.65 which was below the trading price of $27.28 on the day before the public release. This is a stark reserval of a the last several years where equity issues were above the market price.

The banks have been issuing equity almost as fast as the United States can print money to prop up their balance sheets but Fortis is not a financial institution and its equity raise is subject to different considerations than the banks. Thus, its equity raise may give an interesting peek into the markets for the short term such as:

1. Don`t look for great rebound in the stock prices. When blue-chip, dividend yield, recession proof stocks are issuing equity at below market prices, you know that the short-term outlook on stock prices is not very positive.
2. Whoever can retire debt quickest will be in better shape. Fortis has an interest coverage ratio of 1.73 (this is a ratio measuring earnings before interest and tax over interest expenses; or, it measures how easily a company can pay back debt). This is not a great ratio (anything over 2 is ideal. For example, Johnson and Johnson, a paradigm of prudent management, has an interest coverage of 38.7) but in tightening credit environments, whoever can buy the most wiggle room by settling debt will be in better shape on the inevitable rebound since lenders will actually begin lending again on normal lending practices (i.e. pre-housing bubble standards).
3. Welcome to the age of diluation. If we assume the only way to raise money is through an equity raise in the short-term, current shareholders will be diluated from current positions. Large share issuances also affect earnings per share negatively which pushes down share prices.
4. Good money still follows good deals. The Fortis share issuance is a bought deal (this means the investment banks bought the shares and will re-sell them to the public). A bought deal is a sign of confidence that the markets believe the company is a viable entity. It appears for now the markets have not completely given up hope. The good money still chases good deals. If nothing else, if you are a shareholder of companies who are doing equity raises which are bought deals, it should give you reassurance that you continue to own fundamentally desirable companies- just not at unreasonable valuations.

For full disclosure, I am a shareholder of Fortis.

…is yourself. Stocks go up and down. Real estate does the same. The notion of job security is but a myth- even for unionized workers (just ask the GM workers in Oshawa who agreed to a new deal and then promptly had the planet shut down). Your pension? Pension funding short-falls is the ugly financial child people don’t like to mention in polite company. But your skills, knowledge and experience- the stuff in your head- they can’t take that away from you.

The buying opportunity now is to invest in yourself on the cheap. With business and educational institutions needing to put bums in the seats, I have noticed a lot of free seminars being given to drum up business. Yes, there is a sales pitch involved but if you get one nugget of information you didn’t know from a free lunch and learn then why not?

Here’s a suggested action plan:

1. What do you want to learn? It doesn’t have to be work related (although it helps to make you employable if you think you need a job). The whole concept of investing in your skill set is to make you more knowledgeable and well-rounded; the ability to learn new skills is important in the work-force (shows an employer you can adapt) and outside of it (who wants to hang around stagnant people?).
2. How many hours do you want to devote to it? Most regulated professions have continuing education targets. For lawyers in Ontario, I believe it is 250 hours a year. It sounds like a lot but education while on a file counts as continuing education. For most other people, perhaps a few hours a week is enough.
3. Incorporate it into your life. I am only of those people who needs to learn in a group. I need the peer pressure to make myself attend or otherwise my couch and television are too enticing of a target. Its not enough to say “yes, I want to improve my skill set.” You have to incorporate it into your life by booking the same day and time off each week and devoting it to learning.

Where do you go?

A lot of educational institutions will allow you to “audit” a course for a couple of lectures. Be respectful and ask the teacher/professor if you can attend before you do and do only attend a few classes.

Most municipalities now sponsor some type of free educational seminars. Larger municipalities have economic development departments give seminars on a lot of small business topics.

Most bank branches of a sufficient size do give lunch and learns. There is some selling going on but it is a good way to learn about the 101 of money.

Some condo boards actually organize events for their residents. The last condo I lived in had learn to knit nights (I hear knitting is back big time).

Any other suggestions? What are you doing to improve yourself?

Investing, like life, can be seen as a process of making as few mistakes as possible (or, more accurately, learning from them when you are young and it doesn’t cost you much) rather than hitting the home run. After all, how much truly great moments do we have as investors? One? Maybe two?  Just remember that a series of prudent moves can be wiped out by one stupid one. In turbulent times such as this, our propensity to panic tends to increase.

As we all watch the financial markets unravel this week, we, the mere amateur investors, have to be aware that capital preservation is more about avoiding self-inflicted wounds than making one great move. Before anyone presses the panic button, let’s remember some of the more common investing mistakes:

1. Changing your strategy midway through the game. If you have ever worked in a large corporation, you may have experienced the bosses spending months promoting some new great strategy then mere months into implementation they ditch their plans for some new great strategy (see multiple marketing programs, multiple IT platforms etc.). We roll our eyes at managerial incompetence then go home and do the same thing with our portfolio. If your investing strategy is sound, don’t abandon it because it doesn’t work for the short-term. Fundamentally sound investing strategies work over the long-term.
2. That “doing something” will solve the issue. The harsh truth is that we cannot control many aspects of our lives but we create the illusion that we can by doing something. If you have invested in fundamental sound products or adhere to fundamentally sound investing strategies, doing something for the sake of doing something is not going to help the situation. It may worsen it. So don’t be a doer for the sake of being a doer.
3. Listening (and acting) on non-contextual advice. If a 63 year widow told you to move your entire equity into bonds would you do it? If I was 63 and unmarried then I would strongly consider it. If I was 33 years old and married, probably not. The context of the advice giver is different than your own so filter the advice accordingly. Don’t run to just anybody for advice. Ask someone who is in a similar situation as yours who you trust on money issues.
4. There is a magic bullet solution. To paraphrase the L.A. Lakers’ basketball coach and zen-master, Phil Jackson, your problems in life don’t go away, they change. You don’t solve your financial (and life) issues with one magic bullet; problem-solving is multi-tiered and requires a lot of time. Buying into a magic bullet solution is an “all your eggs in one basket” approach to investing which should be highly avoided.
5. If I avoid the issue, it will go away. To quote my boss, “you can’t solve a problem unless you assess where you are at.” If you have an issue don’t ignore it thinking someone will take care of it for you. Be pro-active and tackle it by first facing up to it.

Anyone care to share common investing mistakes to avoid?