I stumbled upon the book Willpower: Rediscovering the Greatest Human Strength by Roy F. Baumeister and John Tierney when a columnist mentioned the book in pointing out the difference between the productive and the not so productive. We think of willpower as something that can help us win more sports contests, save more money or be more productive at work. However, the authors found that the people with the strongest willpower were also the most altruistic, gave more to charity and were basically pillars of their community.

More selfishly, as the authors noted, you cannot plan a 3 week vacation in paradise without making plans in advance.

Usually, book reviews outline the narrative of the book, highlight a funny story or two and give a ranking. I am going to take a slightly different approach. Most likely to Baumeister and Tierney’s dismay, I am going you the main suggestions raised in the book so you don’t have to read the book if you are not super interested:

(I highlighted the personal finance aspects of the book in a previous post)

1. Willpower is a muscle. Like any muscle, it can tire out. The more you tax that muscle during the day, the less your willpower, and decision making process, declines. This is why complex decisions should be made in the morning or shortly after having eaten.
2. Pick your battles. If you want to improve, pick one area of improvement and concentrate on it.
3. To do lists work- but not in the way you think it works. Writing a “to do” or a “to don’t list” eases your unconsciousness into not worrying about the next task. Less worry equals less stress.
4. We tend to be wildly optimistic about the time it takes to do everything. We are often wrong. Limit the number of goals (3 is the ideal number a week) and focus on them.
5. Better self-control = watching what you eat + getting more sleep. The organizational experts are also right. The neater your desk, the more productive you will become.
6. To break bad habits, break your routine. Buying a donut on the way to work each day? Take a different way to work then.
7. Monitoring is important. It helps long term planning and it forces you to focus on your goal.
8. Reward often for exercising willpower. ‘Nuff said.

I would recommend this book for anyone struggling with achieving goals or those wanting to be more self-disciplined.  If nothing else, it raises some interesting issues in a world of too much choice and tries to bring back into vogue probably something we, as a society, should pay more attention to.

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?

The post title is self-explanatory and focuses gives some ideas on investment issues to pay attention to in 2012. I will be blogging about some of these issues in depth for the next 4 months (as you may know, this blog ends April 30 of this year). Without further ado,

1. Work on one aspect of your personal finances this year. Studies show the more diverse your goals, the less likely you will achieve any of them (my review on the book Willpower will be posted this month)

2. Setting a goal and achieving it are two different concepts. Track your goal religiously and have an accountability partner to help you.

3. Remember you are ultimately responsible for the outcomes in your life.

4. Do not forget to work on your human capital. Find ways to increase your earning potential through skill improvement, networking and gaining new experiences.

5. Returns on the market have always been unpredictable. Focus on tax and costs (commissions or MER): the two factors we truly can control when investing in the market regardless of the economic cycle.

6. Pay down your debt.  It is unsexy and prudent. This is why you should do it. Personal finance is not supposed to be exciting. What you do with your excess cash is what is supposed to be exciting.

7. Take anything you read with a grain of salt. The media is in the business of selling ads. Bloggers have their own personal agenda. Read to gain knowledge, not to follow blindly.

8. The closer you are to the daily pulses of the market, the more volatility it seems. Take a long term view.

9. Bad times are supposed to happen. Do not let fear paralyze you. As a matter of fact, downtimes are often times of great opportunity in our lives and finances.

10. Money doesn’t buy happiness. We became a very affluent society and seemingly an unhappier one at the same time. Family and community are riches we often overlook when pursuing the all mighty buck.

Good luck in 2012!

As a follow up to my post in November pointing out how regulators fail to collect fines for white collar offenses, the Ontario Securities Commission reported last week that its collection rate on collecting regulatory fines since 2005 is 1%. The morale of the post continuing to be it is better to be an aware and educated investor rather than relying on regulators to protect you fully.

Bobby Bonilla was a good, but not great, baseball player for the Pittsburgh Pirates in the late 1980′s/early 1990′s. He was able to parlay these years into a series of obscenely rich and guaranteed contracts in the 1990′s. In the meantime, he got fat and lazy as a player (famously playing cards in the clubhouse while his team lost in the playoffs). Known as a clubhouse cancer and a coach killer, the New York Mets, so eager to get rid of him, bought out the last year of his contract at $5.9 million in 2000.

Buying out a player’s contract is not unusual. What was unusual is that the Mets arranged for the $5.9 million payment to be postponed for 11 years- with the first installment starting in July 1, 2011- and then paid for over 25 years at 8% interest. To put this another way, the Mets are paying Bobby Bo (as he is known) $30 million for a $5.9 million payout.

Why would the Mets agree to such a ludicrous deal?

Well, you see, the Mets would invest the $5.9 million with a brilliant investment manager who could out-perform the earn-out. The manager?

Bernie Madoff.

Have a great weekend.

I often receive questions from employees who worked at now bankrupt employers. I have previously posted on the topic of employee rights when their employers go bankrupt.  The good news is that, in Canada at least, there is some relief over and above the lenders in many cases. The bad news is, as my post indicates, payment is only available to the extent there is any money left after the tax man has collected.

The second main topic I get asked is surrounding the issue of constructive dismissal. Constructive dismissal in Canada describes the situation where the employer unilaterally changes a fundamental term of the terms and conditions of the employment (pay, location, duties etc.) without the employee’s consent. In such a situation the employee has two choices: (i) resign within a reasonable period of time and preserve a claim for unjust dismissal; or (ii) consent to the new terms of employment by doing nothing. Typically, when an employee resigns they are not entitled to severance. However, in the case of constructive dismissal, they are potentially entitled to damages as if they were unjustly dismissed (please note constructive dismissal has a slightly different meaning the U.S. which works under an “at will” employment regime and this information is only relevant to Canada).

Most lawyers who are hired by clients with potential constructive dismissal claims advised them to move quickly since any potential claim will be extinguished if the employee does not resign in a reasonable amount of time.

The last main line of questioning comes down to “how much I am entitled to?” The answer is contextual in scope and does require appropriate legal advice. Severance in one industry may differ for severance in another industry. Factors include (on a non-exhaustive basis): age of employee, experience, length of employment, geography, industry, financial health of employer, the manner in which the employee was let go, the manner in which employee was recruited (i.e. head-hunted then let go not soon thereafter) etc.

My answer to all these questions are always the same: start with the relevant Ministry of Labour for information. Most have help lines. Like this blog, it cannot provide advice. It can, however, provide information and tends to be employee friendly. Then seek free consultation with a lawyer. Business is tough for everyone; most lawyers will offer a free consultation.  Most employer-employee severance claims will settle relatively quickly with the right pressure applied. Thus, resort to legal action is sometimes appropriate and worth the cost.

While a positive step to promote transparency and accountability, has the law of unintended consequences taken over and we are too hyper-critical and reluctant to give as a result? The dialogue on charitable giving is generally being boiled down to two metrics- how much money has the charity spent on administration and what is its fundraising expense ratio (which is the amount of cents spent to raise $1.00- the higher the ratio, the better).

A recent study found that 40% of all surveyed believed that a charity should spend no money on fundraising costs (I am guessing these 40% also believe governments can deliver civilization with a 2% flat tax as well).  Another 60% believes that charities should have a fundraising expense ratio of approximately 15% (in other words, 15 cents is spent to raise $1.00).

Here’s the catch- the governments contradict the public on this issue. The Canada Revenue Agency (“CRA”) generally accepts a fundraising ratio of under 30% without comment (for clarity, these are guidelines and not hard and fast rules; CRA has stated that the analysis is contextual).

Here is the second issue- it appears that the higher the charity spends on fundraising and administration a, the better the charity is rated within an acceptable range of expenses. The lesson seems to be looking at charities is not like looking at an investment; since the return is hard to quantify, one cannot boil down looking at charitable dollars with one or two metrics. Certainly, an increased focus on costs has been welcome but swinging too much the other way to look at costs and nothing else is not constructive either.

As I have written before, if one really wants to do good and are concerned about fundraising ratios and administrative costs, one should volunteer even one hour a year to a charitable cause (or bid on bloggers for charity if you feel charitable and telling the world your story).

The first is monetary fines for violators should theoretically act as a deterrent to all participants in the financial industry. Set the fine high enough and it should send a chill against illegal behavior. There’s two problems with this approach. In 2010,  Goldman Sachs agreed to pay the Securities and Exchange Commission (“SEC”) a $550 million fine in connection with Goldman Sachs misleading the public about subprime mortgage products. The amount sounds staggering but, as many commentators noted, this amount was equivalent to 4 days revenue to Goldman Sachs.  A $550 million fine may sound great on main street but it is merely the cost of doing business on Wall Street.

The much larger problem with levying large fines is actually collecting these fines. In 2002, the United States General Accounting Office, a non-partisan branch of the United States government, found that the SEC’s collection rate in its disgorgement policy (disgorgement policy is the concept that a wrongdoer give back the profits obtained from illegal activities) was 14% between 1995-2001 (although, to the SEC’s defense, in many cases of out-right fraud, the guilty have hidden or spent all the money). The General Accounting Office also found procedural problems in tracking disgorgement. In plain English, the SEC was not following up well after fining market participants.

Although a follow up report in 2005 found the process was improving, it did note progress was slow. Tellingly, no updated collection data was provided (as far as I can tell, Canadian regulators do not release any comparative data- although they should). It would appear than justice is sometimes given if not necessarily fully executed.

The second way of looking at the issue is how quickly are regulators responding to white collar crime? It has been commented by many that the justice system simply does not act quickly enough in white collar crimes, either allowing the alleged to hide assets or leave many of the victims waiting many years for justice. For victims who are seniors, this is a delay that is simply not acceptable.

For example, Norbourg Asset Management, one of the largest financial frauds in Canadian history, was exposed in 2005. Two years later, the principal was convicted of securities act violations. Four years later, he plead guilty of criminal charges. Six years later, in early 2011, the investors finally came to a civil settlement to reimburse monies invested. As reported recently in the asset-back commercial paper case, settlement funds can also sit in the bank accounts of regulators for an unduly long period of time.

This is not to suggest that accused should be run over by a justice system focused more on proceeding quickly rather than properly. More accurately though, it seems like that justice is a slow-process (if it proceeds at all- Conrad Black was never charged in Canada even though Hollinger was listed on the Toronto Stock Exchange).

The morale of the story being don’t depend on the regulators to bail out investors or, if it does, be patient. As always, be an aware and educated investor.

Securities are theoretically supposed to be highly liquid due to the fact the stock market is  a meeting place of buyers and sellers. However, some publicly traded securities simply cannot be moved quickly. One such situation happened during the credit crisis when it is difficult to sell stocks in certain companies. More commonly, stocks can become illiquid simply because there’s not enough daily trading.

Take, for example, the growing selection of dividend ETFs. Each has their own unique features. Picking one goes beyond the weighting of the ETF or their MER. Look at the trading volume of the following dividend ETFs as of November 15, 2011.

XDV-T: 52,719

CDZ-T: 56,752

XEI-T: 8, 234

ZDV-T- 1,200

PDC-T: 6,100

What is interesting to note is that ZDV-T, BMO’s Canadian Dividend ETF, has the lowest MER and arguably the greatest distribution reach as a bank issued product. However, the daily trading volumes are not sufficient for an investor to buy or sell the product. By only looking at MER, an investor may not be aware of the fact that they may own a product that is difficult to sell.

The lesson being the  lowest fees are not always the end all and be all in looking at ETFs.

My experience with for sale by owner listings is mixed.  On the positive, it was easy to get a hold of the owner and there was nothing lost in translation when communicating positions.

Here are the issues though. The price did not reflect market. Quite simply, the condo was listed way above market. How did we know? Firstly, my real estate agent ran an analysis which showed the unit was listed 6% too high (I’ll address how he did the analysis in my next blog about looking for a new condo). This was confirmed by the unit immediately below, represented by an agent, listing their unit for 2% below the unit upstairs (remember this is the listing price so the sale price would be lower than that).  Given this is a condo, the layout was exactly the same so there was no real reason to list so high. Also add in the fact the downstairs unit has to add in the agent’s commission in its pricing and you get a sense of how far off pricing was.

The fact the unit below listed for so much less confirmed our analysis. We suspect the owner got many comments about this.  A week after the listing first went up, the price dropped. I understand that over-pricing a unit is typical in  for sale by owner. The owner is too emotionally attached to price properly.

The second issue was the negotiating tactics of the owner.  He mentioned the price was negotiable several times without us asking. He emailed my agent several times asking about interest. He was basically negotiating against himself. For a wide variety of reasons, I did not put an offer on the unit and wished him the best of luck.

However, there are some interesting lessons to learn from this experience:

1. It looks so much easier than it is: In a really hot market, a self-represented seller may be a good way to save money. But in softer markets, such as the mid-tier Toronto condo market right now, expertise is needed to price and negotiate the sale of real estate. As much as I disparage undeserved real estate commissions, I also recognize that good real estate agents are needed for tougher sells.

2. You hire agents as much to act as a stupidity brake than for their services. Lowering the listing price after a week, commenting that price is negotiable and signaling the weakness of his position are typically not things good negotiators do. If one knows that their emotional control and discipline is not strong, one had best to think twice about being a self-represented seller.

3. Patience is key. My over-riding sense of the experience was that the seller was impatient and thought a few showings would do the trick. Selling real estate is like anything else- it is as much a process as a result. Selling real estate in real life is not like tv- there is no cut away which fast forwards you 3 weeks to an offer being submitted.

More adventures to follow.

One side effect of a liquidity trap is that money which is easy to come by for those who can raise it (banks and big publicly traded companies come to mind) are not spending it. The result is these entities have literally billions of dollars in cash which is not being invested since the economy is not sending clear signals it is stable or expanding.

But is this necessarily a bad thing? A University of Lethbridge study entitled “Down Markets and the Excess Cash Theory of Dividends” argues that companies with excess cash in intense to mild down markets lose greater value relative to those companies without excess cash. However, the decline in value of companies with excess cash can be mitigated by the existence of a dividend policy.

Studies show that dividend-paying stocks outperform non-dividend paying stocks in down markets. This seems to confirm the academic view that investors are attracted to dividend paying stock since it signals the future value of the company or reduces agency costs (although it is noted that the signally theory of dividend is constantly under dispute among academic circles). Furthermore, such out-performance continues in months in which dividends are not paid, suggesting that a share repurchase program would do little to increase the confidence of the market.

What does this mean?

One possible implication is that technology companies holding excess cash (think Apple and Google) are beginning to sow the seeds of their own demise. Without the paying of dividends or a stock repurchase (even understanding its limited effect), the market may soon turn against these market darlings relative to their plucky upstarts. Without more capital or r & d investment, are these tech companies allowing competitors to catch up?

Another implication, if we equate businesses with household finance, is that, over the medium to long term, holding excess cash is not good for any household and that such excess cash should be deployed for revenue generating activities.  It is often an overlooked investment but households should look at how to increase human capital through retraining or acquisition of new skills. Since increasing human capital has long-term effects and is portable, it should be considered a vital part of any revenue generating activity.