Thursday, 28 August 2008

Make Yourself a Better Investor, or Perhaps Drive Yourself Crazy

Eliezer Yudkowsky has published Cognitive biases potentially affecting judgment of global risks, an excellent explanation of the various psychological errors of judgement human beings commonly commit (like availability bias, hindsight bias, black swan discounting, conjunction fallacy, confirmation bias, anchoring, adjustment and contamination, the affect heuristic, scope neglect, calibration and overconfidence, bystander apathy), including of course, when we are investing. He hopes such errors by decision-makers won't result in the extinction of humanity, noting that the size of the stakes don't affect the quality of people's judgement!

The paper offers no "5 simple steps" regimen for over-coming such errors - it merely states that being aware of the errors is at least a start to committing them less often. There is a danger in trying to avoid all errors - you may be paralyzed with indecision and drive yourself nuts in the process. As General George Patton Jr said, "A good plan executed today is better than a perfect plan executed at some indefinite point in the future." (see Military Quotes)

I found this paper on the Overcoming Bias website, which is devoted to intellectual discourse on aligning belief with reality using "Cognitive psychology, evolutionary psychology, microeconomics, applied statistics, social psychology, probability and decision theory, even a bit of Artificial Intelligence now and then." Good for fun and some learning.

Wednesday, 27 August 2008

Why Pros Will Not Automatically Outperform DIY Investors

On August 22nd, Larry MacDonald published a note about another investment pro David West dumping scorn on the ability of DIY investors, following on the one put out in July by Avner Mandelman. Various commenters and blogger CanadianCapitalist rebutted the fallacy of professional outperformance in the simplest fashion - it generally is not true! Duh!

There's a fundamental reason why professional stock and bond pickers cannot and almost certainly will never be able automatically to do better than individual DIY investors - investing outperformance requires the successful prediction of the future and the future is complex and very uncertain. Too many factors and events, including especially the decisions and actions of that most bizarrely partly rational and unpredictable animal, the human being, make it extremely difficult for anyone to be able to reliably and repeatably pick the winning (or losing) investments. Investing is NOT like accounting or lawyering, two professions often cited as examples where the professionals' expertise produces better results that an amateur can do. These professions work within a body of knowledge, and a large one at that (which fact alone makes it impossible to do as well as the pro) which gives the pro the advantage. You can actually learn all that you need to guarantee success. Results are most always predictable according to the actions. Not so with investing. Having a Chartered Financial Analyst diploma (the gold standard of investing knowledge) and faithfully applying those methods does not ensure success.

[Part of the problem with discussing DIY investing is that financial planning gets mixed into the investment picking - the tax body of knowledge can influence net investing results and there the pros do have an advantage when things get more complicated. For the average RRSP Joe, things are likely so simple that a couple of high school courses on managing your money could suffice. The point is that financial planning ≠ investing.]

Some commentators like Nassim Nicholas Taleb in his book Fooled by Randomness, maintain that stocks and markets are essentially and inherently unpredictable and that therefore no one can presume to always beat the market. Less well known but far more informed and serious scholars such as Richard Lipsey, Kenneth Carlaw and Clifford Bekar in their opus Economic Transformations argue that society-altering technologies "cannot have unique pre-determined results"(p.16). At a macro level winners and losers cannot be predicted and so will that be the case at the micro level of the companies that develop and use the new technologies to make profits (e.g. Microsoft). With different conditions, it could have been Corel. It isn't hard to believe the plot device in Sliding Doors, where someone's whole romantic future depends on whether she catches or barely misses a subway train home.

Monday, 25 August 2008

Financial Feifdoms - Our Canadian Provinces - Argh!

One thing that would improve our country and bring it forward from the 19th century to the 21st would be to have one set of rules governing personal finances. Every time I read up on a topic to prepare a blog entry, I find that every province has a different set of laws and regulations, sometimes almost the same, sometimes quite different.

Some examples:
  • Income taxes
  • Sales taxes
  • Securities legislation
  • Estates, wills and trusts
  • Family law
  • Health insurance
  • Real estate

Is the truth as invented in Ontario really so much better for its citizens than that of Alberta or Quebec? Do you suddenly become a different person with different needs when you move? In this day and age of mobility and cross-border everything, it can be very confusing whose set of rules applies. It's hard enough having to learn one set.

Rather than have endless commissions, task forces and committees of bureaucrats working away for decades with limited effect, perhaps we could have a Charter of Simplification Rights which would allow a citizen to pick any province's they wish in each domain and to follow those wherever they might be in the country. The provinces with unattractive laws would find out in a hurry which was the best as people voted with their money. A little competition amongst governments might help a lot. I'd expect soon all provinces would be the same. It's just a thought.

Saturday, 23 August 2008

Successful International Funds Transfer with CanadianForex

IT worked!

I finally have done the deed and transferred funds from Canada to the UK using a foreign exchange (FX) dealer - in this case CanadianForex - instead of the bank-to-bank wire transfer method I had used before.

Back in April I posted the results of my research (#1 Options, #2 Fees & Exchange Rate, #3 Extra Services & Practical How To, # 4 FX Dealers into the use of FX dealers to move and convert money and it appeared to be an attractive option in terms of speed, cost and convenience.

I am happy to say that it all went smoothly, the money arrived safely in my UK bank account with no extra fees and within the total 8 business days from end to end, i.e. from my Canadian bank account to my UK bank account. The process was almost completely electronic, online and automated, with only a phone call from the FX dealer, done within minutes of my booking the transfer online, to confirm the arrangement (perhaps a good thing since one must initiate the transfer of funds - also done online through the bank website - from my Canadian bank account to CanadianForex).

Perhaps the only disappointment is that within days of locking in the transfer and exchange rate, the CAD/GBP exchange rate went down from about $2.03 to $1.95. That cost me quite a bit but it was unforeseeable and unpredictable as it could just as easily have gone up. However, I might try booking a forward rate (CanadianForex allows one to lock in a rate for a future transfer up to one year ahead) if it goes down to the low $1.90 level.

Thursday, 21 August 2008

Executor & Trustee Fees - How Much Should You Expect?

Suppose you are called upon to be an executor or a trustee, or you are thinking of appointing a person or company to do so for yourself, how much should you expect the fees to be?

Here is the situation as it appears in a sample of Canadian provinces.

The legislated or guideline allowed fees vary from 2.5% to 5% of the capital and income of an estate and about 0.4% of the capital annually for management of an on-going trust. That's apart from disbursements for out of pocket expenses. Beneficiaries can object through the courts if they think the Executor/Trustee is charging too much. Of course, the general rule of fair compensation means that more complicated estates requiring more work will cost more but the guidelines set a baseline.

An Executor/Trustee is not obliged to take a fee. That may be better from a tax angle since fees must be included in the trustee's income for tax calculations.

Most Trustee Acts allow the setting of higher or lower rates in the Will or other document that establishes the trust. Note however, that the guideline amounts may not be acceptable to some trust companies, as explained in this excerpt from the Certified General Accountants of Ontario publication Executorship: A Guide for Those Called Upon to Act as an Estate Trustee:
"In recent years, trust companies have become dissatisfied with the estate trustee's fees allowed by the Ontario Superior Court of Justice. Consequently, often trust companies decline to act in estates of less than $200,000. In almost every estate where they do accept an appointment, trust companies rely on a fees memorandum, in which the testator - at the time the will is drawn - agrees to fees set by the trust company, which are usually higher than what would otherwise be allowed by the tariff set by the Ontario Superior Court of Justice."

Rule of Law blog has an excellent post with details on how estate and trustee fees work in B.C. along with a link to a long and detailed report by the BC Law Institute recommending changes to the current system there. The report comments on how things work elsewhere.

  • think about, discuss with the Executor and possibly set compensation in the Will beforehand, depending on how big and complex the estate is likely to be; negotiate with some professional firms if they will be required
  • keep financial affairs and estate planning simpler if possible - what perhaps may be saved in tax may be more than offset in lawyer or accounting fees afterwards

Friday, 15 August 2008

The Living Will: a Case of Practical, Legal and Medical Overkill

Beginning with the very name, there is little to like about the Living Will (LW).

First thing wrong, it is a misnomer and has nothing to do with a Will, the document by which you specify what happens to your worldly possessions after you die. A Living Will is described as a document which states more or less what medical treatments you wish to have or not have if you become unable to make or communicate your own decisions and possibly who can speak for you in that event. It seems from this page on the Living Will and Values History Project that the term originated only in 1969, coined by a certain Luis Kutner whose motive appears to have been the promotion of the right to voluntary euthanasia.

This opportunistic piggybacking on the common and established word has caught on but confusion reigns supreme, as evidenced by the proliferation of other terms for the same thing - advance health care directive, advance directive, advance medical directive, representation agreement, mandate, authorization, personal directive, power of attorney for personal care etc.

Why so many terms? The answer reveals problem #1 - different governments have approved different versions and a LW valid in one place may not be recognized in another. Governments includes Canadian provinces, US States and countries of the world - yup, they all have their own since of course their logic and the needs of their citizens are unique. Funny how our needs change when we move from one place to another.... If everybody stayed put in their own little town the different versions wouldn't matter but go off on a work assignment or a holiday and you would need to have a whole series of LWs to paper your trail, all prepared with the help of a lawyer in each jurisdiction in order to ensure their validity there.

Problem #2 is the practical difficulty of letting everyone know who might need to know. Are you going to be able to provide copies to all the medical people who might conceivably need to have your instructions, wherever you might be?

Problem #3 is the one of changing or cancelling a LW, especially as you done what the experts advise (like Douglas Gray and John Budd in their book The Canadian Guide to Will & Estate Planning) and given out copies to your doctor, lawyer, proxy (person granted power to decide for you) and family members. You must go through a formal process, witnessed by two people, to revoke of change a LW. Forget who you gave copies to and you may have conflicting versions, or you might have people act on a version you revoked. Of course, if you stick the LW in a place unknown or not quickly accessible when the need arises, your carefully prepared LW may never get used.

Problem #4 is that your LW may not be followed anyway. The forces of medical officialdom may decide that your wishes are unreasonable or impractical and over-ride them. You may just be creating anxiety, guilt or bitterness by your family if your wishes cannot or are not followed. Can you anticipate every medical circumstance in which you might find yourself and address it comprehensively? There's a reason hypothetical questions are mostly useless.

I do not dispute the motives for making a LW - as expressed in the pdf Living Will within the University of Toronto Joint Centre for Bioethics (you must fill in a free registration to access the copy) - to gain control over your medical treatment and to relieve loved ones of the burden of decisions. (Incidentally, this version of the LW apparently can be valid in seven Canadian provinces so the multiple jurisdictions problem is somewhat mitigated.)

However, is a formal legal document the best way to do this? Wouldn't it be far easier merely to tell your family to follow your wishes and tell them your way of thinking about such matters, give them the latitude to use their judgement and reassure them that you trust their judgement. After all, who will the doctors ask, as ask they will?

If you don't trust your family, you've got real problems. Maybe then you must reluctantly opt for a LW.

The only other limited scenario in which I could see the LW being useful goes back to its origin. If you have a terminal illness so you know what lies ahead, maybe it will be useful and practical to tell others when to pull the plug.

Otherwise, the Living Will is definitely a case of the treatment being worse than the affliction. At least stop using the misleading name.

Thursday, 14 August 2008

It Ain't Just Sports China is Good At

As we watch the Chinese pile up the medals in the Olympics, possibly displacing the USA as the top dog in the sports world, we might also note China's rise in capital markets.

This past January, the McKinsey Global Institute published its 4th annual report on Global Capital Markets and the results are amazing. (The report shows 2006 figures, so things are no doubt different today but it's the best available data.)

Maybe China isn't so democratic but it sure is becoming a capitalist country. In 2006 it ranked second, on a par with all of the Eurozone, in equity issuance and was not too far behind the USA - see this chart.

There has been a massive shift from bank deposits to equity investments in China. In 2004, equity made up only 15% of total capital in China while bank deposits were 72%. A mere two years later, equity had gone up to 30% of the total - see this chart.

And its total financial assets had climbed from a tenth that of the USA to a seventh. That's a huge shift in such a short time.

Last but not least, with their new found wealth, the Chinese are going global shopping, investing their capital in other countries and becoming the world's largest net exporter of capital in 2006. Who knows, they might get a liking for sports teams and buy the Oilers soon, though it's more likely they'll buy the oil sands. Oops, they tried that, didn't like Canada's response and have already pulled out, heading instead for Venezuela.

My investment take-aways:
1) It seems that the action and the growth for investors is coming mainly from places beyond our traditional comfort zone of North America and Europe.

2) However, the report is also interesting as confirmation of the degree of the increasing integration of world capital markets. I believe that means we can expect continuing high correlation of stock market returns across international, making international diversification less viable for an investor.

Tuesday, 12 August 2008

Online Tax Filing: More Cheating or CRA Tightening the Noose?

Yesterday CBC published an article with the provocative title "Online tax filers more likely to cheat: report". The report refers to an internal Canada Revenue Agency review. Buried within the text of the article are two sentences, key in my view to separating the hype from the reality.
"Software users … demonstrate a significantly higher non-compliance rate as compared to non-software users," they concluded."
Then, "The agency also cautions that the definition of non-compliance is a tax-deduction claim that is rejected ..." by the CRA.

So the headline which brazenly accuses taxfilers of cheating can just as easily be stated as "CRA denies more expenses and deductions when you file online." One of the very first comments on the article on the CBC website is from someone who was asked to provide receipts and then had a claim initially denied, and only had it accepted after much arguing with CRA. One can imagine CRA applying stricter rules and being more prone to rejecting expenses when CRA knows that sending copies of receipts are not required to file online. Poor tax filers who have a claim rejected must ask themselves whether they really want to fight the bureaucracy for the sake of what might be a small claim and decide it isn't worth the effort, especially as it might cost them more in accountant's fees than the claim is worth. End result: the denied claim stands and CRA concludes that non-compliance rates are higher for online filers. It becomes a self-fulfilling prophecy!

What types of cheating exactly is CRA talking about anyhow? If you are among the vast majority who get tax receipts from an employer and who make an annual RRSP contribution, where is the opportunity to do the small cheating the article talks about? Political contributions? Medical expenses? I would guess it is rather amongst the self-employed who report their own revenue and calculate their own expenses, in which case the justification for an expense can become debatable.

Now, it would be naive to think that no taxpayers will push the limits and throw in dubious expenses, even ones they don't really believe themselves are justified. No doubt some cheating does take place.

At the same time, CRA never sees or knows about the expenses that other ultra-cautious people never report, but which may be legitimate.

Perhaps the solution is to play the CRA's game and to prepare the tax return using software then print it all out and send it on paper, receipts and all attached. Then they might find the extra costs of handling all the paper outweighs the lost tax revenue from online "cheating". Mind you, such net revenue vs cost calculations seldom drive decisions in government though they should.

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