Category Archives: Psychology

Nearly Everything I Learned About Investing I Learned From My Father, Revisited

Happy belated Father’s Day to all the Dad’s out there. This is an older post that I have edited, expanded, and added to.

My father is not an investor or “bank guy” by any means. But thinking back upon childhood and beyond, I realize that a good amount of the things that are important to investing, are the same simple life lessons my father tried to instil in me when I was young.

They are tidbits of wisdom that seem to have limitless application. Here’s a few that come to mind:

Use the right tool for the right job

Whenever my dad caught me trying to hammer something with the handle of a screwdriver, or unscrew something with a butter knife, he used to stop me and tell me to use the right tool for the right job. Taking the 30 seconds to grab a hammer was far better than breaking the screwdriver and being out the time and money that it would take to replace.

The same can be said about investing. We have a variety of products we can choose from, and several of them have their specific purpose. Use a TFSA if you want to save up for a car, not your RRSP. Use an RESP to save for your child’s education, not your un-registered account. There are benefits to using the right tool for the right job, and penalties for not.

knife for the peanut butter, spoon for the jam

I think this advice was brought to the both of us from either the Flintstones or Sesame Street, but my dad would repeat the jingle if we were going to make a peanut butter and jam sandwich. It’s a simple life lesson: be cleanly and organized.

If you are in the fortunate position to have “extra” cash to play with, or if you “have a hunch” that a stock is going to move, hey, more power to you. Take the plunge, if you see fit. But don’t get your ultra-risky speculations mixed up with your legitimate investments that should be the foundation of your savings.

Simply put, don’t take the money you are planning to use for a down-payment on a house and put it all in the latest IPO. If you can take a gamble, set up a separate account and keep only a small portion of your wealth there.

More importantly, it is linked to the “use the right tool” section above: It is important to keep certain accounts separate, even if you don’t invest in individual stocks. We need to remember time horizons when investing, and use the appropriate vehicle.

Do it right the first time

Nothing upset my father more than when he asked me to do something and I did it half-heartedly. Inevitably, he would make me re-do it. It taught me to put the effort into getting it right the first time.

This doesn’t always work with investing; we all make a bad decision from time to time. But if you can make the effort to make sound decisions, you won’t have to try to make up lost ground in the future.

Creating an investing plan for yourself, deciding an asset allocation, and following the plan is far more important that finding the next Microsoft. The fact of the matter is that most of us will never find the next Microsoft early enough, nor would we sell it when it should be sold. But following an asset allocation plan is something that we all can do… easily.

Keep your head up

This was a hockey lesson. I remember forgetting this advice once, and skating full speed into another kid behind the net. My tailbone hurt for a week.

If you are a do-it-yourself investor, then you will have to keep on top of things, especially if you are investing in individual stocks. Buy and hold is a legitimate strategy, and one that I tend to follow. But if you are not reading up on your companies, then you may be left holding some useless Enron stock, which may hurt more than your tailbone.

For indexers, it is important to keep marginally informed, and take care of re-balancing when your holdings get out of whack by a decided percentage, or at decided intervals.

Another day another dollar

More than advice, this is something he would say (still says to this day, in fact) when he got home from work and I would ask how his day went.

I’ve said in another post that I view my human capital as my most important asset, and it really stems from this saying. As long as you can keep working, you can keep earning, which means you can keep saving. It also means that you can spend when you need to, knowing that you have this powerful asset in your portfolio.

I prefer Steve Martin’s version, though: “All I’ve ever wanted was an honest week’s pay for an honest day’s work.”

Do as I say, not as I do

Probably the most frustrating to have to hear, but one of my favourites now, I would get this line thrown at me when I caught him in some sort of seemingly questionable situation where he told me one thing, but wasn’t following his own advice.

This is as important in investing as it is in life. There is a lot of good advice and wisdom out there from several people who know a lot more than you or me. It doesn’t mean that we need to do exactly what they are doing, especially when scale is an issue.

Warren Buffet is very good at recognizing value in stocks and whole companies. But he has said that the majority of investors would be better off by buying a basket of index funds.

Check your base

Living on a farm, ladders were constantly in use. Whether it be for changing light bulbs, painting barn doors, re-shingling the roof, cleaning the eaves or picking cherries, we were always up on them. No matter how many times I would climb the ladder,  he used to always tell me to check the footing before climbing, and then again on the first rung or so.

A solid base to a portfolio should be able to avoid (or lessen) the impact of a hard fall from market heights. This helped me when the market was approaching 15,000 (I put the brakes on at about 14 and change in June of 2007). The ladder started to feel wobbly, so I stopped climbing, re-checked my base, stockpiled cash, and had a nice cushion to fall on.

If the ladder starts to feel unstable, check the base, or grab another ladder. High stock prices may offer a great time to move some money into bonds, for example.

Don’t waste Your Money

Kids always go through phases and fads. Often these fads cost money. Whether it is video games, rap music, Pokemon cards or BMX bikes, the truth is that most of these things will be forgotten 10 years out.

My father’s words (and disappointed eyes when I wasted my money on something foolish) have had a lasting impression. I don’t often buy shiny things, and save a very healthy portion of my income.

Put your things away

Whether it was my toys when I was little, tools on the farm, or the jars and packages after making a sandwich, my father always insisted that I put things away when I was finished with them.

Not exactly investing, this mentality has left me with a very organized system for recording income, expenses investments, dividends etc. Good accounting practices are very helpful come tax season.

I’m sure there are several more of these little gems that can be found. Feel free to add some in the comment section.

Smells Like Shoe Polish

My friend and flatmate in my 4th year of university was a geology student. His department had given him some tickets for a dinner and lecture on geology at some geological club in Toronto. Always interested to learn about something I know absolutely nothing about,  I jumped at the chance to go.

The keynote speaker raved about how gold was foolishly cheap, and should  have been twice the price that it was. It was an interesting talk, and had I listened to that geologist, I would have made out all right (not accounting for inflation or exchange rates). Take a look at this. It was 1999, and gold was about $250 an ounce.

I have never pretended to understand our infatuation with gold. I understand it now to be another currency, yes, but what makes it desirable?

Gold has a long history of being something we associate with wealth. Empires in Mexico, India, Europe and others… they have all sought after it. It’s history is nearly as interesting as that of salt.

To tell you the truth, I don’t even like gold really. Sure, I would like to own a bar to use as a doorstop or a wafer to use as a paperweight, but that would just be to be eccentric. Gold jewelery has always seemed Gaudy to me. My wife’s engagement ring, and our wedding bands are platinum. Simple. Stylish. Hard.

Yet gold keeps moving higher, and recently some things have happened that make me wonder if it’s possibly on its way back down.

I’ve lived here in Japan for 9 years, and starting last year a commercial started running that made me cringe. The commercial is selling a class and system to trade and make money from gold. The people in the commercial look very happy after walking out of the class, and then it cuts to them in front of a computer screen in their living room, smiling as they (I assume) buy and sell gold futures.

(This seems to have replaced a similar commercial that used to run, which promised to teach you how to make money in the F/X market.)

But the real reason I will continue to stay away from gold  came last evening when a door-to-door gold buyer showed up at my door.

He was wearing a yellow jacket, and asked if I had any gold I wanted to sell. I said no, and he took a step to try to stop me from closing the door. He showed me a flier with various examples of gold jewelry and asked “Don’t you have anything like this that you want to sell?” I said no, and he asked again if I didn’t have anything like it in the house, to which I answered “I’m poor. I have no jewelry.”

Aside from the fact that I wouldn’t tell a complete stranger if I had jewelry in the house or not, the concept of door-to-door gold buying floored me. Has it come to the frenzy that pawn shops are willing to send a workforce out into the community in search of gold?

That tells me something. It tells me that pawn shops believe that gold will continue to increase, so they are willing to go out to buy gold at today’s price with the expectation that they will be able to sell it even higher next week or next month.

And that tells me something else. If there are commercials advertising how you can make money in gold, and pawn shop dealers showing up at my door, well, to me that’s about the same as a shoe-shine boy telling me to buy stocks. It’s advice that stinks, and will leave you with a headache if you stick around too long.

Do Canadians Understand Their Fuel Consumption?

I’ll start by saying that among the mix of personality traits that I have, one is exceptionally “type A.” That particular trait is a continued habit of collecting my personal economic data, and boiling it down to something that I can comprehend.

Having a number that is broken down and comprehensible is very important to me. I could look at receipts and see that we had, say, $2000 worth of expenses last month, but unless I break that down into categories, it is somewhat meaningless to me. Without categories, I would be lost as to where our money is going.

I feel the same lack of understanding when talking to family or friends from Canada who talk about their fuel consumption. They tell me numbers, yet I have no idea what those numbers mean in real terms.

I first became aware of this difference when I was talking to my father a couple of year ago. He asked me how my car was on gas and I told him I get about 15 km to the litre. He was surprised, saying that wasn’t very good. I was surprised that he would say that for such a fuel-efficient car (which was 10 years old, to boot!). We quickly realized that we were talking in different languages. My father’s brain had taken my kilometres per litre and input it into a Canadian calculation of litres per 100 km. To him, my 15km/litre sounded like 15 litres/100km.

Fair enough. Two countries, two ways of calculating fuel consumption. If it was that easy I wouldn’t have a problem. But my question is, can someone who thinks about litres per 100 km really understand their fuel usage?

To be precise, I average 15.1 km/litre from September to June (July and August is all over the board and depends on my A/C usage). Knowing that, I find it very easy to ball-park my cost for going from A to B. For example, I live 7.4 km from job 1, and 8.2 km from job 2.  A round trip to and from job 1 costs me pretty much one litre of gas; a round trip to and from job 2 costs me just over one litre. In my monetary terms, that means that for each job, I am paying roughly 120 yen ($1.50) for my transportation.

Reversing the calculation for the standard Canadian way (here is a good post on how to do it), I can see that I use 6.6 litres per 100 km of driving. But that number doesn’t really help me out when trying to figure out the cost of a trip to the downtown core 4 km away. Maybe it’s just getting used to the number and mental calculation, but for me, kilometres per litre is a more digestible and practical number.

The Carry Trade and Exchange Rates

So now we have an understanding of the carry trade, and a primer on supply and demand. But why does it affect exchange rates?

Simply put, exchange rates are also subject to supply and demand.

If you decide to exchange a few hundred Canadian dollars into Euros for your trip to France, you are essentially selling dollars and buying Euros. Alone it is nothing that would change the economy. But what if millions of people were doing that simultaneously?

It would mean that there would be upward pressure on the Euro, as many people want Euros (much like the Furby in the last post). The desire to own Furbies or Euos would cause the price to increase. At the same time, all those people selling Canadian dollars would cause its value to decrease.

Going back to our Japanese carry trade example from a few days ago, when interest rates in other countries were quite high compared to interest rates in Japan, many retail and institutional investors were sending money abroad: ie. they were selling yen and buying other currencies. The act of doing so meant that the Japanese yen remained low or went lower.

But then the world credit crisis and recession began and there were a few things that came into play in a very short time span.

  1. Japanese investors became fearful: Seeing the global problems many Japanese investors decided to get their money back to Japan as quickly as possible, so they sold their foreign investments and exchanged the money back into yen. This had the effect of strengthening the yen, as it was a sought after currency.
  2. Foreign stock prices fell: We all know the carnage that happened to global stock prices in late 2008 and early 2009. Many Japanese investors involved in the carry trade who had stock holdings sold their shares and repatriated their yen in order to avoid further losses. All this money coming back to Japan further strengthened the yen.
  3. Global interest rates began to drop: Investors who left their foreign investments in place began to question their decision as other governments lowered interest rates. If a Japanese investor had taken out a 1% loan to invest in a Canadian bank account that was now only making 0.25% interest instead of 4%, the investor was losing money. Many investors emptied their foreign bank accounts and brought money back to the “safety” of Japan. Again, increasing the value of the yen as so many people were selling other currencies and buying yen.
  4. Fear on Fear: Through it all, the yen was moving up in relation to many other currencies. A large portion of the movement was due to fear of further losses, or fear of a higher yen. As the yen kept moving up and up, many stragglers were forced to exchange their money back into yen for fear that the yen would go higher, and they would lose even more… ironically, in doing so they would have added to the demand for the yen.

And that brings us to today. Though the yen has come down some, it is still high because there are not many investors willing to take a chance on the global recovery yet. Once North America and Europe raise interest rates to more profitable levels, I think we will see the Japanese retail investor sending money abroad again, which should lower the yen’s value.

Though it’s taken me three posts, hopefully I’ve been able to answer the original question of what the carry trade is and why it moves the yen.

Supply and Demand

My last post dealt with what the “Carry Trade” is actually all about. We want to understand why it can move currencies, but before we can do that, I realized that we need to have a basic understanding of supply and demand.

If you are unfamiliar with supply and demand, the basic premises that we need to remember are:

  1. As demand rises beyond supply, so will price.
  2. As demand falls below supply, so will price.

The easiest way to understand this is to remember the foolishness that surrounded such products as Buzz Lightyear, Furby and Cabbage Patch dolls. They each had a price attached to them when they came on the market, but they became insanely popular. So people bid up the prices in order to get their hands on one.

Someone I know paid somewhere around $100 for a Furby for her daughter.

After the Christmas season, however, manufacturers were able to bring a larger supply to the market, which also coincided with a decrease in demand (no Christmas rush) and prices moved back to rationality. Someone who bought a Furby for $50 on December 10th may have been able to sell it for $100 on December 20th, but  he/she would not have been able to get that price in February.

Think also of tickets for the mens hockey gold medal match at the recent Vancouver Olympics. Tickets were issued with prices of $350 – $775 depending on the seats. Here is a slightly different situation, in that there was a specifically limited supply. You couldn’t run around to different stores or hope that the manufacturer would be able to get out an extra shipment - there are only so many seats in the arena.  As Canada and the U.S. progressed in the tournament, demand moved higher and higher to the point that $775 face value tickets could be had for prices of $5000, $10,000 or even $15,000!!!

The limited amount of seats in the venue as well as the success of Canada and the U.S. meant that prices could move this high. With a normal product if price moves too high, demand will fall off in light of more rational thinking. If there are only 13,000 seats available (about 19,000 seats are in the arena, but 30% were held for Olympic related guests) it’s pretty easy to find enough rich people to pay ridiculous prices.

Without really thinking about it, supply and demand is around us daily. It is responsible for the prices we pay for goods and services, the way kids trade sports cards, the reason service providers know they can raise prices, and the reason exchange rates move up and down.

And it is exchange rates that will interest us in the next post.

Spending Can Be Good

Generally speaking, the premise of this blog is to talk about ways to save, invest, and avoid wasting money, as well as to speak of topics specific to Canadians living abroad.

But let’s face it: we save money for the sake of enjoying it.

Anyone who forgets that is doomed to face either the three ghosts of Christmas Past, Present and Future, or the fate of Silas Marner, who built his fortune only to have it stolen away from him.

My wife and I are great savers. We enjoy earning cash and bookkeeping our income and outcome. But it is all with purpose.

We are approaching out 2-year anniversary, and as I only had a limited amount of time off this summer, we decided to celebrate a little early by taking a trip and some time for ourselves.

Some will remember that I made some re-posts a week or so back, and that is because we were off to a natural hot spa, enjoying the water of a volcanic country, as well as the various local foods that can be found throughout Japan.

A back of the envelope calculation tells me that we spent about $600 Canadian (including lodgings, food, transportation and gifts) for a one-night, two-day stay in a spa area about two and a half hours from where we live.

Do we regret any of if? … Not one single cent (yen).

Years ago I would have thought that a ridiculous amount of money to spend for 48 hours, but at this point in my life I think that – not only am I grateful for the fact that I have a business that allows me such occasional self-pampering, but also for the fact that I have such a great wife/partner/spouse to spend that money with.

I respect Warren Buffet immensely, but I remember reading about what he said when his wife spent a certain amount of money on new furnishings for their house (at the time a remarkable amount): he said something to the effect of “Do you know what that is compounded over 30 years?”

Fair enough. I could compound my $600 over several years and have a good amount of money. But I guarantee that it wouldn’t bring me the satisfaction that was brought by relaxing 48 hours with my wife, while enjoying several seismic baths,  great food and great atmosphere.

Remember: even Ebenezer Scrooge and Silas Marner were brought around to the beauty of humanity over money eventually.

Re-Post: Gender Imbalance and Chinese Savings Rate

I’m on vacation for a few days and am unable to update the blog. I thought I would take the opportunity to re-post a few old posts that I like. I originally posted this in May of this year. 

In my quest to fill the void left by Tom Keene and Bloomberg on the Economy, I’ve been listening to a variety of other podcasts.  The majority of them are bland, boring, and lack the wit and one-liners of Keene.

One good show (though hard to find on podcast) is the Hays Advantage, anchored by Bloomberg’s Kathleen Hays.

On her February 18th show, she interviewed Shang-Jin Wei, a researcher at Columbia University, who has looked at the savings rate in China.

On average the Chinese savings rate is quite high. Many economists point to the fact that China is an export nation, and blame government and businesses for not spending enough in the global economy. Wei, however, points to a more basic human desire as the reason for personal high savings: marriage and gender imbalance. 

In his research (synopsis available here) he found that 30 years ago the gender difference was quite natural – about 105 boys born to every 100 girls. After China implemented the “one child policy” in about 1980, however, things began to change: the gender imbalance widened and savings shot up.

In China, boys are traditionally more valued than girls. Being limited to only one child, many parents will do what they can to ensure that their one child is a boy, whether that be the abortion of girls (technological improvements in ultrasound over the corresponding timeframe have helped this) or infanticide after birth.

After 30 years the results are startling. On average, there are currently 122 boys born for every 100 girls. Mathematically speaking, this means that about 1 in 5 men will be unable to marry in the future.

How does this affect savings?

Wei theorizes, and shows evidence, that parents are trying to make their sons more attractive to female prospects by giving them wealth – essentially building a dowry for them. To do this, parents forego spending on themselves, which drives savings up.

On the flip-side, it seems families with girls can spend on themselves, and those girls will have a lot of choice in the future.

His evidence is compelling. He compares the savings rate of not only parents with girls compared to parents with boys, but also the rates of similar families in different imbalance densities. (ie. a family with a son that lives in an area of 110 boys to 100 girls compared to a family with a son that lives in an area of 130 boys to 100 girls).

If this is the case, no amount of belly aching from governments will change Chinese savings.