Tuesday, October 31, 2006

Trick, then treat

When the Tories promised, in the last election, to scrap capital gains taxes as long as the profits were reinvested within six months, people in the personal finance community were excited.

The theory was that stifling taxes on capital gains were trapping money and hindering the economy, as people held on to assets they would otherwise have sold had it not been for the fear of taking the capital gains tax hit.

I recall it was a key cog in the Tory platform, but they quickly scuttled the proposal after they were elected once they realized how unwieldy (and dare I say, expensive) it would have been to implement.

But news is out today that the proposal is apparently back on the table. Finance Minister Jim Flaherty is publicly toying with the idea of implementing some version of the proposal, possibly as early as in the 2007 Federal Budget.

I can't help but notice that this news comes as the possibility of another election is rearing its head, but still -- good news, I say. Although I must admit, so far my own portfolio is more a story of capital losses, as opposed to capital gains over the years, in the last 18 months or so, as I've gotten more serious about my investments and started to do my homework before jumping in, I'm pleased to say it looks like I have some winners on my hands.

Some day, I'm going to want to sell them. And it will be nice if I can keep as much of my gains from shrewd investing as I can -- since I'm mostly likely to plow every cent of profit I get into buying an economy-boosting home at some point.

If and when that happens, the government will get theirs. I'm still no fan of a lot of the Tories' other policies (the constant bickering over same-sex marriage and their laughable policy on protecting the environment leap to mind) but from a financial perspective I'm pretty impressed by their commitment to stimulate the economy by giving Canadians as much money in their pockets as is possible.

We'll see how this plays out.

Thursday, October 26, 2006

My morning smile

Thanks to Ramit over at IWillTeachYouToBeRich.com for drawing my attention to this today:

How much time do you spend reading blogs vs. your personal finances?

I know people like this. They'll happily spend 15 hours a week making sure their Battlestar Galactica fansite is 100% up to date, but they don't know what an RRSP is. Or how much the interest rate on their $6,000 credit card debt is.

Tuesday, October 24, 2006


Of all the contentious debates currently simmering among the U.S. population, the question of what to do with Social Security is just about one of the most impassioned ones you can find right now.

Up here in Canada, we had our own version of this debate a few years ago, when everyone (and their elderly mother) chimed in with an opinion on when, exactly, the Canada Pension Plan was going to run out of money, and what, precisely we should do about reversing that trend.

State-run pension plans are generally thought of as being underfunded and chronically mismanaged. But in Canada's case, at least, I think that's an unfair characterization. The reality is way better that most people's perception.

Very quietly, the Liberal government in the 1990s overhauled the way CPP works, moving the plan away from low-risk, low-yield Canadian bonds and into more diverse equities from around the world.

Ten years on, the results are eye-opening. The CPP has averaged an 8.6-per-cent return over the past five years, and the chief actuary is forecasting returns of 4.6-per-cent above inflation per year over the long term.

In 2006, the plan actually showed a surplus of more than $100-billion and it's estimated there is already enough money in there to sustain itself for 75 years, even if the assets stop growing entirely.

As financial planner John DeGoey is quoted as saying in the above-linked article: "You can say what you want about Paul Martin but he did well in getting the financial house in order."

I don't write this to in any way cheerlead for the former Liberal government. But in an age where we see waste all around and too many people, and governments, not showing enough fiscal restraint, I think it's important to recognize a job well done.

Remember those numbers the next time you catch yourself griping about the CPP contribution your employer takes off your next paycheque.

Friday, October 20, 2006

Nickels and dimes

"I never have any money," a friend lamented to me this week. "I don't understand why -- I earn a good salary but it all seems to be gone as soon as it comes in," he said as he paid the $1.50 service charge to take $20 out of the ATM machine to pay for his $12 movie ticket.

Thirsty after the disappointing movie, I started out on the 10-minute walk to a local pub to grab a drink when he stopped me, gesturing towards the taxicab line in the opposite direction, and telling me to get in. "It's on me," he said.

Six dollars (and 5 minutes) later, we got out and went in to find a table. Three beers later, on my walk home, I find myself thinking, once again, about his financial predicament.

"I think I know where the money goes," I think to myself.

Wednesday, October 11, 2006

Fools and their money

Another day, another step toward complete financial ruin.

Not for me, of course, but two stories I read today in the daily papers have me convinced that people's zeal for real estate has them blindly making some truly baffling decisions.

First, Garry Marr of the Financial Post's story about Genworth Financial (it's behind CanWest's iron-clad subscriber wall, but you can get the gist of the story on Jonathan Chevreau's Wealthy Boomer blog here) announcing that they will be the first to offer 40-year mortgages in Canada.

Given that Genworth was also a pioneer of sorts when they unveiled 30 and 35-year mortages earlier this year, I'm not surprised that they've upped the ante to 40 years. It's to their benefit that you pay them for longer. But what truly struck me dumb is that in the article, the Genworth rep says the only reason they offered the product was because of the positive response to the previous, 35-year term: a full 20% of Genworth customers now opt for the 35-year term.

That's absolutely astounding to me. I've said it once and I'll say it again -- there's an alarming lack of understanding about the way money works in this country, and the financial services industry is profiting handsomely because of it.

I had just about recovered from the thought that people will now literally be passing their mortgages on to their children when they die, when I read more distressing real estate news in the Globe. Non-conventional, high-rate mortgages to people who don't qualify for conventional loans are increasing to the tune of 50% per year in Canada, a story by Heather Scoffield reveals. More than 85,000 people signed up for the products in 2005.

40-year mortgages? Let's put it this way. If I told you you had to keep paying me money until the Leafs win the Stanley Cup, would you sign up for that?

Didn't think so.

The bottom line is quite simple, really: If you can't afford a house, don't buy one. Don't talk yourself into thinking that paying $700,000 for a $200,000 loan over 40 years is somehow a good idea.

Wednesday, October 04, 2006

Gambling on gambling

I can't lie -- this hurts.

Parlay Entertainment, a small Canadian company that eked out a position as the dominant provider of on-line bingo software, has been swept up in the misery that the entire on-line gambling sector has been wallowing in since the U.S. Congress moved last week to effectively ban gambling on the Internet for U.S. citizens.

I bought shares in Parlay about 18 months ago after being impressed by their management calibre, and the fact that they were very quietly boosting revenues and market share in a fractious market.

The company made news last month when it announced it had agreed in principle to merge with a larger competitor, Chartwell Technologies. I was still mulling over the numbers, trying to decide what I was going to do with my Chartwell shares when this gambling ban news broke.

I can't say I was totally surprised by the move -- Congress has been sabre-rattling for years about shutting down gambling outfits, and a Republican caucus has been ramping up their feigned outrage to try to garner some family-values support going into midterm elections. So I'm not surprised that the move came.

But still: seeing 50% of the value of a company I liked a lot knocked off within the span of a week didn't exactly leave me with warm and fuzzy feelings. According to the company itself, about 60% of Parlay's revenues came from US-based customers. So it makes sense that the company has shed nearly 60% of its market cap since news it woudl lose 60% of its revenues broke.

So now I'm left wondering the $64,000 question -- now what? Do I sell my shares for whatever I can get for them and put the whole sorry chapter behind me? Or do I stick it out, secure in the knowledge that this is probably just an over-reaction?

Right now I'm leaning towards the latter option. A quote from the CEO of sector-heavyweight CryptoLogic on the matter is stuck in my craw:

“Internet gaming is here to stay. The genie is out of the bottle. There are millions of players around the world who play the games responsibility,” CEO Lewis Rose said. “We believe that regulation is the best way to bring on-line gaming into the sunshine. And sunshine is the best detergent.”

At the same time, it has decided to take a non-confrontational approach with the United States in the hope of one day being able to serve that market legitimately. Mr. Rose said he is still hopeful that Congress could eventually choose to tax and regulate Internet gambling, similar to an approach adopted by Britain.

“There are clearly going to be tremendous opportunities now. There's going to be an opportunity for consolidation of the industry. And we believe the cards are in our favour at the moment.”

This view really rings true to me. It's painfully obvious that there's a market for Internet gambling, so it's not going to go away. Prohibition of alcohol didn't work and neither will this over the long term. I suspect that for the next few years, the sector will grow revenues everywhere but the United States, before the U.S. Congress ultimately wakes up to the revenue potential and opens the floodgates to take their share through taxation.

I also think he's bang on in his assessment that consolidation is coming. In that scenario (and with more than $100-million in cash on hand) I suspect Crypto will be a buyer. And Parlay will remain a seller.

But I plan on remaining a shareholder.

Tuesday, October 03, 2006

The Seven Habits of Successful Investors

MoneySense magazine is one of my favourite publications and their current issue on Canada's best small investors is always one of my favourite issues of the year.

The issue profiles a handful of small investors, sharing their strategies for how they grew their meagre portfolios into six and seven-figure masterpieces in a relatively short timeframe. This year's edition isn't available on-line yet (I suggest you buy a copy) but you can have a look at last year's edition by clicking here.

In addition to an update to what's happened to last year's names, the writer of the piece, Duncan Hood, has compiled a list of the seven habits of successful investors, culled from what he's learned through interviewing them for the last few years.

They really want a million bucks
Seems simple enough.

They like to save

Definitely sounds familiar.

They start young
I bought my first mutual fund at 16 and my first stocks at 22. Does that count?

They can take huge risks
Doesn't sound like my kind of bag. I try to curb that impulse.

They can handle big losses
Well, I've had big losses, and it didn't kill me. I guess I qualify.

You can handle debt
No thanks

Your investing style suits you -- if you don't have all of these attributes, don't worry.

Monday, October 02, 2006

Every little bit helps

An interesting bit of news came in the mail for me the other day.

Back in 2003, I came upon a little sum of money when my grandfather died and left me a few thousand British pounds in his will. I splurged on a new laptop for myself (still got it) and vowed to use the rest to get my feet wet in this thing called the stock market I was hearing so much about.

I was vaguely familiar with the concept of diversification, so I resolved to put the cash, about $3000 total, into shares of two companies I'd heard of: Biovail (lots of old people means lots of demand for drugs, I reasoned) and Nortel (if they were going to go belly-up they'd have done it by now, my thoughts went).

Biovail and Nortel.

Don't be alarmed by the blood-curdling scream you just heard. That was just my reaction when I clawed my eyes out at the sight of those two words placed next to each other in my portfolio. Because those two companies have truly given Canadian investors some serious nightmares in the past few years, and I owned both of them at one point.

Biovail's still stinking up my portfolio to this day, but Nortel I gleefully rid myself of only a few months after I bought them. Strangely enough, I actually managed to turn a quick profit on Nortel -- the shares inexplicably doubled from about $5.50 when I bought them to more than $11 when I sold -- which makes the fact that apparently I'm entitled to part of a looming settlement in a class-action suit against Nortel even more humorous.

My on-line broker sent me the above-linked letter, detailing what I needed to do to get my share of the $300,000,000 Nortel has earmarked to pay for their role in misleading investors about their earnings in 2003 and 2004.

So how much can I expect? Crunching the numbers, because of the small amount of stock I bought (only 100 shares) I can expect something in the neighbourhood of a cheque for about $11, and 11 shares of Nortel, currently trading at about $2.50. All in all, it'll be something like a $30 to $40 bump for my portfolio -- not much more than the brokerage fees I'd accrue if I wanted to sell the shares. That's a bit of a downer. With a potential return like that, looks like I'll be hanging on to those Nortel shares once more to see if the firm can reclaim even a shadow of its former glory. At least I didn't have to pay for the damn things this time.

Still, I'm going to send in the forms to participate, and consider myself lucky for the opportunity. Because $600 in capital gains I no doubt pissed away at the local publican house back in the day, plus $40 and the potential for more in a class-action settlement is a damn sight more than most Canadian investors ever got out of the one-time tech darling.