March 28, 2009

Employable: Three Lessons from a Popcorn Farm

I used to like to go to work, but they shut it down.
I got a right to go to work, but there's no work here to be found.
Yes and they say were gonna have to pay what's owed.
We're gonna have to reap from some seed that's been sowed.
--- Dire Straits, Telegraph Road

This month, four acquaintances lost their jobs. Each worked at a different company. Two found better positions. The other two are looking and I wish them well. 

How can you make yourself employable?

You can insure against the risk of losing your livelihood with tips from the Harvard Business Review in an earlier post. There are no guarantees, though. Much like farming.

We visited a popcorn farm last week. Frankly, there's not much to see, but we did stock up on our favourite snack. We learned three lessons that help nonfarmers. Even nongardeners.
  1. you can't control the weather
  2. work while you wait
  3. show you care
You Can't Control the Weather
There will be a rain dance Friday night, weather permitting.
--- George Carlin
Many factors affect farmers: rainfall, sunshine, temperature, pests, the price of seed, the availability of fertilizer, the skills of labour, equipment breakdowns, injuries, market demand, competition.

While weather is certainly a concern, there is little the farmer can do about it. However, the farmer can take steps like having an irrigation system to deal with years of lower-than-expected rainfall. Or build a greenhouse, depending on the crop.

In the Seven Habits of Highly Effective People, Stephen Covey talks about our large circle of concern and our smaller circle of influence. We may worry about the economy, the environment, corporate governance, and terrorism. We probably can't do much about those concerns. Instead, we must focus on what we can change --- including ourselves.

Work While You Wait
Too often, man handles life as he does the bad weather. He whiles away the time as he waits for it to stop. --- Alfred Polgar
Crops grow at their own pace. Growth takes time and a favorable environment. We work now but must wait to see the results and hope for the right outcome. There's no point playing the blame game (" If only management had/hadn't done that ..."). There's no point cramming either. You can't reap tomorrow what you sow today.

There's no point sitting idly either. While waiting for the crops, we can take care of the weeds. We can work on the weaknesses in our strengths. Seth Godin suggests we use slack time to
  1. become an expert by learning something (can include charitable work)
  2. earn a following and reputation through social networks (e.g., I use LinkedIn and now Twitter)
Show You Care
Nobody cares how much you know until they know how much you care.
--- Theodore Roosevelt
You'll quit farming if your heart isn't in your work. Negative sentiments show in poor crops. We've all known people who see work as a burden, who spread their discontent like weeds, who cut corners. Who don't care. Who lighten the atmosphere when they leave.

Even if we work in the virtual world or in tall climate-controlled office towers on what was once farmland, nature reminds us that much lies beyond our control. Yet we persevere. We survive. We change. We thrive. Life finds a way. We find a way.


March 22, 2009

How Referrals Lead You Astray: The Big Lesson from a Wet Basement

April showers bring May flowers. March rain and melting snow brought a wet basement. Water has started leaking in through the cold storage room. Not a flood but enough to warrant repairs. Who to hire? We don't know any waterproofers. So we asked around and learned a big lesson.

W1: Referral 1 (Quote 1)
I paid too much for it, but it's worth it. 
W1 (not a real name) is known in our neighbourhood for excellent work for premium prices. We got a quick inspection, a verbal quote and a business card. Nothing in writing. No brochure. 

Work could start the say after we decided. We planned to hire them based on the recommendations but decided to get two other quotes to be sure.

W2: Free for $50
By coincidence, we received a letter from W2, offering a free 10 point inspection of our internal plumbing. Normal charge? $250 but free for three days for 12 households in our neighbourhood. Maybe they did waterproofing too. Anyway, an inspection couldn't hurt. We phoned. Guess what? A $50 charge for the free inspection. We declined. 

W3, W4: Charge For Quotes
We called a couple of companies from the weekly flyers that "flood" our mailbox.

These firms charge for quotes. Forget that. We see free quotes as part of their marketing process. A quote only takes a few minutes.

Who knows? They take 2-3 days just to arrange an appointment.

W1 Revisited
After pricey W1 did waterproofing for a neighbour, leakage continued!?! W1 redid the work. They stand behind their work, but why did they do a poor job the first time? And one of the workers showed up drunk (and was promptly fired). We took W1 off our list even though they where our preferred choice. This shows that well-intentioned referrals can fail badly.

W6 Referral 2 (Quote 2)
Other neighbours were shocked at the quote from W1. A relative of theirs used W6 last year and was very pleased with the work and price.  They also have a wet basement and were getting a quote from W6. We got a quote too.

After a careful inspection, the quoter came inside to sit at our kitchen table. We got a folder with testimonials, diagrams and articles. Plus two business cards, meaning we could pass one on. Viral marketing.

We were advised to get window wells to fix drainage in two other problem areas. The quoter used a business card as a ruler and drew the footprint of our home. He split the quote into four sections so we could select the areas we wanted serviced. We appreciated this since our budget was $0 to start.

Here's the best part. We got samples of the material
  1. a plastic membrane to stick to our foundation (like self-adhesive rubbery wallpaper)
  2. spacers to create an air channel
  3. a reflective layer to retain radiant heat
We were told to be wary of companies that used tar --- cheaper, less durable.

This written quote was 34% cheaper than W1 (the only quote so far). We could see what we were getting. Our neighbours hired W6 without considering any other company. We were ready to sign too but held off since two other quotes were pending. 

W7 (Quote 3)
Verbal quote using tar (12% lower than W6). No business card. Not available for 2-3 weeks. Did not point out other potential problem areas until we asked. Appalling. W6 was clearly the best choice but we decided to wait until the next day for a final quote before signing. 

W8 (Quote 4)
This company advertised in a local flyer. The quoter said our foundation is concrete blocks, not the poured concrete used these days. So we needed the whole wall waterproofed. The other quotes focused on the cold storage area. We did not need window wells because our windows are above ground. Landscaping would divert the water from our foundation. 

Here's the quote
  • Materials: A rubbery membrane that's applied with a trowel, spacers with a cloth mesh to allow air circulation. We can upgrade to a spacer with R14 insulation value (no one else offered this option)
  • Guarantee: From a real insurance company rather than the usual we-guarantee-our-work-as-long-as-we stay-in-business
  • Digging with machines (all other quotes used hand shovels)
  • Holdback: $500 payable several weeks after completion of the work to ensure everything is done properly
  • Payment: cheque (not the pervasive no-tax-with-cash)
The price is about the same as W6 but waterproofs an entire wall and skips the window wells. We decided to hire W8 but waited until the next day to tell them. The other quoters could start work the next day (don't they have any projects?) but W8 is booked until mid-April. We're hoping for light April showers.

The Lesson
Getting quotes takes time and is not much fun. We had time because we were home for March Break. 

We learned that well-intentioned referrals can easily lead you astray. This lesson could have been costly.

We were ready to hire W1 and then W6. Both would have been mistakes. W1 had the highest prices but did not clearly state what they would do or what material they would use. Misunderstandings waiting to happen. With W6, half the money was going towards unneeded window wells, rather than waterproofing the entire wall. 

photo by ontzy


March 14, 2009

Warren Buffett's Tough Career Choice: Actuary or Billionaire?

You only have to do a very few things right in your life so long as you don't do too many things wrong. --- Warren Buffett

We're currently listening to The Snowball: Warren Buffett and the Business of Life. We didn't know much about Warren's background. Alice Schroeder weaves an intricate, intriguing portrait. Melt the snowball and you'll find the mind of an actuary wrapped in lots of money.

Warren an Actuary?
Here's an excerpt from Chapter 15: Strike One, page 137. While a student at Columbia in 1951, Warren learned about insurance during an unannounced Saturday visit to GEICO headquarters in Washington, DC where he managed to meet a vice-president. 
Warren had even considered actuarial science --- the mathematics of insurance --- as a career. He could have spent decades toiling over tables of mortality statistics, handicapping people's life expectancies. Besides the obvious ways this suited his personality --- which tended toward specialization, collecting, and manipulating numbers; and preferred solitude --- working as a life actuary would have let him spend his time pondering one of his two favourite preoccupations: life expectancy.
However, his other favorite, collecting money, had won out.
I was a life actuary before switching to my current nontraditional role as a marketing actuary. I remain fascinated with life expectancy which deals with two key financial risks
  • mortality: dying too soon (before your life expectancy with financial obligations remaining)
  • longevity: living too long (beyond your life expectancy and outliving your savings)
Longevity is often the larger concern. Since we're living longer, we need more money to maintain our lifestyles and to prepare for the extra financial costs of poor health. In turn, accumulating more money means working longer or making riskier investments in hopes of getting higher returns. Neither is appealing. 

Warren needn't worry about the financial consequences of life expectancy.

The Excitement of Insurance
While you may think insurance is boring, Warren saw opportunity.
He also learned that insurance companies take their customer's premiums and invest them long before claims are paid. That sounded like getting to use somebody else's money for free, just the kind of idea that appealed to him.
If you feel that insurance companies mint money, consider getting shares. The investment earnings get reflected in the insurance premiums. GEICO sold automobile insurance via direct marketing to preferred risks (mainly government employees). This resulted in a winning combination: lower expenses and lower claims. 
GEICO seemed to Warren a no-lose proposition.
That Monday, less than 48 hours after he arrived back in New York, Warren dumped stocks worth three-quarters of his growing portfolio and used the csh to buy 350 shares of GEICO. It was an extraordinary move for the normally cautious young man.
Berkshire Hathaway owns GEICO. 

There are sure to be other insights in The Snowball. The book runs 838 pages (960 including the notes and index). 

While Warren Buffett could have become an actuary, he instead ended up as billionaire. Such is life.

Podcast (includes excerpts from the audiobook)

March 8, 2009

What Does Carrying $1,000 Cash For 30 Days Do To You?

Dogs have no money. Isn't that amazing? They're broke their entire lives. But they get through. You know why dogs have no money? ... No pockets. --- Jerry Seinfeld

Money is energy.
The value of money comes from what it does.
What you give, you get back 10 fold.

So carry lots of cash. I've heard this advice several times.

Who Needs Cash Anymore?
I don't use cash much. Do you? I like having a minimum of $100 and a target of $140-$160. That's more than enough for expenditures that don't take credit cards. Or places like taxis where I don't feel comfortable using plastic. I don't use debit cards, following the advice of Frank Abagnale in Stealing Your Life. You may recall that Leonardo Dicaprio played Frank in the film adaptation of Catch Me If You Can. 

Why Not?
In January, pianist-turned-coach Paul Tobey suggested carrying $1,000 for 30 days. That's outside my comfort zone, which is perhaps the point. Your credit card probably gives you a $1,000 of purchasing power. That's not cash. Neither is a $1,000 cheque payable to you. 

You might not carry $1,000 cash if
  1. you don't have the money
  2. you're afraid of theft (can't trust others)
  3. you're afraid you'll make impulse purchases (can't trust yourself)
During the Canadian winter, there's little for an insider to do. So I tried this experiment and ran into an immediate snag.

The Problem
My bank keeps cutting my daily cash withdrawal limit. I'm not a bad risk. These reductions are meant as protection from fraudulent activity. Originally $1,000 got cut to $500 and is now down to $300. Collecting $1,000 means visiting on four different days, which is arduous. Even worse, the bank machine spews $20 bills. Who wants to carry 50 (or more) pieces of germ-infested paper? I stopped making withdrawals after two days, which may negate the results.

The Results
Carrying extra cash has three positive advantages. 
  1. You feel more successful (much like wearing better clothing)
  2. You feel more prepared for opportunities
  3. You feel more prepared for contingencies
I was in Sudbury recently with my friend Mike (whose preteen daughter apparently reads this blog !?!). He likes paying by credit card but couldn't: someone stole the credit card machine from the taxi. I used cash and had plenty left over. This saved us from walking or hitchhiking to the airport in -35C weather.

Other Emergencies
On September 11, 2001, I was in Halifax, Nova Scotia delivering a presentation while planes were crashing into the World Trade Center. We didn't know until an organizer interrupted just as I finished. At that point, we were all numb. How could both towers collapse? What was going to happen next? There was speculation that the phone systems (land/cellular) and the Internet were going to be shut down to prevent the terrorists from communicating. The power grid could be shut down. The financial system could be shut down to prevent terrorists from transferring money. Very confusing. Very hard to tell what would happen next.

In a daze, I got directions to a bank and withdrew the maximum permitted (probably $500). There were no line ups. As events unfolded, I didn't need this extra cash. What if I did? What if the bank was closed or had run out of money? Cash would have come in handy. 

Carrying more cash works. It seems redundant --- like having a 500 horsepower SUV in the city. If you go offroad, you'll be on a paved sidewalk. You don't need the extra speed either. Even so, the potential gives extra confidence and peace of mind. Unlike an SUV, cash is green (at least in America).

Unlike cheques, credit cards or debit cards, cash is universal. If you try this experiment, please share your findings.


March 1, 2009

10-8 Leveraging: Are Tax Audits on the Way?

Did they get you to trade
your heroes for ghosts?
Hot ashes for trees?
Hot air for a cool breeze?
--- Pink Floyd, Wish You Were Here

Tax advice and income tax strategies. That's #1 on the list of what the wealthy demand from their trusted financial advisors. You're looking for more aggressive recommendations. That doesn't mean you'll blindly act on every idea. You'll weigh the risks and rewards.

But how can you decide what you want until you know what's available?

Fight or Flight?
Cold comfort for change?
Did you exchange a walk-on part in the war for a lead role in a cage?
--- Pink Floyd, Wish You Were Here
Flight: If you're very risk averse, that's fine. You can hide in the shadows by simply paying more tax than necessary. Even then, the taxman may still seek you out: to thank you for being such a profitable customer.

Fight: Successful tax planning leaves more of what you earn with you --- where it belongs. There's more risk, though. You could get audited. That scares some. Others simply factor that possibility into their risk/reward calculus.

CRA Audits of 10-8 Leveraging (or 10/8, 8/10 and 8-10)?

"The Canada Revenue Agency has recently become aware of these loan arrangements and we are reviewing them to ensure they comply with the Income Tax Act." --- Rebecca Merrett, Communications Manager
Since early December 2008, there's been concern about potential audits of 10-8 insured leveraging strategies by the Canada Revenue Agency (CRA). These strategies --- the last major innovation in insured tax planning --- turbocharge the perennial top 5 insured strategies by adding the advantages of financial leveraging while reducing the risks. And creating tax deductions.

In brief, you put cash into a special universal life policy. This creates collateral. You borrow at 10% and invest in suitable investments. This makes the loan interest tax-deductible, which drops your after-tax loan cost to 5%-6% (depending on your tax rate). What happens to your collateral? As a reward for borrowing, your collateral grows at 8% in a tax-sheltered environment. My American Express card rebates 0.5% for borrowing at 10.99% (current rate, conditions apply). Other lenders give points or other incentives.

You can invest with a line of credit secured against your house, but with 10-8 leveraging
  • your loan rate is 10% (meaning larger deductions than borrowing at bank prime rates)
  • your collateral grows at 8% tax sheltered (house prices can drop)
  • you get life insurance
What Might Concern CRA?
CRA looks for abuse of the tax system. And they look for revenue. Since tax deductions decrease tax revenue, CRA may have concerns. Here are the three most likely areas:
  • Is there a reasonable expectation of profit from the investments made?
  • Is 10% a reasonable loan rate? (Dell's current flyer shows rates of 9.99% to 28.99%)
  • Does the General Anti-Avoidance Rule (GAAR) apply? (A somewhat arbitrary "smell test")
You can find out more via the links at the bottom of this post.

There's plenty of noise about what CRA may do.
Running over the same old ground.
What have you found?
The same old fears.
--- Pink Floyd, Wish You Were Here
Those who oppose or don't have access to 10-8 strategies are spreading fear. Those who never understood 10-8, have moved to the sidelines --- where they belong. Those who did their due diligence at the outset remain in the game unfazed.

Time To Panic?
That's your call. Do consider the following facts:
  • when uncertain, insurers get (expensive) independent outside tax opinions before developing new strategies
  • 10-8 leveraging has been around for most of this decade
  • most major insurers offer 10-8 strategies: BMO [bought AIG], Industrial Alliance, RBC, Sun, Transamerica
  • there are no known challenges from CRA
  • major accounting firms have reviewed and approved 10-8 strategies for their clients
  • no insurer has discontinued their 10-8 strategies
  • no major distributor has suspended the marketing of 10-8 strategies
The Worst Case
Suppose CRA finds fault with 10-8 leveraging. What happens? You can expect insurers to defend their positions and accounting firms to defend their clients. The courts would ultimately decide.

In the worst case, the loan interest would not be tax deductible. You would have borrowed at 10% to earn 8% in a tax-sheltered environment. That's not the worst thing in the world. You can unwind the leveraging by repaying the loans by selling the investments made with the borrowed money. You're then left with a "normal" universal life insurance policy. That's not so bad either.

Independent Opinion
Before embarking on any tax strategy, you know enough to get independent advice from professionals with relevant experience. Right? Note the work "relevant". Skills vary. Areas of expertise vary. So do levels of competence, but this is harder to spot unless you're an insider.

I'm biased. The wealthy want aggressive tax strategies to deal with their tax burdens. I was glad to help as the product actuary for one of the first insurers to offer 10-8 leveraging in Canada. Today as a marketing actuary, I spend most of my time helping advisors bring 10-8 leveraging to their clients.

There's fog today but won't the sun rise tomorrow? Won't the wind blow through the trees? Won't hot air give way to a cool breeze? As the old fears disappear. Wish you were here.