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This blog in 2009

December 30, 2008

I am writing this blog because I wish to stimulate conversation and learn from others.  My goal is that through this conversation I will become a better investor and help others become better investors.

While this blog will be primarily about investments and investing, I will also post on administering wills and estates and on politics.  I’ll write about planning and administering estates because I have some experience as an executor.  I’ll write about politics because the ubiquity of governments has caused them to affect most everything in our lives.

1)      Investing and the economy: Managing investments effectively impacts so much in life (retirement, children’s education, independence, bequests).  I have managed my own portfolio for about eight years, have had joint responsibility for a second portfolio and act in an informal advisory capacity for a third portfolio.  I’m not an investment advisor, but have long taken a keen interest.  Through conversations in this blog, I hope we all become better investors (even if you’re Prem Watsa or Warren Buffet you can improve), become financially independent sooner, retire earlier and leave more money to our beneficiaries.

2)      Administering estates: Administering an estate is a tough and sometimes thankless job.  There are the legal and administrative pieces, which are important, but there are also the wishes of the deceased and personalities and emotions of the beneficiaries which must be respected and managed.  I’m going to use my experience as a co-executor for two estates to write about some the challenges and pitfalls and, hopefully, offer some suggestions on how it can “be done right”.

3)      Politics: Whether we like it or not, decisions made by our political leadership can have significant influence on our own personal decision making.  Government policy will affect investment decisions and will affect how estates are structured.  For this reason, I will use this blog to write about politics in Canada, the US (because it directly affects Canadians) and in British Columbia (because I live in BC).

I plan to post regularly and up to three times weekly.  I hope you enjoy it, I hope you contribute to it and I hope you get some benefit from it.

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In today’s Wall Street Journal the Bush government announced $18 billion in loans and non-voting warrants for the Detroit-three.  See article at:

http://online.wsj.com/article/SB122969367595121563.html.

Bush is no longer a Commander in Chief, but is now “CEO in chief” (credit to a recent FORTUNE magazine article).  I’m one who just does not believe government should in business.  I don’t think they should run airlines, investment firms, train companies, shipping companies, own substantial real estate or compete with private industry.  

Government has its place, it’s just not in business.

I’m also not a believer that one should reward failure.  People respond to incentives (incentives and scarcity are two tenets of economics).  If we create incentives for failure it will beget more failure.  Incentives will work to curb behaviours for everyone from fat cat auto executives all the way down to babies and puppy dogs.

I recognize, as Bush states in his announcement, that we are in exceptional times.  I also understand that letting these three employers disappear would create havoc.  But why not let them go into bankruptcy?  Why not force them through the process of purging of union contracts that see workers earning well over $100,000 just for being there and not even working?  Why not force them to rethink their entire method of business in order to compete more favourably with tightly run and nimble competitors (Toyota, Volkswagen and Tata, for example).  

There would be fallout, no doubt.  Creditors would get cents on the dollar.  Workers would be let go (but that $18 billion could go a long way toward retraining them or employing them in the government’s blessed infrastructure projects).  Executives would get golden parachutes.  But the short term pain would set the stage for a proud and profitable recovery.

My good friend Aaron Cruikshank posted to his blog today a note on the role of the free markets and government regulation in the current economic fiasco.  My post is in response to his (which can be seen at http://friuch.com/wordpress/when-the-going-gets-tough-leaders-point-fingers).

The seeds were sowed for this fiasco in 1938, reinforced in 1968, 1977, 1999 and again after 2000 by Greenspan’s low interest rate policy.  Yes, business people got drunk on the sub-prime and ABCP markets and I never excuse egregious business practices.  But the fact of the matter is that this crisis was created by government, reinforced by government and encouraged by government.  Those calling for more regulation are asking for more trouble…eventually.

1938

Fannie Mae was created in 1938 to “support the national commitment to housing” and, more importantly, to backstop “the inability or unwillingness of private lenders to ensure a reliable supply of mortgage credit throughout the country.”  Read: sub-prime loans.

1968 to 1970

In 1968 the US government converted Fannie Mae into a private shareholder owned company and in 1970 created what is now know Freddie Mac.  Freddie Mac’s purpose is to compete with Fannie Mae (yes, a government owned institution competing with a shareholder owned company) and specifically to purchase mortgages, package them up into securities and sell them.  The thinking was that if lenders knew they could sell mortgages onto Freddie Mac that this market would remain liquid. 

1977

Jimmy Carter created the Community Reinvestment Act (CRA) which was established to “encourage” private banks to end their “discriminatory” lending practices.  The CRA was created to ensure all Americans, regardless of their ability to repay loan obligations, were able to pursue the American dream of home ownership.  The CRA audited books of chartered banks and would consider a bank’s loans to sub-prime borrowers when authorizing additional branches or mergers and acquisitions.  

So you’re a bank that’s forced to lend to people who can’t afford mortgages.  But there are these convenient behemoths that will purchase these toxic obligations from you, thereby eliminating your exposure.  And if you don’t make these loans then you can’t add branches or merge with or acquire other banks.  Management has a responsibility to shareholders to grow their wealth, so what would they be forced to do in order to grow?  Adhere to the CRA.

1999

In his infinite wisdom, Bill Clinton exacerbated an already distorted lending environment by putting pressure on Fannie Mae to expand its loans to sup-prime borrowers.  I can’t find a reference, but my understanding is that his administration actually set minimum sub-prime quotas for Fannie and Freddie.  adding fuel to the fire!

Final thoughts

No doubt there was malfeasance in the private sector and I want to reiterate that I don’t obfuscate this commercial greed with pious business practices.  But I’ve read too much from too many periodicals and newspapers blaming the free markets.  Make no mistake about it, this recession was brought on by Democrat and Republican administrations dating as far as back FDR’s New Deal.  

It’s dumbfounding to me the fervent support governments are getting for the tremendous “investments” they are making in their economies.  My greatest fear is that, because Joe Q. Public is so afraid, governments around the world have been given a once in a lifetime opportunity to grow, grow, grow and to reach much deeper into our pockets.  

Governments drink their own kool-aid and really believe in their destinies as the solution to all society’s ills.  Giving them a blank cheque to bail us out of this mess will only perpetuate what was has been created by FDR and encouraged by Carter, Clinton, Bush and Greenspan.  

Isn’t it time to let the market purge the irresponsible players (it will be painful, I know) and let a sensible market take over?

Transportation in Vancouver

December 17, 2008

I left Broadway and Alder at 5:45pm yesterday and arrived for a meeting at the Vancouver Club at 6:25pm.  That’s forty minutes to travel 4.0 km which translates into 6.0km per hour in my car!  That’s not good enough for a world class city.  

Our city planners and civic government have failed Vancouverites in not managing our transportation infrastructure in anticipation of our city’s growth.  They seem to have always been in reactive mode and not out ahead of the population curve.

Some will criticize me for not riding my bike, taking the bus or walking.  I do bike.  In fact, my computer tells me that I have averaged 21.5km/h since December 2006.  I do walk and I do on occasion take the bus.  But in this circumstance I needed my car.  Biking was not an option because I didn’t want to be sweating in my meeting.  Walking and the bus were not options because I didn’t have enough time between meetings and I needed to get home expediently to take our new puppy out for a walk.  

Traffic has lots of negative consequences including road rage, lost productivity, harm to the environment and, when ambulances can’t get through the bottlenecks, medical consequences.  The annual costs of wasted fuel and wasted time are estimated at more than $1500 per traveller in cities like L.A.!

As far back as Julius Caeser’s time, government was dealing with traffic congestion proactively.  Indeed, Caesar banned carts during the day in ancient Rome!  London, Mexico City and San Francisco and Singapore, France and Australia are examples of jurisdictions that ban cars on certain roads at certain times of the day, issue specific permits permitting specific cars on specific high traffic roads at specific times or just tolls for certain roads.  Interestingly, Washington DC deals with congestion by reversing the direction of one way streets in the morning and the afternoon.

Here’s to hoping for civic leadership that produces creative and forward thinking transportation plans for our city.

I’ve been honoured with the responsibility of acting as joint power-of-attorney and c0-executor of an elderly woman’s estate.

The estate is complex.  It has significant assets (cash, equities, bonds, real estate and family holding company) and eleven beneficiaries, three of whom directly own voting and non-voting shares in the holding company and eight of whom own non-voting shares.  The holding company’s primary assets include a house in which four beneficiaries live and a holiday property that all eleven enjoy.

The elderly lady passed away almost three years ago and my co-executor and I have been administering her estate since.  We’re very close to concluding this administration with a final distribution to its beneficiaries. 

It has been a tremendously positive experience for me.  Not because it’s been easy or because it’s been without challenge.  But because it has been hard and has presented innumerable and what have, at times, seemed like insurmountable challenges.  

I now fully understand how important an executor is to the successful administration of an estate.  An effective executor will improve the prospects of its beneficiaries.  An ineffective one will adversly affect the outcome for beneficiaries.

Over the course of time I’d like to write in this blog about my experience in administering this estate.  In part because it was such a meaningful process.  But mostly because I now appreciate the importance of the role of executor.  

We’re all going to die and will, perhaps, have assets to pass on.  Some of us will be beneficiaries of estates and some will become executors (I’m an executor of another complex estate).   My hope is that you, a friend or a relative gets some value from my experience.

The Liberal coalition

December 10, 2008

Some have suggested that by not supporting the Liberal, NDP and separatist coalition in Ottawa, Canadians are saying its “illegal” or “unfair”.  Some have said we in Canada don’t belive in majority rule, democracy or in decision making through deliberation.  

I don’t agree and here are some thoughts on why.

In Canada we really haven’t had more than 50% of the popular vote support the winning party since 1917 (yes there have been interregnums like Brian Mulroney’s 1984 victory), I don’t believe that by expressing opposition to the coalition assembled by the Liberals, Canadians are indicating it is “illegal” or “unfair”. Certainly this Canadian believes it to be shameful – not unfair, not illegal, but shameful. 
What the Liberals did was give the Bloc Quebecois, a party created with the purpose of breaking up this great country, a veto power over the federal government. And they afforded this separatist party that influence simply as a result of the Liberal’s intrinsic believe in themselves as Canada’s natural governing party. 

None of energy, the environment, the economy, the crumbling health care system, the wars abroad or anything else excited the Liberals enough to threaten to fall a government or to form a coalition. What did get them into a froth? The prospective elimination of taxpayer subsidies of political parties in form of a $1.95 for every vote they secured. 

This coalition is a manifest representation of the Liberal Party’s fervent and excited need for power. 

Canadians believe in responsible government which requires the confidence of the House of Commons – parliament. This confidence in and of itself infers that a majority of the lower house must support the government. It is a characteristic of the first past the post (FPTP) system that permits a party to form government with the support of the majority of parliamentarians and not the majority of the people. Just because we have FPTP does not in and of itself suggest Canadians do not believe in majority rule.

Canadians believe in hiring people, letting them get on with their job, rewarding them for success and reprimanding them for failure. Our system has an inherent job review every four or five years (or every three years in the case of Jean Chretien). Do a bad job, get fired. Do a good job and, maybe, get re-hired. In between, get to it

As an electors we want to have confidence in the people we elect. If we are constantly called up to “deliberate” then why even elect a government? Just leave the bureaucracy in place and have all policy decisions made by internet polls. That is the ultimate decision by deliberation.

Now, I have long preferred the American system of checks and balances – particularly when one party is in the White House and another holds the majority (not a super majority) in Congress. Even though he is the most powerful man in the world, the US President has far less direct power there than our Prime Minister. Through the PM’s power to appoint and fire his cabinet, appoint and fire heads of crown corporations, appoint judges all over the country and, effectively, to push policy through without recourse is too much power in the hands of one man. 

England’s Prime Minister is somewhat less powerful because his or her caucus appoints or fires the leader (and I understand that the leader representing the majority of the lower house and has its confidence becomes the PM). This ensures that the party leader and, in the case of government, the PM must keep their caucus onside.

The disappointment that this Canadian feels toward the parties that didn’t vote for Harper’s economic update is not sparked because they didn’t support him. My disappointment, and disgust, materialized firstly because of what the Liberals, NDP and separatists were voting against (subsidies for themselves) and how they were proposing to express their non-confidence (giving the separatist party veto power over a proposed coalition government).

The coalition that the Liberals put together provides a veto to the BQ and the BQ’s purpose is to break up this great country of ours.  This unacceptable for Canada. 

There are some very bright, well read and articulate people suggesting that, because of the machinations in Ottawa, Canadians believe the coaltion to be “unfair” and “illegal”.  Many of their arguments are throught through very well and communicated in very convincing ways.  

However, I think they are drawing some broad conclusions that are wrong.  Canadians believe in democracy, responsible government and a commitment to run our country that is in the best interests of…our country. These interests do not include giving veto power to separatists with the avowed goal of breaking up our federation.

I see a light at the end of Canada’s political tunnel. Unfortunately, it’s a train coming at us.

The Liberals, NDP and Bloc signed an accord that would see the Liberals and NDP forming a minority coalition government for a period of thirty months. The Bloc would hold the balance of power with no formal participation in government, but with a commitment not to vote against the government on confidence measures for a period of eighteen months. The cabinet would be comprised of eighteen Liberal and six New Democrat MPs.

Not only was Harper’s inclusion of party subsidies in his discussion on our fiscal circumstance poor judgment, it was poor government. Canada has been living in an insulated economic bubble, but with oil prices dropping and the US consumer not consuming, reality is quickly setting in for her. Tiny subsidies of political parties have no place in a discussion of our economic strategy. Notwithstanding Harper’s mistake, what the merry band of Dion, Layton and their separatist sidekick are doing is an atrocity. We have tremendous economic instability. Adding this to the mix only creates more uncertainty (look at what the Canadian markets have done thus far this week).

What Dion and Layton are proposing is to replace a party that has formed government after winning in accordance with our first past the post system with a government which will appoint a prime minister who will serve only five months (Dion steps down in May). A government that will stand only with the support of a party which has, as its primary purpose, the objective of breaking up the country. This is nothing more than a power grab by the Liberals. They are the heaviest drinkers of the “Liberals as Canada’s naturally governing party” kool-aid. I’m afraid they’re drunk.

I was impressed with Harper and, on balance, still am. However, Canada needs political leaders that are focused on Canada and not on themselves. This is particularly important at this point in our economic history.

At the moment I’m disappointed in all of them.