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Schadenfreude

As the world watches the stock markets drop like a stone, I got a pretty interesting e-mail from a friend of mine last week.  He quite literally wrote me “So how’s your stock portfolio dude? are you watching those numbers on the ticker closer than ever lol”.  I could just feel the schadenfreude being flung at me.  I tell him things are taking a beating, but I am able to capitalize on some of the volatility and that I’m exiting some investments where it’s close to break-even.  Cash is king right now.

He writes back that he’s happy I’m “not contemplating suicide LOL”.  Haha, yes, the joke is on me… and everyone else who has ever thought enough to invest their money for retirement.  I guess this is his way of saying “I told you so” without actually saying that, even though he never warned me of anything.  I’m only slightly bitter that a friend would write something so asshole-ish to me as I watch my hard earned savings evaporate in a matter of days.

But this post isn’t about why you shouldn’t kick your friend when he’s already down.  That e-mail made me question if investing in the stock market is the correct thing to do at all, and how badly will this economic crisis hurt me.

To answer this question, I first questioned my motives for investing and they’re quite simple:

1. I would like to eventually retire one day, and be comfortable financially in my retirement.
2. I can only do that if I save up money for this, but saving money is pointless if you’re not investing it to fight off inflation.
3. Therefore, I should use my retirement savings to invest in something which will hopefully snowball into something large enough for retirement.

So shoving my money under my mattress is a bad idea (or into a savings account etc…).  My options:

1. Invest in Real-Estate: The downside here is that it’s a risky business. Land value does not necessarily grow.  Home values are continuing to drop from the sub-prime mortgage crisis.  Also, you need a lot of money to buy real-estate.  You get taxed when you sell a second home. Getting a second mortgage to buy a home is silly too, as you’re just forking over money to the banks for interest.  Paying your second mortgage by renting isn’t feasible either because you get taxed on those earnings… and you now have a second job.
2. GICs, bonds, and High Interest Savings Accounts: They all just don’t provide enough returns to fight off inflation.  And if they do fight it off, it’s barely enough to have my money work for me to grow.  Again, my motivation is to retire comfortably.  I only save a fraction of my paycheck so that won’t be enough to live off of when I’m dependent on it.
3. Win the Lotto.
4. Start a Business and Become Wealthy: I actually really like this idea.  As Paul Graham points out, busting your ass off for a year and living like a poor student to create a start-up is a great thing to do.  However, this is hard to do if you don’t have some kind of capital.  It is also hard if you have dependents and can’t tolerate too much risk.  This option was tempting to me, but now that I’ll be a dad in a few months the opportunity is gone.
5. Invest in the Market: This is where the sweet spot is.  I can invest in something which can potentially provide me great enough returns that I can beat inflation and grow wealth over a long period of time.  There are risks, but historically the markets generally appreciate in value over long periods of time.  And since I’m investing to retire, I’ve got a pretty long time frame in mind.  With diversification, I can minimize the probability that all the companies I invest in will go bankrupt in time. I also don’t need a lot of capital/savings to profit from this.
6. Mutual Funds: Same as investing in the market, except you’re paying someone else to do it for you (and most mutual funds underperform). You’d save yourself a lot of money by doing it yourself.

I’ve concluded that yes, investing in the stock market is definitely the correct thing to do.  I say this even as my portfolio is currently worth significantly less than it was when I invested a few months ago.

I haven’t actually “realized” any losses.  I still own the same amount of stock as when I bought them.  It’s just that as of this moment, they are worth less than when I purchased them.  Will this state stay like this forever?  Of course not… one hopes the US economy will rebound. If for some reason the entire stock market collapses and stays that way, then I’d be more worried about stocking up on rations and shotgun shells.  If Armageddon happens money would be a little useless.

Should I do the foolish thing of panicking and selling off all my stock at a loss, and then immediately withdrawing all that money from my RRSP to spend it on hookers and blow?  Probably not.  Investing through your RRSP has the added benefit that you probably shouldn’t pull out that money until you retire… and between now and the time I retire I expect a moment where I make positive returns on my investments.

Actually, right now is a great time to buy stocks.  Think of it is a mega-blowout sale that is only offered every few years.  Buy now or else miss on the great deals.  Warren Buffett would agree, as he’s going on a spending spree right now.  The strategy of buying undervalued stock is exactly how Warren Buffett became the wealthiest man in the world.

So, my friend, I am not contemplating suicide.  In fact, I still sleep as soundly as I did before the market crisis ever happened.  I even managed to capitalize on the volatility and made some profit here and there.

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Summer

Well, another summer has passed in a complete blur and the leaves are just about to change once again.

It’s hard to imagine all that’s happened in such a short few months, but this summer for me has been as action packed as all the others.

My new job at Rove has worked out pretty good so far. I’ve made some good friends through it (actual not-just-co-worker friends) and its pretty nice. Most of my close buddies are back in Edmonton. So as my friendships back home fade I’m finding “replacements” so to speak.

Renata took a few weeks of vacation, so it gave me a chane to live the single male lifestyle for a short bit. You know, the one devoid of chores, a regular sleeping pattern, and whole meals. Binging on video games and take out was great again, but for my own sake it’s good that it only lasted as long as it did.

With that, I’d like to share the news that I’ll be a dad come January if all goes well as planned. Renata’s trip without me was something she needed to ease her pregnancy. Seeing as I’ll need to save mu vacation time for when the little one arrives, it didn’t make sense for me to go with her. Not everyone gets excessive vacation days like civil servants. Yes, I am jealous.

Things this summer have been different with this news. Instead of wandering in some remote trails in the rockies, we decided to play it safe and stay home. It’s not like we’ve had a choice; Renata’s pregnancy has been pretty rough. Her hyper-nausea had her throwing up 5 to 6 times a day. Now in her second trimester she seems to be doing better, and hopefully it continues to ease off.

As un-adventurous as this summer has been, it’s been pretty enjoyable still. At least I know that by the next one, a whole different adventure of sorts should unfold.

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Google Code Jam Round 1

Well, this weekend was round 1 of the Google Code Jam, and unfortunately I did not advance to the second round.  I’m actually really disappointed in myself.  Not because I had high hopes of making it far, but that I *could have* advanced if I had just paid more attention and focused.

I wouldn’t be disappointed if I felt that I had my ass handed to me, but I slipped up on fairly rookie and stupid mistakes.

In all fairness though,  I was beat squarely in my inability to recognize where I went wrong within the two hour time limit.  Given that I had two chances to redeem myself (you’re allowed to compete twice out of the three time slots), I should have made it passed this round.

At any rate, I learned a lot of lessons which will be hard to forget for next time :-).  I still enjoyed the experience, and I’ll probably sign up for Top Coder, a programming competition league which holds frequent competitions.  I could see myself doing this every few months or so just for shits and giggles.

For those interested, here are the questions I attempted to solve, and where I went wrong:

The format is that you are presented with 3 questions.  To solve the question, you write a program which takes in the input data set, and you submit the output for verification.   There are two input data sets, a small one and a large one, with the large one worth more points.  Each question is worth different points (depending on level of difficulty), and those with the most points advance.  If there’s a tie in points, then those who submit earliest advance.

Had I solved any one of these problems I would have advanced to the next round.

The three questions I attempted to solve in both slots this round were:

First attempt:

Question 1:

Problem

You are given two vectors v₁=(x₁,x₂,…,x_n) and v₂=(y₁,y₂,…,y_n). The scalar product of these vectors is a single number, calculated as x₁y₁+x₂y₂+…+x_ny_n.

Suppose you are allowed to permute the coordinates of each vector as you wish. Choose two permutations such that the scalar product of your two new vectors is the smallest possible, and output that minimum scalar product.

I chose this question because it was obviously easy.  You just have to sort one vector from largest to smallest, and the other vector oppositely.  Fast and easy problem to code, so I submitted a solution pretty quickly and was already ahead of the pack. Someone was able to read the problem, solve it, code a solution, download the data set, and submit the data set in 3 minutes time… now that is FAST.  I wasn’t that fast, but I was quite ahead.

The large data sets are verified after the competition is over, so you have no way of knowing if it’s valid until the end.  You also get only one shot at it too. In all my hubris, I ran the large data set and submitted.

I found out that my large set was incorrect, and I quickly realized the costly mistake.  The large data set contains values in the vector that are between -1000000 and 1000000.  And in my solution I used a 32 bit integer to calculate the values, which would lead to an overflow since it can’t represent a number like 1000000 x 1000000 (those tricky bastards at Google!).  Had I simply just used a 64 bit integer it would’ve worked out, and I would’ve scored enough points to advance.

Lesson learned… read the bounds more carefully.

Question 2:

 Problem

In this problem, you have to find the last three digits before the decimal point for the number (3 + √5)ⁿ.

For example, when n = 5, (3 + √5)⁵ = 3935.73982… The answer is 935.

For n = 2, (3 + √5)² = 27.4164079… The answer is 027.

This question was weighted heavily enough that if I got just the small data set to work correctly, I would have had enough to pass.  But no, I didn’t solve it correctly either.

My naive solution, because my math skills suck, was to just compute the value and parse the value for the answer.  For the small dataset, the maximum bound on n is 30… so computation should be enough for a correct answer.  There was no way that I would attempt the large, as n had a max of 2000000000 (that’s a shitload of zeroes).  Sounds simple enough, but how do you compute such a huge number with enough precision.  Precision is at the heart of the problem.  So I used Java’s BigDecimal data type, which is really accurate.

However, to get the square root of 5, I initially calculated it using the Math.sqrt() Java function before wrapping it in BigDecimal…. and there was my big mistake.  Math.sqrt returns a double precision float… and when n starts to get large that’s simply not precise enough.

What I should’ve done was use the Newton-Raphson method to calculate the square root of 5 with enough precision to solve the question.  Just solving the small data set alone would’ve been enough to push me through.

My mistake again was another data type error.  That and not remembering a few years back into my numerical methods class about the Newton-Raphson method…. because every person should know it off by heart.  How could you not?!

I won’t bore you with more details about the third problem which I failed at… but it was one where I screwed up by not reading thoroughly enough (I missed a vital constraint).  *Had I* solved it, it would’ve pushed me into the top 100 and I would’ve made it to Round 2 (sigh).

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So all in all I felt like a newb this weekend.  Shitty in that I could have moved on if I just paid a little more attention to detail and read the questions more thoroughly.  I also felt really rushed and under the gun, so that really clouded my judgment.  All I had to do was take a deep breath and chill out… the answers would have come right to me.

I learned a few lessons though.  Mainly that my math skills suck and that I should maybe re-read some of my old numerical methods and calculus text books.  Also, I should just pay more attention to details. I think that’s more important than anything.

Oh well, there’s always next year.

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Google Code Jam

So I’ve made it past the qualifier round of the Google Code Jam.

The Code Jam is an annual programming competition where the top contestants win cash prizes and a free trip to the Google headquarters in California.  The first place prize is $10000 and 10 free lunches at Google, although the true prize is a job offer from Google.  If anything, it’s a great way for Google to hire the best and the brightest.

I’m taking part in it not necessarily for the job, as I don’t have any plans on leaving Ottawa anytime soon.  But I’m jumping myself here, as the probability of me getting far in this contest is pretty remote.  For one thing, I haven’t trained or practiced for this competition, and I haven’t really competed all that often.

This will be my second ever programming competition.  I did participate in one back in third year University.  I was actually happy on how well I did that time, as my partner and I were short a team member (we didn’t know you could have 3 members per team) and we were also short reference material (you were allowed to bring your textbooks).  We ended up placing 6th in Alberta, and like 16th in the national pool.  It sounds bad, but that beat my expectations as we were up against Masters and 4th year students.  We also didn’t know what to expect and hadn’t prepared at all.

That’s the thing about programming contests.  It’s that they ask a specific type of question which does require some preparation and training for to do well.  Most of the time the types of problems presented are heavy on the algorithms and math side, the kind of problem solving that take up only 5% of your time in real world everyday programming situations.  However, it’s the most critical and interesting (to me anyways) part of programming.  Much like having a broad chess opening repertoire, it’s also good to have a broad understanding of various algorithms.  And much like chess, it’s something that you don’t achieve simply through practice.

So, my whole point is that having not prepared for the Google Code Jam, I totally have low expectations of how well I do.  I actually don’t even think I’ll make it past the first round.  The qualifiers were pretty easy and a basic screen for competency.  I really don’t expect to make it past the first round.

But I’m not doing it to win prize money or get a job offer.  I think I’m taking part in it because I enjoy the challenge, and the pressure it puts on me to be on my toes.  It’s also a good way to keep sharp and use my critical thinking skills.  It’s easy to solve problems at work when there’s no hard time constraint, but in thick of competition against the clock and other competitors, it really demands you to be sharper.

I’ve actually found this whole experience to be even more enjoyable now that I’ve convinced a few of my programming friends to take part too.  My geek friend Pat, who I’ve enjoyed many geeky programming language debates with, has made it past the qualifiers too.  The competition itself is performed on an individual basis, but it’s somehow re-assuring to know that I’ve got a friend who’s feeling the pain and pleasure of competing.

Hopefully I’ll do better than expected for round one this coming weekend.

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Car Hunting

So it’s about time that I owned my very own vehicle.  You know, being a broke student for years on end didn’t really help in that endeavour while I was going through school.  And the usual routine is that for most people, parents are the ones who help you buy your own car when you’re young.  I grew up in a pretty poor family, so that didn’t really work for me as my folks could barely afford to keep the rusty old family car running.

Now that I’m all out of school I can actually for once afford my own set of wheels.  It’s exciting!

Anyways, Renata and I went out car shopping and I had my heart set on getting a Toyota Camry.  There’s just something so roomy and comfortable about Camry’s, and with my first test drive I fell in love with it.  I know it’s odd… you’d think I’d get something sportier and such.

In the winters Renata’s folks hibernate in Arizona, so I get to use her Mom’s Civic SI.  It’s sporty, can accelerate pretty hard (198 horses for a such a small car), and you can feel every bump and knick on the road.  But, I think I’ve opted for the calming and smooth effect rather than the speedy sportster.  Yes, I’m getting old and more boring.

As I was saying, we were out car shopping and I learned a few things.  For one, I should just shut up and let Renata do all the bargaining.  I’m a terrible haggler, and Renata is a born salesperson.  So she knows all their tricks, and knows how to play the game herself.

The whole process took 6 hours, as we hit up 3 different Toyota Dealerships that day.  We met a variety of sales people, with different bargaining strategies and sales pitches.  Some were more pleasant to deal with than others, and all reacted differently to our bargaining.

The first dealership, Tony Graham Toyota, had really nice sales-people.  But they were shielded from bargaining with a sales process where they had to ask their manager for every bargain.  I’m not sure if it was a sales “ploy” where they made us stew while they asked their managers for a price, but it got annoying pretty fast.  They gave us a decent discount, $2700 off of the MSRP, but we wanted to at least shop around some more to see who can offer us better deals.

We swung by Mendes Toyota, and I kid you not I’ve been to hole-in-the-wall pho shops that have a larger room.  Their show room fit like 3 cars, and with 4 or 5 other customers there it felt like a packed house.  Anyways, a sleazy car salesman handled us and didn’t even budge.  Basically, he offered us the retail price, and that was it.  Of course, it got escalated to his manager, and we dealt with him in his rickety old office.  After a lot of hemming and hawing and talking, we got an improved deal.  He showed us his “books”, and the cost of each car and his profit margins.  $3000 off he offered.  Not bad… but the place felt pretty sleazy.

Apparently Toyota’s have very narrow margins (of course, it’s their services that pull in the majority of their profit for dealerships), so we couldn’t get it much lower than that.  At least we knew what the costs of each car was.  He could’ve fabricated the numbers, but they seemed about right from all our haggling.

Finally, we showed up at Bel-Air Toyota at a 4 PM on a Saturday… last day of their work week, and it looked like they were having a slow day.  Bingo!  The sales guy was pretty nice, and he wanted to push a car out as seamlessly as possible.  We settled on the $3k discount, plus some packages and so on.  We got what we wanted, a Toyota Camry that came to $20400.  Apparently Toyota lowered Camry costs down about $4k from the 2008 models, so we got a really good deal.

At the end of the day, I felt like a sleazy car dealer from all the bargaining.  I am not a good bargainer, but at least now I’ve learned how to play a little hard ball.  It makes me think twice every time I buy something, that you can usually get things a little less than the listed price.  I know… I’m so naive.

So, I’m now the happy owner of a brand new ‘09 Camry.  That new smell always gives me a tingly sensation.  Perhaps it’s the formaldehyde in the new upholstery, but I’m pretty happy with my purchase

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Fire Sale

Huge huge savings going on right now!  That’s right, you too can own a piece of corporate America at 20%, 30%, even 40% off the normal going price!

That’s right folks,  the economy is giving us amazing deals on stock prices right now, and the prices keep dropping!

How things have changed so quickly in such a short period of time.  I remember back in April and May picking up a bunch of stocks.  Things were cheap, and it looked like a great time to buy in.  In only two months time, things have slid far below what I imagined.

With the price of oil spiking up and reaching almost $150 per barrel, and the financial sector doing a nose dive, the American stock markets have been taking a severe beating.  I’m just glad that I didn’t get in earlier than I did, but I am starting to feel the pain.

It’s nothing that I’m awfully worried about though, as it’s just one of those cyclical things.  The markets will eventually come back and rebound, it’s just a matter of waiting out the storm.  Having said that, my stock picks are still holding out pretty well and I’m “beating the market” so to speak… even if that does mean that I’m now in the red.

I think I have the worst sense of timing though.  If I only would be patient and wait out the nastiness that was forecasted, I’d be making a killing on the current fire sale on the stock market.  Today, the S&P 500 is trading below what it was 2 years ago!

For anyone sitting on a pile of cash right now, the opportunity to buy ridiculously cheap stocks is coming soon.  Hell, you could buy a ton of random stocks today and look like an absolute genius in a year or two.

Buy low and sell high, that’s all there is to it.  Oh, that and not panicking :-).

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Moving On

Well, it’s been a good 13 month run with Waypoint (www.waypointinfo.com) but it’s about that time to move on to another job.

On Monday, I started my new job at Rove Mobile (www.rovemobile.com).  They’re situated right in the middle of the Byward Market, so it’ll be a fun environment to work in.  It’s a bit of a commute, but hopefully it’ll be worth it.  It is definitely a nice change from the isolation from my previous office.  I do believe that your environment can stimulate you in many ways.

A career in software development is unlike a lot of jobs.  It’s a career where you change jobs often.  Of course, there are a few exceptions such as running your own company, working in a very large corporation, or in the government.  Even then, there are always stories of Microsoft employees and Googlites switching jobs quickly too.  Yours truly left the federal government to enter the private sector.  I personally think moving around is healthy, albeit at the cost of job security and a fat pension.

I guess it comes down to the nature of work in software development. It’s a job where you do problem-solving on a daily basis. It requires that developers are always on their feet, ready to adapt and solve various problems that are thrown at them.  That’s why I’m in it, because I wanted a career where I wouldn’t have to continually “grind” over the same thing.  The unfortunate side effect is that when we’re not challenged, developers quickly become bored and leave.

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Life at Waypoint had its ups and downs, like any company.  The people there were great, and the atmosphere was casual.  However, for a small startup I didn’t feel like I was part of a focused and cohesive team. I think that’s an essential ingredient for succes, because it’s too costly to be inefficient when you’re small.

Compensation was a sticking point too. Right now there are just way too many jobs and too few quality developers.  Hell, in this market you don’t need to be great to find work, just simply being decent will get you pretty far.  It’s the simple case of supply and demand, and the supply is really small and the demand keeps on growing.

Salaries are rising each year, and I was forgoing a bit in the hopes of getting into a company early on.  For me to stay any longer, I would’ve had needed to be convinced that there was a better chance for great success.  It couldn’t just be average success, or mediocre success, because that’s all too easy to find in a city like Ottawa.  It had to be worth the opportunity cost.

I learned a lot of things there at Waypoint, and met some really good people.  I’ve never felt as confident about my skills, and I attribute that to my experience with the company.  I wish I could have stayed longer, but it was about time I had to go.

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Anyways, enough with the negative news.  The positive news is that three days in with Rove Mobile I’m pretty happy and assured that I made the right choice to switch.  I get a pretty good set of benefits and a pay bump.  More importantly, I’m part of a more energetic and vibrant work environment.  There is a greater sense of focus, and they seem to be much more agile and current in an industry that is always changing.  The people are pretty friendly, and though the commute is a little longer it’s nice to see crowds of miscellaneous people again.  I’m already holed up in Barhaven, so it’s nice to get out.

The working environment really helps too.  I get a pretty nice desk, dual screens, and the company has invested in a lot of Herman Miller Mirra office chairs.  If anyone remembers the dot com bubble, those $1000 chairs used to be the icon of startups.  I even got my own box of business cards!  I’ve never had business cards before.  I must be moving on up.

Anyways, things change and life goes on.  Things seem really good at my new job so far, I hope things stay that way.

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Guitarmania

I had the great pleasure to hear Andy Mckee and Don Ross perform on the weekend in Montreal at the Guitarmania guitar festival. It was part of the Montreal Jazz festival.

I’ve been waiting Andy Mckee especially to swing by the area to play, and this was one of the few dates he’s playing in Canada this year.

We arrived at the Place Des Arts, expecting to get really bad seats. Not being able to find the place in the dense Jazz festival crowd, we showed up at the door 5 minutes before the concert. Tickets were general admission, so I thought we were for surely doomed to some nose-bleed seats. “Ya, you see that little dot in the middle, that’s Andy Mckee!”.

Fortunately, the concert hall itself was small and intimate, with only a few hundred seats it was impossible to get a bad seat in the house. We found some seats just meters away from Mr. Mckee. His music is so amazing to hear, and to see him play it live was just a spectacular. The audience was just mesmerized by his beautiful music. It’s probably the best concert I’ve ever seen.

Then near the end of his set, he invites Don Ross onto the stage for some duet action. The concentration of talent on the stage was bewildering. They both just “jammed” and were so caught into just making music. It looked like they had a genuinely deep friendship together, and were just having fun on the stage. My emo self shed a tear!

The second concert was with Don Ross, who kicked off his set with a blisteringly fast and intense song, losing his thumbpick midway through, and trucking on. Don Ross was great to see too, and he has a very different style than Andy Mckee’s. More on the jazzy side, and definitely a lot more intense. He describes his style as “wood metal”. Don Ross’ charisma on stage gives him great stage presence, as he’s a pretty witty guy. He ended off his set calling out Andy Mckee for some more jamming duet action.

At the end of the night the two were out in the lobby signing autographs and cd’s. I got some pictures and got some CD’s signed as well as my concert ticket. Being the goof that I am, I was all shy and couldn’t muster up anything thoughtful to say other than that it was a really great concert. What do you say to those accoustic guitar gods anyways?!

It was a great night for me.

Here’s the two of them playing a song off of the new duet album:

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The Collapse of the Middle Class

Lately I’ve been keeping up with the news in the economy, as that kind of stuff is probably useful when investing.  Yes, I’ve become more “capitalists” in a sense because of it all, but it does not mean that I like the notion of Capitalism as a whole.  Really, a lot of what motivates me to invest into the markets is not pure greed, but a defense against the risings costs of living and inflation.

This week in particular has been quite newsworthy, and has put a lot of things into perspective for me that I hadn’t really fleshed out fully with hard data.  We all know that the rich get richer, and the poor get poorer.  The disparity between the wealthy and the have-nots have always increased over time.  But what has been quite surprising is that the middle-class is slipping too.  They aren’t growing richer, they’re actually growing poorer.   Despite what the McMansions of suburbia depict, with its perfectly manicured green lawns and guzzling SUVs, the middle class are worse off than the middle class of the last generation.

Some interesting bits of information I’ve come across recently:

• I read a pretty interesting article in the Globe and Mail about a Statistics Canada report on the differences in average incomes in 1980 compared to 2005.  In a span of 25 years, the average Canadian (adjusted in today’s dollars), makes only $53 more per year.  Depending on the province, that income may actually be lower.  Those who are wealthy have become even wealthier, and the poor 25 years ago made significantly more money than the poor today.And that’s based on average incomes.  That still does not factor in the fact that today’s housing prices have skyrocketed, that sales taxes have been introduced, which further reduce the spending power of the poor, and that education costs have gone up, which is terrible as education is the vehicle for social mobility.  I don’t think the situation will get any better as time goes on.
• There was a great lecture on YouTube given by an Economics professor at Harvard Law School.  I totally recommend watching it: http://economistsview.typepad.com/economistsview/2008/04/the-coming-coll.html Basically, the lecturer had researched changes in quality of life for the average American middle class family over the past 30 years.  In adjusted dollars, the average working male made just about the same amount as he did in the 70’s.  However, the boost in total family income came about because women now work to add to the family income.  What’s terrible though, is that despite the added second income, middle class families are actually worse off today than 30 years ago when only men worked.The cost of clothing, appliances, and food has gone down, but housing prices have soared outrageously.  Tuition costs are really high too.  And medical insurance costs have jumped incredibly, even while the quality of medical care itself has declined significantly (fortunately for us Canadians, we aren’t burdened by this).  Add to the mix the cost of child care (since Mom has to now work), a second vehicle so that Mom can also commute to work, and higher utility costs and you’ve got one lousy deal.

  The middle class is spending more hours away from home for work and the commute, earning roughly the same, and they face growing expenses and a decreased quality of life.

• The price of food, which has been quite cheap over the years, is now starting to inflate.  Due to anomalies in recent weather, there has been a shortage of food produced for such things as wheat, soy beans, and corn.  The hotter summers have produced drier conditions, which have yielded smaller crops.  The US government has also endorsed an initiative for producing ethanol from crops for fuel (which is neither green nor a solution for oil dependency), which has driven up demand for a limited supply.  Because of these factors, food prices have gone up greatly within recent months.  Egg prices have gone up 30% in 3 months, wheat has doubled in price in a month as well as soy beans.  Rice has nearly doubled as well.  These price increases may not affect the wealthy, but the poor and working class definitely are affected.
• It gets worse… much worse.  Suburbia has been carved out of a dependency on cheap oil.  And now, the middle class suburban life is threatened by the rising cost of oil because of increased demand and shortened supplies.  Suburbia needs all the cheap fuel it can get to fuel the trucks that haul all the goods to the mega grocery stores and the Wal Marts.  Fuel to get people to commute 25 to 40 km’s each way to get to work.  Fuel to keep the electricity running to power all the McMansions, the air conditioners in the summer, and to water all our precious green lawns.  And when that fuel starts to jump drastically in price, living in the ‘burbs starts to become less plausible.Over the past few months, we’ve seen oil hit all time highs almost every day.  Last January in 2007, oil was selling at $60/ barrel.  Come January in 2008 it was selling for $100 US per barrel.  And last week, almost ever day had set a record high for oil prices hitting $126/barrel.  This is an incredible spike in price considering it cost less than half that 18 months ago.

  Some analysts are even claiming it may hit $150 to $200 a barrel within the year, and other institutions are predicting it will stay near the $200 price mark by 2012.  This may mean $2.00/liter of gasoline, doubled costs for food prices, and a significant increase on the cost of cheap goods at Wal Mart due to increased shipping costs.

  There is also the theory of peak oil, which claims that since oil is in finite supply in the world, we will eventually hit a point where drilling for more oil will not be as cost effective anymore, and will require more work to get the oil out.  This makes sense, as oil is not in infinite supply, and the world is consuming roughly 100 million barrels of it a day.  With supply dropping, there is also an increase in demand as China, India, Brazil, and other emerging markets continue to grow oil will be in more demand around the world.

So from all this, we can stare into the crystal ball and make the prediction that the rising cost of living will cut into the quality of our lives, as wages and salaries will not grow with inflation as quickly.

If we are fortunate enough to save our money year to year, for retirement, a new home, or for our kids’ education fund, then we are actually losing a fair chunk of the money we save due to inflation.  Sure, we can put our money in a low yielding bond or GIC, or some kind of investment vehicle that tries to offset or counter-balance inflation, but the simple fact is that such vehicles which appear “safe” holds a lot of risk because of inflation.  You may not visibly see dollars being lost in those vehicles, because it is really hard to see inflation steal from you, but it does happen.  Not only that, but the yields that bonds and GICs provide are based on factors that not necessarily offset inflation.  The consumer price index that is produced by the government, is not wholly accurate for a lot of goods.  It may accurately describe increased costs of food and goods, but for such things as tuition and education (and health care for Americans), it is misleading.

There has always been inflation, and there have always been periods of rapidly growing inflation, and very slow periods of inflation.  But I believe because of the various factors happening today, inflation is accelerating.  At the same time, it can be argued that investing in the stock market is one of the best ways of safeguarding or at least offsetting inflation.

As oil companies, agriculture, and food companies post record profits from the spike in oil prices, etc… their share prices and dividends generally grow responsively as well.  Those share holders who own and are invested in such stocks, for better or worse, profit from inflation.  It’s a terrible game, as the poor and those who are not invested in the market get left out.  Their loss is the shareholder’s gain, and so those wealthy enough to hold large investments become ever more wealthy, while the poor and middle class get squeezed more each day.

So my whole venture into investments is not just a vehicle for the dreams of becoming incredibly wealthy and retiring early in life (though I would love to be just that).  But it is more importantly a defensive mechanism to maintain a standard of living and fighting off inflation.  If you don’t play the game, then you’ll get left behind.

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Boo on Mutual Funds

So in my quest to grow wealth through investments, I’ve had a lot of friends tell me that I should stick to Mutual Funds or GICs, as they have much “lower risk” and because I have no idea what I’m doing.

I must hand it to them, they are spot on in that I really have no clue as an investor as I’ve only been in the “game” for really a few months.  And mutual funds generally carry much less risk than direct investing since they’re super diversified and managed by professionals.  GICs are obviously gauranteed to make you returns, hence the “Gauranteed” in GIC.

Despite all this, I would still rather do my homework and invest directly into the markets.  At the LEAST, I should invest my money into an index through an ETF (exchange traded fund).  There’re plenty of reasons to completely skip passed mutual funds entirely (GICs too for that matter).

It is the simple matter that mutual funds underperform the markets as a whole.  The S&P 500, which is regarded as the benchmark to beat, will beat 80% of mutual funds out there.  So really, you have a much greater chance of earning more money if you simply just invested your money into an index fund (the market as a whole).  The S&P 500, over the last 30 year period, performs roughly at a 10% annual yield.  How many mutual funds can claim that?  Strike one.

Not only do mutual funds under-perform in general, but they carry high fees and commissions.  Sure, that 2% fee doesn’t sound like much to you, but 2% compounded over many years until your retirement do add up to quite a lot.  So not only do your hard earned savings yield you less, but you end up paying for someone to poorly manage your own money! Strike two.

Now the big kicker that most people aren’t aware of with mutual funds is something called “Survivorship Bias”.  Ever notice how some banks have stellar funds that yield 10, 15, even 20 percent?!  Or even how bank XYZ claims to have a variety of funds that average a strong performance of X%? Well, the banks are rigging the numbers in their favor to win you over.  Many banks will carry a variety of funds which cater to various aspects of your investments.  However, not all of their products will succeed and many will fail altogether.  The funds that perform terribly get removed from their line of products, so only the “surviving” funds are left over… with those funds obviously yielding a higher average now that the losers have been cut out.  So not only do mutual funds underperform and have high commissions, but they generally provide misleading information on performance. Strike three!

Alright alright, so mutual funds won’t give me tons of money, but at least they are yielding me some kind of return and I don’t have to monitor the markets, that’s at least worth the price right?  Absolutely not!  For one thing, a mutual fund has no gaurantees of yielding you any returns.  You may actually lose money in your mutual fund, because it really is an investment in the stock markets (albeit, a greatly diversified and “managed” investment). When the markets dip, your fund may dip as well.

Secondly, you can invest in the stock market without having to manage all your investments.  You can invest in an index directly through an ETF.  ETFs are just like mutual “index” funds in that they mirror the movements of the markets, with the exception that you can purchase ETFs much like any other stock.  That means you can buy/sell an ETF whenever the markets are open, and you gain dividends too like any other stock.  The beauty of ETFs is that there is very little commission involved in owning an ETF.  The company managing it takes a very small cut, something like 0.1%, which is a fraction of what the mutuals are charging.  At the same time, since ETFs mirror market indices, it will beat a majority of mutual funds in terms of performance and provide you with a great deal of diversification.  No need to manage your ETFs… you can buy into them and forget about them just like your mutuals.

So really, is there any reason not to buy into an ETF instead of a mutual fund?  It has all the advantages of a mutual fund (and then some), without all the disadvantages of poor performance and heavy commissions.

Of course, you could also invest directly into the markets.  It’s not as demanding as one would think.  Many great investors have built their wealth on researching a company, buying its stock, and holding it for years to allow it to grow in value.  The richest man in the world, Warren Buffet, built his wealth this way.  He wasn’t a day trader who stared at the stock ticker every 5 minutes.  Instead, he sought companies that he saw had a lot of value and invested into them, holding on those stocks for years.  That style of investing doesn’t require constant managing and monitoring either, and it can reap huge rewards.

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