Double Blind

My empirical observations so far suggest that ticket prices have already risen since JetsGo declared bankruptcy. A month ago, you could get round trip tickets from Vancouver to Toronto (or Montreal) for about $140 each way (plus taxes, fees and other garbage). Now you’ll pay about $290 for the same flight. A round trip now after fees and taxes will cost $700. It’s obvious that JetsGo was making the market more competitive, but they weren’t the primary beneficaries of that competition.

In order to compete as a low cost carrier, you need the lowest cost. Sounds obvious, right? JetsGo was pricing its tickets as if it was a low cost carrier, but they didn’t have the lowest costs because of their aging fleet since maintenance costs were so high. In other words, they had no strategic advantage over their competition and wilted away.

For the Canadian domestic market, this leaves two major carriers, Air Canada and Westjet. Westjet will continue to be the low cost producer, while Air Canada will do everything else. They are competitors, but it is highly likely that in the absence of further competition in the domestic Canadian air market, they will continue to survive in some form. This is completely unlike the USA airline industry, where it’s practically guaranteed that two or three major carriers will be going into bankruptcy before their industry stabilizes.

The reaction of Air Canada and Westjet’s stocks after JetsGo announced bankruptcy was incredible – Air Canada went up 15%, while Westjet went up 40%. (On a side note, this should give you a major hint on picking up some cheap capital gains if you can time a major bankruptcy of a USA-based airline company). This doesn’t mean you should go and buy Air Canada or Westjet stock, however. Airlines are a very capital-intensive industry and should be avoided like the plague at most times. It’s only a matter of time before Air Canada and Westjet run into their own financial troubles again. Air Canada just came out of bankruptcy less than a year ago (so they are not going to be due for another ten years because of how they restructured themselves), while Westjet still has to experience its first. Considering the rate that Westjet is accumulating debt (read note 4 on the financial statements), it’ll be a matter of time before they run into trouble themselves. Note at the end of 2003, they had $590M in debt. At the end of 2004, they have $906M in debt.

Justin‘s March 1, 2005 article (“On Media Noise, Missile Defence and ‘Foreign Affairs’”) cites the lack of information concerning various political events in the news. I will disagree with the comments that “Christine” provided which imply that you need a political science major in order to understand what is going on. Instead, you need relevant access to primary sources of information. By primary, I am referring to information from direct sources, such as from Statistics Canada, opposed to secondary sources such as media interpretation of primary sources. It’s important to know that for subjective issues (e.g. whether missile defence is a “good thing” or not), that secondary sources will not usually provide all the information to allow one to independently come to their own conclusions. Instead, you must fish for primary sources of information in order to get a clearer picture. This does not imply that secondary sources of information are useless; they are rather good at getting an issue on your radar scope. It’s just that you have to research issues further than the three paragraphs of effort your average reporter will give to an issue.

One example of digging for more information on a political issue is through reading debates directly on the Canadian Parliament website (click on “Latest Debates” on the left hand side under House of Commons), but keep in mind that what is said in Parliament is theatre, especially for Question Period. But you can find positions of various people by searching the indexes. Try looking up the National Missile Defence System (NMD) index entry and you can see the parliamentary debate on the issue which do contain quite a few arguments. Note that “politically incorrect” things are never said in the debate transcripts, however – you have to figure this out for yourself, or let secondary sources do that for you.

Here’s my take on the issue. Like most events in Canada’s history, the decision not to participate in missile defence was primarily dictated by Quebec. In order for Paul Martin to win a majority government in the next election, he has no place to secure further seats other than in the province of Quebec. If an election were to be held today, Martin would gain nothing in Western Canada and there would probably be little change in Ontario. Instead, the only place where the Liberals can regain enough seats to win a majority government will be in Quebec, where the Bloc Quebecois have 54 seats. Thus, all of Paul Martin’s actions have to be directed towards winning more seats in Quebec, and to a lesser degree, making sure the Conservatives don’t gain in Ontario (24 out of 106 seats).

Since the majority of Quebec’s residents are very anti-militaristic and anti-American, they naturally oppose missile defence. In addition, there is a sizeable portion of the Liberal party that has the same view, and they would make Paul Martin’s life extremely difficult if he supported missile defence. Presumably these are the same insiders that decided to kick out Jean Chretien and cut a deal with Martin so he could become party leader (and thus Prime Minister). The dynamics of the decision were not dissimilar to Chretien not joining the war in Iraq – that was a last minute decision designed to keep the support of Quebec. Likewise, Martin made a last-minute decision not to rock the boat and kept the country out of missile defence. This had nothing to do with the country’s best interests, but simply with pure survival. This was a good political decision, but a horrible one for the country.

Some might question the need for missile defence, but I’m sure those are the same types of people that questioned the need for military aviation research in 1910 or atomic bomb research in 1940. The NDP’s big catch-phrase was “prevent the weaponization of space – don’t join missile defence”, but they should be asking themselves who will weaponize it first. It’s just a matter of time before countries that are not in Canada’s best interests will be capable of launching missiles in our territory. Why they would want to do that is irrelevant, maybe they want our natural resources and will use their potential capability of attacking us as leverage in trade negotiations. You can’t snap your fingers and have a fully functional defence system in a year, you need many, many years to properly implement any remotely complex military system. The USA was effectively offering us one for little economic cost, but we rejected it.

The repercussions of this decision will be felt for at least the next decade. Canada has been antagonizing the United States for the past few years, and since 85% of our country’s trade goes towards that country, this will put us in a precarious position in the future in any negotiations. The current softwood lumber and cattle trade is potentially the tip of the iceberg – can you imagine the damage they can do to the economy if they suddenly decide that auto imports from Ontario are subject to anti-dumping duties?

Because of our proximity to the USA, we really have no choice other than to be as cozy as possible towards them – otherwise they can cause us a lot more damage than we can cause them. Why do we screw up what could be a more beneficial relationship for both parties? Because Quebec rules the country, and what Quebec says is what the whole country gets to do. This will not change as long as Quebec will allow a federal party to make a majority government with Ontario. The rest of the country is along for the ride.

Since March 1, 2005 was the last day to contribute to your RRSP and still have the deduction eligible for the 2004 tax year, a lot of people probably have made decisions to purchase mutual funds or a GIC. While purchasing a short-term GIC (i.e. one that can be cashed at any time) is a good decision when you’re waiting to make one, obviously it is not a long term solution. Worse yet are those that pick some random mutual fund that their advisor suggests is the ‘hot pick’ and forget about it until exactly 12 months later when it’s time to repeat the cycle.

The problem with most mutual funds (e.g. the ones at TD Waterhouse, BMO, etc.) is that they charge too much in management expense fees. Specifically for their actively managed funds, they charge up to 2.8% of managed assets. This is insanely expensive. Let’s pretend your average management expense is 2.5%. For every $1000 you invest in the fund, you’ll effectively pay $25 a year straight to management whether they earn a return or not on your investment. While this doesn’t seem like a lot, the problem is that throughout the years, the cumulative amount of management expenses will become massive, especially as the portfolio accumulates value. Each dollar that goes to management expenses should actually be compounded back into the fund. You will not accumulate assets nearly as quick as you should and there are more efficient ways to manage a portfolio.

Here I suggest two “brain-dead” methods of investing for people that want a minimalist approach to their portfolio. I will venture to guess that the following method will beat the S&P 500 over a thirty year period, but it will not beat it by much. I can say without qualms that it will beat investing in funds that charge 2.5% of portfolio value a year, however.

Brain-dead method 1: Invest in exchange-traded sector funds, not index funds as most financial media would suggest. One reason is because you can reduce your portfolio expenses by a factor of 10 but still retain a huge amount of diversification. You can find cheap sector funds on IUnits (0.55% for their Canadian sector funds), or better yet, SPDRindex.com (0.29% on average) which enables you to invest in specific sectors. By investing in these funds instead of the regular trash that institutions get most people to invest in, you will end up saving a ton of money in the long run. If you manage to accumulate $50,000 worth of assets in the form of mutual funds, you’ll end up paying about $125/year in management expenses, compared to $1250/year for ordinary mutual funds. The only disadvantage is that you incur a commission every time you trade these products, just like a regular stock ($29 at most places). But if you’re planning on investing more than $1000, it’s cheaper to invest in one of these than a regular fund with high expenses.

What to buy? The brain-dead algorithm is the following: Every year when RRSP season is coming and you’re making a deposit into your account, put your money in a sector fund with the second worst 2-year performance amongst all the sectors. Keep your money in this sector indefinitely (until you want to cash out for whatever reason). The reason why you choose the second worst performing sector in the last 2 years is that you’re virtually guaranteeing yourself diversification in a sector that is eventually bound to make a rebound in the future.

Eventually, over a long period of time, you’ll have your money evenly diversified amongst all sectors in the most optimal manner possible, which will take over the function of an index fund. This is the reason why you choose sector funds instead of index funds – when you buy an index fund, you’re buying a spread of every industry sector, no matter what the price is. By splitting your investments by sector, you will be buying cheap.

I do have an observation on index funds in general: The big indexes (S&P 500, TSX 60, etc.) should never be invested in. There is too much money following these indices and thus you should keep your money more narrowly pointed in specific sectors, buying when the sectors are cheap. If you must buy an index fund, choose the least followed index – ideally you or your friends should have never heard of it.

This brain-dead method keeps the ‘effort’ in investment to be limited to looking at a list of about 10 choices every year (plus or minus a few depending on how many sectors you’re looking at) and just examining their two year charts to see which one is underperforming and then hitting the “buy” button.

Brain-dead method 2: Invest in individual stocks of large companies (probably index components) that you know will be around for the next 30 years. This isn’t as easy as it sounds! To give an example, it’s virtually guaranteed that the Royal Bank of Canada will be around in some form. If you want more ideas to research, check out the components of the TSX 60. Is it conceivable that ATI Technologies will be around in 30 years? Probably not. I would also tend to avoid resource-based stocks until the underlying commodity (oil, steel, coal, etc.) has depressed to such a point where the shares have become cheaper.

The idea would be to set a price alert when the price of a stock has dropped by some pre-set level (like 15-25%. Take a look at the charts of some of these banks) and then buying shares in that company when it has dropped your pre-set amount. You would keep a watchlist of about 20 companies (that you know will survive and grow for 30 years) and then buy their stock when the price has dipped. Most often the stocks will drop due to some scary reason (a foreign crisis in debt of some company, threats that the bank will go insolvent, etc.), but this is what will make the stocks cheap and a perfect time to jump in. The last good time to jump into banks was late in 2002, but I can’t recall what the reason was for the decline in stock price. There will be another opportunity in the future – it’s just a matter of waiting and timing it. Despite what most advisors say, marketing timing is completely appropriate – demand the right price for what you are buying.

This is probably a viable strategy dealing strictly with the big 5 banks (TD, BMO, Royal, Scotia, CIBC) and other financials/insurance corps (Power Corp, Manulife, Sunlife, etc.) – they will all continue to dominate our economy for the next generation. If you just purchase shares of these companies at the right price, you’ll probably do better in your portfolio over an extended period of time than most mutual funds. This brain-dead method requires a little more research than the first brain-dead method, but you’ll probably get a better return on your money – I’m willing to estimate you’ll do better than the S&P 500 because you won’t pay anything other than a single commission each year.

Once upon a time, in the Vancouver area, every gas station had the price of gasoline, in cents per litre, posted outside the station. So it became a very easy matter of knowing the pricing habits of each gas station and choose one along your path to work that would be the cheapest at the right moment. So for example, you see 80 cents per litre advertised as a gas station. You go to the pump, punch in your credit card, and fill your car up at 80 cents. Real simple, right?

About six months ago, something happened – gas stations suddenly started putting another sign on their property saying “save 3.5 cents instantly at the pump”. So you drive up to the gas station, which has 83.5 cents advertised. When you actually fill up your car, you end up paying 80 cents per litre. It appears that all the gas stations did this at once, so you can sort of depend on gas prices being 3.5 cents less than what you actually see. This is less ideal, but tolerable since all the gas stations did it (with the notable exception of Super Save Gas!). Questions: Why the heck are they doing it this way? If everybody is doing it, what benefit is there in not just advertising a lower price in the first place? I think I have the answer below…

Recently, I’ve noticed something a little more complicated is happening – it turns out that the Petro Canada chain of gas stations are offering 3.5 cents per litre off only to “Petro Points” users (a ‘customer loyalty’ (a.k.a. data-mining) membership card which you can apply for free, similar as to those offered by Safeway, Aeroplan, etc.). Incidentally, if you pay using a Petro Canada Citigroup Credit card, you get an extra 2 cents per litre off. So if you don’t believe in giving away your own data (either with the “Petro Points” program or with an entirely new credit card), then you get no discount at the pump which you otherwise would have thought you were going to get.

So now when you drive around, you have to pay attention to not only the price per litre, but whether the gas station is still giving the 3.5 cent discount, or whether that 3.5 cent discount is contingent to some other parameters (e.g. the Petro Points membership). This is incredibly annoying – thankfully, only Petro Canada appears to be the dissenting franchise on the 3.5 cent discount by forcing their customers to use their ‘loyalty’ program in order to claim it. This is why I no longer fill up at Petro Canada – why bother filling up there when I can fill up at another place without the hassle of having to fill out some stupid forms?

There is an obvious conclusion to all of this – other gas station chains (Esso, Shell, etc.) will feel compelled to only give the 3.5 cent discount to their customers that use their ‘loyalty’ programs and the net result is that there will be zero savings to the customer because of the lack of elasticity in the consumer gasoline market. In fact, the customer will lose out because they will be forced to carry around three cards of the major gasoline suppliers in order to save $2 on an average fill-up that they otherwise would have been getting had this scheme not occurred in the first place. Finally, because the companies have to buy junk to entice their customers to use their ‘loyalty’ programs (not to mention the cost to administer the program, and establish the computer infrastructure to handle it), this will inevitably raise gas prices for all consumers.

This, my friends, is a classic tragedy of the commons situation. Without getting into further details of my political views (which I’m sure you can find elsewhere on this weblog), one of the purposes of governments is to legislate against tragedy of the commons situations for the good of mostly everybody involved. For example, environmental laws passed in the 1970′s and 1980′s were pretty good at this (e.g. the Canada Water Act). In the case of retail gasoline customer loyalty programs, the only people that stand to gain a net profit are the people hired to administer these programs, while the losers are the people that have to fill up their automobiles every day.

Such legislation would have to be drafted very carefully to continue to allow competition between gas stations, but to prevent the slippery slope that enabled this mess from occurring. The rule would be something to the tune of “The publicly displayed gas price must be made available to all customers and not be reduced or increased without changing the price for all customers”. As you can see, I’m not very good at drafting legislation, but this would be sufficient to avoid the marketing trap that gas retailers collectively have gotten themselves into.

Finally, you are probably wondering whether equivalent legislation should be provided for other stores, notably Safeway, Save-on-Foods, etc. The answer is no – groceries are not commodity items – there are reasonable substitutions between products. People have no choice with gasoline.

Our Chief Electoral Officer (Harry Neufeld) wrote an article in the Vancouver Sun about how the rate of eligible voters to those that actually vote has been declining over the past few elections (from 70% in 1983 to 55% in 2001).

The media usually likes to say that a lack of voter turnout is a sign that the public is disinterested in democracy or they raise issues whether mandatory voting should be instituted. They imply that a lack of voter turnout is bad. My opinion is that the choice whether to vote should continue to be a freedom. The media has been getting it completely incorrect.

It is in any voter’s best interests to encourage those around him not to vote in elections, especially in the case where those other voters will not vote for the selection of the first voter’s choice. The reason is because each individual vote becomes stronger with less votes. Ideally, I would like to be the only person voting in my constituency, because then I will be guaranteed my represented voice in the legislature (although it should be pointed out that if this person is anything other than in cabinet, the power they can wield is very limited).

Taking a look at the 2001 results in my riding, Richmond-Centre, we had 36580 eligible voters, 24495 that were registered, and 16969 that actually did vote (46%). So I had a 0.0059% say on who would be the next MLA for the riding. 0.0059% does not seem like a big number, but if you think in terms of money, if I owned 0.0059% of Apple, I would own $2.1 million worth of its stock.

The reason why the overall turnout in Richmond-Centre was so low was because our riding was a guaranteed BC Liberal seat – the BC Liberals and Social Credit parties have been taking all of Richmond for the last 50 years, so unfortunately we’re taken for granted. This is another reason why I support BC-STV – the individuals within the party have to compete for their safe seats. The parties can no longer plunk down a preferred candidate in a riding an expect him/her to get automatically elected.

The other relevant statistic is the pathetic amount of people between the ages of 18 to 34 that actually come out and vote. 22% of the people eligible to vote between 18-24 vote. 35% of the people eligible to vote between 25-34 vote. Is it any wonders that we see our politicians giving away the country to all the old people (healthcare, MSP rebates, CPP, OAS, etc.)? It’s not because politicans believe we have a moral obligation to take care of them, it’s because they have a disproportionate voice in elections!

What you do not want to see in a democracy are inaccessible voting stations or people visually inspecting who you voted for. In addition, there should be the right for observers to ensure that votes are counted properly. As long as these conditions are satisfied, a low voter turnout works to the advantage of those that actually do vote and is not “dangerous for our democracy” as Neufeld points out. So if you’re against BC-STV, just stay at home and watch the election on television.

One of the few positive features about public sector unions is that you can find out how much they get paid. The government of BC recently did a wage settlement with the crown prosecutors, giving them a 13% wage increase on April 1, 2006. This article isn’t to argue about the amount or the timing, but rather my thoughts on the interesting backgrounder that was attached to the press release.

In particular, the starting wage for a prosecutor after the wage increase is $56,254 for 35 hours a week of work. So after you go through university for four years, and then spend 3 years getting your LLB, do you jump into a job as a crown prosecutor? Not exactly, as you shall see below.

I went shopping for a job as a crown prosecutor, and I found a job posting for a “Crown Counsel” position in Cranbrook, BC. Since I have no idea how long the link will last until it expires, I will explain the job. It’s a “level 2/3A” position, and pays “$68,767.74 – $98,635.30″. In the experience section, they were looking for “Five years minimum admission to practice (criminal law preferred). Membership in good standing with the Law Society of British Columbia…. Applicants with a minimum of twelve years of call may be eligible for appointment at the Legal Counsel 3A level.” This is the type of job you see Jack McCoy doing on Law and Order, with a lot less drama.

I’m guessing that if you have the bare minimum of five years experience, you’ll get paid $68,767/year. If you have 12 years or more, you’ll probably make closer to $90,000/year. It suggests that if the government gives a typical market rate, then your typical lawyer that graduated out of university is going to be making less than $56,000/year when he/she lands in their first job with zero experience. I’m guessing only the top-notch professionals that work 80 hours a week end up making six digit figures, or high profile defence lawyers.

You’d intuitively think that lawyers are shielded from competition due to the high barriers of entry (getting into university, passing the bar examination, etc.), but inferring from the salaries and experience requirements I’m seeing from the government, it’s just as fierce as the high tech industry.

I’ve sometimes wondered whether I should go back to university and get a law degree. Strictly in terms of economics, the decision is easy – as long as I’m employed, there’s no point. Even if I was unemployed, I’d have to be getting into something I really enjoy (opposed to marginally enjoy) in order for it to be worth it. I probably would have a funner time studying legislation when I’m not forced to when cramming for an exam.

Professionally, a job as a prosecutor would get boring pretty quickly – I’d guess 90% of their caseload deals with theft, drugs and assault charges which would get repetitive after a half year on the job. Only the complex cases (Air India Bombing Trial) would be interesting, but these are sure to be assigned to the people with 20 years of experience.