Job Loss Survey, Emergency Fund and Bounce Book

Thanks to all who ticked a response to my latest mini survey about how many times you have been laid off during your working career. Though the survey is unscientific and comprises a very small sample, the fact that about half of you have been laid off at least once confirms to me that planning and for and making provision for a job loss is important for most people, as I had concluded in my previous post on Emergency Funds: Job Loss.

In a few weeks, I'll be reviewing the newly published book Learn to Bounce, which is about the experiences of a whole raft of people caught in the technology meltdown of 2000, how they turned a negative into a positive in their life. Written by Lee Wallace and friend and former colleague Anita Caputo, the very concept of the book - to show with real examples that a job loss disaster is not necessarily the end of the road - appeals to my philosophy: never give up and never be a victim.

ETFs, Fundamental Indexing and Oysters

Fellow blogger Preet Banerjee over at WhereDoesAllMyMoneyGo was kind enough to send me a link showing an impressive-looking long-term out-performance graph of the RAFI Canadian Index over the S&P TSX 60 Index. The return is about 3.1% higher in the back-testing period of 1987-2006 with a lower volatility, as measured by standard deviation. Very impressive! Is it time to dump XIU (the iShares S&P TSX60 tracker ETF) and move over to one of (there appear to be a number of choices for the investor on these mutual funds - deferred sales charge, front-end, no-load) the ProFTSE RAFI Canadian Index Funds?

A bit of googling turned up a brief but instructive analysis titled Fundamental Indexing and the Three Factor Model by noted financial author William Bernstein (of Four Pillars fame). The article deals with the US but the principles remain the same for Canada and would for anywhere else. In it he finds that the approach of the RAFI index can be mostly accounted for by the value-equity tilt and, to a lesser extent, by the size tilt that fundamental indexing imparts and about one-third due to its own unique characteristics. And furthermore about the unique third, Bernstein concludes: "Unfortunately, this latter effect is not statistically significant, raising the issue of data mining. ... Differences in the expenses, fees, and transactional costs incurred in the design and execution of real-world portfolios can easily overwhelm the relatively small marginal benefits of any one value-oriented approach."

When one looks at the annual expense ratio of the Canadian Pro Index Funds at 1.85%, that latter warning becomes especially relevant considering that XIU's expense ratio is only 0.17%. So, if one takes the 3% out-performance of the RAFI index, which is not the fund and is before expenses, subtracts 2/3 for the value tilt, (which can be obtained with by buying the relatively new XCV iShares Canadian Value Index ETF, with the admittedly higher MER of 0.50%), one is left with only 1% out-performance, a gain that is completely lost with the higher expense ratio.

Fundamental indexing, as opposed to market capitalization weighted indexing, is an intriguing idea and has stirred a lot of debate since Rob Arnott launched the concept upon the financial world a few years ago.

But, for now I will follow the lead of the old wise oyster in Lewis Carroll's poem the Walrus and the Carpenter in Alice in Wonderland. The walrus and the carpenter invite the oysters for a pleasant walk along the beach, and this is the dubious oyster's reply:

"The eldest Oyster looked at him,
But never a word he said:
The eldest Oyster winked his eye,
And shook his heavy head--
Meaning to say he did not choose
To leave the oyster-bed."

If you don't know already, you can find out here what terrible fate awaited the oysters who succumbed to the ruse.

Off Topic: Glasgow Wins 2014 Commonwealth Games - Brilliant!

Today's announcement that Glasgow will host the 2014 Commonwealth Games from July 23rd to August 3rd is great news for the city, for Scotland and, I dare say, for sports fans. Since coming to Scotland just over a year ago, I have been very impressed by the friendliness and general competence and efficiency of the people (and hopefully will therefore not be bad news for taxpayers). Glasgow is a city on the rise with a good atmosphere, a feeling of safety and the Scots do know how to party .... warning to Canadians, don't try to outdrink the Scots!

The Games website has lots of information and the Candidate City Summary document indicates that prices are reasonable - the most expensive is £175 for best seats at the opening or closing ceremonies. For individual sports, best seats are a max of £40 or £25 in most cases. With the Canadian dollar appreciating almost daily against the GB£, now at $1.96 per £, it is beginning to get less costly for Canadians.

Scotland has long been a tourist mecca and all those other attractions can add to the pleasure of the games, like visits to single malt distilleries, castles, museums, hill walking and golf courses for those of my tastes. The only funny thing visitors might find is the language - Scots will understand your english with no difficulty at all (too much american tv I think) but depending how careful they are in speaking, you may not understand them because of accent, phrases and words (e.g. cannae = cannot, to blether is to chat, or "tell her I'm asking for her" means "say hello to her for me")

An Intriguing Free Book to Download plus a UK Mortgage Primer

Check out the Mortgages Exposed web page for access to a free download of the book In My Opinion by Michael Kelly, a successful retired entrepreneur. I've just skimmed through a few pages so don't have a firm opinion of it, but first impression is good: it looks quite readable and hey, it's free and it's the complete 110 page tome, not just excerpts. The style looks breezy and light-hearted, advice on what the grandfather has learned and wants to pass on to his grandchildren. The topics he covers includes some financial and budgeting advice, along with relationship advice (from a guy, no less!), education, children, running a business, being an entrepreneur, gambling and even death.

Here's a sample quote I can relate to: "You need not give self-created wealth away. Spend it first. But if you must give it away, do it when you are still alive and can directly observe and enjoy the happiness it might hopefully bring."

Another part of the website has an excellent series on mortgages as done in the UK, actually another short book that can be downloaded with working spreadsheets. The explanation starts from scratch, assuming little or no investment knowledge, and works through the various types of mortgages and related topics - fixed rate, variable rate, interest only, lifetime/revers/shared appreciation, buy-to-let, gearing, buy or rent - in short all the common situations with tips and tools for comparing and deciding between alternatives. There are a series of downloadable spreadsheets to work your own calculations, perfect for DIY types. There is a little bit of theory and lots of practical guidance. The perspective of someone who spent 30 years in the business shows through, who made his money, retired and is now giving back his knowledge to anyone who wants it. Overall, a gem of a resource.

Patientline UK: a Company as Sick as Its Customers

How is it that a company with a virtual monopoly on a convenient telephone and TV service for patients in UK hospitals can degrade financially to a state of life-support while antagonising the public with high and confusing charges and while attracting the ire of the telecoms regulator? Patientline UK is the company soon to provoke a crisis at the National Health Service when its seemingly inevitable slide into insolvency results in its demise.

Patientline has installed 75,000 bedside terminals (pictured on this post) throughout hospitals of the NHS all around the UK. The custom all-in-one terminal provides inbound and outbound telephone service, TV (with a fair range of channels), radio, Internet access (browsing and email) and games in some hospitals. On first impression and limited use so far, the unit appears to be very good from an ergonomic and functional point of view - the wall-mounted swivel arm can put the screen in any position and angle over the bed, the buttons are big and well-spaced, the right-hand handset has a full, albeit tiny, flip-open qwerty keyboard, the headphones (for TV/radio) keep noise levels down, the screen is bright, clear and plenty big enough for close range viewing/reading, the terminal is encased in such a way that it can be wiped and disinfected and the services are accessed through a 4-digit pin code that can be used anywhere in a particular hospital, very convenient for patients moving from ward to ward. Beyond this good stuff, it's all bad for Patientline.

On the surface, the problem is the charges, for TV and especially, for phoning. The BBC article from April 4, 2007, titled Hospital Phone Charges up 160%, describes the proposed phone rate increase, and the vociferous objections that aroused, from 10p per minute to 26p for outgoing calls at any time of day from the patient/hospital to UK landlines. Note my specifying ''outgoing'', ''UK'' and ''landlines'' because rates for incoming calls, to or from mobile phones, non-UK places, on/off-peak hours all are different, and higher. Complexity and confusion is part of the problem for the customer, particularly when everyone's primary concern is for the health of the patient. The various rates are not posted in the hospital that I have been visiting. Finding out later that things cost a lot more than they thought/guessed/feel-is-fair makes people much more annoyed because they feel exploited - ergo the harsher backlash - read reactions here at the Register and here as well, here at SayNoto0870. (Consider in contrast that people happily pay £1.50 per minute to call those adult chat lines.) Probably as a result of the press criticism, the phone rate increase has been rescinded - we are paying 10p now.

However, the TV rate decrease has gone through - it's now £2.90 per day instead of £3.50. So the company has done a good thing, but shot itself in the foot financially.

The charges for incoming calls, which are billed to the external caller, are the other source of phone-related ire. They are 49p per minute during peak 6am to 6pm hours Monday to Friday and 39p at other times. However, the last part of the rate story is untold - the fact that outbound calls to mobiles are 80p per minute during the peak and 40p off-peak. I don't know exactly how the revenue is split between Patientline and the mobile operators but I'm sure the latter are getting a healthy share. On the inbound side, I checked Orange and they charge 55p per minute for calls to Patientline according to a general tariff for calling 070 numbers. Thus, Orange treats hospitals no better than anyone else. Shouldn't the mobile operators be getting some of the criticism here?

What would be an acceptable price for phone calls? Perhaps in the order of 25p per minute, which is the Orange tariff for Pay-As-You-Go? I doubt few would expect rates to be as low as 3p per minute typical of mobile plans.

Closely connected to the cost as an irritant is the fact that most hospitals still ban the use of mobiles within the premises. Formerly this was justified by concerns about interference with sensitive medical equipment. However, this is now officially not a problem since mobiles are no longer believed to interfere with medical equipment (the Health Minister said so! though the studies continue to create doubt as reported at the Register). The remaining hospital ban on mobiles makes people believe that it is only a ploy to protect Patientline's monopoly. Whether the company has successfully brought pressure to bear on the NHS or on individual hospitals is for the walls of backrooms to know but the company certainly blames part of its woes on the loosening of the ban in this Sept.27 announcement.

The last element that acts as an irritant is the fact the NHS seems to consider bedside telephones as a luxury, part of an entertainment unit. Reading the flaming comments and knowing my own situation, being able to talk to family and friends is extremely important for the patient and others. It is more or less an essential part of the getting better process. TV is less essential in my view but this modern day ''opiate of the masses'' can play a big part in relieving the boredom of being in hospital for those awake enough to notice. It's dehumanizing enough to be poked, scanned, jabbed, stripped, drugged, cut open etc. that a little bit of normal outside life can be a big morale booster. The action of the NHS in allowing the service to be introduced, designed and priced as it has displays poor judgment and planning. Blogger Simon Howard struck the nail on the head way back in 2005 when he defended the position of Patientline and knocked the NHS.

seems to have off-loaded responsibility with a poor concept. Though outsourcing to private companies can be an extremely effective mechanism for reducing costs and improving effectiveness of service delivery, it won't work if the concept is wrong. Patientline obviously had (still has?) a vision for a complete patient interaction system at the bedside with the ability to order meals, view patient records, conduct satisfaction surveys and provide related health information. None of this seems to have come to pass. Instead the NHS/Patientline is delivering entertainment at entertainment prices but the customer/patient wants treatment support at NHS-level prices.

The question of the service concept affects the system design and the size and sophistication of the service put in place. If Patientline had the wrong over-blown idea about the future uses or applications, it is quite possible that the £160 million the company is now trying to recoup, is much more than it would have spent for a simple phone and TV system delivery system. Over 75,000 bedsides, that's £2133 each, quite pricey for a phone and a TV on a dangling arm, I would think (OK, there's Internet too but it comes free for TV users ... now why would Patientline go to the extra cost of a computer monitor just to offer it free??). Blogger Wayne Morgan posted this critique of the technology adopted by Patientline, saying it could have been much much cheaper to use IP telephony instead of what he describes as the ''classic digitally switched way''.

One thing for sure is that the company Patientline is not profiting from the high prices. It is a public company whose only business line is the hospital service so nothing is mixed up with it to conceal the truth. The financial reports are posted on the company website under the Investors tab. Losses have been considerable and constant. The BBC report cited above quotes a company representative as saying last April that the company only had sufficient funds to last another 12 months. Nothing seems to have improved since then and the September 28th Trading Update has an ominous warning: ''If the current revenue trends continue then the liquidity position of the Company will become increasingly tight towards the end of this calendar year.''

Prediction:

• Patientline UK will go bust, provoking a crisis in hospitals
  
• NHS will respond by allowing mobiles to be used in most areas of hospitals
• Another company will take over the Patientline infrastructure for a pittance, thereby attaining a low fixed cost structure; the new company will eliminate phone service avoiding the controversy and concentrate on TV, which is cheaper and easier to manage and bill, and which constitutes 70% of the actual usage of the terminals by patients (ah yes, the sweet spot!); the new company will be a highly profitable cash cow
• Hospital staff and patients will have to cope with lost/missing mobiles, a lot more ringing phones, battery chargers, some extra calls through staff for those few who do not have mobiles
• Mobile operators will continue to make their healthy margins in the immediate future
• In the long term, the adoption of VoIP by hospitals for internal use, such as has just been done by the Birmingham trust, will enable and entice (i.e. get money from) the NHS/hospitals to use this standard infrastructure, to solicit competitive service offerings from multiple providers for phone, TV, radio, Internet, anything digital, as well as medical and hospital admin functions through the bedside device (note the irony of the Patientline terminal image above, obtained from their own website, which shows a menu choice, a service that is not offered through Patientline).
  

The story could probably serve as a business school and public administration case study on how not to do things.

Update May 26, 2008 - The Interim management statement of February 15th shows that revenues had dropped another 25% in 2008 vs 2007 and includes these words: "Shareholders should note that it is unlikely that any value will be attributable to ordinary shares following any restructuring of the Company's debt." The company is now owned by debt-holders. With annual statements due in June, will the long, slow fall be interrupted by a conversion of all the debt into equity? That would still not make it a viable business however.

Comparison Shopping on Computers: Canada vs USA vs UK

There has been a lot of complaining lately on the slow downward movement of prices in Canada compared to the USA. Since I probably will soon be in the market for a new computer and I have the luxury of buying it in the UK or in Canada as I travel back and forth between the two countries a lot, I decided to do a simple comparison. Computers have the convenient property of being pretty well standardized worldwide so it is easy to make apples to apples comparisons, especially when there are are worldwide vendors like Dell Computer, whose online ordering and configuration website make it possible to build the identical machine for different countries. Purchasing power parity would lead us to believe that identical items in different countries should have the same price after currency conversion.

Below are the results of my little experiment on the delivered price, including taxes and shipping, for a Dell Inspiron 530s. The only substantial difference is that the Canadian version has Windows Vista Home Premium while the US and UK versions have XP Professional. There might be a price difference on that account but since Dell offers some systems with a choice of Vista or XP at the same price, surely there cannot be a big difference in the total cost of the system.

The currency conversion rates are those on Yahoo as of today UK£ = 1.9528 C$ and USS$ = 0.9344 C$.

Total Delivered Price

• UK £597 = C$1165
• USA $1158 = C$1082
• Canada $1435, or 23% more than the UK and 33% more than the USA!!

Looks like I will be buying my next computer in the UK, not Canada. I used to think that the UK's cost of living was shockingly high compared to Canada's but the substantial rise of the Canadian dollar against the pound sterling is changing that situation. My cost of living (in C$ terms) here has declined by about 10% in the last year as a result (which is a great consolation, since my portfolio investment losses in the Vanguard Europe ETF (VGK) have thereby been offset to a large degree).

A final insult is that only Dell Canada does not offer any systems with Ubuntu Linux, an operating system I have been happily using on a 2000 vintage Dell laptop. In fact, the only reason I will replace the laptop is an intermittent and growing hardware malfunction (my cursor seems to wander uncontrollably around the screen at times). Linux will enable me to use the hardware till it breaks, as opposed to having it become obsolete in half the time due to software bloat in the Microsoft environment.

Dell Computer in particular has no excuse for the above pricing differences since it doesn't manufacture any systems in Canada and since it manufactures PCs as and when they are ordered and so has no inventory pipeline with embedded costs to cycle through that might somewhat justify a delay in adjusting prices downward.

More Lessons from Who Wants To Be a Millionaire

As host of the UK version Chris Tarrant would say, ''this is serious business''. A previous post of mine made a light-hearted comparison of the show to investing. Ha-ha, the joke is on me. I've just discovered a heavy duty study on the subject. Do you like equations with lots of Greek letters, then download Who Really Wants To Be a Millionaire: Estimates of Risk Aversion from Game Show Data, a paper published in 2005 by Roger Hartley, Gauthier Lanot and Ian Walker of Warwick University? Attached is a sample ... just don't ask me to explain.

The paper includes some fascinating trivia based on a complete inventory of the first 11 series of UK shows up to June 2003 (the authors had the cooperation of the show sponsors):

• 3 out of 515 contestants won the £1 million top prize (using my higher math skills, that works out to 0.6% not the 1-2% I from my first source), which is the same number who went away with nothing
• the mean of winnings was much higher at £54k than the £16k I'd guessed, though the standard deviation was a whopping £106k (i.e. those infrequent big prizes distort the stat)
• 2/3 of people voluntarily stopped by deciding not to answer versus the 1/3 who had to stop by getting a question wrong
• the quitters left with an average of £72k while the wrong guessers ended up with an average £17k (and this latter figure includes the £1 million winners who the authors decided had not quit voluntarily!); unfortunately the authors don't comment on this difference and I wish they had ... maybe it's called knowing when to quit while you're ahead?
• the probability that a phone-a-friend will know the answer is only about 40%
• the ask-the-audience lifeline is as valuable as both the phone-a-friend and the 50-50 put together; is this a manifestation of the wisdom of crowds / markets?
• 3/4 of the contestants were men, who the authors say are less risk averse than women
• the early round questions are more weighted with pop culture and sport
• the show's production team sorts the possible questions into 15 bins one for each of the questions levels, using their judgment and experience to make them progressively more difficult
• being more educated doesn't help much

Now I don't know if the authors truly would conclude this because it isn't said so in words (maybe the results of one of the equations says as much?), but a fascinating media report in the New Scientist magazine, titled Too Scared To Be a Millionaire?, says: ''The economists’ analysis, based around a mathematical model, suggest that more people would have won a million – and the contestants have taken home more overall – if they were less risk averse and willing to gamble.'' People are risk averse, and the authors find that again in regards to WWTBAM. I really wonder whether people are unjustifiably risk averse in general and with respect to investing as well. In other words, do people stick too much of their investments/savings into safe but low yield things like bank accounts and GICs? Isn't it curious for example that in the richest country on earth, the United States, people are at the upper end of the ladder in holding equities, as I noted in yesterday's post?