Those of you who show up here on a regular basis know that your boy Nelly here isn’t very generous with the guest post spots. In fact, I tell most of these people to kiss the hairiest part of my ass.
But today, you kids are in for a real treat. Paul from Asset-Based Life is one of the finest finance bloggers out there. Handsomest too, or at least I’m assuming. He consistently posts some of the most entertaining and thought-provoking stuff out there, and he’s not a douche despite having a blog name with a hyphen in it. It’s criminal he doesn’t have more readers.
Paul and I decided to do a “dueling banjos” type of post, whatever the hell that means. He’s going to take one part of an interesting personal finance argument while I take the other. The winner will feast on the warm brain goo of the loser. We do not mess around.
The topic? It’s about going to college. To put a further twist on the topic, I’m going to argue the pro-college side of the argument despite consistently saying college is hella overrated, while Paul, who’s presumably more edumacated than a penguin dressed up with a bowtie, will take the anti-college side of the argument. Make sure you go check out Asset-Based Life for my side of the argument.
Without further aideu, here’s Paul. Make him feel welcome by tossing some rotten tomatoes his way.
There was something truly decadent about going to college. My parents were quite frugal and passed it down to me, but somehow financial discipline was thrown out the window when it came to college. I was told over and over, “We’ll pay for wherever you get in.” I managed to get in a very good and very expensive school. So much for the ol’ ROI.
College opened up many career paths. I learned a lot and had some fun. But as a cold, pragmatic investment decision, college was highly suspect when I went. It’s even more so today.
College Costs Too Much
A degree from my alma mater, if you started today, would set you back a cool US$280,000 (if you grew my actual cost back from dinosaur times by 7% p.a., it’d be about $360,000).
That is a lot of money.
If you consider your career a quest to build a big pile of financial assets (not a bad way to view it), college can start you off with a huge crater to fill.
There is certainly a premium in going to college, and a further premium to a great university. I just feel that the premium is rarely worth the cost.
Even if you’re able to go to college on the cheap, or even free, there’s still a big opportunity cost to the time you spend there. Which brings us to our second charge against college.
College Takes Too Long
You can accomplish a lot in four years. You can earn a full four years of wages (trust me – I went to college). You can learn and master a trade. You can start a business and see it thrive.
There’s a long-running quip that a bricklayer who stays busy can outearn (net of school cost) a doctor. Add in a high saving rate, compound interest, and perhaps a little entrepreneurship, and their tortoise v. hare race isn’t even close.
If I had simply learned a trade out of high school and started working and investing, there’s a great chance I’d be ahead of where I am today.
But What About the Learning!
I learned some really interesting things in my college coursework.
I had an Anthropology 101 class that was fascinating. But you know what was far more fascinating? Just about any Jared Diamond book I’ve ever read.
I had a great Philosophy course where we proved we do exist. That was definitely worth a semester of my time, and I feel sorry for you non-college grads who are still struggling with that question.
Almost everything I learned in class could have been picked up from a book (and funny fact, we actually used those “books” in our classes). Today it’d be even easier with all of the cheap or free online teaching resources.
As a business major with post-college jobs in finance, I was rather shocked how little of my coursework I used. In those rare cases I did, I always needed a refresher to remind me what I (sorta) learned.
Notwithstanding that, I did need a college degree for my first job in financial consulting, and that brings me to…
College Is An Incredibly Inefficient Filter
It’s hard – sometimes very hard – to get into college. That can make college a useful filter for employers. Since the schools have gone to all of that trouble to identify top test takers, high achievers, and whatnot, lazy companies can use that as their own screen for hires.
The only problem with this Rube Goldberg machine is that it requires students to then sit through four years of classes, many (most) of which they’ll never actually use. Plus there is the real risk of finding after four years that you should have gone a non-college path. Sorry about that.
Can’t we design a near-instant filter similar to college admission? Is it really that hard? I know of some companies who rely heavily on IQ, behavioral, and knowledge tests and don’t really care about your pedigree. I think that trend is just starting.
If college was and would always remain a ironclad filter for great jobs, I’d probably favor it more. But we’re shifting to a more meritocratic world where your college degree union card isn’t as important. The role of college as a filter may be nearing its end.
The Move to Meritocracy
Nelson (feeling charitable) and I (ambitious!) have both decided to write these guest posts today. Somehow we both felt it was a good use of our time.
Are you going to measure the quality of our posts based on how much we spent on college (fingers crossed)? Or are you going to judge them based on the quality of the writing (boo)?
There are many fields where college just isn’t relevant anymore, and there are many a millionaire and billionaire with no degree. If an orangutan was a world-class programmer, he’d have a job at Google tomorrow.
There are professions where college is still a required credential, and if you really want one of them, then have at it. Just know we’re shifting more to a world of merit. If you just want a big pile, college may not be the best route. I’ll tell you what is.
The most lucrative career paths have always involved entrepreneurship. If you want a shot at being truly rich, start your own business.
It’s a scary path with uncertain prospects, but one thing is certain: You do not need a college degree to become an entrepreneur.
On the contrary, I think a college degree can inhibit entrepreneurship. College debt, a comfortable salary, and a personal brand of “college grad” can lower your risk tolerance and turn up your nose to many simple but great business ideas.
As an entrepreneur, if you ever need skills that might come from college, you can simply hire those folks. When they sniff that you don’t even have a degree, you can tell them to go make you some more money.
I’ve always wanted to be an entrepreneur. While my current effort (strategy consultant) levers my college and MBA degrees, I have no doubt I could have found one that didn’t need a degree at all.
Wait! College Is So Much More than Career Prep
I had a wonderful university experience. The social aspect was really fun. I made great friends and had many a good time. I even spent a semester in London, which was culturally amazing for a simple Texan lad.
But here’s a sneaky little secret. Did you know that people who don’t go to college are also allowed to have fun? You may not get do it in a Hogwarts-like setting, but you can have many of the same incredible experiences. You can even visit foreign countries and cultures – they let in non-students too. And you can do it much, much cheaper.
Can your genius reach its full potential without being tested in the crucible of college? I’m gonna go with yep. Many brilliant minds are forged outside of college. Colleges mass-produce pseudo-intellectuals, but I don’t know that they craft real genius.
College Isn’t Completely Worthless
College is a safe and well-trodden path from high school. You don’t need to pick a career; you just need to make it to your 9am class. Your professors will help you learn, the administration will help you pick courses and majors, and recruiters will come right to you on campus.
All of this outsourcing doesn’t come cheap, though.
I didn’t even think about careers in high school. With my parents’ full support, I just moseyed to college ‘cause that’s what one does. Had I sat down and grasped I was at the start of a great adventure, with college as one of many options, I might have gone a totally different and more lucrative route (esp. if my parents gave me my tuition as seed capital!).
College is clearly worth something. It’s just often not worth the cost in money and time. It’s an incredibly expensive luxury. In a word, it’s overrated.
As I outlined in the post RIPPING business owners who think you should shop local TO SHREDS, I’m convinced a full 90% of small business owners are disgruntled ex-employees who decided that they were going to be the boss, dargbloomit.
Because these folks aren’t entering the venture with the proper mindset, they make a lot of mistakes. Ultimately, they boil down to the same handful of things over and over (and over) again.
Here are 5 of the most common mistakes business owners make.
A local photography shop personifies this common business mistake.
They’ve got a nice studio and are only one of three locations in town that can take passport pictures. They do a reasonable passport business and a few family portraits, too.
Desperate to increase their business, the photography place decided to expand into retail. Soon the front of the studio was filled with used DVDs and other such nonsense. It’s not even photography related!
Why this place wanted to expand into retail is beyond me. Then, friends of mine went to ask the photographer for engagement/wedding photos. They had a budget of $500 for engagement shots and $2,500 for the wedding.
The response? “I’m not interested in dealing with Bridezillas.”
So to review, instead of expanding into the wedding picture business with 10 times the margin of passport photos, this photography studio decided to sell junk. Why expand into something you’re not good at when there’s a big opportunity in your core business staring you in the face?
This brings me to point two…
There’s a really easy way for the average small business to put themselves head and shoulders above the competition.
Be good at what you do.
An example? Don’t mind if I do. Most of the time, interactions with small business owners go something like this.
“Hey, I’d like (item). Can you get it in for me?”
“I don’t know. Can you give me a little time to check and I’ll call you?”
(two weeks later)
“Hey, did you look into that item for me?
“I’M WORKING ON IT. GOD. STOP HASSLING ME.”
If you’re providing a service, the way you present yourself is equally as important as actually doing the damn job. In Alberta, right now there are thousands of former oilfield employees who have decided to become handymen. Most of them struggle because they aren’t professional. They do things like providing verbal instead of written quotes and don’t show up when they’re supposed to.
There are a million ways to differentiate a business from its competitors. You can be cheaper than the rest. You can do a better job. You can offer a unique spin on a product or service. And so on. But — and this is crucially important — you can’t do all those things. Pick one and become incredibly good at it. Expansion should only be considered once you’ve mastered the original business.
A word of caution before committing to be the lowest priced operator. This is much tougher than you’d ever imagine. There’s a reason why your competitors charge what they do.
Easy payment solutions
I can’t believe how many businesses don’t make it easy for customers to pay them.
Getting back to the contractor example above, an incredibly straightforward way for a handyman or plumber to differentiate themselves would be to accept credit card payments. A good way to accept payments is with Paysafe, as they have everything you need to accept and process payments globally. Technology makes doing this incredibly easy. All you need is a smartphone reader and a 20-minute lesson on how to use the software.
It’s not just about credit cards, either. If none of your competitors offer payment by cheque, do that. Ideally, the more options you can offer, the better.
Don’t make it difficult for customers to pay you. It’s that simple.
Skipping on marketing
This was one of my big problems as the World’s Worst Mortgage Broker(TM). I assumed people would just find me because I was the only broker in town.
This was not a smart way to do business.
Here’s the math I didn’t get back then. Say the average mortgage paid me $1,500. If I spent $300 per mortgage transaction on marketing, I’d still make a net profit of $1,200 for approximately 5 hours of work.
Instead I dabbled in free stuff. I built a Twitter and Facebook page before abandoning both after a month. I started a mortgage blog that lasted about six posts (and wasn’t read by anyone except me, either).
Spend a minimum of 20% of revenue on marketing. Don’t have 20% to spare? Then you need to get into a better business.
Follow a simple rule when it comes to spending your precious capital. Track the return of every dollar meticulously.
Say it cost you $20,000 to open your own hair studio, cash that was borrowed at a 10% interest rate. Anxious to pay off the debt, you throw every extra nickel towards the $20,000. In a year, that bad boy is paid off.
But at what cost? Say that $20,000 could have been invested in fancy machines that do perms (Do ladies still get perms? Serious question). Those machines generate an additional $10,000 in annual profit.
Paying off the debt immediately saves our hero $2,000 in annual interest. But it comes at the cost of $10,000 in missed profits. As long as subsequent investments generate more than $2,000 each year in profits, the debt should remain as long as possible. Even at 10%.
Unless you have the kind of generous parents who can afford to drop tens of thousands of dollars on your education, it looks like you’re going to be stuck paying for your own education. Don’t sweat it. Having to pay for things yourself builds character.
Most people pay for their post-secondary using a combination of factors. Many will work during the summer months. Some will be able to hit up scholarships. And others will have a sugar daddy, willing to give them cash in exchange for, uh, companionship.
That last method isn’t recommended, especially if you’re a dude.
The process is mostly the same in the United States, but slightly different enough to warrant a blog post. Here are four significant differences with student loans between the two nations.
Related: the case against going to college
College is crazy expensive in the United States versus Canada. Especially when you compare elite schools down south to equivalent institutions up here.
Take McGill, one of Canada’s top schools. A student from Quebec will only pay $2,328 per year in tuition. Someone from one of Canada’s other provinces will pay $7,227 annually, while international students will pay between $15,000 and $40,000. Each will also have to pay an additional $1,000 for books.
Compare that to Brown, which is one of America’s top schools. Tuition for the 2017-18 school year is $52,231. How anyone affords that is beyond me.
What ends up happening is U.S. students end up much deeper in debt than their Canadian peers. The average Canadian ends up with approximately $25,000 in student debt after their university degree is completed. The average American student will owe more than $37,000.
Both Canadian and American student loans are administered by their respective governments. But Canadian borrowers will likely deal with their provincial government rather than the feds.
Here’s how the Canadian system works. The federal government comes up with a certain number of guidelines. Each individual province decides whether they’ll follow these rules or tweak them to their own liking. Quebec, naturally, has its own set of rules. So does Ontario and Alberta.
In the United States, loans are handled exclusively by the federal government through the Federal Student Aid program.
Working with banks
In the United States, many student loans are issued by the federal government itself. These loans are called Stafford and Perkins loans, and are directly subsidized by the U.S. government. These loans are capped at approximately $10,000 per year for each student.
This isn’t enough for the average borrower, so many turn to private student loans. The largest player in this part of the market is Sallie Mae, which specializes in student debt. Sallie Mae has approximately $150 billion in student loans outstanding. In addition, many banks offer private student loans.
In Canada, most student loans are done directly with the government. Students can borrow up to the cost of their tuition each year from the feds, plus a top-up for books and other incidentals. If a borrower needs more, they can then hit up a private bank for more cash. Banks tend to market their loans to people who need more than the average loan – like doctors.
For the most part, whether you live in Canada or the United States, you have to pay back your student loans. Bankruptcy won’t get rid of them, either.
There are loan forgiveness programs in both Canada and the United States. In the U.S., you must first get a job with the government or an approved not-for-profit organization. Then, after you’ve already made 120 qualifying monthly payments, you can apply to have your remaining student loan balance forgiven.
It’s a little different in Canada. Doctors and nurses who work in remote communities can apply to have their student loans forgiven. There are also several provincial programs that will forgive a portion of someone’s student loans (via tax credits) if they live and work in a province for a certain amount of time.
The bottom line
Essentially, both Canada and the United States have very similar systems designed to encourage as many people to attend school as possible. There are only small differences between the two. For more information about Canadian student loans, consult a student loan expert.
That’s not even clickbait, either. I really did that well.
Let me take you kids back to a special time in my life, last week. Ah, last week. What a time to be alive. We weren’t at war with North Korea and the UTTER HORROR of the Fyre Festival was yet to be upon us.
And your BOY Nelly was buying himself a stock.
That stock was Canam Group Inc. (TSX:CAM), which might be in the most boring business in the history of the world. The company is the largest fabricator of steel components in North America. These steel structures are then used in buildings, stadiums, bridges, and so on.
Canam has also historically been in the stadium roof business. If you know a stadium with a retractable roof, chances are Canam was involved in it. The roof business isn’t as steady as the steel structures business, since these roofs are complex. In 2011, Canam posted big losses because the new roof for Vancouver’s B.C. Place ended up costing much more than anticipated. The same thing happened in 2016 with some unnamed roof project that was probably the new Atlanta Falcons stadium. So management officially announced they are getting out of the stadium business.
Canam shares ended up reaching a low of $3.19 in late 2011 before recovering to more than $15 in 2014. A similar decline just happened, shares fell from a peak of $15 to below $6 before recovering a bit.
There was more to like about Canam, too. Earnings came in at $1.08 per share in 2015, $0.70 in 2014 and $0.74 in 2013. The company was clearly capable of posting decent earnings when things went right. Shares also traded approximately 50% lower than their stated book value. And I was paid a decent dividend of around 2.5% to wait.
So I jumped in on Tuesday and bought shares at $6.30 each. I set a target price of between $13 and $14, expecting the stock to trade at that level in 2-3 years.
It didn’t take nearly that long. On Thursday morning I woke up to news the founding family (along with a private equity firm) were taking the company private with a bid of $12.30 per share. Shares immediately opened at $12.15 each, and I sold into the strength. I got $12.17 each for my shares.
That translates into a 93.2% return in just two days. If we want to get frisky (or if I just want to brag), that works out to a 17,009% return annualized. Hot diggity daffodils!
And it was in my TFSA account, so that bad boy was all tax free. Now I just need to figure out where to put my new cash. I’m thinking all on red, baby!
Other stocks I bought
I won’t spend too much time on these, mostly because I have other crap to do. What? Video games count.
The first stock I bought was Yellow Media (TSX:Y). Yes, I’m well aware the Yellow Pages are no longer a thing. Approximately 70% of the company’s revenue in 2017 will be from its digital business, which is growing well and has plenty of potential for consolidation.
Free cash flow in 2016 was $97 million. Shares have a current market cap of $207 million. That puts shares at just a little over 2x free cash flow. Yellow Media might really be the cheapest stock in Canada.
Debt is a bit of a concern, with approximately $400 million outstanding. There are about $300 million worth of secured notes with a 9.25% interest rate that mature on Nov 30th, 2018. If free cash flow doesn’t fall off a cliff, I think $150 million of additional debt could be paid off by the maturity date. They also have the right to refinance starting May 31st.
I paid $7.95 each for my Yellow Media shares, so I’m down a little today. My target price is $18.
The other stock I picked up in the last month was Canaccord Genuity (TSX:CF). Now that I think about it, it’s a lot like Canam. Canaccord has a decent niche in the investment banking world, as well as an active wealth management business. Investment banking in Canada was the shits in 2016, but has recovered somewhat this year.
Canaccord also has a mountain of cash on its balance sheet and only a tiny bit of debt. Shares were just a little above tangible book value when I bought (I paid $4.83) and the company had posted earnings of $0.39 per share as recently as 2014. Management also bought back shares when the price was low.
Canaccord shares get crushed every time the capital markets part of the business falls into the toilet. It happened in 2008, 2011-12, and 2014-15. Each time Canaccord shares either doubled or tripled off their lows in a couple of years. I’m hoping to do the same. My target price is $12.
Hey, he’s back!
You guys are only excited because of incredibly low expectations, but I’ll take it.
Let’s talk a little about share buybacks. For those of you who don’t know what in the prey hell a share buyback is, it’s when a company takes extra money and uses it to buy its shares back in the open market.
A simple example. Say you had a $1 million company that’s divided into a million shares, each worth a dollar. It earns $100,000 one year, capital that doesn’t need to be reinvested in the business. So you decide to use the cash to buy back shares. Your company is still worth $1 million but there’s only 900,000 shares outstanding. So each share is now worth $1.11.
It’s easy to see why the holders of the remaining 900,000 shares are fans of this scenario. Their shares are worth more despite not doing a damn thing.
Many top companies regularly buyback shares, but they really half-ass it. Each year, management get a certain number of shares as bonuses, mostly just for existing. To mask that dilution, companies will buy back just enough shares so the total outstanding shares don’t go up.
Aside: Here’s what I’m talking about — enough with the joke share buybacks.
I recently discovered an ETF dedicated to share buybacks. The First Asset Canadian Buyback Index ETF (TSX:FBE) “provides investors with exposure to a portfolio of equity securities of quality companies with active share buyback programs that have significantly and consistently reduced their issued and outstanding share count.”
Does it deliver? Let’s take a closer look.
The terrible ETF
There’s a simple way to check whether this ETF delivers on its promises. We can look at the top 10 holdings and see what’s happened to the share count from the end of 2013 to 2016.
Let’s table this up, bitches.
||% Change in Share Count
|West Fraser Timber
|Brookfield Asset Mgmt
|Canadian National Railway
So, overall, that ain’t bad. A total of four out of ten increased their share counts in the preceding three years, but two did so only marginally. WE’RE ONTO YOU, ROGERS AND CAMECO.
The fund has 40 total holdings, but it doesn’t actually put the holdings online, so I needed to consult the latest fact sheet. It’s limited to the top 10.
Before writing this post the most recent fact sheet I could find was from September 30th. Here are the top 10 holdings back then. Try to stifle your laughter.
||% Change in Share Count
The holdings back in September decreased their total share count by less than 1% on average over the preceding three years. Encana did two major share issues in the preceding three years. The CEO of Constellation Software has gone on record and said he dislikes share buybacks.
These are the kinds of companies to be included in a share buyback ETF? Really?
Check under the hood
Before we give this ETF too much crap, keep in mind it follows the CIBC Canadian Buyback Index, which actually has a history of outperformance.
Still, you’d think the index would be built in a specific way. The companies with the largest share buybacks would be top positions, while the ones that don’t make any significant progress wouldn’t make the list.
But it isn’t set up that way. Aimia has repurchased 12% of its outstanding shares since 2013. Telus has bought back 5.4% of its shares. They don’t show up anywhere in the top 10 holdings. The top holdings are a mix of true share buyback superstars and companies who take the practice as seriously as I take my latest diet.
The lesson is to look under the hood of these specialty ETFs. Which takes away from the entire point of buying an ETF in the first place. You don’t buy ETFs to do research. If you do the work, you might as well just build your own portfolio.
Anyhoo, if you’re looking for companies that buyback their shares on a regular basis, you can probably do better than the First Asset Buyback ETF. Just too many swings and misses.