As you read this, there are currently 529,839 entrepreneurs in Canada struggling to take their business to the next step. Y’know, give or take.
Every business has its own unique challenges, but most can be broken down into one main category. Some struggle to get sales. Others have costs slowly ballooning out of control. The lucky ones are swept off their feet, barely keeping everybody happy as orders keep pouring in. Naturally, the first and second groups hate the third. Uppity bastards.
This here blog, back when I was serious about making money at it, suffered from some of the same issues. Writing for other websites was much more profitable (in the near-term, anyway) than pecking away on the keyboard for Financial Uproar (the website which is like a tightly coiled sex robot in a jar). I spent so much time on content that I didn’t have time to establish relationships with real brands. And besides, why would any legit business partner with a website that made 13,920 different kinds of dick jokes?
That last paragraph was a little depressing, huh? Good thing I only do this for fun these days. Oh, you’re not enjoying yourself? I will make you have fun.
If I were to start over in the world of websites, I would make one major change. In fact, it’s something I would recommend many entrepreneurs do.
That change is…
I once poo-pooed partnerships, talking about the somewhat uneven relationship between two anonymous partners who started drifting apart once their business was running smoothly.
But some six years later, I now know there’s more to that story. The first partner was much more ambitious than the second, so he went ahead and worked on his own ventures. The second guy was content to run the business. So even though they drifted apart over time, the hard feelings quickly diminished.
Even though the two partners grew apart, they still accomplished more together than either one could have on their own. Their business has grown by leaps and bounds, and each of them have substantial investments outside of the partnership. Both spend money like drunken sailors too, so it’s obvious there’s some decent cash flow there.
Coming back to this blog, it’s obvious the advantages I’d have if there was another person helping out. I could focus on the writing while they worked the advertising side. Or we could both write, giving y’all differing opinions on stuff. This would leave time for both partners to network more effectively. The possibilities are endless with two people, while one quickly runs out of time. At the end of the day, it’s all about using different strengths to maximize benefit to the business.
One of the things I really enjoy about my grocery job is working out problems with my co-workers. It’s amazing how helpful it is sometimes to get a different perspective on things. If I’m stumped on a problem, a different set of eyes can easily find a solution. If you’re a solopreneur, you don’t get that benefit without reaching out to one of your peers.
Not every partnership will work, and that’s okay. I entered into a joint venture with an unnamed former PF blogger back in 2016. It only lasted a few weeks before fizzling out. I didn’t have the time to dedicate to the venture, while my partner had his own flaws. But we got as much traction in that first month as Financial Uproar got in its first year, including mentions on a couple of major blogs. Not bad for a couple guys working on something part-time.
Not every business would benefit from a partner. And there are certainly some entrepreneurs who would drive even the most optimistic co-owner batty. But on the whole, most businesses would benefit from having two (or even more) people with different strengths and weaknesses. I know if I were to ever go into business again, I’d do so with somebody else.
Admittedly, this story has very little to do with personal finance. Sorry about that, but not really. I’m also not 100% sure it’s true, since all the info I have on it is second-hand. I trust my “sources” on this, but haven’t done any of the work to verify. Yes, kids, I’m even a lazy investigative reporter.
Still, I think it’s a fascinating tale with a lot of fun lessons about unintended consequences. Which, to be frank, are easily the best consequences. It’s not even close, either.
The year was 1996, and my local golf course had big expansion plans.
Located on the edge of town, the course featured a nine-hole track with plenty of trees along the river. It was a standard par 36 course, playing a little over 3,000 yards from the middle tees. Like many local courses in Alberta, it was publicly owned but was managed by a board of directors. The board then set policy, hired a manager, and so on.
There were a few problems with only having a nine-hole course, however. It struggled to attract big tournaments, simply because they all play on 18-hole courses. Tourists were avoiding the place for the same reason. And, of course, having a back nine would allow the course to sell more 18-hole rounds. More people would cough up the extra cash to play 18 unique holes versus the same nine holes twice.
There was just one problem. The course is nestled between a highway and a river. It’s bordered by houses on one side and a farm on the other. Even if the farmer was willing to sell (he wasn’t), the land was too flat and boring to make a good location for nine more holes. And buying out homeowners was impossible.
There was a multitude of undeveloped land just across the highway, but it was hilly terrain filled with coulees, ravines, and more cacti than the set of a Hollywood western. This land would be expensive to develop and would create a golfing experience vastly different than the existing real estate.
Despite the obvious reasons against choosing this land, the board went ahead and did it anyway. And to their credit, the result was spectacular. The back nine is a wonderfully unique experience. It might be the hardest nine holes in the province (I once lost 10 balls in nine holes), but it’s unlike anything else out there. Each hole presents a different challenge. Some demand length to carry your ball over a ravine. Others require precision to place your ball in a narrow, sloping fairway. And one particularly nasty hole requires a 190 yard carry over a water hazard and bunker to a narrow green.
The problem wasn’t with the back nine itself, which worked out quite nicely. The problem was how it was paid for.
Here’s the unintended consequences part
Building nine new holes in terrain not suited for holding a golf course was expensive. The price tag quickly ballooned into something worth several million dollars.
To pay for the expansion, the board of directors tapped multiple sources, including going to the local community with a unique offer. The golf course would sell two tiers of lifetime memberships. The first, which cost $10,000, would be good for one individual to golf as much as they wanted. The second, which cost $25,000, would let a business owner and a number of their employees golf for free. Avid golfers snatched up the deals, and the course ended up selling dozens of each kind of memberships.
Fast forward 20 years, and the establishment was beginning to have some serious money problems. Despite increasing rates annually and a book filled with tee times, the top line just wasn’t budging. After bringing in an outside consultant to crunch the numbers, it was obvious what the problem was. Some 60% of rounds were played by individuals using these lifetime memberships.
Here’s what happened. Most avid golfers snatched up these lifetime memberships like your author scarfing down Doritos. Casual players were then driven away by the increasing costs on a per round basis, the general decline in the sport’s popularity, and an unwillingness to play the incredibly difficult back nine. Sure, some tourists came to play the venue, but those numbers are steadily falling as well. It turns out fewer and fewer people are golfing these days.
The board faced an interesting conundrum at this point. The wording in the lifetime memberships was ironclad; there was only one way to get away from the commitment, which would be to declare bankruptcy and start over again under a new organization. But it’s not quite that simple, since the place wasn’t necessarily insolvent.
Certain lifetime members also reacted in a predictable way. Once word got out the board of directors were looking for ways to end the gravy train, they put themselves up for nomination. I’m told the board is now mostly filled with these people.
The moral of the story
If I had a time machine, one of the first places I’d go is back to those board meetings in the mid-1990s to see if anyone foresaw this coming. Yes, I am that lame.
The lesson is simple. Beware of the long-term unintended consequences of today’s actions. This is often easier said than done, of course. Second-level thinking is hard but is often necessary.
In late 2016, back when I took this here blogening seriously, I felt the need to inform you kids about the newest plan from upstart mobile provider Public Mobile. Despite being owned by Telus, the large Canadian telecom which makes up a big chunk of my wife’s RRSP, ol’ Pubby ran things a little differently than the rest of its peers.
It’s an entirely self-serve operation. You had to physically order your own sim card and stick the thing in yourself. Then you have to navigate the website on your own to sign up for service. You can’t call in for help; in fact, Public Mobile doesn’t even have a phone number. If you’re confused, they make you hit up the forums of the website, where poorly paid moderators answer all your pressing questions. Alas, those rat bastards refused to play along when I asked what they were wearing.
In exchange for all of this, Public Mobile offered some uber cheap cell phone service. I personally signed up for a plan that gave me unlimited in-province calling, unlimited text messages and 12 GB of data every three months for $120. After qualifying for a few different discount bonuses (including referring some friends and signing up for credit card auto-pay), I got my cell phone bill down to around $35 a month.
The best part? Public Mobile promised the rate would stay the same as long as you kept paying your bill. I had locked myself into a very good plan for potentially a long time. After all, the company’s marketing was very clear. There would be “no surprises.”
Everything was all fine and good, until last week. That’s when the surprises started.
So there I was, sitting at work, entertaining everyone with my stories of meeting randoms off the internet, when I got a text message from the fine folks at Public Mobile.
(Click to embiggen)
My succulent plan was no more. THOSE RAT BASTARDS. MORE LIKE PUBIC MOBILE, AMIRITE?
I was pretty pissed, but was resigned to the fact that the price would be going up. $140 every three months (after bonuses) was still a pretty good deal for what I was getting, and if there’s one thing these companies understand, it’s my laziness. Most people would just shrug and move on. That’s what I was prepared to do.
Good thing the rest of Public Mobile’s customers aren’t as lazy as me. They actually did something about it. Oh, did they ever.
Thousands of them took to the internet to voice their displeasure. Reddit threads quickly blew up, as hundreds of users pledged to report Public Mobile to the CRTC for false advertising. Remember, the company promised “no surprises.” Countless more took to Twitter and voiced their displeasure, tagging local media and consumer-minded TV shows like CBC Marketplace. Apparently there are some 300,000 Public Mobile customers, and most of them were PISSED.
24 hours later, the company caved.
It sent out a new text to affected subscribers saying it wouldn’t go through with the price increase. But it did keep the possibility of hiking fees at some point alive. In an official statement, General Manager Dave MacLean said “while all good things must come to an end at some point — that point is not today.”
Cheap asses everywhere rejoiced their victory, at least for now.
The lessons learned
This wouldn’t be a Financial Uproar post without looking at the bigger picture. How can you personally profit from this information?
Let’s talk a little about being the low cost provider of something. While it can be a lucrative spot to be in a market for the right organization, it usually isn’t a smart idea. For every company like Wal-Mart, there are a million imitators that fail badly.
Let’s face it; price-conscious customers are a pain in the ass. All they care about is getting the best value for their dollars. If you target that market, be prepared to be fought tooth and nail over every price increase. Meanwhile, the top end of the market is much easier. They’ll gladly accept price hikes in exchange for a better product.
Many companies begin as price leaders before realizing it’s a crummy place to be. Westjet got its start undercutting Air Canada. These days the average Westjet fare is no lower than the competition. McDonald’s is no cheaper than Wendy’s or Burger King. Pepsi tried to be the better value proposition than Coke for years before finally giving up. And so on. There are hundreds of other examples.
Of course, Public Mobile is only a small part of Telus, which is a behemoth. At the end of the day, thousands of people leaving Public Mobile is nothing more than an annoying inconvenience. When you’ve got close to nine million subscribers, you can afford to piss off a few customers. Besides, both Bell and Rogers are doing the same thing, somehow. We’re naturally wired to hate all utilities, which is why they end up being pretty good investments.
That’s just gross, Nelson. What a terrible mental image.
Welcome back, Italics Man. Have I ever mentioned nobody likes you?
Once or twice, yes.
Oh, you’re still here?
There’s no time to waste with more terrible Italics Man jokes, dammit. We have important personal finance issues to discuss, dammit. And then you’re all free to go for pizza, dammit. That last dammit was stretching things a little, but I just can’t help it, dammit. I love the word dammit so much.
I’m sure I’ve mentioned it before, but here’s the Financial Uproar Don’t Crap Where You Eat Rule in a nutshell. If you’re lucky, your employer will offer you the chance to invest in their stock, usually at a nice discount. See, your boss cares!
Many people take advantage of this perk and buy every spare share they can get their hands on. This is a bad strategy, especially if someone doesn’t have much in the way of other assets. Putting all of your eggs in one basket is a bad thing. If the stock falls, your entire net worth goes with it.
But it could get potentially worse. If the stock falls and you lose your job, you’re doubly screwed. Don’t listen to what porn has told you about getting doubly screwed. It sucks. She’s not enjoying herself, fellas.
That’s the Financial Uproar Don’t Crap Where You Eat Rule. Spread your bets, especially when you don’t have that much cash to begin with.
Exceptions to the rule
The rule is a little tricky because there are certain acceptable ways to get around it.
Only a maroon passes up the chance to get succulent guaranteed returns. Sure, buying stock at a 25% discount is hardly guaranteed to lead to riches, but in general you’re not going to screw up too badly by taking advantage of an employer match. Buying assets at firesale prices is a good thing.
So what’s an enterprising young person to do? It’s simple. Take the match and diversify out the stock over time. Cycle money out of the investment into a boring ol’ index fund periodically. You can either do so when the stock bumps against new highs, or create a set schedule to accomplish the same thing. If you pledge to sell some of your stock on each December 1st, for example, it’ll take the market timing aspect out of it. And lord know, y’all suck at market timing. Except me, of course.
Frankly, this part of the Don’t Crap Where You Eat Rule is child’s play. Most everybody with functioning grey matter knows this. Which is why we’re going to kick it up a notch.
Extending the rule
Let’s take this rule a step further. Here’s why you should avoid investing in the same sector as your job.
Often, a stock goes down because of management ineptitude. Some wannabe Steve Jobs bets the future on some new finangled gadget and the whole thing goes down the toilet. And then he gets fired and collects a massive payday while heading out the door. Isn’t capitalism fun, kids?
But perhaps more often a company’s stock price isn’t necessarily in their control. Your company might depend on debt to expand operations. Rates go up and the stock gets hit. Competitors also feel the pinch, so their stock reacts accordingly.
Knowing this, does it make sense to invest in the same sector? Probably not.
Then there’s my specific example. I work at a grocery store, which I will readily admit it a pretty crummy business. Competition is high, margins are low, and there’s a huge amount of operating leverage. It costs a lot of money to keep the lights on and the freezers working. I should avoid the retail sector when investing (which is my Kryptonite, but I am getting better) and focus on better quality companies.
So to wrap this up, embrace the favor your employer gives you and buy their stock at a discount. Just make sure you keep such a position on the small side and diversify greatly. The only thing that sucks more than losing your job and all your savings is that one man show I went to put on by Italics Man.
The year was 2015, and it was a simpler time. Donald Trump was only pondering a run for President, content in knowing he would never emerge victorious from such a quest. 96% of today’s stupid memes didn’t exist. The Chicago Cubs were still hapless losers.
And your trusted author was buying up Pizza Pizza (TSX:PZA) shares.
There were a number of things I liked about the stock. The company had big plans to expand into other provinces — particularly Quebec and Manitoba — building on its dominant market share in Ontario. Alberta’s economy was expected to recover, which would provide a nice boost to the company’s Pizza 73 chain there. The valuation was decent (I paid around 15x earnings) and the stock sported a succulent 6% dividend yield.
There’s a lot to like about the royalty trust business, too. Essentially, public investors own about 20% of Pizza Pizza, but in a separate company. The parent deals with all the expenses, the advertising, and so on. The royalty trust has virtually zero expenses (other than interest, taxes, and the ongoing cost of being a publicly-traded company), as well as a dependable source of revenue (a portion of top-line sales). This leads to terrific profit margins, dependable growth, and the ability to pay generous dividends.
So I loaded up, buying aggressively in the $13.50 range. The position eventually became about 10% of my portfolio.
At first, this looked like a terrific investment. Shares would eventually peak at $18 each in mid-2017 before falling. As I type this, Pizza Pizza shares trade hands for $14.25 each. Including dividends, this is a return of about 7% a year over 2.5 years. The TSX Composite Index rose about 4% a year during that time.
Although the result hasn’t been a disaster, I thought I’d revisit the decision. And I decided I’d do things a little differently. Here’s what I’d do.
Spread your bets, yo
Choosing between a diverse portfolio filled with many different stocks or having big positions in a few securities comes with a number of trade-offs.
Taking a big position in a stock works out if the thesis is correct. And what’s the point in researching if you’re not going to have confidence in your results?
But at the same time, diversification has obvious benefits, especially if you’re a bit of a wuss. If you happen to be wrong, you’ll protect more of your net worth. And if you’re buying a stock like Pizza Pizza primarily for the dividend income, then it’s easy to argue for diversification. More sources of income will protect you from a dividend cut.
Let’s look at how Pizza Pizza has performed versus some of its peers. This chart shows the share price performance of Pizza Pizza, A&W, Boston Pizza, and the Keg, since mid-2015 until today.
The correlation is interesting, but probably not that surprising. After all, these royalty trusts basically follow one of two factors — interest rates and same store sales. A&W had stellar results in 2016 and early 2017, which lead to it’s outsized performance. Results returned to normal lately, which is why the stock has fallen so much.
If I would have split my Pizza Pizza investment into four different stocks I would have given myself a comparable income stream while hedging my bets away from one company. I would have been free to sell A&W during its outperformance, or I could have just let it ride. But diversification would have given me more options.
The bottom line
I don’t regret my Pizza Pizza decision, and I’m happy to hold the stock. The company has upped its payout three times since I bought it, bringing my yield on cost up to close to 7%. I know yield on cost isn’t the best metric, but dividend growth is always nice.
But in the future, I’ll be hedging my bets by putting some money to work in Canada’s other royalty trusts. These are good businesses, companies I plan to hold for a very long time. They have the potential to be the bedrock of a good income portfolio, something which appeals to me more and more as I get older.