Monday 23 March 2009
A question came up today at work—what would new residential
two-bedroom units being built in the west end of Ottawa rent for—the
property manager said $900 per month and the REALTOR said $1,100 per
month. Who is right and how to test it?
The subject property is on a Main Street which is both good and bad—lots of traffic but also lots of local services.
The Property Manager has a bias—lower rents may make it easier for
him to rent. (Cautionary note: the reverse may also be true. If a place
rents for too low a price, it may not appeal to main stream renters who
do not want to live in a downscale building—remember, a price conveys a
lot of information beyond just the dollar figure.)
The REALTOR wants to sell the units to investors so he has a bias
too—he wants to show the highest possible rents and the highest possible
cap rate to the investor for optimizing the investor’s ROE.
My suggestion is simple: in today’s Internet age test it FOR FREE.
Put a free ad on https://ottawa.kijiji.ca/: one that describes the
place slightly differently and with a different REALTOR name to call at
$900 per month and another free ad for $1,100.
My guess is that the number of calls on each ad will be about the same, meaning that $1,100 per month will probably work.
Possibly, the number of calls will be higher for the higher rent as
people associate the higher number with a better quality building and
class of tenant, in which case, the right rental might be higher still:
$1,150 or even $1,200 monthly.
Then again, I could be wrong and the $900 per month ad will attract a lot more calls.
That is why you do this kind of research.
But think about it:
1. It’s free.
2. It’s not market research—it’s guerrilla marketing research for three
reasons: a) it’s free, b) you are asking about units that don’t yet
exist and c) you are not asking a theoretical question (at least as far
as the respondent is concerned), you are getting a real call from a real
person looking for an apartment right now.
3. It’s not really ‘vaporware’ either—these units are for sale and for
rent and will be built this year. Typical of GM, you are leaving out the
fact that they are not ready right NOW so you are in a gray ethical
area but still, the renter could be looking for later in the year
Ps. I will give you the results when we have them…
Prof Bruce @ 5:03 pm
Rules? There are no rules in entrepreneurship.
Friday 20 March 2009
Probabilities of the Sens Making the Playoffs (as of March 20th, 2009)
My son, Matthew, a humongous Sens fan, has been calculating the odds
of the Sens making the playoffs, assuming that 94 points will do it and
using a single win probability of .6 under new coach, Cory Clouston. It
has gone from a 1 in 16,410 long, long shot with 19 games to go to a 1
in 459 chance after last night’s big win over Montreal. If they can win
every game and get to the last 5 games, the odds are not bad: 1 in 12.8.
DON’T GIVE UP, Sens!
Matt has calculated the odds after each win. Here is the table of how probabilities change with each consecutive win.
Games Remaining Probability Ratio 1 : X
19 6.0936E-05 16410.66737
18 0.00010156 9846.40042
17 0.000169267 5907.840252
16 0.000282111 3544.704151
15 0.000470185 2126.822491
14 0.000783642 1276.093494
13 0.001306069 765.6560967
12 0.002176782 459.393658
11 0.003627971 275.6361948
10 0.006046618 165.3817169
9 0.010077696 99.22903013
8 0.01679616 59.53741808
7 0.0279936 35.72245085
6 0.046656 21.43347051
5 0.07776 12.8600823
4 0.1296 7.716049383
3 0.216 4.62962963
2 0.36 2.777777778
1 0.6 1.666666667
Matthew P. Firestone, Salesperson, REALTOR, Partners Advantage GMAC Real Estate, Brokerage
www.OttawaRealEstateNews.com and www.PartnersAdvantage.ca
613.836.3378 ext. 255 (dir)
Prof Bruce @ 10:58 am
Writing, Research and Experimentation
Sunday 15 March 2009
(To Live By and Some Anti-Rules, Not to)
I have been asked over the years if I can come up with some ‘rules to
live by’ in order to become a successful entrepreneur. I think those
‘rules’ might also apply to anyone in any field of endeavour and to life
itself more generally. So I put together Prof Bruce’s 30 Rules of
Guidance which are a mixture of new age philosophy and ideas as old as
civilization. I am not claiming originality here.
Now I am trying to be an impeccable warrior (that concept comes from Carlos Casteneda’s The Yacqui Way of Knowledge), a Good Samaritan, Atticus Finch (a wise, compassionate, learned character in Harper Lee’s To Kill a Mockingbird) and, of course, failing at all three. But, for what it is worth, here are my 30 Rules.[I have also argued that, in entrepreneurship, there are no rules but
Some Rules to Live By:
1. Be someone others can have trust in. Trust is the foundation of a successful life in business and in your personal situation.
2. Under promise and over deliver. Build your reputation on this (and by living up to other rules listed here).
3. Have a belief in something greater than yourself. Be part of a team.
4. Develop some self-knowledge. Be in touch with your gut (instincts),
your heart and your subconscious as well as your conscious mind.
5. Be the same person in private as you are in public—don’t be a phony.
6. Behave ethically.
7. Don’t place your trust in false prophets.
8. Live a healthy lifestyle—all things in moderation. Don’t drink and
think. Get some exercise. Don’t take drugs. Don’t smoke. Eat reasonably.
Enjoy the life you have been given and enable your body and your mind
to work to their full potential unclouded by substance abuse. Exercise
some self-discipline. Get enough rest.
9. Try not to swear. Don’t lose your temper– people who do so
immediately lose about 10 points off their IQ when they do. He/she who
loses their temper first, loses. Keep your perspective/don’t overreact.
Exercise self discipline. Remain calm in an emergency. Don’t panic. The
reason why it’s ‘women and children first’ is that this perpetuates the
cycle of life and ensures the survival of your tribe.
10. Try to find some time for yourself and your family every week.
11. Honour your elders—don’t throw people away because they got older.
12. Do unto others as you would have them do unto you. (The Golden Rule.)
13. Avoid the Seven Deadly Sins of pride (vanity), envy, gluttony, lust, anger, greed and sloth.
14. Give people including yourself, a second chance (but not a third chance). Forgiveness is blessed. Don’t carry around hate.
15. Be a Good Samaritan, a good citizen and a volunteer.
16. Make no acts of commission but forgive yourself and others for acts of omission, everyone makes mistakes.
17. Don’t hurt anyone or through your inaction allow anyone to be hurt.
Don’t be a bully. Be gentle with those weaker than yourself.
18. Be faithful to and love your spouse and your family.
19. Be humble—walk a mile in someone else’s shoes. Understand the other
person’s perspective and culture but don’t lose sight of your own values
and culture. Be merciful. Remember: ‘There but for the Grace of God, go
I.’ Don’t live an extravagant lifestyle. Be modest. Live modestly.
20. Take care of our planet. Leave the campsite (our planet) better than you found it.
21. Don’t steal. Don’t take what doesn’t belong to you.
22. Seek education, experience and wisdom. Work smarter. Enhance and embrace your creativity.
23. Don’t lie.
24. Love your neighbour as you would yourself. Stand up for others who
need your help. Help others and be generous. If you want something done,
ask a busy person. Manage your time—make each day count.
25. Be positive. Have a sense of humour. You can win often just by
deploying humour. Winning is better than losing. Do not fear success.
Fear failure. Don’t be afraid of competition—it will make you better.
Don’t engage in self-pity when things go wrong. Look in the mirror first
before you blame others for your failures. Don’t get too high or too
low. Compartmentalize—try to keep going even if parts of your life are
not working well.
26. Be patient. Success takes years of effort and practice. The harder you work, the luckier you get. There are no shortcuts.
27. Lead by example. Be committed. Focus. Be competent. Show up every
day for work—the ‘show’ must go on. Do things in parallel. Be a good
team member, friend and colleague. The Captain is the last person to
leave the ship which means he/she may go down with it.
28. Seek out others who share these characteristics—surround yourself
with good-hearted, positive people. Those that do not possess these
characteristics, shun them/exclude them absolutely from your life.
Someone who has shown that they cannot be trusted twice, cannot be trusted.
29. Take care of your business so you don’t become a burden on your
fellow human being and so your business can take care of your family, so
your family can take care of you, so you can help your fellow human by
‘giving them a fishing rod not a fish’ so they can help your business.
Take responsibility for yourself. Pull yourself up by your bootstraps
and help others to do the same. Accept help if offered and seek it when
you need it. When something isn’t working, change.
30. Stick together, reach out to others and give back to the community.
There are other cultures which have quite different frameworks. You
need to know what those are. You can be friends with almost anyone, my
Dad once told me, as long as you understand their perspective. But that
doesn’t mean you embrace their values or surrender your own. I list
below some other cultural notions to be aware of.
Some Anti-Rules Not to Live By:
It’s OK to lie as long as I don’t get caught.
He/she who eats fastest eats more.
More pie for me means less for you.
He/she who has the gold, rules.
Survival of the fittest.
Might makes right.
I win/you lose.
Heads I win/tails you lose.
If it’s legal but unethical, it’s still OK.
What’s mine is mine, what’s yours is mine.
It’s all about me.
Have we talked about me lately?
If you can jump the queue and get away with it, do it.
Every man (woman or child) for himself or herself.
If you can cut in, do it.
Abandon ship, grab a lifeboat before everyone else and while there’s still a seat for me.
If it feels good, do it.
DO UNTO OTHERS BEFORE THEY DO UNTO YOU.
When you run into people who exhibit one or more of these behaviours,
you must act to protect yourself, your family and your
business/organization from them which is your absolute right. Beyond
that, have a sense of humour about it.
One of the reasons that Anglo culture has become so dominant is that
these rules to live by, to the extent that they actually reflect that
culture and are adhered to, produce high achieving individuals and
disciplined societies that work well together in tribal teams. Let me
give you an example.
If there are 350 people in a theatre in an Anglo-sphere country and a
sudden fire breaks out, some of the biggest males with booming voices
and strongest females will suddenly materialize saying things like: “We
seem to be having a spot of trouble here. Let’s everyone be calm,
please. Here, here, make way, make way. Women and children first.”
Some of them will hold the exit doors open even as smoke and heat
become impossible to bear– they will stay there unto their deaths if
they have to. Others will be reminding people (rather nicely) to queue
This way, probably 335 persons in that theatre will survive. Contrast
this with experiences in other cultures with less discipline. If it’s
every person for himself or herself, the largest, strongest people first
panic then run for the exits, followed by others who in their rush to
flee pile up against the doors which unfortunately in many places still
The crush of humanity against these doors, seals them as if they were
welded shut– they may as well have been. People climb over each other
to try to get out, weaker ones are pushed down in the stampede and begin
to be crushed. They will not die from smoke inhalation or fire, they
die from suffocation and other injuries sustained in the pile.
About 15 of the largest, most powerful people in that theatre survive. There are 335 dead and it’s a national tragedy.
Soccer riots are very similar.
The end result is that their tribe is endangered. Don’t let that be you.
ps. Here is another piece of advice from colleague John Walsh:
* Learn from your experiences or you are doomed to repeat them.
Prof Bruce @ 11:42 am
Rules? There are no rules in entrepreneurship.
Lawyers Lose Their Minds (REALTORS Might not be Far Behind)
Saturday 14 March 2009
(Please also refer to: Deal-Killing Lawyers, https://www.eqjournalblog.com/?p=84)
Have lawyers completely lost their minds? In the Great Recession of
the Double 00s, they are charging clients higher and higher hourly
rates, some as high as $950 per hour (that is the top rate being paid to
bankrupt Nortel’s legal beagles). Is anyone really worth that?
If they work 2,000 hours per annum at that rate, it works out to a
$1,900,000 take. Let’s compare that with the annual wage for, say, the
smartest investor on the planet who has made more money for more people
than anyone else I can think of, Warren Buffett, whose 2008 salary at
Berkshire Hathaway was $100,000 and his total compensation for that year
A few weeks ago, a highly paid lawyer I know, billing around $475 per hour, was working on a file for a joint client of ours.
Here is the list of things he did:
1. Couldn’t find any of the documentation on the real estate deal.
2. Nor could any of his assistants.
3. This is less than one week before completion.
4. We had to resend the APS and all other documents twice more before we could finally be sure they wouldn’t lose them again.
5. They didn’t know who was acting for the Seller—despite us having told
the firm one day after the agreement had been reached (more than two
6. Thus, they hadn’t contacted the Seller’s lawyer; when they did they
found out he was going on holiday and would not be able to close on
7. “No problem, we’ll just ask for an extension.”
8. He didn’t realize that there were not one but three Sellers
and an extension agreement from one of the Seller’s lawyers was
worthless without the agreement of the other parties. (The three Sellers
were acting together but each of them had separate, independent legal
counsel: the pub owner, who was a tenant; she was selling her business
along with the building owner (the Landlord) who was selling the
structure and the landowner who had leased his land to the building
owner on a longterm deal.)
9. He also didn’t know or couldn’t remember the name of the other lawyers.
10. He instructed us to prepare an extension agreement and have the
Buyer sign that and then submit it to the Sellers for their signature
not realizing that one of the three Sellers was having second thoughts
about completing the deal.
11. He did not know or had forgotten that if a party (in this case, the
Buyer) signs an amendment, that re-opens the whole deal and the other
party or parties (the Seller or Sellers) could now walk away from the
12. You cannot offer an amendment and then when the other side rejects
it, say: “Just kidding, now we want the original deal back.” Ontario
real estate law just doesn’t work that way. Once you re-open a deal, it
is a whole new ball game.
13. Obviously, the extension agreement had to be signed by the Sellers
(all of them) first. Then the Buyers can accept with no fear that the
deal could be torpedoed by one reluctant Seller.
In the end, we got all the Sellers to sign the extension agreement
(ethically (not legally), they really had to since it was one of their
lawyers who was unable to complete the deal since he was away) and then
the Buyers signed it and, at the end of the day, the deal was completed.
But what was the legal bill on this transaction and why are sharp lawyers like this one performing so poorly?
For one thing, they are by and large technophobic—their systems for
e-filing and capturing information in an accurate manner that they then
can easily access and sort, suck.
For another, they are hurt by the sin of pride. They think they are
infallible and that, even if they make a mistake, they are protected by
their errors and omissions insurance plus intimidation. Who wants to sue
a lawyer? They have more ways to weasel out of things and more cunning
legal tricks than you will ever know. Plus their legal fees are nothing to them since they have giant incomes and access to their own legal counsel anyway.
Another reason: I believe that most lawyers today are far more
interested in money than they are in their clients. So they take on way
more clients than they can really handle and set up systems to churn
those accounts for maximum billings on each file.
Maximum churn may also align with failure to resolve matters. That
is, lawyers have a monetary incentive to become attack dogs for their
clients and refuse to settle or resolve issues. By prolonging things or
making them more complex than they need to be, lawyers can bill their
clients for more hours.
It also appeals to a client’s baser instincts to have ‘someone take
their side’ or ‘stand up for them’ no matter what. Your desire for
revenge or to hurt someone you dislike or you believe has done you harm
lines up nicely with your lawyer’s desire for more billable hours.
Your job and, I believe your lawyer’s real job*, is to resolve
things. That requires a different set of skills such as the ability to listen
to the other side, to see the other side’s point of view and to propose
ways to settle or reach a deal in addition to putting your own point of
view across in a non-inflammatory/non-defamatory way.
In Canada, most law firms will not take on any cases on a contingency
fee basis (where they defer their fees and take a percentage of
whatever they win in court). As a result, ordinary Canadians just can’t
afford legal representation and must therefore do their best on their
REALTORS like me should never give clients legal advice but what do you do when you know your client’s lawyer is a fool?
* REALTORS should not be too smug on this issue. There is a similar
debate going on as to what a REALTOR’s job really is. Is it to
relentlessly represent their client’s POV? To listen only to their
clients and slavishly serve them? To be their attack dog? That is what
regulators in the industry believe and what Real Estate College’s teach
and what is contained in most REALTOR Codes of Ethics.
But I believe that REALTORS (and lawyers) better serve their clients’
interests when they look beyond this and ask: What is truly in my
client’s best interests? Endless litigation? Endless disputes? Making
points off the other side? Never giving an inch? Never reaching a deal?
I don’t think we serve our client’s best interest this way. I think,
at least in part, our mission should be to arrive at a fair deal for all
parties. If your REALTOR client is a SELLER, then find a way to sell
his or her property; for a BUYER, do the reverse. Why? Because they need
to sell or buy. There’s a reason why they are doing this. You need to
keep the end game in sight and not get caught up in oneupmanship.
This doesn’t mean you substitute your judgment for your client’s but
it does mean you are more than either an attack dog, a mail box or a
ventriloquist’s dummy. Use your own judgment and keep your temper in
check. (Your IQ drops about ten points when you lose your temper.)
Lawyers, REALTORS and some of their clients seem to have difficulty understanding that if you take all
the value in a deal, there will be no deal: you have to leave something
on the table for the other party otherwise, why would they ever agree?
This seems a simple concept; it is not. In a recent case, I analyzed a
situation for a potential SELLER. If they decided to disaggregate their
property by severing off a piece of vacant land and then turn their
existing building into a multi-tenant space, they could maximize value
from it. They could sell their land for around $750,000 on its own plus
get a handsome additional amount for their building once it is remodeled
The main factory (which they are about to shut down) is a building of
about 40,000 sq. ft. Once it is vacant, they could hire us to lease the
space for them, fill it with good quality tenants on long term leases
after they upgrade building systems and put demising walls in place to
sub-divide the space.
This all costs money and time: a) to sever and sell the vacant
property, b) to demise and lease and c) to finally sell the building
based on its capitalization rate.
If the cap rate on this type of property is, say, 8.5% p.a. and if
they lease 40,000 sq. ft. of industrial space at $7.50 per sq. ft. per
year triple net with a long term vacancy rate of 6%, then the building
could be worth:
So the vacant land and building, in the fullness of time, might be
worth $4,067,647. But wait they have to pay some REALTOR fees so maybe
they net $3,864,265. But hold on again, this process might take two
years and we have not yet accounted for the time value of money nor the
out-of-pocket costs for doing a land severance and remodeling the
building for multi-tenant use.
Meanwhile our mandate from this international client is to get them
out of the place by mid-year (four months away) which is obviously
inconsistent with this alternate, dollar-maximizing strategy.
Having said all of this, their CEO had a hard time understanding why
he simply couldn’t just ask $4 million for the property as is/where is.
No amount of analysis could persuade him otherwise. (It actually
eventually listed and sold for $2.4 million.) Finally, he got it when I
said: “Bill (not his real name and the numbers here have been changed as
well), why would anybody ever buy anything if you keep all the money and leave nothing on the table for them? Where’s their incentive to buy from you?”
Ps. You will note above there is a difference between what is ethical
and what is legal. The Sellers probably did not legally have to agree
to the extension but ethically they did, at least in my view.
I have argued with lawyers that where ethics and the law diverge, ethics should prevail. They do not agree with that view.
They are concerned that situational ethics (i.e, ethics that changes
in differing circumstances) will undermine the system of law that we
have inherited based on precedent known as common law.
But here is an instructive example for you:
You are a poor student; you are walking along a river bank and you
see some unfortunate fellow drowning. You rush over and pull him out of
It turns out he is a well to do chap and he thanks you over and over
and says: “You saved my life. I am in your debt. Let me send you
You tell him: “Really I was just doing what any good Samaritan would have done. You don’t owe me anything.”
“No, I won’t accept that. Write down your address and I am going to send you a $1,000.”
“OK, that will be a big help with my tuition fees. I accept—here is my address.”
A few weeks later, you are wondering about that cheque. You call him
up at his big downtown office. You try a few times and finally you get
through his receptionist and his assistant to speak with the big man
himself. You politely remind him about his promise. He says: “Oh yeah,
that. I was just kidding, sorry. There’s no money for you. Too bad so
sad. Oh, but thanks for pulling me out of the river, kid. Bye.”
Now do you have a legal claim? You go see a lawyer and explain what
happened or maybe you just file a claim in small claims court. Either
way, the answer will be ‘no’.
A contract under common law requires offer, acceptance and consideration.
In this case, you performed the service (pulling him out of the
water) before there was any offer or acceptance and, hence, there is no
compensation owing under law.
Next time you see him drowning, you must first ask him: “If I pull
you out of the water, will you give me $1,000?” (This is the Offer). He
says: “Yes, anything, just save me!” (This is the Acceptance.) Then you
pull him out of the water. (This is the consideration—in this case, it
is a service performed rather than a financial exchange but the
principal in law is the same.)
Now tell me, what Good Samaritan would ever do this?
To my mind, in an emergency, you just act to save your fellow human
being. If he promises you some compensation after the fact, it’s a
promise and that has an ethical dimension that clearly trumps the legal
interpretation whatever lawyers and the courts may say.
When you were a kid and you promised to do something for a pal,
didn’t you think that meant anything? If you knew that when you were
seven, you probably haven’t forgotten it now that you are an adult.
“The legal profession used to quite esteemed (if not liked) but is
now much maligned. Lawyers moved with the times and, like most of
society, became the servants of whingers, whiners, blame-shifters and
those attempting to remove personal responsibility from the moral
compass of society,” Andrew Firestone, Regulatory Frameworks Branch,
Department of Finance & Deregulation, Australia.
Prof Bruce @ 10:31 am
Monday 9 March 2009
I did a little Guerrilla Marketing for the Sens last week. I
put a definition of Spartacat (the Ottawa Senators Mascot) on
UrbanDictionary.com. It’s free and gets lots of traffic.
It’s also good PR for Spartacat! During the first couple of years of
the Sens rebirth when they were not a very good team, Spartacat was the
most popular ‘player’, signing and handing out his ‘player’ profile more
than 100,000 times. His signature was, of course, a paw print.
I also did a tribute to a deceased friend of the Senators, former US
Attorney General, Elliot Richardson by adding his version of the words
‘Intricate’ and ‘Intricated’ too.
Here are the definitions I used:
A combination of Spartacus, Sparta and cat implying a brave soul; one
who stands up to bullies in every facet of life– in sports, business
and in his or her personal life.
Example: “Holy smokes, Batman, that’s a guy we should have on our side– he’s a Spartacat.
Links: sparta spartacus brave cat standup courage king trustworthy trust fearless
by Prof Bruce Mar 5, 2009
To bring people on board or to get them onside with an idea or a
proposal or an initiative of some type by getting them ‘intricated’ into
the process bit by bit, almost without their noticing that they are
making a commitment.
Example: When a group was trying to Bring Back the Ottawa Senators in
1990, a team that had not played in the National Hockey League for
nearly 60 years, one of their key advisers, former US Attorney General,
Elliot Richardson (now deceased) said: “First we’ll intricate the League
then we’ll get the (expansion) franchise!”
Links: commitment intricated onside promise franchise concession commit grant agree vote majority decide favor
by Prof Bruce Mar 5, 2009
To intricate someone; to bring people on board or to get them onside
with an idea or a proposal or an initiative of some type by getting them
intricated into the process bit by bit, almost without their noticing
that they are making a commitment.
Example: When a group was trying to Bring Back the Ottawa Senators in
1990, a team that had not played in the National Hockey League for
nearly 60 years, one of their key advisers, former US Attorney General,
Elliot Richardson (now deceased) said: “First we’ll get the League’s
Board of Governors intricated then we’ll get the (expansion) franchise!”
Links: commitment intricated onside promise franchise concession commit grant agree vote majority decide favor intricate
by Prof Bruce Mar 5, 2009
ps. Here is a cool story about our first year mascot; he was a wild
American, maybe the best mascot we ever had. We didn’t know it but he
was working in Canada illegally. He got caught on the wrong side of the
border with a few hours to go before game time and couldn’t get through
border security. So he rowed across Lake Erie.
pps. There is another story about our mascot. We originally wanted it
to be Marvin the Martian, the little guy from the Bugs Bunny Show who
dressed up in Roman Garb. But Warner Brothers wanted a huge license fee;
we thought they should pay us instead! For the great exposure we could
give him through national television. (This brings up the who pays whom
problem quite typical in the post modern information economy.)
So we looked around for another creature and settled on Sparty. A
minister called me up after our home opener and complained about him–
the Romans put Christians in the Coliseum for sport where lions ate
them. I was very apologetic; it had never occurred to us. We sold Sparty
dolls as the ‘Friendly Lion’ and we used the lion because we hoped that
one day the Sens would be King of (their) Jungle!
Prof Bruce @ 11:27 am
Saturday 7 March 2009
Everywhere you turn today, people are blaming the international
recession on ‘the sub-prime mess’. But whoa, hold them horses; a
sub-prime borrower could be your son or daughter, your mother-in-law,
your best friend or you and me.
Let’s first remember why we have a sub-prime lending market in the
first place—it is to make more of our citizens, homeowners. There is the
idea that homeowners make better citizens because—
1. They have bought-in to social norms and have a stake in their societies.
2. They benefit from owning their own homes in terms of forced savings
(that part of their monthly mortgage that goes to paying off the
3. They have some inflation protection.
4. They have security of tenure (they won’t get kicked out by a Landlord).
5. They can customize their homes to their own individual tastes and needs.
6. They care more about their neighborhoods.
7. They are vigilant with respect to crime, vandalism and graffiti.
8. Home equity is the number one source of capital for starting a new business.
9. Home equity is also one of the most readily accessible emergency funds.
In Canada, it has been the goal of our government since the immediate
post-war years to increase the percentage of Canadians who can own
their own homes. This has also been true in the US, Australia and other
nations. In fact, planning for post-war reconstruction began before the
end of WWII—as early as 1943 and 1944 when it became apparent that
Germany would likely lose the War.
Central Mortgage and Housing Corp (now renamed Canada Mortgage and
Housing, CMHC) has been in the business of guaranteeing home mortgages
for sub-prime borrowers for a long time—they do this through a
self-funding program that adds a point or so to the cost of your home
mortgage when you are a highly leveraged Buyer (up to a 95% loan to
value ratio in most cases).
Here’s a scene from It’s a Wonderful Life where George
Bailey is arguing with Mr. Potter about whether working people should
have access to high loan-to-value mortgages. It’s worth watching if for
no other reason than to remember why our parents and grandparents
organized institutions like savings and loans, co-ops, local banks,
building societies, building and loan, private lenders and sub prime
Ask most people how much money they can save and, if they are honest,
they will tell you: “Not much.” Even relatively good savers, once they
have saved $5,000 or $10,000, can’t resist spending it on a new PC,
laptop, vacation in the DR, downpayment on a new car, what have you.
But most people will think twice about accessing their home equity
for anything other than a major crisis or to start a new enterprise.
These days with unemployment soaring practically everywhere, the
thought of owning your own home and owning your own business, looks
pretty good. I don’t know about you, but I wouldn’t like anyone tapping
me on the shoulder and telling me: “We don’t need or want you anymore,
you’re finished here, get out, you useless bugger.”
Of course, outplacement firms handle it better than this but don’t
tell me that what you hear and what they say are the same. What they say
is: “Due to the overall economic situation that the company faces, you
will have to find a job elsewhere. We have services such as CV
preparation and an outplacement office you can visit every day and we
have an industry-leading severance package for your review and, if you
like, the review of your counsel.”
What you actually hear is what I wrote above. It hurts, a lot.
Politicians often say that they are immune to criticism. Don’t believe a
word of it. They are incredibly SENSITIVE to negative stories about
themselves. Employees are too.
Now it isn’t hard to figure out what the Internal Rate of Return, IRR is for a sub-prime borrower in normal market conditions.
Let’s say that your brother-in-law buys a $245,000 home with 5% down
($12,250), pays 4.5% for his mortgage and another 1% to CMHC for
insurance because he is a sub-prime borrower. He holds onto the house
for five years and then sells. Real estate inflation is 2.25% p.a. and
he ‘pays himself a rent’ (this is called an imputed rent) of $1,675 per
You can look at the imputed rent as what he would have had to pay for
a rental accommodation of similar quality for himself and his family.
Now under these assumptions, he bought the home for $245,000, he will
sell it for $273,800 and he will pay some transaction fees (basically
legal costs and real estate fees) of $14,492 so he nets around $259,339.
Remember he started with $12,250 and he ended up with $66,085 after
five years, made up of: a) getting back his original equity of $12,250
when he sold the home, b) pay down of the mortgage principal of $37,254
(I used a 20 year amortization, which in conservative Canada is more
typical than a 35 year amortization that they tend to use in the US,
which lowers the monthly payments but significantly increases the total
amount of interest he will pay and significantly decreases that amount
of principal he will pay down in the first years of his mortgage) and c)
$28,831 from the increase in the value of his home less his original
equity (don’t double count!).
Now you tell me, how many of your friends can save $66,692 in five
years (or $63,843 if we ignore the contribution by imputed rent in Years
1 to 5) and how many can make an IRR on their equity of 42.1% p.a.?
How about what happened to me—I gave a major private bank $100,000 in
1995 to invest for me in the Bank’s mutual funds. In the greatest stock
market boom in the last 150 years (since the first days of the railroad
revolution when everyone thought that there would be a RR going to
everyone’s home and business and everyone bought speculative RR stock
issues like they were buying a regular coffee for a nickel), the Bank
LOST $8,000 of my money. I never once got the promised monthly statement
and when I finally insisted on a report in 2000, I realized they had
churned my fund over and over again and that they had four of the worst
ten performing funds (this is out of 1,000 CDN. mutual funds). I asked
for my money back—I told them I wasn’t angry, just ‘gimme my money
back’. A monkey throwing darts at a chart of 1,000 mutual funds would
certainly have done better. My father-in-law, Ken MacMillan, an old
timer with a conservative bent, got the last laugh—he believed in CASH
like most people believe in drinking rum while lying on a Caribbean
I have uploaded my simple IRR model to my server and you can download it in .xls format by clicking here. I included a case where you have a more normal down payment of 25%.
In that second case, you put down $61,250 as your downpayment on the
$245,000 home, your interest rate is lower (since you don’t have to pay
CMHC insurance for a high ratio mortgage), your imputed rent remains the
Now your IRR on your equity is lower (a still respectable 19.9%) and
the cash in your jeans at the end of five years is $137,503 (or $107,633
if you ignore the imputed rent).
You can see that, relatively speaking the high leverage home buyer
has done better: your brother-in-law turned his $12,250 investment into
$63,843 for a multiple of 5.2 while the more traditional homebuyer who
put down $61,250 turned that into $107,633 for a multiple of 1.8. Both
are good results but the higher leverage returned relatively more.
This points out an important fact—almost no one becomes wealthy from saving—the only way to wealth is through investing.
I also include in the spreadsheet a leverage summary—if you take your
25% down and buy 5 (rental) properties instead of one, you end up
generating a ton more cash in five years: $197,307! Refer to the
spreadsheet for details on how I calculate that.
Now for the downside: if the market goes down by more than 5%, you
are upside down on equity. That means your equity is wiped out and banks
will get very nervous. They may well refuse to renew your mortgage when
the renewal comes up or will insist that you top up your equity so
that, if they have to foreclose on the property or power of sale it,
your equity may be wiped out but their loan is protected.
But in a market like we are experiencing now, you might find that the
rental market actually ticks upward. As Banks foreclose more and more
people—they have to live somewhere. Rental vacancies might go down and
rental rates might actually increase.
But I like to remember what Warren Buffett has said many times over
the years—“If you haven’t sold (stocks) in a down market, you haven’t
lost anything. So why worry?”
This is also true in a down market in real estate. As long as your
home or your rental portfolio can cashflow itself, stay with it. Real
estate corrections happen but in Canada, the overall market direction is
up by 2% p.a. or more over a very long period of time.
There have been many downturns in the real estate market but it is
still the one, time-tested way of creating wealth for yourself and your
family. Most of the great fortunes in Europe including Elizabeth
Windsor, Queen of England, and the Holy Roman Catholic Church are
largely real-estate based.
Types of Return
There are essentially three types of return in real estate:
a. cash on cash;
b. real estate inflation;
c. forced savings (this is a wealth effect) through the pay down of principal each month.
Cash on cash means that you are making some money from the property
each month. You should NEVER buy property that is cashflow negative on a
monthly basis hoping that inflation or forced savings will bail you
Real estate inflation and the wealth effect both accrue to the equity
holder. This is why comedian and actor Chris Rock has said: “Shaq
O’Neal is rich but the man who signs Shaq’s paycheck is wealthy.” If you
control assets, you are wealthy or, at least, have the possibility of
I don’t believe that sub-prime mortgagees are to blame for the
financial meltdown in the marketplaces of the global economy. They are
being unfairly blamed. In Canada, we still have CMHC standing behind
homeowners who can only come up with 5% down. Good for Canada!
The folks on Wall Street engineered complex financial products that
practically nobody understood. They sold sub-prime mortgages as if they
were prime mortgages and have done an incredibly poor job of managing
those portfolios. Why should they care? They sold the portfolios and
made huge fees. The suckers who bought them now are stuck with millions
of mortgages, some of which they can’t even find the paper on. Try
It is always the poorest members of our society who pay for the
ridiculous bonuses and fees paid to these people. Sub-prime borrowers,
who can least afford it, pay the highest interest rates on their
mortgages, their credit cards, on OAC financing in stores, for services
they buy—everyone builds in an extra margin for risk for them.
Plus it is almost certainly the middle class, the poor and the SMEE
sector who will pay for the bail out of Wall Street Bankers, Insurance
Companies and major corporations who have enough political clout and can
hire the best lobbyists, through higher taxes and more costly services.
It has happened before—when Canadian Banks went out of their minds and
loaned excessive amounts of money to Third World Nations in the 1980s
(which were never paid back), ordinary Canadians and SMEES paid about
two points more to the Banks for the next ten years to restore the
Banks’ capital bases.
We should not allow banks to foreclose on properties where borrowers
have solid payment histories just because the Masters of the Universe on
Bay Street and Wall Street have gotten frightened and decided to shut
down their funds and call their loans. This is counter productive,
smacks of panic, craters the resale and new home markets and undermines
60+ years of efforts to turn our countries into nations of homeowners.
ps. if you want to learn more about HOW TO OWN YOUR OWN REAL ESTATE, read:
Prof Bruce @ 11:59 am
Development Economics and Entrepreneurship
Livable Cities and Neo-Urbanism
No Money Down Real Estate Investing
Business Improvement Associations
Saturday 21 February 2009
We have all heard the saying: “God only helps those that help themselves” and it has never been truer than in today’s economy.
In Canada and the US, national governments have announced massive
stimulus and rescue packages but their efficacy has yet to be proven.
Personally, I think the word ‘massive’ is misplaced. In Canada, the GOC
(Government of Canada) is planning to spend around $30 billion over the
next two years to get the economy going. That sounds like a lot of money
but in Canada’s economy that works out to about 1% of GDP per year—big
but not really massive. The US stimulus is proportionately bigger but
still how much impact will it really have? No one knows. The US
situation is more critical but we will just have to wait and see.
I think that former Prime Minister Jean Chretien’s approach to the
last Canadian recession in 1993 and 1994 was more nuanced. He announced a
(relatively puny) $2 billion infrastructure program. Then he went
around Canada and made hundreds of speeches saying: “Canada is No. 1.
The UN says so.”
Between his sunny optimism, his confidence in the nation and himself,
the leverage that the GOC got from his modestly-sized infrastructure
program, the financial discipline he and his Finance Minister Paul
Martin put in place for the GOC itself, he reduced a $42 billion deficit
to zero in three years, set the stage for lower interest rates and
higher growth rates, placed Canada into a national budget surplus and
trade surplus for the next 12 years.
Recessions are largely caused by psychological factors often
compounded by economic shocks—oil price changes, war, real estate
bubbles, other asset class bubbles, financial engineering, fraud,
inflation, deflation, bad monetary or trade policy and poor leadership.
Guess what, the US has had ALL of that for the last eight years. It was
obvious some time ago that running an annual US National Accounts
deficit of $300+ billion and a trade deficit of the same proportion was
For most of us, there will be little impact from the so-called rescue
packages. Maybe a few tax cuts here and there. But in Canada, the
stimulus package passed by the GOC with the co-operation of the Liberal
Party of Canada depends in large measure on the co-operation of the
Provincial and Territorial Governments together with municipalities to
match Federal spending in tripartite agreements.
Speaking of the City of Ottawa, our Council can’t agree on anything
so the likelihood of Ontario, the City of Ottawa and the GOC doing
anything that will benefit Ottawa is quite small in my view.
Let me finish my introduction by telling you a joke that a Priest once told so I feel alright about repeating it here.
A man is warned by a police cruiser: “Get out of here! The flood is
coming.” The man says: “No way, I’m not leaving my home. Jesus will save
The next thing you know he is on the second floor of his home with
the flood waters raging below. A boat comes by: “Hop onboard! You’ll die
if you stay here!” “I’m not leaving. Jesus will save me!”
Finally, he is on the roof. A helicopter flies by. “Climb up the ladder or you’ll drown.” “Jesus will save me,” he shouts back.
The next thing you know he is at the Perley Gate. St. Peter looks up
and sees the man approaching. A surprised St. Peter says: “What are you
“I thought Jesus would save me?”
“Gosh, he tried to, three times!” a frustrated St. Peter replies.
I have been asked as an urbanist how we can revive main streets in
small and large towns. Many Main Streets have been hard hit by
competition from massive big box stores. One small Ontario town has
practically nothing worthwhile left on its main street—it has a girlie
club, a pool hall, a XXX store, about a dozen vacant and boarded up
retail locations, a liquor store, a pawn shop, a GOC Coast Guard base
that closes up shop at 5 pm and is in any event gated and set back from
the street so it forms another ‘Black Hole’ on the street.
On the second and third storeys, there are a few residential
tenancies but many of the buildings are vacant. Some have not been
heated in years.
Some municipalities believe they can revive their main streets by
repopulating them with retailers or by adding paving stones, street
furniture, sculpture, flower pots, statues, fountains, classic street
signs, kitschy lamps, speed bumps, banning cars, allowing cars, allowing
on-street parking, banning on-street parking, narrowing roadways,
expanding roadways, putting in medians, taking out medians, putting in
street trees, making roads one-way, making them two-way, allowing all
turning movements, banning left hand turns, allowing more road cuts,
restricting ingress and egress, implementing setbacks, going back to
zero lot lines, reducing building heights, building pedestrian
enclosures to protect people from the elements, removing glass
enclosures to unveil the storefronts hidden behind them, what have you.
None of this works worth a darn. I just can’t see how a local
hardware store can compete against the giant big box chains or how a
general merchandise store can compete against the ‘everyday low price’
regime of a major US-based chain of superstores.
This strategy must fail and will fail.
There is ONLY one way to address the problem of main streets in North America—and that is to have people living there.
What makes Manhattan such a success commercially is that there are
300,000 to 400,000 people living in a tight confined space. Want your
local coffee shop to be a success? You need people with some resources
living within a ten minute WALK.
If you want your main street to work, you need to get people to live
there. They need to be able to rent or BUY their accommodation. There
are a lot of people who want to live in a place where it is possible to
walk to a store, buy a litre of milk, grab a coffee with friends, WALK
to their friend’s house for dinner, set up a small business to work from
home, have a couple of employees work with them without fearing a knock
on the door by a By-Law enforcement officer telling them that they
can’t have any employees working in their apartments or condos.
I hear from local Councillors all the time—“We can’t do that! We need
more commercial assessment and if we let people live there, our tax
base will erode.”
I would recommend trying hard to get rid of the undesirable uses and
work with building owners and the local community to put in place
totally flexible zoning that would allow some of the old stock of
commercial buildings on these traditional main streets to be used for
residential uses (including the storefronts at grade—I would rather have
a bohemian couple with a kid living in a storefront than a boarded up
place or a XXX shop), offices, shops, studios, co-ops, …
I would recommend mandating:
1. People can live and work at home. We make more intense use of our
structures that way (by using them for work and as homes) and add life
to our towns after 5 pm and on weekends.
2. People can shop nearby.
3. There is a mixing together of folks from differing socio economic strata.
4. People build close to the road.
5. They have front porches.
6. Roads are narrower.
7. Densities are higher.
8. Elders can stay in their communities.
9. The gardener, nurse, school teacher can find affordable housing in the neighborhoods where they actually work.
10. In-home apartments and granny flats and apartments above the garage increase property values not decrease them.
11. Live-in students are tolerated.
12. Apartments above shops are built.
13. There is a tolerance for diversity.
14. Problems are solved at town hall meetings and not by confidential 1-800-RAT-LINES.
15. Schools, government offices, post offices, libraries, places of worship get the best sites in town not the worst.
16. Roads are grid based.
17. Every road is two way.
18. On-street parking is allowed.
19. Left turns are permitted.
20. Connectedness is the underlying principle of town design.
21. Everyone suffers some through traffic so that no one suffers all of it.
22. Gridded systems prove that the slower the individual vehicle goes, the faster you move traffic over the entire system.
23. There are no beggar-thy-neighbour policies whereby you put speed
bumps, no through traffic, no left turn, one way and other self
defeating traffic management policies in place.
24. Rediscover vertical transition lines that differentiate uses as you proceed up the building elevation.
25. Care for the public room as if it were your own private space—don’t
tolerate litter, graffiti, petty crime (or any other form of crime),
when stuff breaks, fix it right away.
26. Start a festival.
City building is essentially a positive exercise by positive people.
According to James Howard Kunstler (Home from Nowhere) if we want great
cities, burn the zoning codes and allow your city to grow organically.
Today, people drive 100s of kilometres and take a ferry to park their
cars to wander around a place like Nantucket. Why? Well, they like the
walk-about feel of the place. They like to see people sitting on their
front porches. They like that there are sidewalks and that houses are
close to the street and each other. They like the fact that there are
trees overhanging the street providing shade in the summer and some
protection from winter winds.
Main streets are incredibly valuable places—for some reason that
absolutely defies explanation—we just can’t build ’em like we used to. I
mean it would be a simple matter of measuring how street patterns and
the built form were constructed in the 1930s and then just duplicate
that, more or less. But we just can’t seem to get away from our zoning
books and its rules long enough to allow that to happen. So if we can’t
do it, let’s at least not rip down a three storey street-fronting
near-heritage building on main street and put a mini-mall with front
yard parking in its place.
And when we do have new development on main street, let’s remember
how they built towns in the 30s and do our best to come as close to that
as we can. Let developers build more density and let them mix in
residential and commercial uses. Relax height limits—unless you can get
people living there, no main street will work worth a darn.
You can pack a lot of density in buildings that are three to eight
storeys high. Scandinavian countries have shown with the right urban
design, you don’t need 40 storey towers to get to the critical mass you
need to make city services and commercial uses viable and cost
And you can make five to eight storey buildings quite human scale if
you step back floors 4 to 8 from the street. This gives the impression
that the buildings are three storeys and allows more light at grade.
Remember—if people don’t live there, the community is not viable.
The National Capital Commission (aka, the No Commitment Club) has
been trying for years to make Sparks Street (a pedestrian only
street/mall) in Ottawa work. They have tried just about every useless
(and costly) remedy that I described above, all to no effect (other than
to drain taxpayers’ wallets and purses).
In 1985 (!), I proposed to the NCC that if they wanted to revive Sparks Street, they had to do five things:
a. convert some of the vacant or underused office space nearby to residential uses;
b. allow some of their land holdings in the area to be developed for residential uses;
c. give a density bonus to developers to add a residential component to their office towers;
d. open the mall to car traffic again;
e. add a charity casino.
Of course, they did none of these things, opting instead to rebuild
the mall at a cost of several millions with new pavers, street
furniture, fountains and other lipstick-type stuff.
26 years later, Sparks Street is still pretty much a useless urban wasteland.
Walk around the old town of Stratford, Ontario, home of the
internationally acclaimed Stratford Theatre Company, and you see a
quaint little town with elegant eateries, cute toy stores, neat bed and
breakfast places, linear parks along the waterway, comfortable
apartments above shops, gridded streets where every block unveils a new
vista and a brand, spanking new office tower with mirrored curtain wall
that comes down to grade.
The whole block is dominated by this modern abomination. It is like
the town allowed someone to build a black hole on this lifeless part of
When there are no vertical transitions and there are no doors onto
the street, when people can’t see into a space and even if they could,
they would have no access to it anyway, you have created a dead space.
At night, it is a dangerous place to amble by. It’s just occupied 9 to 5
Monday to Friday. You might as well as make this the HQ for your local
motorcycle gang. It would have more life even if it would scare away
everyone except chapter members.
So if your main street needs help, start by helping yourself:
1. Form a BIA.
2. Make sure it is staffed by volunteers—keep its cost to a minimum.
3. Get the local business community, community association and town Councillor onside.
4. The BIA should encourage a team approach—an affirmation of the character of the street and the community.
5. Relax and change your zoning code.
6. Do the real things and forget about lipstick.
7. Be flexible in your approach—if something is working, do more of it. If it isn’t, change.
8. Get the town to lower or grant a holiday on costs for new
construction such as development charges. For example, when former
Ottawa Mayor, Jacqueline Holzman, pressed her Council to rescind
Development Charges for developers of residential units in the downtown
core of her city, building activity there took off.
9. Become neo-urbanists and embrace the principles of neo-urbanism as expressed above.
Copyright. Dr. Bruce M. Firestone, B.Eng. (Civil), M. Eng.-Sci.,
PhD., Entrepreneur-in-Residence, Telfer School of Management, University
of Ottawa; Founder, Ottawa Senators; Real Estate Broker and Mortgage
Broker, Partners Advantage GMAC Real Estate, Brokerage. Ottawa, Canada
Prof Bruce @ 1:01 pm
Livable Cities and Neo-Urbanism
Property Taxes/Municipal Taxes and Fees
Friday 20 February 2009
Optimal Production of Goods and Services for the Maximum Number of Persons
Capitalism is under attack today for the abuses of a few ambitious,
unscrupulous executives who have either perpetrated massive frauds upon
the public or enriched themselves at the expense of others without
providing value in return. We have laws against the former (it’s called
fraud) and we weed out the latter through a process in which people
refuse to buy from or sell to the latter.
Not for a minute should the reader think that such miserable examples
of humanity are any more prevalent in a mixed capitalist economy than
they are in, say, a socialist society, a communist one, a feudal
arrangement, a dictatorship, a religious hierarchy, a co-operative, a
kibbutz, a kingdom, anarchy, tribe, a family or any other type of social
system. Extreme cases make for bad laws—if someone in your company
misuses access to the Internet, banning access for the 19 out of 20
employees who use it as a valuable resource, is wrong for the
corporation, bad for company morale and will lead to a catastrophic loss
A Ponzi scheme (a pyramid scheme) is not a new device. Fraudulent
investment products have been around forever. Products of dubious value
and extravagant claims have been peddled to the unwary for centuries
upon centuries. Humans have been trading for about 100 centuries and,
for most of that time, this has led to a huge increase in wealth. Humans
are by far the most dependent creatures on the planet—we specialize and
then we specialize some more—this is as true of individuals as it is of
Adam Smith in the WEALTH OF NATIONS notes that a seemingly simple
overcoat is the product of “the joint labour of a great multitude of
workmen …without the assistance and co-operation of many thousands the
very meanest (poorest, ed.) person in a civilized country could not be
When individuals pursue their own self-interest, they are, in effect,
self-organizing to produce the optimal amount of good and services for
the maximum number of persons in their society. This, of course, assumes
that a competitive market exists for those goods and services and that
individuals are prevented by their competitors from over-charging for
their products or services by their desire to maximize individual
Obviously, governments have a role to play in ensuring competitive
markets and enforcing laws against fraudulent behaviour. But beyond
that, it is clear that governments cannot be counted on to produce goods
and services efficiently through any form of direct government action.
There is abundant evidence that the private sector can do this much more
The Tyranny of the Commons
The City of Ottawa wanted to bring in a new By-Law regulating the
private use of private wood lots. Wood lots in private hands that had
been reliably producing logs and firewood since the early 1800s were
suddenly clear cut in anticipation of the By-Law’s introduction. Owners
who were good stewards of their lands for generations—replanting and
tending to their forests—suddenly became Paul Bunyans. They feared that
their property rights were about to be taken away and they maximized
their immediate return by felling every stick on their properties.
Of course, the local market was flooded with firewood, prices
dropped, lands looked like Dresden after the firebombing in WWII,
streams were contaminated with runoff, wildlife lost whatever habitat
they might have had and future generations lost any income they might
have had from these wood lots.
This is the difference between optimization behaviour and
maximization of the objective function and the difference between the
use of a commons and the use of a private domain.
Lake Baikal, one of the natural wonders of the planet, contains more
water than all the great Lakes of North America. It is the deepest lake
in the world. It was also a dumping ground for spent Soviet nuclear
reactors, literally dropped there—out of sight, out of mind.
If no one owns something, no one cares for it, no one nurtures it, no
one looks after the best interests of its stakeholders or the large
scale ecosystem, of which humans are a part.
Efficiency and the Environment
No society has ever existed that left no footprint on their
environment. All societies pollute. Some more than others as we have
But it is ludicrous to assume that efficiency and environmental
protection are mutually exclusive. If producers can find more efficient
ways to deliver their products or services, this, by definition, lessens
their impact on the environment. Fewer materials, labour and management
as well as less energy in the delivery of a product or service is
obviously better for the environment.
And private sector initiative is the only way to obtain higher levels of sustainability.
Surely, newspapers, if they are to exist at all by the end of the
21st Century or maybe even by the quarter century mark, must find new
business models. The idea that we should clear cut forests, expensively
transport logs to mills, turn the logs into pulp and paper using
chemical processes that are devastating to air and water quality, ship
the newsprint to printing plants, print huge volumes of newspaper, to be
transported by trucks, planes, more trucks and finally automobiles to
your front door, to be consumed in 20 minutes with your morning coffee,
to be thrown in the recycle bin, to be scooped up by truck and then
shipped to a recycling plant in China to be re-shipped across the
Pacific to the printers to be… This is an insane industry in sunset for
Devices like the Kindle 2 will almost certainly be used for the delivery of the daily news and not just for downloading e-books.
(This is not an argument against the concept of the local or national
daily. Daily newspapers are an important part of creating a cohesive
society. We need a common language and jargon—if everyone becomes an
island with his or her own niche RSS feed, we will find it increasingly
difficult to have national conventions like, in Canada, the pursuit of
peace, order and good government, which are of paramount importance in
terms of producing a civil society. It isn’t intervention by the police
or the threat of prosecution that keeps the great majority of people
honest—it is the voluntary buy-in to national conventions and accepted
standards of behaviour. National news organizations, national
broadcasters have a vital role to play—but they need to adjust their
business models and soon.)
For more discussion by the author of “The Environment—A Solution?”, see https://www.eqjournalblog.com/?p=81.
Peter Patafie, a guest speaker a few years ago at the University,
shocked a group of B-School students by saying his priorities were:
1. First, take care of your business;
2. Second, take care of your family;
3. Thirdly, take care of yourself.
One student asked Mr. Patafie if he had somehow got the first two in the wrong order. He said: “No.”
“Do you know what the number one cause of divorce is in Canada? It’s
not that you have fallen out of love with your spouse. It’s not that you
are arguing about the kids. It’s about finances or lack thereof. If you
have creditors calling you in the middle of the night, well, that puts a
lot of stress on the family.
If you take care of your business first, it will sustain you and your
family, sometimes for generations. That is how you take care of your
family and yourself.”
The morality of capitalism is based on the notion that if you, first
take care of your family and yourself, then you will not become a burden
on your fellow human. That is a moral imperative.
And once you have achieved that, you are in a position to do good works for others, another moral imperative.
To summarize then, the moral underpinnings of capitalism and entrepreneurship are:
a. The freedom to self-organize to achieve optimal production of goods and services for the maximum number of persons;
b. That efficiency and environmental sustainability are linked;
c. That private ownership of the commons also means careful husbandry of resources;
d. That your first priority is to take care of your business;
e. So the business can take care of your family;
f. So your family can take care of you;
g. So you don’t become a burden on society or your fellow human being;
h. So you can look after the interests of your fellow human beings;
i. So that they can help your business.
It is a virtuous circle.
Perhaps Sir Winston Churchill said it best: “Indeed, it has been said
that democracy is the worst form of Government except all those other
forms that have been tried from time to time. (Speech in the House of
Commons, November 11th, 1947.)
Prof Bruce @ 9:58 pm
Development Economics and Entrepreneurship
Friday 13 February 2009
I recently gave a lecture to a group of engineering students
and one of the questions I received was: “Can you TEACH
entrepreneurship or is it just something you are born with?”
I think the answer is in the numbers—businesses started by former
students and those that I have mentored over the last number of years
have a success rate, i.e., a five year survival rate of 72 out of 78 or
around 92%. Compare that with unmentored enterprises where the survival
rate is approximately 45% (with a ten year survival rate of just 29%;
source: Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By, Scott Shane, Yale University, 2008.)
Scott Shane’s ten year graph of business failures 1992-2002
After just under two hours, I think the students had a better
understanding of what an entrepreneur does and how to start a
sustainable business. They learned:
1. How to build a sound business model;
2. How to bootstrap it and access sources of bootstrap capital;
3. Why ideas are not enough—good execution is key;
4. Why selling, securing real clients, including pre-launch customers is important;
5. The importance of cashflow;
6. Why competition is not necessarily a bad thing;
7. How to create a compelling value proposition for a single client or customer;
8. How to differentiate yourself from the competition;
9. How to intricate the Internet into their businesses to create
scalable enterprises with mass customized products and services;
10. What Web 2.0 can do for their businesses;
11. How to use Social marketing and guerrilla marketing to cost effectively capture new clients;
12. Why gadgets and gizmos are not the basis for a sustainable business;
13. What an entrepreneur and intrapreneur really do;
14. Why they need to develop a broader map of the way the world works so
they can do quick ‘thought experiments’ to test out an idea without
spending a great deal of time and money on useless ideas;
15. Why if you build a successful business, holding onto it mat make a
lot more sense than selling it—if you take care of your business, it
will sustain you and your family for a long time.
Perhaps the biggest thing that I can do for students is to give them
confidence that they are on the right track, that their mental map of
the way the world works is sound and that they can go out there and just
do it. After all, the longest journey is the one that never begins.
One of the students who attended that lecture (Daniel Beauchamp) will
come to study entrepreneurship with me next year. I asked him why he
wants to do that and I think it is worthwhile to record what he said
“The reasons why I want to study entrepreneurship are pretty simple.
First of all, I’ve never been one to want to work for a massive
corporation. The thought of being one of thousands of employees haunts
me. I feel like it takes away the sense of freedom and individuality—as
though I would be classified as just a number, or just a piece in some
larger puzzle defined by a corporate agenda.
The film “Office Space” and the comic strip “Dilbert” exemplify this
quite well. They’re both about software engineering firms and they both
show the types of companies that are composed of endless floors
containing endless cubicles that are all the same. This is definitely
not for me.
At the end of the day, I want to feel like I’ve accomplished
something. I want my work to directly influence the products and the
services that the company I work for provides.
This is the true beauty of working for a smaller company. There’s a
real sense of teamwork and camaraderie and that’s something that I truly
I believe that I have a multitude of useful skills and ideas and I
don’t want them to go to waste. I would like to use what I can offer to
better society today. There’s a reason why I’m in the biomedical
specialization of Software Engineering—I want to maximize my potential
and give back to the world. There will always be a demand for medical
products and, more and more, we are seeing these products using cutting
There are plenty of possibilities. By taking your course, it will
help me to discover what I should take on. I’ve always been one to love
The opportunity to study the ins and outs of entrepreneurship is something that I do not want to miss out on.
I have plenty of ideas for new companies and products and I
need to develop the knowledge of how to bring them to life. I will bring
to the course my engineering knowledge, my people skills and my
In my experience, there are a number of reasons why entrepreneurs choose that path. They include:
a. They feel they can make more money or they see the need to make more money.
b. They believe they can have more flexibility in their schedules.
c. They think that they don’t have other viable choices; e.g., they get laid off or can’t find a JOB.
d. They want to provide a legacy for themselves and their families and kids.
e. They want the fame that goes with success.
f. They want to prove to themselves and others that they can do it.
g. They want to be their own boss.
h. They want more responsibility sooner in their careers than they could get in a typical JOB.
i. They don’t like bureaucracy and rules—they want to make up their own rules.
j. They want to belong to a team and to feel like they are part of something that is bigger than themselves.
k. They want to give back to society—if they have success, they can better help their fellow human.
l. They don’t want to become a burden on society.
m. They want to be responsible for themselves and make their own decisions.
n. They feel that they can create more interesting work for themselves than others can create for them.
Of all of the above, I believe, after thousands of interviews with entrepreneurs, that the last reason is the most important.
Humans are uniquely driven to be creative. We have these huge brains
and dexterous hands with opposable thumbs and there is a deep seated
drive to use both. Humans are constantly tinkering with their
environment. Living in Dilbertville is not very satisfying and,
notwithstanding all the risks, effort and heartache that can come with
an entrepreneurial lifestyle, it is still the choice of many, many
The kids who took over the Internet from DARPA, the DOC and ICANN in
the 1990s wanted to move there—to a fantasy place where there were few
rules and abundant territory to be explored and developed. Remember,
poets, artists, architects, writers, sculptors, musicians,
videographers, software architects and novelists are entrepreneurs. They
come to study with me too because they want to be rewarded for their
creativity, they don’t want death to be a career move and they want to
learn to get rich while they are still alive.
Prof Bruce @ 2:41 pm
Rules? There are no rules in entrepreneurship.
Thursday 12 February 2009
Setting the Land Speed Record
I recently wrote a note to a young developer who is facing potential
NIMBY (Not-In-My-Back-Yard) opposition to one of his projects.
NIMBY’itis is a big part of the development scene in the City of Ottawa.
In the City’s new Official Plan, they state that they want more life
on city main streets and more density in established urban areas but
when somebody actually proposes it, NIMBYs often come out in opposition.
Some City Councillors can become frightened and they may ignore their
own OP. Council ends up down-zoning lands in response to this type of
Anyway, here is what I wrote to him:
“As you get older you will get more used to the Nimby problem. When I
was a developer, I used to daydream about rounding up a posse and
riding over and hanging the blighters from a lamp post. (Obviously, I am
not actually recommending that.) Now I just try to win.
I had one guy show up to an OMB Hearing drunk; he was asked why he
opposed the project. He said: “Because I don’t want it to go ahead.” The
OMB Panel Member replied (very patiently I thought): “I understand that
you object, but can you tell us why you don’t want it to go ahead?”
“Because I don’t.” He just repeated that refrain for the next 15
minutes. We actually never got to present our side—we had a lawyer,
planner and myself there. We got up to make our case, but the Panel
member just told our lawyer to sit back down.
The OMB found in our favour right then and there, after just 20
minutes. But the guy still managed to hold up our project for nine
months anyway. He probably cost us $30,000 for the Hearing and
preparation and another $45,000 for the nine month delay—at a cost to
himself of initially sending a fax saying he opposed the project and
then showing up nine months later for 20 minutes.
He owned a small shopping plaza near ours, so he was just afraid of a
bit of competition. (I actually like competition, BTW. It makes you
sharper and you often see your sales INCREASE when competition builds
near you. That is why like uses (say, gas stations, fast food joints,
restaurants, sports equipment retailers) locate near each other. It
creates a focal point for that type of merchandise within the city and
everyone benefits from that and each others’ marketing dollars too.)
I had another hearing recently with the City of Ottawa itself
objecting to a project. The local Councillor was in favour and all our
neighbours were in favour but one God-awful City of Ottawa Planner was
opposed. I think we set a land speed record for the fastest OMB Hearing
ever. We won the Hearing in eight and a half minutes—I timed it.
I suspect the City spent several tens of thousands of dollars on
their legal counsel and planning staff for what surely was a colossal
waste of time.
This is fairly typical in this City and one of the reasons why it has
the reputation in Canada and the US as not a good place to do
development work in.”
Prof Bruce @ 10:42 am
Learning Events, Lost and YouTube
Thursday 29 January 2009
The University of Ottawa’s Entrepreneurs’ Club Business
Dinner last night was quite the show. On a tough weather day and with no
public transit running in Ottawa, the student Club pulled it off. The
speaker was interesting, the food was great, the ambience in the War
Museum quite special, attendance was fantastic under the circumstances,
the company (students, staff and private sector guests and sponsors) was
a good mix. What a worthwhile learning and networking event it was.
One thing I thought of while their guest, Joyce Groote, President and CEO of Holeys
was speaking, is what a shame the Club did not video her presentation
and put it up on YouTube. They went to all the time and expense to
create a learning opportunity by bringing in a high caliber speaker from
Vancouver (she traveled 3,000 miles after all!) and, if other students
weren’t there or couldn’t afford to be there, they missed one heck of a
If they had put it up on YouTube, however, it would be available
“forever” for all the world to view and to learn from… Now, the event
will be forgotten and the marvelous talk by Joyce is gone into the
(It would also make selling the BD easier next year—to attendees,
sponsors and the keynote speaker, herself or himself. Plus, the Internet
is a kind of record, long term memory or how-to manual for future
members of the Entrepreneurs’ Club. The membership and its executive, by
definition, change every four years as students graduate. So imagine if
the EC had a video record of 18 years of Business Dinners to learn
from. Video learning is a rich new format—you can say a lot in two
minutes of video. If it is well constructed, you can say more with two
minutes of video than you can in reading a text for the same amount of
time. And, today, there are many, many students who learn faster from a
video or in a classroom setting than they do from reading. Such is
We are videoing extensively now, including up to three hour lectures, together with a time log.
We can put 60+ minutes of video on the Internet, as long as there is a
time log associated with it so that people who only want to, say,
listen to Ms. Groote’s take on “litigation as a business strategy”, can
jump to that part of her talk and watch that for two or three minutes.
(She is in a death struggle with Crocs, a much larger company. There
have been numerous conflicts between the two makers of these innovative
shoes (which are based on the use of closed cell polymer foam) over who
owns the IP for this new product category. Last year, Holeys spent $1
million on lawyer’s fees (out of total revenues of $17 million)
defending legal actions in many of the countries where they operate.
Litigation as a business strategy seems to be a largely US-based
phenomenon. It works, I suppose, but if they put as much effort into
product innovation, business model change, effective selling and clever
marketing, most companies would be much better off, I think. This war
must be obvious to all: when I googled Holeys—a paid link for Crocs came
up. I was also prevented, for a time, from getting to Holeys website—it
The Club might have needed two people: one doing the video and the
other creating the time log—the latter must be able to write down (to
the second), what the speaker is discussing and the “table of contents”
must be really good because most folks won’t watch hour-long
presentations on the Internet.
So a good quality log and accurate links make this a much more
compelling proposition. They could use YouTube and/or other sites to
post the video, for free. We manage to shoot classroom lectures with ONE
person operating the videocam on a tripod and creating the log at the
I believe that information and ideas should be free and that
Universities and other institutions (as well as for-profit corporations)
should make their IP available to the public domain; if works of art,
music, writing, research, patents, copyright never enter the creative
commons, then there would not be any opportunities for entrepreneurs
like Walt Disney (and, ironically, no Disney Company today) to create
his masterpiece, Snow White. Ironic, because the Disney Company is one
of the corporations most opposed to works entering the creative commons
(they have successfully asked Congress (twice) to extend copyright on
Mickey Mouse so that no one else can create mashups using Mickey.)
Snow White saved Walt and the Disney Company from bankruptcy but
where the heck did the fable come from? It was, of course, the Grimm’s
Brothers who created the original. The heirs of the Grimm’s brothers
didn’t sue Walt and the Disney Company and other large scale owners of
IP should show more restraint today in their relentless pursuit of
others who make fair use of their works, in my view.
I prefer the MIT approach to IP—make all courseware, assignments,
even exams available to the world on the Internet; the Institute sells
the delta factor—the value of being in the classroom with very smart MIT
Profs and other students. Anyone can audit a MIT course for free
anywhere on the planet where there is an Internet connection. But to go
to Boston and mix with the students and teaching staff—that is the real
Jan. 29, 2009
Prof Bruce @ 2:50 pm
Writing, Research and Experimentation
Body Clock and the Arizona Cardinals
Sunday 25 January 2009
Perhaps the most unlikely of teams to ever make the Super
Bowl, the 2008 Arizona Cardinals, have their time zone (Mountain
Time—two hours earlier than Eastern Time) to thank for their ticket to
the big game. If you were watching the NFC Championship Game (played in
Phoenix at the University of Phoenix Stadium at 1 pm Mountain Time on
Sunday Jan. 18th, 2009), it sure looked like the Philadelphia Eagles
players were not ready to play at kickoff time.
In fact, the Eagles players didn’t seem to wake up until the third
quarter when they totally dominated the Cardinals. For the Eagles
players, by the third quarter, their body clocks would have been telling
them it was around 5 pm ET and, by then, they were knocking the
shell-shocked Cardinals around the field, left, right and centre.
During the game, I was thinking of our recently deceased friend, Jon
Shearer, an expert in how to deal with time shifting (especially for
business executives who do a lot of traveling and for shift workers like
police officers and health care workers). I wanted to ask Jon about the
I suspect that sports teams don’t do enough to prepare their players
for this kind of a problem. If you look at the relatively poor record
of, for example, the Ottawa Senators Hockey Club over the years on the
West Coast, I think that this issue has probably played quite a role in
their sub-par performances there. Certainly, when they played the fifth
and final game of the 2007 Stanley Cup Finals in Anaheim, it looked like
their goalie at that time (Ray Emery) was moving at half speed—he had
an unbelievably dismal save percentage of .667 in that Cup-clinching
game for the Ducks. (You can’t win on a regular basis in the NHL—regular
season or playoffs—without a goalie with a save percentage of at least
You have to give credit to the Cardinals for their 4th Quarter
comeback against the Eagles: what a great news story the rise of the
Cardinals has been in this year’s NFL Playoffs. It is a fairytale story
of the resurrection of 37-year old quarterback, Kurt Warner, and the
appearance in the Super Bowl of a team that has been almost as bad as
the Detroit Lions for a long, long time. In a year without much good
news, the Cards are a heart-warming, underdog.
The Eagles did not perform as well in the 4th Quarter as they did in
the 3rd and the Cards did relatively better. This too is not unusual if
you are having trouble with the change in time zones—it takes a long
time to wake up your body, then it wakes up for a while and then begins
to shut down. In a sport like the NFL that demands unbelievable peak
performance from its athletes, even a small degradation in performance
is a killer.
Clearly, coming east for west coast teams or Mountain Time zone
teams, is not easy either. The Cardinals (only the second team with a
9-7 regular season record to make the Super Bowl) got decimated in their
east coast games losing horribly to non-playoff team (at 11-5!), the
New England Patriots. So again the Cardinals need to thank the NFL
seeding system that gave the Cards a NFC Championship home game despite
the fact that the Eagles had a better regular season record but the
Cardinals were Division winners while the Eagles were a wild card team.
I suspect if the game had been in Philly, the result might have been different.
The Cardinals have to come east for the Super Bowl in Tampa to play
an east coast team—the Pittsburgh Steelers. The Steelers are favored by 7
points at the time of this writing and one would have to think that the
best defence in the NFL together with what will probably be a
pro-Pittsburgh crowd (Steelers fans have a LONG history of traveling to
support their team) plus the Cardinals awful track record on the east
coast (helped by the tough transition in terms of adjusting their body
clocks) will mean a decisive win for Pittsburgh.
But you never know—the great thing about sports is that is why they
play the game. It is one of the few things that make the national
networks still relevant today—they can reach huge audiences in real
time—and people can enjoy particpating in a large-scale tribal rite that
is the stuff of water cooler chat the next day.
It would be a shame if all our national institutions (including
newspapers) were to fade away to be replaced entirely by niche
narrowcasting on the web. I love the power of the web to bring
communities together who have an overpowering interest in, say, yoga or
vintage autos or whatever but the national networks, mainstream
newspapers and institutions like the BBC, CBC, NPR or ABC (in Oz) have a
very important role to play—people need to have some shared values and
the ability to buy-in to national conventions (like, in Canada, peace,
order and good government) so that we can communicate with each other.
Otherwise, we are going to end up with 1,000s of sub-cultures, a Babel
of voices, and none of them will understand each other. That is not good
for mutual understanding and respect.
Postscript: There are many tools for combating time shifting problems
such as adjusting as rapidly as possible to the new time zone, ensuring
the right timing, amount and type of food and fluid intake, changing
light conditions, etc. But one of the simplest techniques for the
Arizona Cardinals is to make sure that they get to their destination
time zone early enough for all their body clocks to change. They are
leaving for Tampa on Monday—the game is on Sunday. So we will see. Watch
how they perform PHYSICALLY early in the game to see if they made the
Prof Bruce @ 12:20 pm
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