Buying a New Car - Lessons Learned from a Sour Experience with Toyota

I thought that I'd provide an account of my dealings with Toyota Canada.

Round One

In August 2014 I ordered a 2015 Toyota Highlander from a Toronto dealership, Toyota on the Park.  I was informed that it would be delivered in about 8 weeks as the company was having trouble satisfying the demand for this popular vehicle.  I was surprised that we were kept waiting for more than 20 minutes to do the paperwork for the deal.  We were about to walk out before someone finally came to see us.  This should have been a warning sign about what was to come.

In October, we arrived at the dealership to pick up the truck.  The following things happened:

• The salesman greeted me but failed to acknowledge my wife (big mistake);
• The salesman passed us off to a colleague, saying that he had been promoted (big mistake);
• The colleague showed us the vehicle and it was the wrong colour - this happened even though the dealership had checked with us 10 days after we had made the order.
• We refused to take the truck.  The deal was terminated. 

The fallout:

• The sales manager apologized but other than that, made no effort to address the situation. In fact, he mentioned that if we wrote Toyota Canada, the letter would be sent to him for a response.  (He has most assuredly misjudged us on that one as we know how to work the system.)
• The reputational damage to the dealership continues ... it has been bought out by a conglomerate and the service which usually comes from a hands-on owner is gone
• The deal was not concluded ... cynically, we think that the dealership did not really care because they could sell the Highlander within days ... we think that the dealership realized that they had made a mistake with the vehicle colour and decided to proceed with the expectation that we would accept the car.

Round Two

On January 12, 2015 we visited another dealership, Downtown Toyota in order to place an order for a Toyota Highlander.  The service was absolutely wonderful - smooth, competent, pressure free.  

However, after more than four months of waiting for delivery, I contacted the dealership and informed them that I wished to cancel the contract.  (A clause noted the the contract could be voided if a vehicle was not delivered within three months of the signing date.)

Of course, the dealership was disappointed.  They offered additional financial compensation but I pointed out that the wait was unreasonable and further, that receiving a 2015 vehicle so late in the model year would mean entail an accelerated depreciation.  I noted that they had been failed by the parent company, Toyota. Why offer a car when you cannot deliver?  

Some Key Points in Purchasing a New Vehicle

Assuming that you have done your due diligence in selecting a vehicle, here are a few guidelines which I have found helpful in making a purchase. 

1. Always read the contract carefully.  Ask for time to read it alone.  Always include a clause specifying the deadline for vehicle delivery and that the contract will be null and void if the condition is not met.  (Some dealers will even offer to supply a courtesy car if vehicles are not delivered by the specified date ... check this out.)
2. Check out the dealer ownership.  Do business only with dealer-owned establishments as they are more accountable and interested in their businesses.  Ask to meet the owner and make your own assessment of his/her character.  If you cannot meet the owner ... walk away. 
3. Check out the dealer's reputation.  There are many sites which provide opportunities for customers to provide feedback. While there will always be cranky people who are impossible to satisfy, you will quickly see emerging patterns. 
4. For pricing, use on-line auto pricing services to get an idea of dealer costs and pricing patterns.  (Some reviewers have criticized these services but having some basic information is useful for one's negotiations.)
5. Visit web sites which provide advice on vehicle purchases in order to prepare yourself for negotiations.  
6. Realize that the dealer has to make a profit.  

I will make a future posting on Toyota's response to my letter. 

In the meantime, I have decided to purchase a different SUV.  After my experience:

1. I reviewed potential vehicles using a variety of sites including: Consumer Reports, Edmunds, Kelly Blue Book.  I did not pay much attention to automotive writers.  I did scour vehicle owner websites as they are perhaps, the best indicator of vehicle quality/owner satisfaction. 
2. I reviewed potential dealerships for quality of service etc. 
3. I visited the most highly-rated dealer on a low activity day (morning early in the week) and test drove two models in a variety of situations.  I started by saying that I had selected the vehicle and that my purchase was contingent on a test drive, approval by my wife, and price. 
4. I made sure to meet the owner.  I was impressed.  He loves the business and dealing with people and is focused on customer service.  (You can deal with him directly in getting vehicle service as he is right on top of his business.)

At all times, I was in control but gently so.  There was give and take.  The experience was cordial and friendly.  When the time comes, I'll buy a second vehicle there and will get both of our vehicles serviced there. 

Best Credit Cards for Canadians Traveling in the United States

Using Credit Cards with Discretion

With the exception of purchasing a house, I have always subscribed to the dictum: "If you can't pay for it in cash, dash."

There is a difference between "wants" and "needs",  although through the process of rationalization, the difference can often be narrowed.

It is somewhat easy to diminish the stock of one's "wants".  I have always had the practice of waiting for at least a month before making a prospective purchase.  It's amazing how many "wants" and even "needs" disappear as a result.

When I make a purchase, I always try to buy an item or service "on sale".  At the very least, I always comparison shop.  The only time I make an exception is when I determine that the supplier provides superlative service or where the difference of patronizing a local supplier and a more distant supplier is negligible.  (I prefer to support neighbourhood establishments in the interest of maintaining a vital community.)

When paying for a purchase, I always try to use a credit card in order to receive the benefit of "points".  I NEVER run up a balance on the card as it defeats the objective of purchasing things cheaply.

Foreign Exchange Fees - the added burden of using credit cards

I do not travel in foreign countries without a credit card for the following reasons:

• Transactions are fast and easy.
• There are records for review.
• Many cards come with insurance benefits such as emergency health, travel interruption some auto insurance coverage which can reduce the cost of vehicle rentals. Credit cards represent a major improvement over travellers cheques and carrying large sums of cash. 

However, there is a downside which is sometimes unappreciated. Each time you make a purchase in a foreign currency for a Canadian credit card issued in $Cdn, you are liable for a foreign exchange fee.  The fee is generally in the range of 2.5 percent! This fee is in addition to currency exchange rates. 

The combination of these charges, can easily exceed the earning power of the card and leave one in a "deficit" position.

(Note that many Canadians use credit card denominated in $US; however, they still are still liable for exchange rate differences if a conversion from $Cdn to $US is involved in the payment out the outstanding balance.)

Here is a synopsis of rates on various cards which Canadians routinely use in the U.S.

Credit Card	Foreign Transaction Fee	Signing-Bonus Points	Annual Fee
Chase Marriott Rewards Visa Card	0%	30,000	$120 Waived 1st Year
CIBC Aventura Visa Infinite	2.5%	15,000	$120
TD Aeroplan Visa Infinite	2.5%	25,000	$120
RBC Avion Visa Infinite	2.5%	15,000	$120
BMO Rewards World Elite	2.5%	30,000	$150
Scotiabank Gold Amex Card	2.5%	15,000	$99 Waived 1st Year

http://www.greedyrates.ca/blog/travel-tip-avoid-foreign-transaction-fees-canadian-credit-card/#.VVpBFlVVhBc

I initially thought that I could avoid this situation by taking out foreign cash in my local bank branch or an ATM stateside. However, this approach does not save money.  I came across this graphic on the website: http://www.greedyrates.ca/

The situation is not much changed from March 13, 2004 when the preceding chart was prepared ... with one exception which should interest Canadian travellers who stay in hotels in the U.S.

Mariott Rewards Premier Card

Click on the preceding link to see the benefits associated with this card.  Included:

• No foreign exchange fee
• Sign-up offer which includes free nights which can amount to several hundred dollars
• Fee waiver for the first year

I applied for the card and have received a free night in the Mariott chain.  I figure that the card will more than pay for itself even with the addition of annual fees which apply after the first year. The Marriott chain and its affiliates cover a wide geographic area and the hotels provide fair value and quality.  In a future post, I will report on my experience with the card.  Even when travelling cheap while on long distance cycling trips, I have always found that the Marriott group and like hotels provide that little measure of added value over most competitors in that they allow bikes in the rooms. The generally spacious rooms are great for drying clothes and spreading out one's kit.

Investing in Part Time Employment Agencies - Part Two - Context

Contextual Framework

It is always useful to be mindful of high level "drivers" when one is investigating potential investments in a given sector.  I have learned that they contribute to an operating environment within which companies can either thrive, founder, or just get by.

Here are a few key variables which, in my view, will affect the performance of the sector:

1.    State of the Economy

As noted in Part One, the level of activity in the sector is correlated directly to fluctuations in GDP.  When times are good, the companies prosper.  Is it now timely to invest in these companies (when times are good) or does it make sense to invest following a major correction and when valuations are low?  This is definitely one instance where it makes sense to time the market - something which seasoned investors as Herr Buffet would discourage.  I would contest his view.  In fact, his practice of "waiting for the fat pitch" is just another way of timing the market i.e. he makes his purchases when valuations are low and there is a wide margin of safety.

2.    Long-Term Trends in Human Resources Management

It would appear that there is a well-established trend to the increased use of temporary/contract employment.  The advent of the Internet has facilitated this trend and increasing the size of the talent pool that companies can access.  Further, in some areas such as the EU, treaties have increased worker mobility, thus enlarging to pool of potential workers.

3.    Disposition of the Work Force

People are adapting to the world of contract work.  It has always been a feature of the non-unionized, low skill work force, something which has been addressed by government in social assistance programs such as unemployment insurance schemes.

Times have changed.  No longer do people associate with a company for their working life.  Nor do they work within one occupation given the pace of technological and social change.  For a variety of reasons, people have accepted that they must be more adaptable to survive.  The same applies to companies who must be more nimble in the face of increased globalization.  "Temporary" work is the new normal.

4.     State of the Part Time Employment Industry

Evidence would suggest that the sector has room to penetrate further the world of HR management.  It also suggests that models for HR management are changing in that some in-house functions are being outsourced to an increased degree.  In my opinion, there is room for considerable growth in the sector.

The industry is fragmented in the US, less so in Canada, and very much less so in several European countries.  I have not yet investigated this in South America and Asia.

In the last decade, the Internet has expanded the pool of talent and several companies have done well by making connections between service providers and companies.  The market has room to grow, especially given that high level services are being outsourced on a more routine basis.  It is generally not recognized that this would not have been possible without much improved education levels throughout the world.

A Few Observations About Investing in the Sector

1. The market in Canada and the US appears to be fairly flat over the past few years.  I plan to review the market in other jurisdictions.
2. The market is very cyclical and is tied directly to the performance of the economy.  Many regard temporary employment indices as leading indicators of economic performance. 
3. Labour laws are an important consideration.  
4. The "pool" of available workers may be shrinking due to lower birth rates and a more "mature" population profile in Europe and North America. 

Investing in Temporary Employment Agencies - Part One

I am interested in the trend to the increased use of temporary employees.  In starting my research, I had two main questions:

Does the trend represent the "new normal"?

Does it present some interesting investment opportunities? 

Short Profile of the Industry

Statistics Canada defines the temporary staffing services industry:

Temporary Staffing Services – NAICS 561320 This industry comprises establishments primarily engaged in supplying workers for limited periods of time to supplement the workforce of the client. The individuals provided are employees of the temporary staffing service establishment. These establishments do not provide direct supervision of their employees at the clients’ work sites. The main activity of these establishments is to supply personnel for temporary work assignments. The temporary staffing firm hires its own employees and assigns them to clients to support or supplement the client’s workforce in work situations such as employee absences, temporary skill shortages, seasonal workloads, and special assignments and projects. When working, these employees are under the direct supervision of the client, but being on the payroll of the temporary staffing firm it is the temporary staffing firm that is legally responsible for their actions and that specifies their pay, benefits, etc.

Temporary staffing agencies supply workers to many sectors:

Trends

There has been a trend for the increased use of temporary employment services by industry.  I would urge readers to click on the following link and read the entire article for a quick introduction to the world of temporary work.  Here is an extract:

The proportion of all men holding any type of job in the United States 63.5%, the lowest figure since 1948.  Among prime working-age men between 25 and 54, 81% hold jobs.  In 1969, 95% of all men in the prime working years had a job.  Adecco, a temporary placement company, that the rate of growth in contingency workers three to four times the rate of traditional jobs and will soon comprise at least 30% or more of the global workforce. 
http://business.financialpost.com/executive/careers/the-notion-of-contractor-workers-is-here-to-stay

Profile of the Canadian Staffing Market presentation

The above-noted profile presentation is worth reading in its entirety.  Some key points:

• the market penetration of temporary placement companies in Canada is lower than elsewhere
• most contingent staffing is not done through temporary placement companies globally
• staffing market growth is directly correlated with GDP growth
• Canadian staffing market is more concentrated than in the US but much less so than in France and the Netherlands
• a variety of staffing models is presented ranging from the "traditional" in-house HR office to a more dispersed mode (this resonated with me as I've watched the evolution of employment practices over the past three decades)

The Canadian Staffing Index 

The Canadian Staffing Index measures the hours of labour performed by a sampling of temporary and contract staffing in the staffing industry. The data collected is the largest sample size done in Canada provided by a number of Canadian staffing companies and accounts for approximately one third of total staffing industry sales. To preserve confidentiality the data is collected by Staffing Industry Analysts www.staffingindustry.com; an independent company specialized in staffing industry statistics. Data is available for the months starting July 2008 (the benchmark month) to the current month.

In review of similar Index research from the USA, many experts agree staffing industry employment data serves as an economic indicator. Historically, temporary employment improves as overtime hours increase and as unemployment claims decrease. This means the Index can provide a "near real time" indication of how the Canadian economy is performing.

Profile of the US Staffing Market (presentation)

It is similar to the Canadian market.  The performance of the American staffing and recruiting industry is linked closely with the state of the economy.  

Temporary and contract staffing sales totaled $109.2 billion in 2013, according to the quarterly ASA Staffing Employment and Sales Survey. That was an increase of 4.3% over 2012.

Search and placement sales grew 8% in 2013, according to Staffing Industry Analysts. Applying SIA’s yearly growth estimates to the most recent (2007) U.S. Economic Census benchmark shows that search and placement sales totaled $13.2 billion in 2013.

Combining temporary and contract services with search and placement services, U.S. staffing industry sales set a new annual record at $122.4 billion in 2013, 4.6% more than in 2012. Search and placement sales accounted for 10.8% of total staffing and recruiting industry sales in 2013.

SIA forecasts U.S. temporary and contract staffing sales to grow 5% in 2014 and 6% in 2015; search and placement sales are expected to grow 7% and 10% in 2014 and 2015, respectively.

Here is a very revealing synopsis of the increased prominence of temporary employment in the US.  emsi produces insightful reports on labour markets and you can subscribe to their offerings by visiting their web site: emsi

Here is a map showing the gains/losses in temporary employment in the US in 2013.  Note that employment in the oil and gas sector has declined significantly since then and that the situation has changed especially in areas where fracking activity has declined.

There is reason to believe that the temporary employment sector will increase in importance.  Hiring and management practices are changing.

Why?

Economic Uncertainty

While North American economies are improving, memories of recessions and the uncertainties regarding the future state of the economy have led employers to be more cautious in the hiring of full-time permanent employees.

Temporary workers are easier to dismiss in the event that they do not work out.  Further, in some companies, the hiring of temporary workers provides an opportunity "to kick the tires" and screen potential long-term hires.

There is also some evidence that firms are reducing expenditures on in-house training to upgrade skills and productivity of their workers.  A variety of reasons may account for this: budget austerity, corporate philosophies which discourage the practice, fear that newly-upgraded employees will look elsewhere for better wages, etc.

Just-in-Time - Flexibility to Meet Staffing Needs

Structural changes in the global economy have led to the rise of the just-in-time products/services delivery mode, meaning that a firm's employment needs can fluctuate significantly depending on demand.  As opposed to maintaining an overhead of permanent employees, many companies opt to hire temporary workers even though they generally represent a higher short-term cost and often come with lower rates of productivity as they must adjust to company cultures and satisfy company-specific skills.

Boomers and Evolving Expectations re the Nature of Work

As the work force ages, many individuals opt to continue work for a variety of reasons: the lack of adequate retirement savings to meet their needs/wants, a desire to "keep busy", and the "freedom" that temporary work provides.

Whereas low skill workers face uncertain prospects and an unenviable outlook for employment and economic advancement, skilled, in-demand workers have more options.  Increasingly, people do not regard employment with one company as a life-time commitment.  Further, the traditional "contract" between companies and their employees has changed in that companies are less reluctant to "rightsize" quickly in the interest of the short-term bottom line.  Many skilled people have opted to pursue contract work as it provides variety, an opportunity to expand networks, and comparable wages given that company employee benefits are gradually eroding in many sectors.  As many skilled people near the ends of their careers, they discover that being rehired back as "consultants" can be exceptionally lucrative.  Many of my compatriots have followed this course and enjoy vastly increased pay packets along with more discretionary time.


Companies

As a general observation, the companies in the US are more fragmented than in Canada, France and the Netherlands.  There may be opportunities for consolidation on the part of well managed companies with strong balance sheets.  Another growing aspect of employment management companies is management of contract work via the Internet.  (See the Profile of the Canadian Staffing Market earlier in this post.)

I plan to explore potential investments in this sector in future posts.

http://www.workforce.com/ext/resources/images/WFM_Web-Art/September-2014/WF1014_HotList_RGB.jpg

The review will include companies in Canada and the US and may expand later to France, the Netherlands and countries in the EU and the upside down part of the world i.e. NZ and AUS.

For another perspective on the industry, it is instructive to peruse the investor presentation by Adecco, one of the world's largest staffing agencies.  It provides a number of useful insights into the nature of the business and its prospects for growth.  Highly recommended:  http://e3.marco.ch/publish/adecco/239_3536/Adecco_-_Q1_2015_Presentation_Final_RS.pdf

Here are two very useful outlooks on the industry:

http://www.staffingindustry.com/row/Conferences-Webinars/Webinars/European-Staffing-Webinars/Archived-Webinars/Temporary-Staffing-Trends-Forecasts


www.staffingindustry.com/row/Research-Publications/Publications/CWS-3.0/Archive/2011/December-14-2011-Vol.-3.36/Plan-for-APAC

The Dhandho Investor - some useful lessons for all investors

Recently, I read The Dhandho Investor: The Low-Risk Value Method to High Returns by Mohnish Pabrai (John Wiley & Sons Inc., 2007).

Pabrai is the manager of the Pabrai Investment Funds http://www.pabraifunds.com/

For a peak at his most recent activity, take a look here:
Current Holdings

I enjoyed Pabrai's book.  Unlike many of its ilk, this book is written clearly and directly - elegantly even.

I always wondered why I encounter so many Indian hotel/motel operators on my cycling trips.  Now I know.

The Patels, immigrants of Indian origin arrived four decades ago in the U.S. and gradually emerged to be prime players in the American hotel industry.   Pabrai attributes their success to "Dhandho" (approaches which generate wealth), specifically, the low risk/high return approach to making business and investing decisions.

It's a story of a few pioneers setting the example and others following the model of investing in small motels (often sold at fire sale prices during recessions), minimizing costs, and above all, entering into businesses only when the risks were low and the rewards high. The book is worth the read for that alone.

Pabrai extends the Ddhandho analogy to the field of investing and through story telling, illustrates how investors can take a similar approach.

He writes at a conceptual level as as opposed to getting bogged down in a swamp of superfluous detail. (For that he provides links to other value investors with stellar records of success.  I have featured one of them in an earlier edition of The Financial Passage Maker: Joel Greenblat, author of the wonderful The Little Book That Beats the Market.)

I have given a great deal of thought as to how many stocks I should have in my equities portfolios.  One the one hand, conventional wisdom dictates that one should have a well-diversified portfolio in order to minimize risk.  On the other hand, a overly large portfolio (as seen in a great many mutual funds) starts to approach market indexing with the disadvantage of higher frictional costs.

Like Buffet and a few other successful managers, Pabrai restricts the number of holdings in his portfolio in order to maximize returns (this as opposed to realizing small gains overall based on the stellar performance of holdings which constitute a small portion of a large portfolio).  There are two aspects to this:

A.  Initial Selection

Pabrai devotes most of his attention to the process of selecting potential investments.  Here are some rules-of-thumb:

• invest in existing businesses as they are more knowable than new ventures
• invest in simple businesses which are understandable
• buy business in sectors with a slow rate of change
• buy distressed businesses in distressed sectors
• buy businesses with a durable competitive advantage
• focus on arbitrage (a variant of the preceding bullet)
• buy businesses at big discounts to their intrinsic value
• be a copycat (see what other value investors are doing)

B.  Sizing a Position

I have always wondered about this question: whether to "go big" or limit the size of my stake in a company.  With the exception of a few investments in new ventures, I have come to the view that it makes sense to commit a significant amount to new investments - at least 5 and preferably,10 percent.  There are two provisos to this:

a)  that I have done my homework well in the initial selection process and have waited for what Herr Buffet calls the "fat pitch". This wait may take months/years.  I will wait until conditions are favourable for the investment and try my best to ensure that there is a significant element of safety.  Pabrai looks for scenarios with the following byline:  

"Heads, I win; tails, I don't lose much!"

The Kelly Formula

Successful gamblers recognize that their success is based on two things: the ability to wager on an objective assessment of the odds; and, the maximizing of returns by optimizing betting patterns. There is a body of mathematical theory which provides one window on optimal betting strategies - the Kelly Formula.  I will not get into the details here as it is somewhat complex.  You can find the details here:

http://www.financial-math.org/blog/2013/10/two-tales-of-the-kelly-formula/

http://www.marketfolly.com/2013/01/position-sizing-utilizing-kelly-growth.html

Pabrai is interested in maximizing the returns on wining investments and to that end, he limits the number of holdings in his portfolio.  He is careful to exercise due diligence in his selection and establishes a substantial stake in order to maximize returns on successful investments. To keep things simple, he generally allocates 10 percent to any single holding.  

Of course, this approach also leaves one open for large losses in the event that an investment goes south.  Pabrai tries to minimize losses by looking for investments with a wide margin of safety and by holding investments for about three years.  This holding period reduces the temptation to exit positions before things start to "turn around".  It is often the case with investing in depressed or out-of-favour businesses that prices drop before the market starts to recognize the intrinsic value of the businesses. 

My Take

Pabrai's book is a nice supplement to some notable books on value investing.  I have altered by checklist for evaluating potential and existing investments.  In a future post, I will present my checklist.

In recent weeks, I reviewed my portfolios.  I now have a substantial cash position (more than 30 percent) and will wait patiently for the "fat pitch".

The other advantage of limiting the number of holdings in a portfolio is that it is easier to monitor the progress of one's holdings - also to monitor developments in the sector which may affect the performance of a holding.

The performance of some value funds has lagged the market in recent years; however, I have the sense that a correction will take place soon and that it will create conditions amenable to the value approach.  To my mind, negative real rates of interest have "forced" people to seek out yield and to accept a higher degree of risk.  For many, the increased focus on equities and dividend stocks may end badly, especially if companies lack strong balance sheets and a "wide moat".

Some Useful Sites for Value Investing

Dataroma

This is a very clean site which provides information about the activities of top value investors.  To my mind, it is one of the best of breed: very easy to use, beautifully presented with profiles of investors which include: portfolio holdings, recent trading activity, news releases, annual reports etc.  It's all here: my go-to site. 

Guru Focus

This a rich site.  It features a variety of free offerings, including: profiles of the holdings of prominent investors, articles on investing, insider trading activity, and profiles of international markets.  There several fee-based features, but most readers will find that the site is very useful without a subscription.

Use the site to get investment ideas (remembering that the gurus maintain large portfolios and cannot justify the cost of investing in smaller entities).  Some of the articles are useful in order to "take the pulse" but remember to read them cautiously as some may be oriented to promote a viewpoint/company.

Value Investors Club

This site presents investment ideas "where top investors share their best ideas".   I find it useful in that it provides access to the thinking processes of those who submit investment ideas.  To my mind, this is just as valuable as those companies which are identified in the various submissions.