I love this article on The Register about a man who was found to have secretly outsourced his entire job to China:

A security audit of a US critical infrastructure company last year revealed that its star developer had outsourced his own job to a Chinese subcontractor and was spending all his work time playing around on the internet.

The firm’s telecommunications supplier Verizon was called in after the company set up a basic VPN system with two-factor authentication so staff could work at home. The VPN traffic logs showed a regular series of logins to the company’s main server from Shenyang, China, using the credentials of the firm’s top programmer, “Bob”.

You have to admire the chutzpah of the guy. But the excellent part of the story is that his resultant work was not substandard.

In fact, Bob, the happy coders in China, and the employer would all seem to have benefited from the arrangement:

[Bob] was paying them a fifth of his six-figure salary to do the work and spent the rest of his time on other activities.

Bob is employing salary arbitrage, as made famous by Tim Ferris in his DIY freedom tome The 4-Hour Work Week.

Realising his company was grossly overpaying him for his skills on a global basis, Bob addressed the issue and pocketed the profits – both in terms of money and also in terms of time.

A drone’s life

That brings me to the first of two disappointing elements to this story.

Instead of using his time productively – maybe generating an ongoing passive income stream to pay his bills when he was eventually busted – it seems Bob spent most of his time goofing around on the Internet.

Here’s his typical day, according to the report:

9:00 a.m. – Arrive and surf Reddit for a couple of hours. Watch cat videos

11:30 a.m. – Take lunch

1:00 p.m. – Ebay time

2:00-ish p.m – Facebook updates, LinkedIn

4:30 p.m. – End-of-day update e-mail to management

5:00 p.m. – Go home

It’s a shame that once freed from the laborious constraints of typical hourly work, Bob choose to indulge in exactly the sort of Western slacking that’s giving the Chinese and others their opportunity. There’s only so many cat videos on YouTube that anyone needs to watch in a day.

Secondly, although it’s not explicitly stated in the article, it seems his company was concerned about Bob’s unorthodox approach to his job, given that it has had a report written up on him.

This despite the fact that it considered Bob one of its best employees:

In his performance assessments by the firm’s human resources department, he was the firm’s top coder for many quarters and was considered expert in C, C++, Perl, Java, Ruby, PHP, and Python.

Why didn’t the scheme ‘work very well’ for Bob’s employer, too?

Granted we’re told he was working on ‘critical infrastructure’, so perhaps there were security concerns. But in the terrorism-jumpy US that could mean a sewage farm in Indiana.

Apparently Bob had repeated the trick at other companies, too, so he was raking in thousands altogether. And that’s the crux of the issue.

The typical middle manager is far more concerned with what you are doing than with what you are producing. I personally find this attitude so galling and belittling that I’m pretty much unemployable. I can’t understand how anyone can not be at least mildly miffed by it, once you see what’s going on.

Bob’s deception was corporately untenable, even though he was achieving the work asked of him. Most companies can’t have workers questioning the system, any more than the machines can let humans run amok in The Matrix.

In a better reality, one of the companies scammed by Bob would promote him to head of Human Resources, and have him re-wire its entire operations.

The man is clearly an organisational genius in the tradition of Henry Ford.

Welcome to the real world

Bob’s achievements sum up why I am a freelance and I work for myself, from home, as much as I possibly can.

The time savings are extraordinary if you’re any good at your job, both in terms the productivity gains on the work you do, and the hours you save in schlepping back and forth to an office where most people spend half the day on Facebook.

But there’s a further benefit of not aligning yourself too closely to the fortunes of any one particular witless company or another.

Put your head down, strive hard, but unless you’re curing cancer, you’re doing the job of your childhood dreams, you have a one-in-a-million leader, or you always aspired to sit in meetings to have long discussions about superfluous projects and initiatives that will arrive stillborn and be dissected in tedious detail while your precious life-hours are drained away in company-branded coffee cups – sorry, did I say that out loud? – then remember you’re always working for yourself.

You might also ask yourself: “Could my job by outsourced to China?”

If yes, then it could be prudent to take defensive action and seek a new job before a corporate Bob does yours in for you.

Good reads from around the Web.

The RDR era has arrived. A three letter acronym hasn’t caused so much excitement since as a tiny chap my co-blogger The Accumulator first heard EMF’s Unbelievable in 1990 and started wearing his baseball cap backwards.1

Fund manager Rob Davies has written a very clear outline of what RDR means for you on his Munro blog.

Noting that few will choose to pay the £250 an hour that a truly independent financial adviser could charge, Rob concludes that:

The DIY approach is appealing for those with portfolios of less than £100,000 where a few hours advice could be equivalent to 1% of the assets. As with any product or service, more informed clients are more likely to make better decisions even if they use an adviser.

Basically, RDR really means that investors have to learn a lot more about what they invest in.

Over the past year or so numerous websites have sprung up hoping to capitalise on so-called ‘orphaned’ investors looking to take charge post-RDR.

To my mind, calling investors shut out from the financial service industry’s grasp ‘orphaned’ is a bit like saying Snow White was orphaned because she ran away from her evil step-mother.

But then we’ve long been advocating that most of us can manage our own investments, provided we take the time to do some research.

Common sense and history suggests simple portfolios will deliver adequate returns for most savers. Simple portfolios major on diversifying among the main asset classes and periodically rebalancing, and so sidestep many of the pitfalls plunged into by unwary DIY investors.

Unfortunately a lot of personal finance journalists seem to prefer to make life complicated. Pointing readers towards a sophisticated online tool that promises to help you reach some perfect asset allocation for your risk level – for a big fee – makes for a better story than pointing them to a blog page.

Or maybe I’m just miffed that we weren’t mentioned in the FT’s roundup of five fee-charging websites for DIY investors:

A clutch of online services has sprung up for “RDR orphans”, who want guidance with their finances but cannot justify spending £160 an hour – the average cost of post-RDR advice, according to BDO.

Some of these sites are backed by established firms, such as big advisory practices or insurance companies. Others are start-ups. However, even the ones that offer advice by phone are not a direct replacement for an individual adviser.

There is a clear separation, too, between those that recommend actively-managed funds (bestinvest, Fundexpert) and those that advocate an approach based on index-tracking (Money Guidance, Nutmeg). There are also different business models, from flat fees to trail commission.

I’m not slighting those services, incidentally. While I think all have drawbacks as well as strengths – not least their fees – I’m not one of those zealots who thinks everyone can do it themselves. Some people will need their hands held. As we’ve discussed before, the Internet offers lots of interesting possibilities here.

It’s just that I think getting an education and then creating something like our Slow & Steady Passive Portfolio is going to serve an neophyte ‘orphaned’ investor better in the long run then plugging some numbers into a website and buying without understanding.

Still, you could do much worse than start with those online tools. As the ever excellent Merry Somerset-Webb explains, again in the FT, banks are lining up to make a mint from offering advice post-RDR:

Let’s pretend we have £200,000. We go to Lloyds and invest in the stuff they suggest. That’s £5,000 (2.5 per cent of £200,000). At HSBC the same investment would cost £2,425 (£950+£975+£500). At Nationwide it would be £6,000 and at RBS £3,000 (£500+£2,500).

Are you stunned? I am. And this, remember, is before you take into account the advice fees. You don’t have to take this option, of course, but if you see an adviser at, say, RBS it is hard to see him suggesting otherwise. There’s another £1,000 gone.

What might you get in return for these vast fees? Odds are they’ll have a soft spot for funds run by another part of their business. So you’ll get to pay those fees to the bank too. Let’s say you end up in funds with total costs of 1.2 per cent a year (this, by the way, is a generously low estimate on my part). There’s another £2,400 gone (assuming your adviser doesn’t suggest you use the money to pay down your mortgage instead, of course).

As Merryn says, the good news is that post-RDR, all these costs are transparent. Get out your calculator and you can add up how much it will all cost you.

[continue reading…]

1. Apologies for a 20-year old cultural reference. Believe me, if you are under 30 you did not miss much. [↩]

A question about the demo high-yield portfolio (HYP) I set up back in May 2011:

“I found the portfolio for income you did for your blog and have been following your website since but as far as I can tell you haven’t told us any trades since then.

I think it would be better if you told us what trades you are doing for this portfolio (and what is your overall trading strategy / aim).

Thanks and understood if you don’t want to disclose your strategy /  trades for privacy reasons.”

A simple query, with a simple answer: I haven’t done any trades in the portfolio.

All 20 of the shares I initially chose remain in place today.

This isn’t sheer laziness on my part (although my inner editor should have thought a bit harder about whether a demo portfolio that wasn’t traded would make for gripping blog fodder!)

Rather, the idea of this sort of HYP – into which I invested £5,000 of my own money to ‘keep it real’ as the kids used to say – is that you enjoy the dividend income, while leaving your shares to do the business.

If there is a trading strategy, it’s pretty straightforward…

Don’t trade!

Doing nothing is not nothing doing

People get hung up on seeking the best investments, beating the market, avoiding blow-ups, and maximizing their dividend income.

Never mind that every one of those aims – to “beat” and to be “best” – will prove impossible for most people.

It wasn’t always like this. In the old days, a wealthy gentleman or lady about town held a clutch of blue chip shares (and bonds) for income, and scarcely had any idea there was a market that they could fail to beat.

There were no index trackers to make things even simpler, but equally there was no CNBC to tell them they had to get out of Monkey Brain Holdings by teatime or they were toast. They might have reviewed their holdings with their accountant or banker if they should come into more money – or perhaps at family milestone, such as a coming of age or a death – but that was about it.

Obviously things could and sometimes did go wrong. But often enough, over the long-term, it seems to have gone right, too. And I think the approach still has some merit today, especially for those who distrust the paradoxes inherent in index tracking.1

I obviously didn’t notice this alone. Motley Fool UK writer Stephen Bland, for example, is just one of several writers to make a similar point. He’s done it best in his pieces about a fictional dowager called Doris, who enjoyed her dividend income oblivious to the huge wodge of shares that provided it.

Bland optimistically calls such HYPs ‘eternity’ portfolios.

Perhaps he eats a lot of vitamins. I wouldn’t dare expect my portfolio or its owner to live forever without a trade. But I wouldn’t wait up.

Practical reasons not to trade shares

Besides striking a blow for old-fashioned rentierism, there are other reasons why I don’t have a trading strategy for my demo HYP:

• Research suggests the more you trade, the worse your returns. By reducing my opportunities to make boneheaded decisions, I’ll hopefully increase the chances of success.

• I’ve also no plans to trade because the demo portfolio can’t afford it. I set it up with £2-a-pop dealing fees in a Halifax Sharebuilder account. However it costs £11.95 to sell a share. That’s a huge amount compared to the £250 invested in each company, making dealing very expensive.2 (Any comparison between the cheap price of entry to Sharebuilder and the tactics of your local drug dealer would probably be libelous, so I’ll say nothing more.)

• I also have no trading strategy because I’ll make it up on the hoof. In my view, once you’ve decided to go to the dark side and buy individual shares rather than passive funds, you must do it your way. I believe active investment is at best an art not a science (at worst it’s an illusion) so no firm rules.

Others take a different tack. Rules that work for some people include:

• Sell a shareholding if the dividend is cut.
• Sell half of a shareholding if its share price doubles.
• Reduce a holding if it becomes greater than 10% of the total.
• Reduce if its annual dividend stream is more than 10% of the total.

But not here.

Why I will end up trading in the portfolio

Ideally I won’t ever trade these shares. The total dividend payout will increase faster than inflation, and by 2020 we’ll be as shocked at how well things have turned out as any parent when their grumpy, smelly teenage boy turns up in his 20s with a nice new girlfriend and a haircut.

In reality, something will need to be done sooner or later.

A company will be taken over. I’ll need to reinvest the proceeds if it’s a cash offer, or possibly sell the shares if it’s a dividend-threatening merger. There will be rights issues, too, and maybe demergers. And while I’ve no rules, I may sell a shareholding if a company cuts its dividend or – more controversially – if I judge it’s likely to.

In addition, I will probably not ignore diversification, even if Doris does.

The danger with very long-term buy-and-hold is that one or more companies does particularly well. It then dwarfs the rest of the portfolio, which increases the risk. A related danger is that the dividend income stream from a particular company become a very large percentage of the total, leaving your income stream vulnerable to one bad blow.

When (not if) this skewing happens, it will be tempting to reduce the outsized holdings.

This is a tricky area. In long-standing buy-and-hold portfolios, it’s often a few big winners that deliver most of the returns. If you start trimming them too soon, you risk a mediocre outcome.

On the other hand, old portfolios that are never pruned can become fantastically lop-sided or top-heavy (as well as making their owners look like geniuses if you put too much weight into why they first picked a big winner in the first place).

The typical dabbler in shares asks if they should sell because a share has gone up 20%. In veteran buy-and-hold portfolios, you might find one that’s gone up 2,000%.

There are emotional factors to keep in mind, too, especially as this mini-portfolio is meant to be being run as if it was a significant-sized one – perhaps the bulk of somebody’s equity investments.

While it might be mathematically sensible to run your winners, in practice few people can handle having most of their money in 2-4 companies, with the rest of their holdings tagging along like gulls following a trawler.

Onwards and hopefully upwards

Remember that this demo HYP portfolio is meant to explore (for me as much as anyone else) the ups and downs of holding blue chip shares for income.

I’m not claiming to have a secret method for picking the best 20 shares you could want on any particular Thursday. And I am certainly not saying that buying and holding blue chips for income will beat the market.

I used real-money to keep it realistic, and because I’m curious as to how it will turn out. Do note though that while there are similarities – I like dividends, and I don’t trade most of my portfolio much – this demo HYP is not even close to a mirror of my own wider investments.

Finally, because somebody always asks, I should say again I’m not reinvesting the dividends – see my previous post on why I’m withdrawing the income.

Right, back to the metaphorical hammock!

1. I am not saying they are right to find index funds distasteful. I am saying I have met many people who do, and I have failed to convince them otherwise. [↩]
2. If I ever do trade I will possibly rebate most of the dealing fee with new money. This is meant to be a scaled-down model of a more practically-sized portfolio after all. We will see. [↩]