The thing is, Deans isn’t in the tire business. His family sold that company 50 years ago, and his grandfather used the funds to start a chemical firm. When that company was sold, Deans’ father used the proceeds to launch a plastics business. After working in banking and government relations, Deans joined the family firm in 1999 — and later worked with his father to sell it to outsiders. Today Deans runs a publishing and consulting firm, Détente Financial Press. “I’m a fourth-generation family business,” he says proudly, “but I’m not carrying on anything that represents the family name.”

His attitude is markedly different than that of most business families, who strive to pass their companies to succeeding generations. The problem with that approach is that it’s so hard to do. According to the Canadian Association of Family Enterprise, only 30% of family businesses successfully pass to the second generation — and just 10% make it to the third.

But this dismal record doesn’t stop business owners from trying to pass on their businesses. A plethora of consultants and family business research centres have sprung up to help them beat the odds.

To Deans, this is pure hooey. When the odds are so high against success, he says, why fight them?

The problem, he says, is that most businesses are “gifted,” at least in part, to the next generation. Mom and Pop subsidize the cost because, well, what kind of parents wouldthey be if they charged their kids retail? But such kindness can destroy businesses, says Deans: “Gifting the family business is dangerous to your financial health.”

When you acquire a subsidized business from your parents, the baggage that comes with it can ground a 747. Mom or Dad may expect a continuing say in the business. They can block needed changes, whether it’s firing an underperforming employee, or selling off part of the business. Their “generosity” may force incompatible siblings to work together, compel their children to run a business they don’t want or prevent innovation.

Deans’s solution: the family business should never become more important than the family. It should always be for sale.

Fittingly, that concept was handed down to him by his father and grandfather, who refused to burden their heirs with unwanted businesses. Their “start and sell” approach meant no one was forced to go into a business they didn’t enjoy and no sibling was favoured over another. If adult children wanted the family business, they could buy it on the open market.With this approach, what gets passed on to succeeding generations is not a business that some want more than others, but an even division of cash, and a legacy of business success. In essence, the family is passing on a set of values.

Deans is passing on his own values through a new book, Every Family’s Business, which conveys his controversial message through a simple storyline: a conversation between two family business survivors who meet on a flight to Barbados. It’s a breezy tome that he hopes every member of a business family will read in order to rewire their concept of what makes a family business successful.

How do you put Deans’s philosophy into practice? Here are a few pointers:

• Don’t fall in love with the family business. Plan for your exit. “Start at the end and work backwards.”

• Make sure everyone in the family knows the business is always for sale. Anyone in the family can have it — or no one.

• Be professional. Conduct a SWOT analysis (strengths, weaknesses, opportunities and threats) of your business once a year to understand what needs to change. If family members join the business, conduct formal performance reviews.

• Communicate! The kids must understand the parents’ plans for the company, and the parents must know which kids (if any) want to get involved. “Silence destroys wealth and relationships,” says Deans.

• If an heir wants to buy your business, charge market value. “When all family members understand there is no family discount on shares, there’s nothing to be jealous of.”

• Pull money out of the company. “Get those retained earnings into the hands of wealth managers who can spread the risk around,” says Deans. This also makes the business more affordable for anyone wishing to buy it. m

Graham knew all about making money in hard times. He honed his investing techniques during the Depression, when he managed money on Wall Street and invented value investing. He later taught Warren Buffett how to invest. Before Graham died in 1976, he boiled his experience down to what he called The Simplest Way to Select Bargain Stocks.

If you’re a long-time reader of MoneySense, you already know about Graham’s Simple Way. Every year for the past four years, we’ve compiled a list of Simple Way stocks. Each year our list has outperformed the S&P 500. Assuming you had purchased equal dollar amounts of each Simple Way stock for your RRSP and rolled the profits into new Simple Way stocks every year, you would be up 93% in 56 months, not including dividends. Over the same period, the S&P 500 advanced only 17%. We’re particularly pleased with the Graham picks over the past year. They gained 22% while the S&P 500 lost 8%.

In 1976 Graham calculated that a Simple Way investor would have achieved fairly consistent 15% average annual returns during the prior 50years. Our performance since 2004 has been close, with annualized returns of 15.4%.

Picking stocks using the Simple Way is like doing the two-step. In the first step, you seek stocks that are cheap and in the second you keep those that are relatively safe. Graham defined a cheap stock as one with an earnings yield that was at least twice as large as the average yield on long-term AAA corporate bonds. The yield on 20-year AAA U.S. corporate bonds was 6.1% when we selected this year’s batch of Graham stocks, so we looked for stocks with earnings yields of 12.2% or more — which is equivalent to a priceearnings ratio of 8.2 or less.

We now come to the safety step. Graham detested excessive debt and insisted his picks be well capitalized to protect against bad times. He stuck to stocks with leverage ratios (the ratio of total assets to shareholders’ equity) of two or less.

Graham suggested selling his picks when you had achieved a 50% profit or no later than the end of the second calendar year after purchase. To make things even easier, we sell a crop of Graham stocks when we pick a new bunch.

With Graham’s criteria in hand, we used the MSN.com stock screener to find a short list of this year’s candidates. We narrowed it down by focusing on U.S.-listed stocks with market capitalizations of more than $2 billion. (All figures are in U.S. dollars.)

I have high hopes that Graham’s method will continue to do well, but all the usual warnings apply. Use Graham’s list as a starting point for your research not the final destination. If you don’t understand a company, pass it by. After all, there are lots of Graham-style bargains out there and you don’t have to buy every one.

The 2008 bargain bin

Ben Graham’s Simple Way identifies U.S.-listed stocks that are both cheap and safe. Nine stocks made our list.

Or maybe a storm toppled a tree and caused several hundred dollars worth of damage to your garage. Is that a worthwhile claim? Or will you just wind up giving the money back to the insurance company through increased premiums?

To find out, we canvassed insurance brokers across the country. Here’s what they told us:

• You should always make a claim on your car insurance if the damage was the result of something outside of your control. So if someone backs into your car in a parking lot and disappears, or if a stone hits your windshield and cracks it, or if hail destroys your new truck’s new paint job, get on the phone to your insurer. “Even if the damage is several thousand dollars, claims like this won’t impact your premium,” says Cory DiRosa of DiRosa Insurance in Oakville, Ont.

• If in doubt, do the math before you file to see if an auto accident claim is worth it. Most insurance agents or brokers will walk you through the decision, which will vary by province. In Ontario, a single at-fault accident will probably boost your premiums by 15% or more for six years. But two at-fault accidents in under three years can double your premiums for years to come. In B.C., two at-fault accidents will boost your premiums anywhere from 40% to 200%, depending on your driving record.

• If you’ve been using the same company to insure your home for five years or longer, some insurers will allow you one free claim before raising your premium. “So if your $2,500 golf clubs are stolen, it’s your first claim and you’re a long-time customer, make the claim,” says Vicki Van Santen, an insurance broker with Generations Insurance in Toronto. On the other hand, if you’ve been with your current insurer for only a couple of years, a single claim will probably boost your premium by 10% or more for three years.

• Don’t claim damages of less than $1,000 on your home insurance. It’s simply not worth your while. Most policies have at least a $500 deductible, so at most you stand to get a couple of hundred dollars — but you may wind up payingsubstantially higher premiums in years to come as a result.

• You should claim for any major house damage. So long as the damage was the result of an accident, and so long as it was your only claim in the past five years, even a $50,000 claim should not affect your renewal. But beware frequent, small claims. Insurers will usually not renew you after your third claim in five years, even if all the claims were minor. “It all boils down to frequency with home insurance claims,” says Van Santen.

• Since it doesn’t pay to make small claims on your home insurance, the smart strategy is to raise your deductible to $1,000. The higher deductible will save you up to 20% off your premium annually. “Higher deductibles mean lower premiums,” says Bob Fitzgerald, executive vice-president for Aviva Canada in Toronto. If you feel you can afford the risk, you can raise your deductible to $5,000 or more and cut 40% or more from your annual premium.

Seg funds are offered by insurance companies; at first glance, they look much like mutual funds. But seg funds impose very high fees— as much as 4% a year, which is substantially more than the 2% to 2.5% that most mutual funds charge, and four to 10 times what index funds bill you.

So why would anyone buy a seg fund? A major appeal used to be that creditors could not seize seg funds if you went bust. So if you had concerns about your financial health, or ran a small business in a risky industry, seg funds provided you with a lockbox that your creditors couldn’t get into if things went wrong.

But that rationale for buying seg funds has just disappeared. Thanks to recent changes to the Bankruptcy and Insolvency Act, creditors can no longer get at any money you hold in your registered retirement savings plan (RRSP), registered retirement income fund (RRIF) and deferred profit sharing plan. As long as you placed your money in one of those plans 12 months or more before declaring bankruptcy, it’s off limits to the people you owe. So you no longer need seg funds to build a firewall between you and the bill collectors.

The companies that sell seg funds aren’t going gently into the night. They are touting other benefits from seg funds. For instance, most seg funds come with a guarantee that ensures you or your beneficiaries get back your initial investment at the end of 10 years or when you die. That can be attractive to people worried about a stock market plunge. In addition, seg funds don’t have to pass through probate when you die, which means that your heirs save on probate fees.

But none of those benefits is worth the high fees, says Marc Lamontagne, a certified financial planner with Ryan Lamontagne Inc. in Ottawa. He notes that the stock market nearly always rises over the period of 10 years, which makes the 10-year guarantee on most seg funds of dubious value.”I don’t think there’s one 10-year period in history when paying the extra fees for segregated funds would have been worth it,” he asserts. “You get better returns using a mix of low-fee mutual funds and index funds. That gives you the best of both worlds, especially for anyone under60.”

The death guarantee and the lack of probate fees is most attractive to investors over the age of 70. But Norm Rothery, chief investment strategist at Dan Hallett & Associates Inc. and the founder of StingyInvestor.com, wouldn’t recommend seg funds even to the elderly. “The guarantee is useless and can be obtained much more cheaply,” says Rothery. “Just buy a GIC and put the interest you receive in riskier investments. That will guarantee your principal. You don’t need seg funds for that.”

Here are a few tips every tax-smart student shouldknow.

• File a tax return, even if you didn’t earn enough to pay income tax. That will guarantee you receive the $350 GST rebate. It will also guarantee that you get a refund of any taxes you may have paid through payroll deductions with your employer.

• You can claim $400 a month for each month you attended college or universityfull time ($265 a month for part-time students). You can also receive a tax credit of $65 a month for textbooks ($20 a month for part-time students).

• You can claim any tuition fees over $100 as a tax credit. Eligible fees include any mandatory amounts charged by the school.

• Here’s how to keep mom and dad happy: you can tranfer any unused federal credits, up to $5,000 a year, to a parent. “Just keep in mind that the transferred credits must be claimed in the year they are incurred,” says Hamel.

• You can write off moving expenses if you moved more than 40 km for a summer job. “Just remember, it has to be a real move to qualify,” says Hamel. “It can’t just be coming home for Christmas.”

2. THE DRUNKARD’S WALK by Leonard Mlodinow ($27.95, Pantheon): Chances are that you don’t understand chance. Mlodinow, a physicist, thinks that randomness is much more of a factor in our lives than most people realize. In this fun and funny book, he explores how we overrate CEOs who luck into a winning streak, fall in love with miracle cures that may have no effect on our health, and spend too much money on highly rated wines. OUR TAKE: If you’ve always suspected that life is not much more than a random throw of the dice, odds are that you will love this book.

3. THE TRILLION DOLLAR MELTDOWN by Charles R. Morris ($24.95, PublicAffairs Books): Readers of the business pages know about the U.S. real estate collapse and the huge losses suffered by international banks, but most Canadians have yet to feel the impact. That may change if this book is right. Morris argues that we are living in a financial casino without any safety regulations — and, oh, yes, the casino happens to be on fire. OUR TAKE: A smart, concise guide to the biggest financial crisis of our times. While the book’s viewpoint is American, we recommend it for anyone who wants to understand how the world got into this mess.

4. A SPLENDID EXCHANGE by William J. Bernstein ($33, Atlantic Monthly Press): Bernstein has set himself a monumental task — to explain how the process of buying and selling goods has determined the course of history, from the copper merchants of ancient Sumeria to the stock traders of contemporary Wall Street. OUR TAKE: A wonderful book that will fascinate anyone interested in history or economics. Along the way, Bernstein explains why winds and pests have done more to shape society than kings or generals.

5. SWAY by Ori Brafman and Rom Brafman ($25, Doubleday): This book has a wonderful subtitle: The Irresistible Pull of Irrational Behavior. The authors examine why investors refuse to sell their losing stocks, how you can make an audience pay more than $20 for a $20 bill, and what makes an experienced airline pilot disregard safety regulations and take off in a fog. OUR TAKE: An entertaining exploration of an important topic — with useful advice on how to defend yourself from psychological illusions.

Martin and Jennifer Murphy don’t know why they feel so poor. Between the two of them, they make a healthy income of more than $100,000 a year. But, after paying the mortgage on their nine-acre farm and feeding three kids, they never have a dollar left over. “It would be nice to have some money in my wallet just so I could go to Tim Hortons for a coffee,” Martin told us in his initial letter. “I often ask my wife how everyone else does it, and we assume for the most part that everyone puts it on credit. Am I wrong?”

Martin isn’t the type to complain. At 43, he’s a powerfully built, soft-spoken man who has worked for nearly 20 years in an auto plant in Oshawa, Ont. When he’s not on the assembly line, he’s working on his farm, raising Christmas trees. “Well, trees and kids,” he chuckles. Martin doesn’t smile often, but when he does, his grin lights up the room.

Nothing puts a grin on his face faster than his wife, Jennifer, 42. (We’ve changed their names and some details to protect their privacy.) She’s a striking, athletic woman who is in many ways his opposite. While Martin is laid back and quiet, she talks in bursts and vibrates with energy. In addition to looking after their kids, aged 10, 8 and 5, she works part-time as a social worker in a local hospital and competes in triathlons. “I do a lot of my training in the early morning, at 5 or 6, before everyone is up,” she says. “And sometimes Martin will take the kids for the afternoon so I can work out. We’ll pack some food and then he’ll work out back on the Christmas trees while the kids have a picnic beside him.”

It sounds like heaven — except for their financial worries, that is. Given the grim outlook for the auto industry, Martin isn’t sure how much longer he can count on having a job. And since he and Jennifer are barely making ends meet on his current salary, a layoff could be devastating. “We have so much and I am thankful for everything we have, but it’s difficult not to worry,” Martin wrote. “Do I have enough to retire? What happens if I lose my job?”

Background

Martin and Jennifer grew up just outside of Kingston, Ont., in the same small town, but in very different families. Jennifer was local gentry — her father was a lawyer, her mother, an elementary school principal. Jennifer was one of five kids. She and her siblings competed in local swim meets and were encouraged to excel in school. “There was a big focus on education in my family,” Jennifer says. “We weren’t spoiled, but we always had enough — there were three cars, we all took piano lessons, that sort of thing.”

There wasn’t a lot of piano playing in Martin’s home. His parents were Irish immigrants who worked hard, but didn’t have a lot. His father, a factory laborer, considered sports and education to be garbage. “I was the oldest of four kids and Dad always made it clear that he expected us to go out there and get a job the second we finished high school,” says Martin.

Martin did just that and after a series of jobs as a farm laborer and warehouse worker, was hired as a forklift driver in an auto plant in 1989. A year later he bumped into Jennifer at a dance. They had met in high school, but had never been friends. Something clicked that night, however. Two years later they were married.

Jennifer had by that time completed a degree in social work and was working as an addiction counselor. She and Martin pooled their resources and bought their first home. Four years later, they paid $143,000 for the farm they now live on. It was in sad shape. “The house was so bad even the real estate agent wouldn’t go in,” says Jennifer with a laugh. The previous owner had been an old woman who kept 30 dogs indoors and used one of the bedrooms to whelp the pups. But Martin and Jennifer saw the farmhouse’s potential. They gutted the place, installed a new well and soon had a handsome residence.

Their first child, Robert, was born in 1997. He was a fine baby, but as he grew older was always thirsty. He would cry because he wasn’t allowed to drink the toothpaste water. When he was three, Martin and Jennifer took him to the doctor and soon received the diagnosis: their firstborn had Type 1 diabetes. “He’s now on an insulin pump, but, sure, we worry,” says Martin. “He plays soccer, he runs, he’s an active little guy, but if he goes on a school trip, one of us always goes with him just in case there’s a problem with his insulin.”

Martin and Jennifer went on to have two other kids — Erin, 8, and Seamus, 5 — and while neither has displayed any sign of diabetes, the Murphys worry that they too may develop the illness. They would like to have a financial cushion so they can help out their kids if that should happen.

To help build that financial cushion, Martin has devoted his spare time to planting thousands of Christmas trees. He originally thought that having a sideline business might help him escape the drudgery of the auto plant a few years early. “It hasn’t worked out quite as quickly as I hoped,” he says. “Christmas trees take 10 to 12 years to come to maturity. I started planting in 1997. I figure that in a couple of years the trees might produce, say, $20,000 a year in income, but right now I’m content if they just don’t cost me a lot of money.”

That comment brings a hoot from Jennifer. “He dreams, I worry,” she says. Since their second child was born, she has worked half time at various social work jobs and is currently employed two-and-a-half days a week in the palliative care ward of a local hospital, where she earns $30,000 a year. Even on a part-time basis, it’s a demanding, stressful job.

What adds to her stress are the bills. She looks after the family accounting and there’s never quite enough money to go round. “I’m always juggling, always putting off one thing to pay another,” she says. “The reality is that we’re always in overdraft and I can’t sleep some nights worrying about what we’re going to do.”

The challenge

The Murphys feel under pressure. Their income just barely covers their bills and that’s without any luxuries — they rarely buy clothes, have only basic satellite television, and don’t eat in restaurants. They struggle to contribute to their RRSPs each year.

Martin can look forward to retiring in 12 years, at age 55, from the auto plant with a full pension, but he doesn’t know if the factory is going to stay open that long. His employer is a money-losing automaker and Martin fears that his $70,000-a-year job could disappear any day. “There aren’t a lot of well-paid jobs in this area,” he says. “And I don’t know what would happen to my pension if my employer went under. Will it all go up in smoke?”

Jennifer’s goal is to finance university for their three kids and to stop running overdrafts at the bank every month. She knows the easiest way to put more money on the table would be for her to go back to work full-time, but she doesn’t want to do that. “Raising three young kids is demanding,” she says. “I want to be a good mother and I know that if I were to work full-time, I wouldn’t have a lot of emotional energy left for my own family.”

Meanwhile, there’s Robert, who is just about to turn 11. His diabetes seems to be under control, but the Murphys worry that his condition may worsen in the years to come. “If he doesn’t get a good job when he grows up, with good benefits, I worry about how he’s going to cover his health costs,” says Martin. Their life insurance agent told them that Robert is uninsurable because of his condition. However, the agent did sell them $50,000 policies on each of their younger kids, in case the children develop diabetes later in life and can’t get insurance.

The Murphys figure their home and farm (now with 5,000 Christmas trees on it!) are probably worth about $480,000. But they are carrying a $200,000 mortgage on the property, as well as $30,000 in loans that they took out to buy a car and a tractor.

They have scrimped to make RRSP contributions each year and have managed to build their savings to $170,000, but they’re the first to acknowledge that they have no clue as to how well the money is being invested. “We’ve trusted our financial adviser to tell us what to do and he’s put us in what he calls a wrap program,” says Martin. “We really don’t know how to judge it.”

The makeover

The Murphys came in with doubts about the financial products they had been sold, and those doubts were quickly confirmed by our panel of advisers.

Norbert Schlenker, our lead financial planner, was quick to pounce on the insurance policies they had been sold for their younger children. “They make no sense,” he told the Murphys. The point of insurance is to replace lost income. Insuring a child’s life is a waste of money because children don’t produce income. Yes, the policies guarantee their two younger kids will have a bit of insurance as adults, even if they do develop diabetes, but will $50,000 in coverage really make much of a difference to them? “You are being taken advantage of,” Schlenker told the Murphys. “The insurance agent who sold you this is making an emotional argument, not a rational one. The amount of money that’s involved is not huge, but it’s just one demonstration that the financial industry is very good at selling you products you may not need.”

Warren MacKenzie and JoAnne Anderson, the two other members of our advisory team, helped the Murphys understand exactly how much they were paying for investment advice. “The wrap program you’re in is probably charging you 3% a year in fees,” Anderson told them. “So you’re paying several thousand dollars a year in fees. That’s far more than you should be paying.”

Schlenker pointed out how they could put together a simple portfolio composed of index funds for under 0.5% a year in fees. “The difference over the course of a couple of decades is huge,” he told the Murphys. “You’re talking tens of thousands of dollars.”

The advice

“I know you feel stretched to the limit,” Schlenker told them. “I wish I could tell you that things will get better on a day-to-day basis, but I can’t. There isn’t any way to turn your empty wallets at month end into a happy cash surplus as long as Jennifer remains part-time.” The good news? A return to full-time work for Jennifer is an option, not a necessity. Either way, the Murphys will be fine in the long run.

For now, the couple should realize they are not spending money foolishly. Schlenker pointed out that they pay $20,000 a year in taxes and nearly another $20,000 on their mortgage. Factor in the costs of raising three kids, investing in the farm and contributing to RRSPs, and “you’re managing your budget very well. You’re going to be absolutely fine — more than fine — in the long run.”

Especially if the Murphys remember that much of the money they’re putting out is building wealth for the future. “I think a lot of your stress would be alleviated if you realized how much equity you’re building up every month,” MacKenzie told them. Between paying down their mortgage, contributing to their RRSP, tending to their Christmas tree farm, and accumulating pension benefits, they are adding tens of thousands of dollars to their net worth every year.

Our experts assured Martin he could stop worrying about losing his company pension. Even if his employer were to go bust, Martin’s pension is protected by a government backstop and he will collect most, if not all, of what he has accumulated. If Martin makes it to 55 at the auto plant, then his pension benefits and Jennifer’s half-pension, combined with the farm income and the impressive amount they’ve accumulated in their RRSPs, will provide the couple with a comfortable retirement. At that point, if they want to help out with their kids’ university expenses, they could continue to work or even sell part of the farm.

Our experts did have tips for the Murphys. First, they should get out of their expensive wrap portfolio and construct a diversified portfolio using low-cost index funds. (For more on the mechanics of doing this, see “Be a Couch Potato”) This could easily double the effective return from their portfolio. A conservative assumption is that their low-cost portfolio will produce 6% annual returns, meaning their $170,000 in savings will double over the next 12 years. If the Murphys continue to contribute to their RRSPs at their current clip, they will have $450,000 or so in savings by the time they hit their mid-50s.

Second, the Murphys should keep their chins up. The biggest threat they face is that Martin may lose his job, but even then they have options. They could replace most of the $70,000-a-year shortfall if Jennifer went to work full-time (for an additional $30,000 a year), the farm started to produce $20,000 a year in profit and Martin found additional work that would pay $20,000 a year.

For now, the Murphys should focus on paying down their mortgage and contributing to registered education savings plans for their kids. If possible, they should continue building up their RRSPs. The most tax-efficient way to do that is for the high-income spouse (Martin) to contribute to spousal RRSPs for the lower-income spouse (Jennifer).

They should drop the life insurance on their kids. And — most important — they should stop beating themselves up. “You’re not doing anything wrong,” Schlenker told them. “In fact, you’ve accumulated far more wealth than most people your age. So don’t feel you have to put every extra $35 that comes your way into your RRSP. Use it to improve life now, not when you’re 95.”

Six weeks later

The Murphys have cancelled their kids’ life insurance policies. They’re getting out of their wrap account and becoming self-directed investors in index funds. “I think we took our adviser by surprise,” says Martin. “He didn’t really say anything. But what we’ve found is that it takes forever to change things. It’s a mountain of paperwork and we’re still in the middle of it.”

Will Jennifer go back to work full-time? Can Martin make the farm pay? Read their blog at www.moneysense.ca/martinandjennifer.