TomB16 investing blog

The WBI plummeted today to 141.76. That's down 10 percent from three days ago. It's still crazy high, all things considered.

 

Thank you for the post, Phil. I share your perspective, to an extent.

When a market is stagnant, options can be used to make money, even for long-term, old, guys like me.

There are a couple of core equities we've held for many years that we have been buying with our distributions. I have specific price targets and these stocks have been above these price targets, much of the time. Instead of just waiting, I have sold puts at our strike price to pick up a bit of extra cash. There is no risk, as I would buy at that price, anyway.

I keep our strategy really simple. It would be easy to crank up a complex system of options, triggers, and cash allocations based on various market data. That runs against my core holding of wanting to partner with good businesses and enjoy the revenue they produce while actively staying away from the shell game of trading.

Still, options do have their place.

 

Thank you, Last Alpha.

I don't have much to say. Q2 financials will start coming out in about a month. I'm waiting for the sky to fall, holding onto our core companies, and letting cash build.

Once the sky falls, I expect it to fall further based on election fever. If Biden wins, I expect the market to turn up slowly. If Trump wins, I expect the market to turn up more quickly but perhaps with more volatility. Regardless, I expect the campaigns to cause negative market impact right up to election day.

For those who follow the WBI, it is currently 146.59.

 

I share your opinion that campaigning will likely be more toxic to the markets than anything that happens after the election.

 

There are a handful of interviews and blogs from business owners stating they will not survive a second quarantine lockdown. Some won't survive this one.

Given the growth of coronavirus cases in the COVID denial states, there will clearly be a second wave. The question is, will there be a second quarantine.

I'm still trying to figure out if there is even a modest chance of a second quarantine, as that would cause me to sell nearly everything and move to my fallout bunker. On the other hand, the current virus trajectory is going to create a humanitarian crisis. It's too bad we have so many stragglers in our herd.

If anyone would care to share thoughts on this, I would appreciate it. My current line of thought is the chance of a second quarantine is low, even in the face of the rising death toll. The economy simply could not survive.

I'm glad I have a significant amount of cash, laying around. Anyone who goes all in, at this point in history, is more brave than I am.

 

Something happened today that caused me to think of the people I know who, over the years, have gotten into the stock market, thinking they are the smartest people around but actually knowing absolutely nothing, and then had their ass handed to them. It's a common occurrence in my peer group.

It's exactly like someone thinking they can fly a 747, hopping in the cockpit, jamming the throttles to the firewall, and then pulling sticks and twisting knobs randomly. The odds of a good outcome are infinitesimal.

Thinking about this, I've come to the conclusion that thinking you know what's going to happen tomorrow is a direct sign of ignorance 98% of the time.

It's pretty seldom that I think I know what's going to happen tomorrow or with any given company. It does happen, rarely. Mostly, I do nothing because the vast majority of the time, doing nothing is the correct thing to do. I refrain from taking action on market signs because they are a mirage, most of the time.

That's how a long term investor does it:

Statistics - doing nothing almost always the right choice

Gut - you know what's going to happen so why not take action that will lever that knowledge to get rich quickly

Long term investors go with statistics, as far as I know. Perhaps WXYZ or other long term investors do it differently and will chime in with their approach.

 

I envy you your cash position. I'm just over 18% and it won't be a whole lot higher, when the second dip rolls into town.

We expect a significant amount of non-market cash on the horizon but it won't be here for the fire sale. On the other hand, it doesn't look like the markets will catch fire again until the very end of the year, so maybe there is no panic.

On the other hand, when this is all done and the fire is finally out, I expect a whole lot of inflation. When/if that day comes, people like WXYZ who remain fully invested will be well positioned to take advantage of that economic beat down of the middle and lower classes.

 

20 years ago, when I first started to seriously think about retirement, I did ton of financial planning. Seeing money flow through life was a revelation. It was the start of a spreadsheet fetish that would continue to this day.

I learned a bit from the various spreadsheets and I learned a lot from making the various spreadsheets. The process is more valuable than the result. I highly recommend a deep dive with spreadsheets and planning to anyone who wants to understand how much money they need to generate and how much they can spend.

Without doing a deep dive, it's difficult to understand how high a price you pay to "just let someone else do it". Aggregation products, annuities, and high volatility approaches are a waste of human life.

This is a summation of that effort but here are the high points.

It comes down to earnings, inflation, and sustainability.


While you may generate high earnings, projections need to be worst case scenario. IMO, only a fool would trade and/or stay fully invested during retirement so earnings will be greatly reduced, over the saving years. I still use positive projections but I mix in the idea that we need more than two years of money to live on that is non volatile and, therefore, not in the equity markets. This causes an earning dilution during good years but mitigates having to sell into a crashed market during the financial firestorms our society creates.


Investment Earnings

Retirement less than 10 years - Forget earnings. Take the amount of money you have, divide by the number of years, and that's the maximum you can consume per year. If your net worth is $500,000 and you have 10 years to live, you can have a modest retirement. Any earnings are a bonus.

10 < retirement < 20 - This basically turns into living off earnings for 10 years and then living off principle for 10 years. If you want to retire at 60 and plan to live to 80, you need to carry almost the full balance for the first half or it will get extremely lean in the final decade. How much you need at this point is going to vary widely depending on your ability to reliably compound money. For most people, they will be able to pull out about 4% of their net worth, so $1.25M will provide the same modest $50K annual income as the previous example.

20 < retirement < 30 - To retire for more than 20 years, you're going to have to earn more than inflation. Keeping up with or ahead of inflation is important, unless you have a ton of money. If you want to live off government paper, you're going to need millions of dollars for a modest retirement.

retirement > 30 - If you can fund a retirement of 30 years, you have enough money to live indefinitely. At this retirement horizon, Inflation is such a dominating factor that you either earn enough to keep up or you can't retire. It would take a silly amount of net worth to overwhelm a portfolio that under performs inflation for three decades.

More than 30 years is roughly the same as 30 years.


The Spend Down

Let's only consider retirements of 20 years and over.

After calculating portfolio damage based on several patterns of spend down, I noticed the same graph again and again.

Assuming a steady financial state: earnings = inflation + spend

Each year inflation will remove some of the buying power of your nest egg. You will also directly extract money on which to live. You have to earn enough to compensate for these two factors.

In this mode, your nest egg is going to have to go up for the first 2/3 of your retirement. If you are spreading your money over 30 years, your nest egg needs to go up for the first 20 to maintain a withdrawal rate that paces inflation. It's counter intuitive. It looks like this.



If you spend less than earnings minus inflation, the graph becomes parabolic. Stop being cheap. Make it rain. It looks like this.





What You're Going to Need

When considering a 30 year retirement, investing chops are more important than the size of your nest egg. If you're an expert investor, you will do fine with $1M. If you are an average investor, you are going to need $1.5~2M. If you are a modest investor, you can't retire for 30 years unless you've been gifted a nest egg by a billionaire family member.

This is a broad generalization, however, I believe it holds true. If your portfolio is made of aggrigation products (ETFs, mutual funds, annuities) other than a simple index, you cannot retire for 30 years.

Those who don't understand money, investing and taxes are the two most boring topics in life. These folks are giving away a decade of their lives to their career that they wouldn't need to. What's more, learning to invest takes a lot less than a decade. They might not like it, particularly at first, but the best investment you can make to have a good life is learning how to invest.

If you're a trader, you can never retire so disregard everything I've written and keep working so you can pump money into that slot machine. I sincerely hope it comes up cherries.

There are two problems with retiring on trading, both are deal killers. First, it's far too volatile and the bottom of the net worth lows will not survive the withdrawals you will need to live. To retire, you need reliable income. Second, it under performs investing over time and simply isn't viable. I encourage everyone to get trading out of their system at a younger age so they can start the job of building net worth for retirement.

 

In the last post, I wanted to make a point that I did not make. It sucks to get old. lol!

When you are looking at 30+ years of living off investment income, a small difference in investment earnings makes a huge impact on the result. This cannot be overstated.

Buying an ETF, mutual fund, or annuity (the traditional retirement investment vehicles) will likely cost you to work a decade longer and have 10 years less retirement. Over long periods of time, small differentials in earnings make a huge impact.

When someone asks me to recommend an aggregation product or any situation in which someone else manages their money, I think to myself, "They had better enjoy their career because they are going to have a lot more years of it than they would with a good quality investment plan."

On the other hand, most people are not capable of managing their money so aggregation products are their best case scenario. This group is fortunate to not be part of "most people".


The S&P 500 gained 29% in 2019. If you're trading program gained 10%, it would be the same as losing 19% on a flat year. The cost of losing to market gains and inflation cannot be overstated.

The cost of losing to the broader market is higher than the gain of out-producing the broader market. If you can out perform the S&P 500, go for it. Just please understand you are spending your earning years proving something that almost everyone fails to prove.

 

I hope today's post triggers some discussion. It's a philosophical introspection.

You buy a stock at $5/shr that yields 10%. The stock goes up to $10/shr before the dividend changes. Does the stock yield 5%, 10%, other?

Convention suggests you have a $10/shr stock that pays 5%, however, I would contend this is trader thinking.

If you put $10,000 into a stock that yields 10% and hold it for 10 years, you're going to make 10% from the original capital for a decade. I feel it's best normalized like a bond. I don't update the spot market of my bonds after buying them, either. I monitor the market price but I always consider the bonds to be face value plus coupons.

So, as a long term holder, I have several stocks I intend to hold through crashes, depressions, and Kardashian marriages. For these specific holdings, I project based on purchase price plus yield, just like I calculate a bond.

If I was a trader, or for stocks I'm not married to, I consider the spot price and have set thresholds that, when exceeded, will trigger a sell.

Up to the second pricing is trader think and not appropriate for situations where I consider myself a part owner in the business; that's most of my portfolio.

 

I want to post, yet again, about market timing. This is a touchstone of long term investing, so I am diving deep.

We don’t trade stock. We buy. I usually time the market on most buy orders but not always. We’ve only sold a handful of companies, over the years. When I see something core that stops me from believing in the long term health of the company, I sell regardless of price, so I don't time position exits.

With very few exceptions, I only buy when a company is at a fairly specific discount. A few times in our investing history, companies have stayed below that level for months at a time. In these cases, I have over-funded our savings/investments as much as possible. The older I get, the more aggressive I've gotten at throwing cash at companies when I see value.

There have also been two periods in the last decade during with nothing showing value. When I was younger, it was really hard to let cash build during these rare periods but I now don’t worry about it. These days, it wouldn't bother me to go two years without buying a stock. It does make it easier to stand down when you have a nice portfolio. It was tough during the growth phase.

About 1/3 of the time over the last decade, there has only been one stock that is at or near a value point. That number isn’t a hard number but I treat it as a hard number because you have to draw a line somewhere. If only one is at or near my value point, I don’t time the market. In this case, I just buy.

When no companies are at our value point, I do one of three things: let cash build, cut a long-term buy order (up to 90 days) at our value price, sell a put at our value price. I consider the put to be without risk, because I would be happy to buy at that price. Long term limit orders have hit more often than I would have thought, even when the prices is well below retail.

During periods where two or more companies we want to buy are at our value point, I time the market. The point being, we have alternatives. These are position expansions so we’re not desperate to buy more stock. I might put in a long standing buy order significantly below our value price, trying to get a deal. The more choices I have, the harder bargain I drive. I can think of two times we've missed out on good prices due to my skinflint methods. Most of the time, it works out well. Certainly, we have not gotten rich off this approach. This is a micro-optimization. I believe it works in our favor but it is of very minor value, at best. On the long term, minor value compounds so that’s why I do it.

Lastly, the cost/benefit of this market timing varies with dividends.

In the case a company distributes money to the owners, the market timing becomes clear.

If a company yields 7%, I can place a long term limit order at 7% below our value point and it will be a good deal if it fills in under a year. If it takes over a year, I would have been better off to just buy and enjoy the dividend.

 

Need I remind anyone, the Buffett Indicator is now over 147 and we just emerged from a Q2 that is a total blood bath by anyone's estimations?