What is all this talk about selling our investments and going to cash? Dr. SoS and I decided that we are selling our stocks and are going to sit in cash for an indeterminate amount of time. Before we explain why we made this decision, we should cover a few basic things.
If you read other personal finance blogs, you read about the term FIRE. This is an abbreviation that refers to Financial Independence Retire Early. We define Financial Independence (FI) as having enough money in passive income that you can stop working. We define Retire Early (RE) as retiring before the traditional retirement age of 65. We believe you can have Financial Independence without Retiring Early, but cannot truly Retire Early without Financial Independence. We intend to get to Financial Independence within the next 10 years. As for retirement, I already took an early retirement package, after my first 19 year career at a software company, and ended up finding a better job. Dr. SoS has plans to create other passive streams of income, and eventually will stop seeing patients. Neither of us really have plans to retire. Dr. SoS wants to spend her time and energy helping people. I want to continue managing our money and would like to teach financial literacy, computer programming, or foreign languages.
The VTSAX Vanguard Total Stock Market Index Fund Admiral Shares is the ETF (Exchange Traded Fund) of choice for many personal finance bloggers. The great thing about this investment is that the fees charged for it are low. With an Expense Ratio of only 0.04%, you can save up to 2% from other funds or having someone else manage your money. Warren Buffet recommends that investors should invest in low-cost index funds and that is most likely why many people invest this way.
The good thing is that if you invest in this broad market index fund, you will follow the American market. The bad thing is that you have no chance to beat the market. At this point, many people will say that there is no way to beat the market. If that is true, then how have Warren Buffett, Charlie Munger, Guy Spier, Mohnish Pabrai, Phil Town and all the other Superinvestors of Graham-and-Doddsville managed to beat the market year after year? With a little knowledge, there is a way.
Compounding Against You
Investing in a broad market index like VTSAX is easy and allows you to enjoy the success of America and the US stock market. The problem with it is that when the market crashes, which it will at some point, you crash right along with it. If you have $1,000 invested in the market and the market crashes 50%, this leaves you with $500. The issue is that compound interest can work against you just as much as it works for you. When you lose 50% of your money you now need to earn 100% to get back to $1000 from $500. The stock market averages 7% per year, so with these average market returns it would take you 11 years of compounding to make back your money. Hopefully, the market will recover better than 7% per year, but why be hopeful when you can make your own destiny?
Making Your Own Destiny
Rather than investing in the entire stock market, you could put in a little effort and invest on your own. I know you are saying that you could never invest on your own, but the truth is that you can. Warren Buffett and Charlie Munger are geniuses, but it does not take a genius to beat the market. You just have to understand that stock price does not equal business value. Then you need some instruction on how to decide business value. We plan to share some techniques, but to get you started, we recommend you read the following new book. You can buy it through Amazon, Audible, your local bookstore, or save your money for your investments and reserve a copy at your local library.
How Warren Buffett and Charlie Munger Taught Me to Master My Mind, My Emotions, and My Money (with a Little Help from My Dad)
by Danielle Town and Phil Town
Rule Number One – Don’t Lose Money
We discovered Phil Town in 2005 when we saw him speak at a motivational seminar. The crazy thing is that Dr. SoS and I were both at the same event, but would not meet one another for another five years. We own multiple copies of Phil’s books, read his blog, and listen to his podcast. We began investing on our own about five years ago. Phil follows the writings of Warren Buffet and other value investors to make incredible returns. Phil’s favorite quote by Warren Buffett talks about the two rules of investing. There are only two rules of investing.
This sounds preposterous, but Phil’s first book Rule #1 discusses this at length. Although, this book, and his other book Payback Time, are both great books, the book Invested is much more approachable for the average person. Phil teaches his daughter, Danielle, to invest. The book helps us learn vicariously as she discovers how to overcome her fear of investing and learn to value wonderful companies.
This is the basic process that you will learn when you decide to read the book. Look for businesses that have meaning to you and that follow the same values that you follow. Begin with the companies that sell products or services that you buy. Make sure that the business is one that you are capable of understanding. If you cannot understand what the business is doing, or how they generate cash, then pass and look for another business. Check that the business has some intrinsic characteristics that give it a durable competitive advantage against similar businesses in the same industry. This is what Warren Buffett calls a “moat”. Make sure that the business has management with integrity and talent and that look out for their employees instead of taking advantage of them. Then, as Charlie Munger says, “We should not pay an infinite price for a business”, so we need to calculate the value of the business. Finally, we sit in cash and wait for our wonderful businesses to go on sale, which provides us with a margin of safety against loss. Once you are able to do this, you will not only not lose money, but will beat the market handily.
Selling Our Investments
Right now, we only own two companies. They are not exactly wonderful and we did not buy either of them at a sale price. Both companies are quite volatile. I used this volatility to make money by trading options on the stocks. In the last year, I averaged a little over $4,000 per month trading options. I enjoy making money on our money, but after reading Invested, Dr. SoS and I decided to invest instead of risking our money. We believe Danielle and Phil Town’s ideas are better than chasing volatility where you can get seriously burned if the market turns. Overall, the current market price is greater than its value. Our plan is to sell these two companies and sit in cash as we work through the exercise of assigning a value to our list of wonderful companies. Then when Mr. Market puts our wonderful companies on sale, we will buy them.
Won’t we miss out on the gains of the rising market that the VTSAX investors enjoy? We will, but we will also have plenty of cash available when the stock market turns and puts all of our wonderful companies on sale. At that time, we will not only be able to buy our wonderful companies that coincide with our values at way below their value, but will also be able to stockpile them and realize returns far greater than investing in ETFs. This is why we do not mind sitting in cash.
We really like the FIRE community and see such passion in all that they are trying to do. We hope some of these great people will see that they can not only vote with their values by investing in their own list of wonderful companies, but will also realize gains that beat the market and decrease the time it takes them to make it to FIRE.
Now get out there and make your own destiny!
This blog is for education and entertainment only. Do not consider any of this as financial advice, because we are not financial advisors, nor have we considered your personal financial situation as your fiduciary.