Investing questions, and what's going on in general?
type568

I'm unsure how to start this topic, despite thinking about it two days.

I am exceptionally grateful to this community. I came here in 2007 while studying to program using the library, back then I could barely write my programming question in English good enough for one to understand me. Then I was asked nicely to write it differently. This assisted greatly in developing my programming skills, and also getting my English to "good enough for daily use", which is obviously well below a native speaker, but I can read a US GAAP, watch a movie or talk to IB tech support on the phone, and read "fooled by randomness" the way the author wrote it. :)

Also the psychological aspect. Older & component people from the other side of the world are spending their time to help you. This is exceptionally motivating. I believe being here back then made me a better person.

I remember wishing one day I could be as tech savvy to regularly help here, well didn't happen. Despite the fact I dropped from university(Bachelor of Computer Sc.), or rather abandoned it.

Now, about my wishes to give something useful back. Despite not possessing competitive knowledge in programming, I did spend the last decade on the financial markets, mostly equity. I don't want to brag, but.. In order for you to have a reason to actually get interested in asking any questions I should add - my work is rather successful so far.

Since 2013, I had one down year which on average was much lesser loss in % than the years when I gained. I did surpass the symbolical 7 figure in $ last november, AND I live in Russia(this matters as the average monthly salary here is under $800). Over 95% of my capital is made on the market.

Intention of the last two paragraphs is to suggest I've certain understanding of what's going on in the world of finance. Now, I'm nearly sure some of you may have questions of all kinds you'd like to be answered..

Like what's going on with inflation, is the US debt gonna collapse the economy(no), should I buy shares of Tesla, Zoom, AT&T or whatever. Should I pay down my mortage ASAP, why Bitcoin isn't a threat to any currency, but it might replace gold, should you personally(despite not having the market as your full time job) use leverage, and blah blah.. You can ask anything, literally. If it's too general or "stupid", I'll try to come up with as interesting & specific answer as I can. No limit for questions per post :D

I would truly enjoy sharing my knowledge, & spending time to write answers to answer the question to your satisfaction. And today I'm sure I know quite some about the topic.

amarillion

Congrats on your success!

Actually why not? I recently started putting some money in ETFs. And I was thinking about buying some stocks as well. How would you go about picking some good value investment stocks? I'm going for a hands-off buy-and-hold strategy. Should I buy stocks that pay dividend?

I just want to make my savings work a little harder. I have no great desire to become a full-time trader. I suspect in order to be really successful with that you have to focus on nothing else.

type568

I live in Russia as I said, and for you - depending on location taxes matter exceptionally. US govt takes 10% tax from a dividend a US company pays me. Now this is so because I filled a form I'm not a US tax resident, otherwise it'd be 30%. So these 30% are something.. Problematic, which should be accounted for while making your projections when buying a dividend stock. I assume if you live outside of U.S, your country is likely to grab extra anyways.

About ETFs, stocks & stuff. Generally good ETFs(good, well good = cheap, passive) are a great idea for a retail investor as they save you a lot of risks.

About value, & buy and hold. I don't want to suggest a retail investor try to catch mad swings in individual stocks, and look for opportunities to make a quick back. However, a passive balancing strategy is something the majority of people miss out from.

Let's say, you decide to invest 50%/50% into two ETFs. What would you expect your returns after X years to be? An average of the two, and you wish you put it all into the better one, right? Well, wrong. Balancing a portfolio, is this risk free tool available for "common folk" to buy low, and sell high, without actually doing any complex analysis.

Imagine you bought a high tech ETF, like nasdaq(QQQ) & some emerging markets stuff..
Let's say each of the indexes were worth 1000, and you invested 100k in each. You had 200k.

Let's say first year you got +20% on nasdaq, and -20% on the other thing.. So, after the first year you're square.. Your Nasdaq holdings are worth 120k, and the emerging are worth 80. But your balance is skewed, so  you sell some nasdaq, each one is worth 1200, you own 100.. You sell 17, that's 20 400, leaving you with 99 600 invested in nasdaq (83 shares), and you spend the 20 400 to buy more of the other ETF which is now worth 800, that's 25 shares + you got $400 spare.

So you got 83 shares of NQ + 125 shares of the other thing. +400$ (0.2% not like it matters)

Imagine this returns to where it was after another year, 1000 & 1000. Then you got 83k + 125k +0.4k. You're up 4.2% on a flat market, while taking less risks than investing in either of the individual ETFs due to diversification. And 20% swings aren't much. Yes markets correlate, but balancing opportunities occur regularly.

We're all close to programming here, so developing a prettier algorithm isn't a problem.. First of all balancing should be triggered by misbalance, not by date. Let's say check it every month, should it get close to your trigger - every week, and balance when it triggers. Well, I'd use mixed triggers, both time AND misbalance. Or you could say just time, but misbalance made it shorter. This strategy will work best while using instruments that have the best volatility one against the other, hence the less "alike" they are, the better. I'm thinking dividend EM + US high tech are probably as good as it gets, given both instruments actually "return value". I could suggest something third, but it'll decrease the balancing effect. Bonds are awfully expensive now. Short term heaven yield none, trading commissions may end up being more expensive. Long term debt.. Well, you'll be at the mercy of the fed. And it has become a complex game which I wouldn't suggest anyone play, unless it's your full time job and you know really well what you're doing.

However, while the loans are as cheap, not using leverage in your life is.. Rather silly. The two cheap kinds of leverage available are mortgage, and broker's leverage. IB provides particularly cheap leverage. I don't suggest to mortgage your home, but well - surely do try to stretch it, rather than pay it asap. This is either relevant or irrelevant depending if you have it, and what kind of agreement you have on it(in Russia you can always pay it down asap, or refinance it and etc', people have free options on it).

Now broker's leverage. Actually, I'm wrong calling it the only other available one, as there are MANY ETFs which have built in leverage. Particularly interesting one is TQQQ. It's a nasdaq with 3x built in leverage, automatically managed. Means they buy MORE when it goes up, and sell when it goes down. So -33% ain't gonna be -99%. However +33%, isn't x2. It's much more, as compound interest kicks in on this thing. This asymmetry is already quite something, isn't it?
Why is this tool interesting? Well, open up the chart, questions are answered. But how can one work with this without monitoring it daily?
Well, since it has a built in leverage, you buy it for just some of your cash. Let's say 30%, which is 90% exposure. Then add to it some 40% emerging dividend ETF, and leave 30% cash. So you got 130% exposure, while still maintaining 30% cash. Why do you need it? Because TQQQ has crashed many times, and will crash many times more. So you build up an algo, on what levels of drawdown on your portfolio you start pouring in reserves. I sketched an algo on this thing a while ago, couldn't quickly find it, but I can search again or write it again if you're interested. Or rather you can write it yourself(in english), and I could add something to it.

The most important thing to understand here(especially when any kind of leverage is involved) is that your worst enemy is.. No, not the leverage. You are. Your greed & fear. That is, the algorithm must NEVER be broken. If you wish to change it, then you do. But you apply changes after a period of time. I'd say one quarter is too little. Half a year to a year.

About being a trader, I know really few successful guys. I'm more like a portfolio manager who manages his own portfolio. I CAN keep a stock for over a year, unless I find something better that fits. But yes, even doing this while regularly beating the market, while actively managing the portfolio is supposed to be the deal of your life I think, at least it'll take years to master. I'm actually thinking now i've more free "emotional energy" and time for other things than I had any previous year. Although I wouldn't say this about 2020, well, COVID was a mess.

Now, about "good value stocks".. This is a complex topic. U.S. is really poor from this standpoint. Huge amounts of cash, zero rates make their dirty job of making everything that is earning money expensive, so you're better off with kind of growth. But today I believe there's a new term, "value growth".. There's nonsense like Tesla, Zoom, & Amazon which MAY stand up to their value, but are priced to near perfection. & then there's Facebook, which P/E will become lower than this of a non distressed SP500 in a couple of years should the price of the stock freeze. And it won't, I'm nearly certain. I dumped it a couple weeks ago for some speculative "Momo". Now from a similar standpoint(as FB) I own shares of Alibaba. Yes BABA's troubles are a little more serious than FB, but it grows faster, it's cheaper and investors tend to overreact. It's a great business, long term & short term. The US-China tensions make things a bit complex. Like what's gonna happen if the US actually makes it delist? I think probability is very low, <10%, but go figure. Let's say probability is 20%, even then it's worth something.. Fine, let's say we want a discount of 20%. It should still be worth 300, and it cost <225.

So what should you be looking for?
First of all, the company should be "for shareholders", this is rarely an issue in the US, but it is occasionally in other countries. Though it should also be managed well. Taleb's "Skin in The Game" discusses this in depth. IBM seems like an interesting value play, but go figure when the management reverses its course. There's no major stakeholder who makes bold decisions and thinks about other things than his short term bonus, like there are in Tesla, Amazon, FB & even Apple, still(Tim cook seems like knows what he's doing, AND he's got a billion in the stock & stuff).
So you look at P/E(how much does $1 of a company's profits worth). What's going on with the profit(or at least revenue, for growth companies it's often more important), then you decide if it's worth your back.
Now, there's another agenda.. Dividend aristocrats. In the world of low yield, these companies are highly leveraged but seem solid, and pay great dividends. Much higher than cost of leverage for YOU, and inflation is your friend.. So stuff like AT&T, Altria & OneOK is rather interesting. Credit rating is high(well, we do remember the subprime mortgage, the companies are usually solid enough individually, but they do heavily rely on cheap credit, although their debt is cheap and already long term, so its cost is not gonna explode overnight, and inflation is there to assist). Perhaps a portfolio of such stocks could be an alternative to EM ETF, but i'd still go for the ETF if I wasn't full time in this stuff, as it makes room for less errors, AND it's country diversification could add volatility between the investment tools, TQQQ vs an emerging market is likely to be very volatile which is what you need to balance as often as you can.

I'll be glad to answer more questions, and thanks for the congrats :P

Matthew Leverton

I know one person personally who was so successful in day trading (mostly crypto currency) that he and his wife were both able to quit their jobs with millions in the bank. But the ones that lose money don't talk about it.

I wouldn't find day trading to be an enjoyable occupation. I take the invest and forget approach while minimizing unnecessary living expenses. After 20 years of that, I could now retire (before turning 40) by simply living off of 4% withdrawal indefinitely.

An interesting thing is that once you get to a million+ dollars of interest earning assets, it becomes kind of obvious that what you do with your day job income is almost irrelevant compared to what you do with your investments. That is, whether you save 10% or 80% of a modest income at that point it barely impacts how much wealth you accumulate. "It takes money to make money."

type568

I know one person personally who was so successful in day trading (mostly crypto currency) that he and his wife were both able to quit their jobs with millions in the bank. But the ones that lose money don't talk about it.

I got such a guy on twitter. Well, all crypto success is obviously the result of single vast episode of luck, but also very likely not "pure luck". Doesn't mean he'll waste it all, but doesn't mean he'll repeat his success. I own some BTC, it's approx 8% of my current networth, obviously it's all profit by now(pulled more than invested). I wish I bought this thing when I first heard about it here on this forum. :)

But perhaps it'd be bad for my skillset, and personality. That guy I mentioned is very.. "Spiky" & defensive.. After a long while eventually I found out why, he well understands the role of luck in his life. He was often posting successful day trading results, weirdly all was "after", and then he stopped.. I'd assume he quit it altogether, not sure.

I was starting my "career" while trying to get into day trading, dreamed about it.. And failed. Not like I'd like to be doing it now, but then given the size of capital and cost of living - I don't need it either.

I had systematic success in 2014, which lasted precisely one quarter. I was working both long and short, on a specific gap related pattern, doing my homework before each market open. During the 13 weeks I had one loss, which was smaller than smallest profitable week(essentially 0). Unlikely "pure luck", but then it just stopped working. Something has changed in the market, so the fact is(most likely) that I saw some inefficiency that was there for a while, but then it was gone. Perhaps someone more sophisticated has found it, and implemented an algorithm. It was fun. Was I just lucky? Well, I found a system and used it.. Well done me. I could never find another one, or at least I started working differently.

I agree with you about expenses.. My initial capital is an apartment from grandpa(I live in it now), which was rented out for over a decade.. Since I was in school. So for a period of time I lived for half of what it paid, and invested the rest. Used all my effort to maximize returns, and at some point in time it started to yield.

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An interesting thing is that once you get to a million+ dollars of interest earning assets, it becomes kind of obvious that what you do with your day job income is almost irrelevant compared to what you do with your investments. That is, whether you save 10% or 80% of a modest income at that point it barely impacts how much wealth you accumulate. "It takes money to make money."

Yes, but then it takes great deal of understanding to actually do something, which others would consider risky, given you're not really ready to take the risk. And 1m $ in US isn't this much, a lot of estate not all that luxurious can cost more than this, there are salaries which give 150k+
What does a median experienced coder make?

Now about living using 4%.. I'm unsure it's safe bet in the US. Means you must earn 4%+ inflation. I'm assuming it's OK if you still take 4 on a downturn(means you may take less today than it was yday on a bad year), otherwise given the awful rates - it'll still require a strategy. Junk bond ETF (HYG) yields 4.6%, but come on - 2% is inflation, they say they're ready to tolerate 3%.

Obviously you wanna grab equities.. But well. Some aristocrats imploded during COVID. I'm certain you can build a strategy to safely support your 4%, and more likely than not - just by buying some stuff and owning it, you'll make it through with 4% without imploding the capital, but it's not unimaginable today that you won't.

I'm sure you've read books written by people much smarter than me talking about 4%, or even 5%.. But these books were not written when US govt was borrowing for 10 year well below inflation. Heck, 4% was easily treasury yield ABOVE inflation.

You got no questions at all? :(

Edgar Reynaldo

Can you give me a simple rundown of investing in crypto currency?

Aldrik

What you have explained so far is very interesting but I do not know how I can put it to practice. How do you find stocks that you like? Where do you read up on individual stocks? When do you sell? How many stocks do you hold at any given time?

You said Alibaba's stock price should be 300 but is currently <225, how do you estimate a stocks actual value?

Lets say I only want to look at my portfolio once a month, what kind of stocks should I be looking at?

type568

Can you give me a simple rundown of investing in crypto currency?

Well, this is probably one of the "too general questions", but I can try to point out some things from you, so that you can ask more specific questions afterwards.

First of all, the only interesting thing is Bitcoin itself. Etherium has the potential, but it may make sense ONLY after POS triggers, or at least when it nears. Currently, well, yes it may do 10% in a day, but considering investment in to an instrument which inflates 10%/yr instead of earning you something(like a stock) - well, meh.

Although it IS(Etherium) a solid second(to bitcoin), so.. Go figure. But then you don't have a good instrument to invest with it yet.. Well, you CAN buy it, but then you'll suffer that 10% inflation, and all altcoins are much more volatile. So it'll be really sad to buy a top, and there's good reason to think in an instrument with inflation this top maybe permanent.

There isn't an ETF for bitcoin yet, there's an ETN, GBTC, but there are problems with it. There's a reason this kind of instruments is much less trusted than ETFs.

So what you can do, is probably go somewhere like localbitcoins.com, and figure how to buy some there.

Now what to expect, and how to manage it? I certainly would not suggest you trying to time the top, or the bottom. However, above I mentioned a balancing strategy. It may actually be a good idea to keep in bitcoins somewhere between 5% to 15% of your networth. So buy it for 10%, if it dives below 5% - buy back to 10%, don't buy it more often than once a year. Sell it to 10% if it reaches 15%. This way it'll never bankrupt you, and you'll buy low & sell high. If 5-15% is too much, do it 4-10%, IDK. The point is the concept here.

However, I think it's likely an ETF for bitcoin will be approved soon. Then the story will be much much easier.. Vanguard applied for it IIRC, totally trustworthy company.

Aldrik said:

What you have explained so far is very interesting but I do not know how I can put it to practice. How do you find stocks that you like? Where do you read up on individual stocks? When do you sell? How many stocks do you hold at any given time?

You said Alibaba's stock price should be 300 but is currently <225, how do you estimate a stocks actual value?

Lets say I only want to look at my portfolio once a month, what kind of stocks should I be looking at?

Can you be more specific about what you'd like to put to practice? 
About individual stocks.. It's very complex, there are MANY aspects, unless you wanna do this a thing of your life - I don't think you can really be competitive. Go for the ETFs. How to put it to practice - I explained in above posts.. Buy (for example) 30% TQQQ for 30% of portfolio, some emerging markets ETF for another 40%, and use the 30% as reserve when(if) you lose 15%, 25%, 33%, 45%.In vast majority of cases I sell in order to buy something I think is better, although occasionally some news do trigger a sell. Sometimes my willingness to deleverage triggers a sell, as I'm(almost) always nearly 200% long stocks(I strongly discourage you from doing so!).
About a stock's actual value, well, it's usually really complex to estimate a stock's true value, it's also quite subjective. I can do this with a margin of safety that is given if the stock is vastly cheaper than rational estimates.. Alibaba's current P/E is under 25, but the growth rate is fantastic. It grows much faster than Google, but Google is much more expensive nevertheless.  Let's say it's the same "perspective"(but BABA grows faster, so I think it's the other way around actually), and let's give 20% discount for it being China. It's still too cheap. That's not enough of an argument, what if Google overvalued? Or overhyped?(look at tesla)Well, if it doesn't grow it'll be cheaper than SP500.. Heck it already is, but it grows revenue faster than 30%(!!!!) a year. For how long will it continue? It may slow down, but still TOO CHEAP!
You can ask more specific questions about stock picking, but this isn't something that can be learned quickly.
General concept is to figure the earnings, I use for example seekingalpha.com, investing.com . But the most reliable way is to read a report on the company's website to get the numbers. Maybe a good idea to actually read the text of a report.Then estimate how much a $ of profit cost, how will it be returned to you(or invested in growth, if so - it must be appropriate investment with good expected return, if company's revenue grows fast, and profits don't lag too much - probably they know what they're doing), and compare it to other stocks. Good idea is to have a good margin of safety, and to know why is it cheap now(irrational fear is the most likely answer). So it's a good idea to figure a driver for a stock price. But then if you wanna own the company long enough, it may not be necessary. 

General asset classes, portfolio management can mostly be just "understood". Now stock picking... Writing a book wouldn't deliver the experience one accumulates over a decade :(Or perhaps it's good, go figure.. But the question is comparable to "how do I program in Java" by someone who isn't familiar with programming :(
Nevertheless, I'll write down multiple unconnected aspects, perhaps all together with the above written will connect some dots.

1. Understand the cost of profit, and the perspective of this profit. And how it can be returned to the investor.Generally this 1. is much more than it seems, perhaps it is almost the entire answer to the question, but then go figure how to do it..

2. Compare the stock to its peers, but then all companies are different, and you often can't simply compare the numbers. Obviously SaaS has to be more expensive than a company that actually sells software licenses for life, and a growing company maybe in a transition to SaaS, then it'll look like its revenue is shrinking, because of the standard of reporting. Well, dig through..
3. If the stock took a dive, try to figure why, and perhaps the dive is either too deep, or doesn't make sense at all. This is likely your best buy, and highest return for the following year. A loss of 25% promises a 33% gain when it recovers. 33% => 50%.
4. Solid dividends, higher than your cost of borrowing. Especially if the difference is vast, and little reason to doubt the dividends will not become smaller.
5. Chart.. ? Well, it may hint a moment of entry. Again I don't recommend, but go figure.
6. Good to have a major stakeholder invested, who works for the share's value.
7. Avoid companies that can't be assessed. In the end the IPO of Tesla ended up being an astonishing investment, but back then the company only had promises. How could one assess it? Current valuation is also.. "to perfection"It's good if a growing company becomes cheaper than an index in a year or two given it continues the growth at your expected rate, Then most likely the stock will go up. This is true about BABA, it was true about FB a month ago.
8. Heavily shorted stocks aren't always "fairly shorted", it was the story of Tesla.. I was buying it 270 => 200 presplit. Short interest of 30%, and bear tesis ranging from "it's just an automaker" to "they'll be bankrupt, Musk is fraud & blah blah". Short squeeze came.
My answer is very..  Weltered, sorry about this. But I don't really see how I can answer the very general questions of stock picking in a post, it's art.. I do have plans to write a book one day, well. It's a long story can't be made short.So I do suggest you pick a strategy based on couple of ETFs.

Matthew Leverton
type568 said:

And 1m $ in US isn't this much, a lot of estate not all that luxurious can cost more than this, there are salaries which give 150k+

What I mean is if you want to get from $1 million to $2 million whether you make $100k/year or $200k/year is almost irrelevant. By doing nothing but safe investments you'd get there within 10 years unless the markets tanked. At the current pace probably around 6 years. Sure, the extra income you make and save would help you get there a little faster --- but it's the fact that you already have $1 million that helps you quickly get to $2 million.

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What does a median experienced coder make?

Depends where you live. $60k - $120k is a reasonable range for somebody who isn't managing or making executive decisions.

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Now about living using 4%.. I'm unsure it's safe bet in the US. Means you must earn 4%+ inflation.

7%-8% tends to be a safe return for most investments. So if you are taking out 4% you are covering inflation. You definitely have to be prepared for down years and maybe take a little less out, but unless something catastrophic happens, you should be good. (And if something catastrophic happens, perhaps everybody is screwed anyway.)

Every $1 million then gives you $40k of safe spending money. I know families of 5+ who live off of that here. It's too tight for my liking but at 2.5 million you're at $100,000 of salary and that's hard to spend for someone with a paid off house who's not wasteful.

type568

What I mean is if you want to get from $1 million to $2 million whether you make $100k/year or $200k/year is almost irrelevant. By doing nothing but safe investments you'd get there within 10 years unless the markets tanked. At the current pace probably around 6 years. Sure, the extra income you make and save would help you get there a little faster --- but it's the fact that you already have $1 million that helps you quickly get to $2 million.

I wouldn't say a little.. If you're making 200k, and got 1m - well it is a reliable extra 20%. Should a major downturn arrive & stay a bit longer than COVID - it's likely to assist you even better.

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Depends where you live. $60k - $120k is a reasonable range for somebody who isn't managing or making executive decisions.

I thought 60 was median like a decade ago, from what Google had been suggesting.

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7%-8% tends to be a safe return for most investments. So if you are taking out 4% you are covering inflation. You definitely have to be prepared for down years and maybe take a little less out, but unless something catastrophic happens, you should be good. (And if something catastrophic happens, perhaps everybody is screwed anyway.)

Well, that's the point.. Be prepared for down years. How can you be prepared? Take less than 4%.

Imagine a downturn of 40% over 4 years, then 4 years more to recover. We're talking nominal prices. It's rather deep, but totally not unimaginable.

So, you got 1 000 000.
today: 960 (you took your 40)

then it all goes.. first year is -10%, you're at 960-96~ 854, given you still take 40 you're at 814.

2nd year, if we're to dive 40% in 4 year, 2nd yr IS NOT -10% of your current, but -11% (as it is a 90% => 80%), which places you to about 724 (814 * 0.89), from which you still need 40k? This is 684.

third year is -12.5% following the logic of 80% => 70%. 684 * 0.885 ~ 605 - 40 = 565.

The bottom of -40% is: 565 / 7 * 6 ~ 484 -40 = 444.

fifth year: (-40 to -30) means 444 * 7 / 6 is 518-40 ~ 478.
6th: 478 * 8 / 7 ~ 546 - 40 ~ 506
7th: 506 * 9 / 8 ~ 569 - 40 ~ 529
8th: 529 * 10 / 9 ~ 588 - 40 ~ 548.

This is what happens if you crush in to a -40% bear market that lasts 4 years, and takes 4 years to recover. 1000 => 548:
960, 814, 684, 565, 444, 506, 529, 548.

Now depends what happens with inflation, what you owned, if it was total return or were the dividends above inflation blah blah

You also mentioned a paid house. We'll you'd be much more solid if it wasn't paid, and it would allow you to live of 3.5%.

4% is legit if you're relatively old, and there's some fund that takes your money, and keeps it when you die, then they can allow you to burn through it. Unexpectedly long life of an individual is offset by rules of big numbers, and average life expectancy not being volatile.

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7%-8% tends to be a safe return for most investments.

Past performance isn't indicative of future results. And I'm not picking on you, I've good reason to say this specifically now. The market IS expensive. The rates are low. The market is on par of what it was in 2001(even pre covid, and future expected returns past covid), it's more sustainable now than it was then, because of the rates. But actualy earnings are very low.

Look here. Median, average SP500 P/E is ~16, from there you can derive your expected returns. Don't look at current 40, but when returns return it'll still be ~30, double of the "typical".

You could look at the high yielding dividend aristocrats like Altria, Exxon, Oke, AT&T, but they're all under heavy pressure which is well reflected by their stock prices(hence the returns), although I do consider them undervalued. But heck, a 7% dividend yield, minus 30% tax, minus inflation & you got no margin of safety.

We can build a lot of models, and debate about the fact Fed wouldn't permit such a downturn. And you'd be right, unless the Fed triggered it. I don't think inflation spiral is a major concern right now, but it's still the largest concern I can think about. What this can do, is force a major downturn WHILE the inflation is on the higher end of it. So on a tightening cycle to curb inflation can we get a nominal -40%? Sure we can. And then we'll average inflation of 3%+.

In other words I not good with 4% consumption. Because current profits are very expensive. The S&P500's 1$ of profits cost is near historic highs(even the future expected one, after covid), which isn't necessarily a bubble because of the low rates. And it can be so indefinitely, why not? But it does diminish expected returns, & especially safe returns. They're high for the latest years because 1$ of profits of the index goes higher and higher, but now THIS cannot run indefinitely.

In other words, i disagree with you 1m allows you to spend 40k/yr indefinitely given you live & invest in the U.S. Certainly not if it's also taxed with 20-30%%.

Are we "in a bubble"? Rather not than yes, rates are low.. So stocks aren't too costly and are likely to continue giving high returns for a while. What IS CRUSHED by the rates is reliable investment returns.

So what a 1 million can do? In my eyes it can allow you to be more picky about your work, do what you like, work less.. And if not "do things you'd do for free", at least yes only do things which are interesting for you. Know more people perhaps? Did you meet 11th person during the last decade? :P

Matthew Leverton
type568 said:

You also mentioned a paid house. We'll you'd be much more solid if it wasn't paid, and it would allow you to live of 3.5%.

The expression I used meant I owe no money on my house.

Where I live, a house that costs $1 million in a big city would cost $100k. Internet research about cost of living and salaries is going to be skewed towards expensive places.

Regarding taxes, I don't even pay 30% effective tax rate while gainfully employed. There are a ton of ways to legally lessen your income tax hit. If I was living off of $80k here (quite comfortably) my tax rate would be close to 10%.

I didn't invent the 4% rule and lots of people retire early by it. I'm not saying it's a guarantee but it's a risk I'll be willing to take. If I worked at my current pace until retirement, I'd retire with 30-40 million dollars in investments. I have no desire or ambition to accumulate that much wealth.

In the worst case if the market got bad, I'd have to go back to work and get some primary income again.

I don't disagree with what you are saying at a high level, but I do think you overstate the amount of money someone needs to live comfortably in a low cost of living area.

type568

The expression I used meant I owe no money on my house.

Yes, I understood you. And my point is that a mortgage is cheapest source of long term funding available to a person. So owning your house fully is nice from standpoint of mental comfort, but it's a luxury that impacts long term investment income, as some of the funds frozen in the house could've been used for investing purposes which yield more than the cost of credit. And unlike broker leverage can be much more reliable, and not eligible to raising payments(depends on the agreement), or a margin call.

About the tax rate.. Is it about "what you live on", or what you earn? Dividends paid to your brokerage account aren't taxed? Though then I'm sure there are ETFs that optimize this stuff.

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I didn't invent the 4% rule and lots of people retire early by it. I'm not saying it's a guarantee but it's a risk I'll be willing to take. If I worked at my current pace until retirement, I'd retire with 30-40 million dollars in investments. I have no desire or ambition to accumulate that much wealth.

Nice projection :o

About the capital I'm talking about, well, yes it depends on the risks.
And you're totally right about varying cost of living.. U.S. is a huge country, but then would you be as happy in a place with low cost of living? Will it offer all the things you want? IDK, an Opera? The healthcare, proximity to your family?

Now about returning to work. If you don't want to, it's a problem. I'd rather have a work I don't dislike.. Like all that FIRE stuff. You hate your work this much you wanna retire early? Maybe pick something for your liking, even if it's less providing?

But generally I guess I can't tell you something you don't know it seems. I suspect you do know more than ten people.

LennyLen
type568 said:

So owning your house fully is nice from standpoint of mental comfort, but it's a luxury that impacts long term investment income, as some of the funds frozen in the house could've been used for investing purposes which yield more than the cost of credit. And unlike broker leverage can be much more reliable, and not eligible to raising payments(depends on the agreement), or a margin call.

Couldn't you recreate some of those funds by using the house as collateral on a new loan?

type568
LennyLen said:

Couldn't you recreate some of those funds by using the house as collateral on a new loan?

I'm quite sure you could, especially in a country with an advanced financial system as the US. In Russia such loans are considerably more expensive. So it's a good idea to arrange a fake buy of an apartment.. We're doing this, good thing not married officially.

Matthew Leverton
type568 said:

About the tax rate.. Is it about "what you live on", or what you earn? Dividends paid to your brokerage account aren't taxed?

Ordinary dividends are taxed like regular income.

Qualified dividends (held long term and other rules apply) are taxed like capital gains, so at 15%.

Also, if you make less than $80,000 (filing jointly) you don't get taxed on any capital gains or qualified dividends that I'm aware of. I believe once you are a $1 more than that you get taxed at the 15%. (That is, I don't think the first $80k is 0% for people who make more than $80k, but I could be mistaken.)

So basically as an early retired person, if I were making $40,000 in qualified dividends / capital gains yearly, then I would choose not to re-invest it. Then I could sell up to $40,000 of additional stocks and stay below the $80k threshold.

In addition, I'm not sure if those numbers are before or after deductions. I can subtract $24,800 off my income for standard deduction when tax time comes. I can subtract at least $4000 in credits off of my tax bill for having children. (And that number is up in these COVID times if I was only making $80k.)

Anyway, I'm not running the numbers here for real, but it's quite possible that as a retired person, I could make $80k of passive income from my investments and not pay a single dime in income tax.

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but then would you be as happy in a place with low cost of living? Will it offer all the things you want? IDK, an Opera? The healthcare, proximity to your family?

It's where I was born and raised. I lived downtown Chicago for 5 years; so I know the comparison between rural and city. I don't find the additional cost to be worth it. Also, I can easily take a day trip into Chicago and enjoy those things as frequently as I ever did when I lived there. The only thing that I miss about city life is immediate access to different types of food.

I don't hate my work; in fact, I like it. It's quite flexible and I can do whatever I want. And perhaps I won't retire as early as I could. To me the important part of the whole "FIRE" movement is the "financial independence" part to truly do whatever you want to do.

If you wanted to live for, say, 40 years (age 40-80) off of investments, how much money would you want to have saved up?

type568

Ordinary dividends are taxed like regular income.

Qualified dividends (held long term and other rules apply) are taxed like capital gains, so at 15%.

Also, if you make less than $80,000 (filing jointly) you don't get taxed on any capital gains or qualified dividends that I'm aware of. I believe once you are a $1 more than that you get taxed at the 15%. (That is, I don't think the first $80k is 0% for people who make more than $80k, but I could be mistaken.)

So basically as an early retired person, if I were making $40,000 in qualified dividends / capital gains yearly, then I would choose not to re-invest it. Then I could sell up to $40,000 of additional stocks and stay below the $80k threshold.

In addition, I'm not sure if those numbers are before or after deductions. I can subtract $24,800 off my income for standard deduction when tax time comes. I can subtract at least $4000 in credits off of my tax bill for having children. (And that number is up in these COVID times if I was only making $80k.)

Anyway, I'm not running the numbers here for real, but it's quite possible that as a retired person, I could make $80k of passive income from my investments and not pay a single dime in income tax.

Complexity of U.S. tax code is something beyond imagination. I don't know if it's true, but I encountered claims U.S. tax compliance devoured approx 1% of GDP. Back then it was only slightly smaller than GDP of Israel where I lived then.

I pay 13% from dividends. 0% from capital gains. Simple.

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It's where I was born and raised. I lived downtown Chicago for 5 years; so I know the comparison between rural and city. I don't find the additional cost to be worth it. Also, I can easily take a day trip into Chicago and enjoy those things as frequently as I ever did when I lived there. The only thing that I miss about city life is immediate access to different types of food.

Yeah well, if it's your home it's good.. I was flown to Israel when I was 8, then I return home to Saint Petersburg when I was ~23, & no plans to "move on".

Quote:

I don't hate my work; in fact, I like it. It's quite flexible and I can do whatever I want. And perhaps I won't retire as early as I could. To me the important part of the whole "FIRE" movement is the "financial independence" part to truly do whatever you want to do.

Makes good sense, odds are I'll be busy with investments til I die, or go insane or whatever. Intensity of it may change, perhaps one day I'll decide I'm tired of leverage or something. Most of the time it's 80-100%, if it's 50% I'm uncomfortable and FOMO, need MOAR.

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If you wanted to live for, say, 40 years (age 40-80) off of investments, how much money would you want to have saved up?

I think the question makes.. A weird assumption. At the age of 80, do I have to die? What if I run out of moneys, and don't die? :D

But then even if I know for sure I only need to last 40 years, I can't project actual gains with any certainty. While talking about 40 years, you can't really securely drain even 1% above what you gain, as it'll be going down slightly at first, but faster & faster. If you also hit a market bump, you may drawn really fast. So it's either up, or down.

However, given the fact I live in Russia, the tax code is quite favorable & the dividend yields & payouts of certain companies assure a safe withdrawal of at least 5%, so $2 mil would totally do for a young man with a place to live who wishes to start a family. It'll be easily top 1% in terms of standard of living. Though less so if talking about Moscow, but you won't be starving either.

I'm quite certain the capital gains will drop through the years, but it'll happen via capital growth, not dividends getting smaller.

In my portfolio I've a company with P/E of about 6, which invests in its growth & pays good dividends. It's a small cap, yes.. Rosagro. The current dividend is over 7%. This is for H2 2020. So annual is probably more than 10%, there's seasonality.. :)

I also have "Severstal", which is likely to pay more than 10% from its current price.
It's a cash cow though, but they do have investment program which is certainly more credible than this of most U.S. aristocrats, though I own OneOK, they seem nice.

However, my plan is to earn all I can earn. I enjoy the process, this is a constant test to my professionalism and I see no reason to try to stop. Perhaps at some point in time I'll be willing to put less time & effort in to it, and hence reduce risk, try to only caputre longer price movements etc'

In two words my strategy is building a balanced portfolio of ideas which I expect to yield in most cases within a quarter, sometimes within 3 quarters, rarely more. However, it's almost always companies which I believe in, in general and consider good investments for a long time. There are exceptions.

There's a bank, VTB which promises good dividends in 2022, then even greater in 2023. And I'm almost sure it's bullshit. But I'm almost sure the market will nevertheless buy it at some point in time this year, besides the stock lags in performance for the last year. It's pure speculation, I wouldn't buy this shit if I had to hold it for years, but it's a good trade. I'm in it for the buck, not to prove a point.

Edgar Reynaldo

What makes crypto currency go up and down. Are they all worth it? Which one is best? Bitcoin is at $60,000 right now.

Bob

I could now retire (before turning 40) by simply living off of 4% withdrawal indefinitely.

If you mean "4% of the current portfolio size", then that'll indeed last forever. You may not like how many dollars that represents though.

If you mean the traditional safe withdrawal rate of "4% of the initial portfolio, adjusted for inflation", then that's only calibrated for a 95% success rate for 30 years (Trinity study).

Success rate falls off very quickly after 30 years. Of course, there's a large range of outcomes: you have a 60% probability of ending up with more money than you started, inflation-adjusted. So if you're flexible with your spending, you can actually start withdrawing larger percentages.

3.5% is better suited for longer time frames like 50 years.

A ~2% withdrawal is considered a perpetual portfolio, with world-wide diversified assets.

Here's a long series of posts with tons of data and studies, if you want to dive into the details.

PS: Avoid leveraged funds. Volatility decay can easily get you to underperform the baseline index.

type568

What makes crypto currency go up and down. Are they all worth it? Which one is best? Bitcoin is at $60,000 right now.

Well, same as any kind of instrument with an order book - it's a story of who's got less patience: the seller, or the buyer? In many cases, like current story with "Dogecoin"(which is literally a joke, it's the purpose of the coin - a joke) - it's about some PR pump & buying by individuals. Usually to sell higher for a profit, but with Musk it's probably mostly for the sake of a joke.

The fundamental value of most cryptocurrencies is undefined, cost of mining hasn't really much to do about it, as miners turning off their machines do not really slow down the emission, at least not in the medium term. The system has to adapt to adjust for dropped mining speed.

However, in my eyes Bitcoin is a good replacement for gold in investor's portfolios. This is a partial answer to "why cryptos go up & down": bitcoin rising spurs a FOMO, and searching for next thing,, and various altcoins make investors feel like these coins can go up much higher, and much faster.. And it's true as they're much smaller. Then they collapse more as well.

Perhaps only other uncontrolled crypto that makes sense is ETH, but it has a problem which is 10% emmission rate per annum. At some point in time it'll move to POS from POW, and there likely to be an ETF that's gonna do the management for investors for a little fee. Then it may become investable..

Bob said:

PS: Avoid leveraged funds. Volatility decay can easily get you to underperform the baseline index.

I disagree, it's important to understand the decay though. I find it a good idea to use such a fund, while ensuring you have reserves and a system to buy the pullback, and deleveraging higher.

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If you mean the traditional safe withdrawal rate of "4% of the initial portfolio, adjusted for inflation", then that's only calibrated for a 95% success rate for 30 years (Trinity study).

I wonder how this study looks, and I guess I should spend some time on that series of posts you mentioned, the author looks quite sane.

I was also building distribution charts with certain logic of portfolio, and asset classes managed with certain "randomity".. Problem is, underlying assumptions or the probability of their distribution in the model is product of author's imagination, barely more than this. It can be wrapped in to fancy words of history, and statistics - but it is still just imagination. Fat tails are there. & you gotta benefit from them.

Best protection against a loss is accumulated profit.

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