Lack of Trust in “Mr. Market”

My last post talked about how I attempt to have a better reason to invest in companies beyond the dividend yield they afford. While I usually have some sort of hypothesis and analysis over why I invest in companies, the ability to see a real return for my money is something that I have a hard time giving up on. My problem is that I don’t really trust the market to respond like it should, at least in a time frame that I would expect it to.

Investment theory, specifically that of value investing theory started by Benjamin Graham and followed as well as popularized by Warren Buffet states that if a company is fundamentally sound, but is undervalued in comparison to the market, there is an opportunity for the market to eventually “catch on” to this oversight. I’m not one to argue with the richest investor in the world, but as I said, I have trust issues.

My issues come from the fact that for the most part, I will freely admit that I have no greater knowledge of the market than anyone else. I understand financial statements, and through many years of accounting school could probably create the reports for most companies (not well, but I could do it). I can analyze the pros and cons of an investment and identify potential risks that the company may face down the road (mainly because I’m a pessimist and look at things like this on reflex), but I can’t tell what the crowd is going to do.

My trust issues lead me back to dividend stocks as my main targets for investment. Payments to me on a regular basis show, perhaps at the expense of potential capital gains from the company, that my investment still exists. I understand that I may be giving up a potential “home run” investment that will significantly reduce my time needed at work, but I just can’t get behind the assumption that capital gains will happen automatically.

I would be perfectly fine collecting dividends that keep up with the rate of inflation on the stocks I’m invested in forever – I don’t really expect that the stocks I’ve invested in will go up (although most do). I know what kind of cashflow my wife and I require to live the lifestyle we’re “accustomed” to, and dividend cashflow allows me to gauge how close we are to that point.

Chasing Yields

I enjoy sports betting. Having a bit of money on a game makes it much more interesting to me, than just watching a bunch of super-athletes try to beat each other. My favourite sport to bet on is NFL football, and I’ll usually have between five and twenty dollars bet on the outcome of a few Sunday afternoon games I’m watching over the winter. I’ve tracked my win and loss totals over the past few years, and seem to come out ahead when I’m betting straight-up on the game – especially when I’ve done some reading and paid attention to how the teams are doing over the week. Where I lose money is when I start chasing the “big” win (big being a 300% win instead of a 200% win on games bet). I’m not sure where my logical brain goes when it decides that instead of winning by 7 points (the public “line”), the team I’m betting on is definitely going to win by 15 – chasing the gains, a strategy that generally doesn’t make much sense at all.

I really try not to chase the same type of high yields in my retirement investing – going for the big score so that I can exit a few months earlier than I had originally planned. There are a lot of sketchy companies available to put money into that could lead to more of a setback than just investing in basic index funds.

I attempt to hit a middle ground of investing where I believe my investment funds are being used efficiently. I’m willing to take on risk in my investments for the return provided, but I really do try to filter out the companies that seem much too good to be true. I will admit that I am probably too enamoured with dividend yields, in comparison to capital gains. Dividends (for me) provide a tangible and more dependable return in comparison to capital gains. Their yields can be measured and are somewhat more predictable based on company reports. As an example, a significant cut in the Canadian Oilsands dividend was somewhat predictable after a string of bad news reports – while I couldn’t predict this cut outright, I think it’s more understandable than a stock decreasing 10% due to something overseas that doesn’t necessarily have any relationship to what the stock is doing.

So, while I look at yields, and am attracted to the reported current investment returns I could possibly attain, I try to look much further into a stock than this number to ensure it will be a good investment a year or two down the road.

Are you hooked on dividends? Have you ever chased a high yield from a “bad” company?

Take ALL of My Money (Just Not Right Now)

I have made it abundantly clear to both of my parents that I would prefer that they end their lives with as close to a zero balance as they can possibly manage. I haven’t depended on my parents financially since I was 18 years old, and I certainly hope I won’t need their money from now into the future.

Estate laws in Canada are set up to allow assets left to spouses or financially dependent children or grandchildren to be transferred tax free. In the event someone dies without any of these individuals in their lives, or assets have been left to other individuals through a will, the item is deemed to have been sold, and subject to all applicable taxes. These tax laws don’t really affect most people that much – someone dies and their moderate estate is left to a spouse or goes to a relative or is bequeathed to someone else according to instructions left in a will.

I’d like there to be a 100% estate tax (outside of the current rules on spouses and dependents, along with registered charities). I don’t understand why someone who is now dead, and no longer needs any money can control what happens to their money. I would prefer to see estate taxes force individuals to pay their own way through life, and make it as good as it can possibly be. Our current system is very skewed towards the above-average level of wealth person, who has the ability to leave substantial fortunes to create an heir, something which our society seems to disagree with significantly.

Higher estate taxes would have the same effect on most people as my company’s vacation policy, which is a “use it or lose it approach”. People would have less incentive to squirrel money away in their retirement – they could (for example) buy a bigger annuity, which would ensure that all funds are used up at death, rather than setting something aside for their adult children. Higher estate taxes could also lessen the income and sales tax burden on individuals, allowing for greater spending power now, in return for being taxed 100% more when you don’t need money anymore.

My argument for having a system like this is that I really don’t think dead people need money anymore. Why not set up a system that stops estates from making people wealthy for doing nothing, and reduce the tax burden on the people who are living now?

Buying Time From My Employer

Summer seems to have finally arrived in Ontario. This long weekend saw a lot of outdoor time, which resulted in my wife and I getting some pretty good sunburns (overcast skies somehow hide the sun from us) that will start peeling in a gross manner sometime near the end of the week. This is the time of year that we wait all through the winter for – I dream of playing golf while there are three foot snow drifts covering up my backyard, and now I can actually go and play (usually not as well as I dreamed about), life is much better. The problem with my schedule right now, is that there are 40 hours in the middle of the nicest hours of the day that I’m at work.

One of the reasons I have stayed at my current company as long as I have (over a decade now) is the generous vacation policy they provide. I currently receive 22 days of vacation, meaning I really only have to work for 11 months of the year. I have asked around to other companies that I may have interest in joining, and most places don’t offer more than 3 weeks to start. My wife and I take a one week vacation together every year, as well as a few long weekends to relax and maybe go to a cottage. The rest of my time off I tend to use as half days on the golf course – in an attempt to spread out the free time as effectively as possible.

While I would always take more money for my job, the truth is that I’ve almost capped out on my salary for my company, which is a Crown Agency of the Ontario government. I don’t know if I would ever run out of vacation days, but if the summer “eats” up a few days, things might be getting pretty slim by Christmas and New Year’s this year, when I may want to visit friends and family. I haven’t sought “official” company policy on this, but I have been toying with the idea of increasing my vacation time via unpaid leave this year. A few days wouldn’t really impact my financial plans, as long as the money I would be making has been saved up, and I may prefer to have the time off over the money in the fall and winter this year.

For me, I have to look at this as an overall plan. If I looked at the day off costing me “X dollars per day”, I would never do it, the opportunity cost would be too high (mostly because I’m cheap and don’t like to leave any money on the table) I’d work and make money instead of enjoying my leisure time.

Would you take unpaid time off if you were an employee? Does your employer offer this option to you?

Administrative Update (4 Months in)

I started my solo blog over 4 months ago. Over that period of time, I’ve written two posts per week (a total of 40 posts, or 20,000 words) allowing me to put my sometimes incomplete thoughts about spending, investing, and early retirement.

Based on the analytics I get as part of my Internet Service Provider, I can see that there are people actually reading me on a regular basis. To date, I’ve done nothing to possibly expand the readership of the website. I’ve kept the same fairly drab theme on the site, and have essentially just written posts.

My goal over the next few weeks is to hopefully spruce up the place a little bit. Given the fact that I’ve never really done anything like that before, I’m hoping any changes I make won’t make things worse. I endeavour to make adjustments slowly (mostly out of necessity), and hopefully unnoticeable.

I wanted to thank the people who have been reading my website. Blogs like this are a mix of a place to vet ideas, as well as a sort of vanity project – to write and expect that people actually care what I’m saying, especially mostly complete strangers.

I hope to keep writing. In the coming months, I think I’ll move into looking at my current portfolio, and how I arrived at the mix of assets that it holds. I’m hoping that the information that I provide will either be useful to the people that read this, while at the same time allow me to analyse at a deeper level the investments I’ve made to-date.

Creating a Balance

On comedian Joe Rogan’s podcast last week, had a very interesting guest named Aubrey de Grey, who is a theoretician in the field of gerontology. The goal of Aubrey’s work is to essentially be a science fiction genius. He sits around all day figuring out ways to fix human bodies so that they people don’t break down over time. Although things like vaccines and clean water, along with better hygiene and medicine have helped people live longer, we are currently at a bit of plateau as far as life-extension goes.

My main takeaway from the whole podcast was that currently there is almost no difference (on average) between the lifespan of a super long-life person – the so-called “blue-zone” [link] populations, and the rest of us unhealthy slobs. Aubrey stated that right now, no matter how healthy someone is, the average difference between a “normal” person and a super healthy person is about 4 years (when everything was kept at a constant). I like to think that I’m a somewhat healthy individual, but realistically, all of the sweating and soreness from working out is probably not really adding that much projected time to my life.

Putting mortality into perspective makes me seek balance in my life. Most of my past decade has been spent fully engrossed in retirement planning. I know that there are times when I should probably think a little bit less about my future retirement and have a little more fun right now. I don’t necessarily obsess about my retirement planning and savings, but I still have a bit of a habit of automatically saying no to things from back in my debt pay-down days, which took place over most of my twenties.

With only around 50 years left to live (not a pleasant thing to think about, but it’s true), my goal is to work out a balance to enjoy today, hopefully as much as I’ll be able to enjoy myself in 45 years. Some of this enjoyment depends on money I spend, but a lot of it is how I allocate my time and interests in leading a fulfilling life.

Already “Wind-Down” Time

I like to learn. I was continuously in school until 2 years ago, I had been in taking formal courses for almost 30 years straight. While almost always tedious, I did enjoy the part at the end of the course, looking back and realizing that I’ve actually learned more than I knew a few months before – even though there were a couple of instances I didn’t actually learn enough to pass the course. Taking courses did get better once I decided that it wasn’t a good idea to stay up until 1 a.m. on a work night to finish an assignment that was due the next day (time management would have been a huge help during my University years).

Even though I enjoy learning, I think I’m mostly done with formal education. I read quite a bit of non-fiction on all sorts of subjects (right now I’m reading a book on curing autoimmune diseases) and prefer to learn at a much more relaxed pace, which, based on previous experience is much better than trying to cram in most of the Canadian Tax Code over 10 weeks. Taking tests and being graded is stressful, and will bring very little enjoyment to my life because of that. After taking part in “higher education” by distance education to get an accounting designation, I’m not interested in trading off the 10 to 30 hours a week it takes to get through more courses.

I don’t really have any major career aspirations that require more education. In fact, I don’t really have many career aspirations at all. I like the job I’ve been doing over the past three years, and don’t really see a reason to change that at this point. The job I have has (for now) the correct mix of enough responsibility, without a significant risk of me losing my job in making a mistake. I get along well with my coworkers, and because I’ve worked in the same place for over a decade, I know most of the people in my 400 person company.

One of my friends asked me why I didn’t take part in any team sports, as I’m fairly athletic and it would seem like something I’d be into doing. In the past, I’ve played beach volleyball, ultimate frisbee, and slow pitch. I wasn’t terrible at any of those things, but after the initial couple of weeks of having fun, I started to really dislike having to go somewhere once or twice a week. This type of obligation is the reason why I think I’m done with formal education – I’ll keep learning, just more on my own.

The marginal return on any money I would spent and time I would invest just doesn’t make sense to “waste” on more school. Even though I still have approximately nine and a half years to go before my projected retirement age, I’m already in “wind-down” time – taking 2 or 3 years for more school (such as a Masters or other higher education), to use for 6 years doesn’t really make sense to me.

My Retirement Nightmare

I read a really well-written blog post by Go Curry Cracker! The article looks at how a portfolio would fare through the worst stock market downturn in history, which, coupled with continuously high inflation rates lead to an almost 0% real (inflation adjusted) return. The writer went through a very well thought out strategy of how someone could adapt their retirement to survive through a multi-year downturn.

This really long market downturn is my own personal finance nightmare. Once I retire and my wife and I are fully dependent on the funds I’ve accumulated, a significant downturn would cause a great deal of stress. Watching my retirement account dwindle over time due to market decreases would be like losing my job and coming near the end of my Employment Insurance period with no real job leads in sight.

The problem that I can see in this kind of downturn is the same issue that happens with any “bet” that includes unknown information – you’ll never know when the bet will successfully “hit”. In the case of the stock market, nobody ever really knows if a market downturn will last 4 years, or in inflation-adjusted terms 27 years, like the 1965 to 1992 period. From a gambler’s perspective, it’s like playing roulette and deciding that just because “red” hasn’t come up in a while, it’s a good idea to put money on red on the next spin, even though the same odds exist around the next spin of the wheel as on the previous.

Our household could adapt to a downturn for a few years – we could change our household expenses significantly if we needed to, eat cheaper food, or even sell the house to live someplace that costs less than our current condominium townhouse. If this sort of thing went on for decades though, eating a few beans and rice might not really cut the mustard to save our entire retirement plan if 80% of the equity disappears.

This line of thinking is what causes me to question my target “number”. It causes me to wonder if my wife and I would ever be able to save enough money to be totally secure. If my wife and I have spent $20,000 for 12 years, can I predict that $20,000 per year will be enough to last for a few decades? Do I need to factor in significant market changes by reducing our projected withdrawal rate? Or, in the end do we just retire with a plan and hope it works out for the best and enjoy our financial freedom for as long as we can?