The Gamble of Value Investing

      My eventual plan with my investing portfolio is to have five to ten percent of my investments in what will hopefully end up being “value” purchases, with the hope that these investments result in significant capital gains in our household’s available funds. So far, I have not made any of these types of investments, but have been doing a substantial amount of reading, hoping to accumulate as much knowledge from smarter investors than I probably ever will be.

My goal (investing-wise) is to have the following makeup:

10% – Bonds (ETF)
~80% Dividend-producing stocks
~10% in “value” stocks.

My current “obsession” with value investing partially has to do with diversification – moving away from the larger dividend-producing companies that I am currently focused on in order balance the portfolio with smaller and varied companies. The second reason for looking at value stocks as an alternative is the hope for the odd “home-run” on a minimal level of investment to increase the overall investment returns on the way to retirement.

At this point, I would say that I am in the range of “knows just enough to get my self into trouble” when looking at investing opportunities. I will not be fully investing my “Value” money immediately, while I take the time to learn all that I can about this way of looking at the market. Up until now, I was (at a basic level) looking at yield-producing companies and examining whether or not these entities would be able to continue to provide dividends to investors in the future.

Based on my limited knowledge of value investing, there seems to be the following steps involved:

  1. Identify stocks selling at a bargain.
  2. Research the stock extensively.
  3. Buy the stock at your target price.
  4. Wait for the market to figure out what you saw in the company, and buy the shares up to a profitable level.


Step one to three makes a lot of sense to me, and the stocks I pick and targets I set are mainly dependent on the research I do and the skill that I select stocks. It’s step four that depends on other investors either believing the same thing I did, or something happening with the company that is the concern with this type of investing. There are going to be times that I’m either wrong, or may enter a position too early that would result in initial losses on the purchase of a stock.

The gamble of investing in stocks that are currently undervalued, based on whatever metrics used to select the stocks is that nobody else will agree with the hypothesis that I’ve come up with, kind of like inviting everyone to a party and then nobody showing up – likely resulting in a similar feeling of dejection on my side.

For me, the potential gains from this portion of my retirement portfolio outweigh the risks associated with this type of investment, allowing for potential capital gains not available from the rest of the securities I have planned to purchase.

Playing the Game

The first job I ever had was horrible. I worked at a chicken farm gathering eggs on weekends. The job was very manual, and entailed me pushing a heavy-duty metal cart up and down very dusty and smelly rows of tightly caged hens picking up 4 eggs per hand and throwing them down into 30-egg flats over and over again for 3 to 5 hours (depending on what stage the chickens were at). At the end of the day, I would have averaged around 10,000 eggs gathered and needed to take a twenty minute shower to get the smell of the barn off of me. I was paid piecemeal, at (if I remember correctly) around four or five cents per dozen – it didn’t work out to a lot of money, but for an eleven year-old, it was quite a bit more than I had been making prior to that.

My parents instilled the habit of saving to me early, and would not let me just spend the money how I wanted to. I was “forced” to save money, and given very little access to the majority of funds. Through my parent’s investment advisor, a mutual funds investment, which I still remember (over 20 years later) being a Templeton emerging markets fund. Every weekend, I would check the finance section of the local newspaper and watch my “fortune” shrink and grow.*

One thing that I was allowed to buy was a Sega Genesis. My mom ordered this for me from the Sears catalog (I lived in a small town that had no electronics store, and this was pre-Internet 1991), and I had to impatiently wait the 3 to 5 business days for this awesome new toy to show up. My first ever game was “Sports Talk Baseball” and I probably played that for hundreds of hours – whenever nobody was watching our family’s one television that had 4 channels, I was on my Genesis, probably killing brain cells.

Since my Sega Genesis, I moved on to a Playstation 1, 2, and 3, as well as owning a Wii and X-Box 360. These days, I don’t play as many video games – It’s not due to anything other than I have other stuff I’d rather do – read more books or watch more sports, or spend more time with my wife. For 15 or 20 years of my life though, I probably averaged around two hours of video games per day. I liked the challenge of starting off in a game, being TERRIBLE at it, and slowly but surely getting better and better, gaining skills (useless skills in real life, but skills nonetheless) until I hopefully beat the game.

Personal finance is similar to video games. My personal finance life started with that terrible job, and having a savings plan strictly imposed on me by my parents, and continued on until today. Along the way, I have learned quite a bit from both experiences as well as following people’s lessons who are much smarter than I am. I somehow single-handedly paid for a University education, as well as the loans associated with those. I bought my first car, got a place to live, and paid off the entire mortgage of my house.

Similar to the video games that I probably spent too many hours playing, the whole process of personal finance is basically a grind. You save relatively small amounts of money, and slowly but surely through experience, luck or skill build up confidence and assets until you’re hopefully in a position that you can win. In my case, winning will be having a large enough portfolio that my wife and I will be financially independent by the time I’m 45.

Right now, I’m kind of at the beginning of the game – my portfolio is fairly small, the investments held are creating very little overall wealth on their own, and it’s kind of a frustrating process. I read as much as I can about investment planning and investment vehicles, but I am still pretty much a rookie at the whole “put money here and it will hopefully be worth more than it is now in a few years” strategy. Hopefully as time goes by, my odds of winning “The Personal Finance Game” will increase significantly.

*While I was writing this, I looked up the historical performance of this fund, and it has remained at essentially the same price point over the past 20 years.

Having Any Investing Plan is Better Than None

I try not to be a money snob. I don’t discriminate between short-term “Early Retirement” planners, the longer-run value investors, or the more average index investor. I think that each method has both benefits and pitfalls, depending on risk tolerance, market conditions, and capital availability. Over the long-term, I think there is probably a “winner” in all of these investing strategies – there have been many studies showing how each will turn out over time, including risks of each method of investing.

One thing I know, is that given the choice between any method of investing for retirement and not investing at all, I’d take something over nothing. I have many people in my life who seem to take a long-term “hope it all works out” approach to retirement planning, and not really do anything (save and/or invest) that may help them when they can no longer work.

I don’t think everyone needs to retire at 35 or 45, or even 60. I think that there should be some recognition however that at some point in a person’s life, they may either not want to get up in the morning to work for money, or they might no longer physically be able to work anymore. It’s so easy to put off that inevitable day in return for vacations, a new car, a bigger house, or any number of purchases that could be made by an “average” middle class household.

For me, working towards financial independence is a long-term goal that I try to keep in mind anytime I start thinking about doing something foolish with lots of money. It’s the kind of goal that stops me from what I would deem frivolous spending. I would rather work towards an end goal with my available funds.

A different, probably less aggressive goal could be anything that would ensure that both my wife and I have enough money when we’re done working. Instead of a 40 – 60% savings rate, a more reasonable 10 or 15% rate would ensure a small fortune in savings over a 35 or 40 year period at even a very conservative rate of return, because the way I see it, any savings and investing plan is better than none.

Fight Lifestyle Inflation

I like new gadgets. I am mostly successful at stopping myself from purchasing too many new things. I don’t like to waste money and I know that within a month or so of purchasing something like a new phone, I’ll be eyeballing the next version that does almost the exact same thing, but looks just a little bit different. I have staved off buying anything new, mostly because there’s nothing inherently wrong with my current phone.

Most electronics have been made to become obsolete fairly quickly. Over time, programs stop working, buttons start being a little finicky in working and the overall user experience just isn’t the same as when you got the item. In the case of a phone, I’ve noticed my 3-year old phone is starting to get really “laggy” over the past couple of months. If all I used it for was a texting machine and camera, this would be fine, but I use it as my main source of reading news and social networks for most of the day and evenings, so it is becoming a bit more of a pain to use.

Phone companies creating the contract dates – Ideally, something that costs between $500 and $700 would last for more than 2 or 3 years (the length of time most people wait between “upgrades” due to changes in cell phone contracts. I know I’ve fallen into getting a new cell phone more than every 3 years, starting with various flip phones, and moving to two different smartphones in the last five years.

Going into retirement, the desire to constantly buy the newest and best stuff would be a huge burden on our savings plans. Living with a 10 year old television that still shows HD, but doesn’t show sports in 4k is something we might just have to live with, same as dealing with an 8-12 year old car or 3 year old cell phones. One of the reasons we are able to even contemplate retiring significantly early is because we have kept our expenses much lower than our income coming to this point in our financial lives.

Buying into the consumer lifestyle too far for things that really won’t change our lives that significantly will not allow us to retire early. Beyond the initial rush of buying and being able to compare the new shiny thing to the old beat up “heap” it replaced, living with the “old” will allow for less of a possibility of outspending our savings.

The Hope for More Free Time

I follow a few local fitness people on Facebook, they sometimes post good deals on classes or have interesting articles. This week, one overly ambitious business, which focuses on mobility and flexibility had the following question posted: “Are Pelvic Control Drills Part of Your Exercise Routine?”. My answer to this question, is that first of all, I don’t even know what a pelvic control muscle is, or why I’d need it, and secondly, why would I work on this pelvic muscle instead of just going for a walk.

In an ideal world, I wouldn’t have to go to work, and would have a solid 2 or 3 hours per day to lift some weights, go for a walk, and then work on things like flexibility or other physical things that will allow my body to stay together in the next (hopefully) 50 years. With work, I really don’t have the time to do much more than make sure that I don’t spend all of my time sitting around and doing nothing.

Besides not having time to work on pelvic control drills, and other things that I should be doing to get in better shape, there are other things that slide due to a lack of time. One example is the fact that I should be much better versed in investing. In order to reach the goal my wife and I have set out, we have nine and a half years to save and invest enough money to allow us to be financially independent of our jobs. This kind of “responsibility” should take up a good chunk of my available time, but seems to slide to the back burner some weeks to make room for the latest library book, round of golf or Netflix show.

I’m hoping that I’ve gained enough knowledge over time that I won’t look back in horror at the investing decisions I’m currently making in the future when I will be hopefully much more confident and savvy. Once my wife and I are out of the workforce, I will hopefully be able to leverage some of the free time I gained into better returns for our portfolio. Until that time, I battle procrastination, and trying to get everything done all at once, rather than having to rush to get things done in my free time.

A Big Question – How Long Do I Think We’ll Live?

It’s kind of a morbid question to ask how long you plan for a retirement account to last for. Ideally, once I’m done working there will always be money in the bank, but realistically, I’d rather sort out a way that my wife and I are not over-saving now to have a massive “war chest” of money that we’re never going to touch.

Personally, I have used firecalc to assess my retirement plans, including withdrawal rates for spending, additional dollars being earned (through either my own pension fund, the Canadian Pension Plan, or potentially Old Age Security). I have found it a useful tool, as it has “told” me in several retirement setups that there’s a good chance my money will run out before I need it to.

I picked age 100 for my wife and I when I run these test calculations. I don’t know if in 60 years medical science will have obtained a significant breakthrough regarding age reversal or not*, but this seems to be a conservative age for early retirement planning, with the current average lifespan is much less than that at 81.24 years for Canadians. There are more and more people living past 100 these days compared to even a decade ago, due to enhancements in medical science. While I hope that I won’t be “inefficient” in my planning by working longer than I need to, it does seem prudent to save a bit of extra money just in case either my wife or I does make it past the average expectancy.

My hope is that with my dividend paying portfolio I will never have to touch the principal investments I have made and can essentially live off of some of the earnings, while re-investing the rest. To me, this is one of the benefits of investing in dividends (whether it’s the most efficient way overall to is in question) – hope for some capital return, and take the dividend money off the top. As long as the underlying security remains valuable, my hope is that we will never have to worry about running out of money in old age.

It is an important question to ask when setting up any sort of retirement portfolio, whether you’re planning on leaving the workforce in your 40s or you wait until your 80s – do you have enough money saved to maintain the lifestyle you want to have?



* I’m currently reading an interesting sci-fi book titled “The Postmortal” by Drew Magary that looks at the downside of humans finding a cure for aging. I would recommend it to anyone interested in the world of speculative fiction and likes this kind of story.

Boxed In?

My wife and I decided 6 years ago that we wanted to be financially independent from our jobs by the time I was 45 (she will be 42 at the time, but doesn’t think it would be fair if I had the opportunity to retire and she didn’t, so we settled on a co-retirement). 45 is an arbitrary date, and we may end up changing our end goal, depending on how our finances are looking at the time, or if there are any changes to our current goals.

Working towards a concrete goal with a date in mind is helpful to me because it gives incentive to follow the plan I have set out in order to meet the set goals. I’m a procrastinator by nature, and not having any financial goal would lead to leakages, and an eventual “collapse” in the entire plan, along with probably a lot of inefficient spending made by my entire household.

On the other side of having this kind of plan, my wife and I have so far dedicated ourselves to a pretty aggressive route to retirement. On a day to day basis, most of the financial stuff takes care of itself – we don’t spend very much and therefore passively accumulate quite a bit of money naturally. Where our plan has kind of “boxed” us in a bit is that we require a fairly significant amount of money coming into our investment accounts on a regular basis in order to fund our financial plan.

I worry sometimes that we’ve limited some of the flexibility we may have in our working life by going down the Early Retirement path we’re on. Realistically, we don’t really require very much money to live on. We have no debt and could maybe right now add some flexibility to our lives. For example, instead of working 40 hours right now, we could reduce our hours to a percentage of that at jobs that pay less, but may allow for a different or more rewarding experience on a day to day basis.

Our main tactic to ensure that we aren’t “stuck” with a decision we made a number of years ago is communication and flexibility. If my wife or I decided tomorrow that we wanted to go for a job that paid half as much as she’s making now, we would have a discussion over the impact to our future plans and work it out – this kind of long-term plan requires buy-in from both my wife and I, and if either of us were unhappy with what we’re doing for most of our waking hours, the whole thing won’t work.

It Isn’t So Bad

My goal of being financially independent by the time I’m 45 seems both outlandish and kind of a waste of time. The main question that I get when I tell people (which are few in number) is what am I going to do with extra 20 years compared to the conventional retirement age of 65. This kind of “break” from the normal isn’t something that most people even contemplate, let alone attempt, it’s just not really done.

I don’t fit into most moulds of what the majority of people would term an “adult” (I use this term loosely, because as a 35 year old, there aren’t that many people in my age group who feel that they are sufficiently grown up). I have absolved myself from the responsibility of parenthood with surgery last fall because I decided that having children really wasn’t my thing, and my wife was in agreement over this lifestyle choice. I would term myself as eccentric more than anything, mainly due to my non-acceptance of the “normal” life.

What I have tried to do is reduce the responsibilities in my life to a bare minimum. Most of the responsibilities I gave up just made sense either financially or timewise, but I’m glad I made the decisions I did. I have no debts, my monthly expenses are low enough that I could afford them on a minimum wage salary, and my wife and I have no dependents – we have simplified as much as we can, other than the fact we still need money to live.

So, that’s our current “project” – to accumulate enough savings to get rid of the final major responsibility we have in our lives – having to work.

The thing about our jobs is that neither of us mind doing them. The work isn’t overly taxing (we both work nice desk jobs) and it does keep us engaged on a day to day basis. The issue with the job is that it keeps us engaged way too long in a day. If I had a choice, my ideal work day would be about two and a half hours long, not the 8 to 10 hours it is now. It would be a much better thing to do if it was just another part of my waking hours, rather than taking up most of the time I’m able to do things.

In my next post on Thursday, I’m going to start looking at my retirement portfolio, and publishing my current project, which is tearing it apart, to hopefully make it better.


Cutting Through the Confusion

In the past, I was obsessed with reading anything and everything I could about personal finance and investing. I learned a lot about value investing, options trading and strategic option purchases, day trading strategies and just about everything in between. I like to learn and don’t think it’s a bad idea to educate myself about the different ways of looking at stocks as potential investments.

The problem with reading so many points of view is that it causes quite a bit of indecision when I look at buying anything. Having so many ways to review a stock or any kind of investment provides a myriad of reasons both for and against buying or selling a security in the exact same situation. I can completely understand why there’s so many books – it would be a pretty hard sell for an author to look at an original book written by Benjamin Graham and just completely agrees with every point that was made in “The Intelligent Investor” in 1949 without adding their own “spin” on a good strategy.

There have been lots and lots of books written to try to make investing simpler. Most of these books promote index trading as the safest way of doing this. On the flipside of these books are books that state that index investing creates a significant opportunity cost over their particular investment theory. While “Couch Potato” Investing is probably the easiest method of investing, and is very popular because of it’s ease of use, to me (and probably just me) it seems like I’d just be dusting the marketplace with cash, with no real expectation of what will happen to it, besides depending on the market to go up, forever.

So, what do I do? With various conflicting messages regarding investments I “should” be making, I scour for securities that fit the criteria I’m looking for that fit with what I’m trying to do – which is to generate enough cashflow to support my wife and I on an annual basis. In most cases, this plan means buying “expensive” companies or securities that provide me with a dividends that are slowly (very slowly) adding to my household’s annual income. While this method seems pretty inefficient to a value investor, it fulfills my requirements for investments and provides me with a return that I can see and count on (as far as anyone can count on any investment).

This strategy doesn’t mean that I don’t look for alternative investments that would provide a significant capital gain if they work out, these types of investments just make up a very small portion of my entire portfolio. I’m not adverse to any type of investment, I just prefer this way and have accepted the somewhat more risky and inefficient manner in return for financial independence in 10 years.

Seems Easy, Right?

I’m sure I’m not the only person that does this, but about once every couple of months, I run through the calculations that show me where I’ll be at age 45, and what kind of return my investments will need in order to “safely” be able to retire. I don’t really have a magic number, but ideally, I’d like to have somewhere around $20,000 coming in from investments at retirement that would easily cover all of the expenses my wife and I incur on an annual basis.

$20,000 per year is a reasonable goal to achieve. We don’t spend very much, and if we want or need anything else, we could pick up some casual labour for a period of time to supplement our “retirement” income. I will be the first to admit that I don’t have 100% confidence in my investing strategy, but I would have to invest in over 70% “dogs” to completely fail at this goal.

On the other hand, if I were able to achieve a reasonable 10% return every year for the the 10 years I’m hoping is the limit of my working career, things get quite a bit less tight financially, compared to a more conservative 5 to 7 percent per year that I’m actually counting on earning in the kind of short period of time that I’ve given myself to invest (I like to make things difficult on myself).

The problem with an early retirement plan is that instead of 40 or so years to invest (from 25 to 65, which is how you’re supposed to do it) I only have the 10 years to do it. It means I’m much more open to a downswing in the market, as I don’t have the long-term certainty of probably increases in the stock market seen over history. The short window of investment is somewhat concerning, but if it comes down to it, our solution would be to work until we felt we had enough money to retire – either on a full time basis to continue investing, or part time to allow the funds invested to accrue.

I think that for my wife and I, it has paid to live fairly frugally. I read in an article last week that more important than huge amounts of exercise that people use to lose weight, is the volume of food that is consumed. Living frugally (to us anyways) is the same thing to my wife and I – we’ve been able to first pay off our entire house fairly quickly, and then begin our road down investing towards an early retirement exit.