A different approach to asset allocation

[market timer]

What's new in the life of MT?

Can you give us an update?

In the 13 years since this thread was started, I have never really had an investment strategy that was reliable and allowed me to sleep well. When I was in my mid/late 20s, I shot for the moon with MYR. In my early 30s, I was paying off debt caused by margin calls. Finally, by mid-30s, I started to have some financial stability, but never a consistent investment strategy. I spent 2013-19 having moderate success trading bonds and temporarily buying dips in equities, but certainly underperformed a simple buy and hold strategy. I just never believed the rally would go this high or last this long.

By March 2019, nearing age 40, I wrote here that I'd had enough and was moving to cash. As my assets have grown, now over $2M, and my desire to earn an income is fading, it has become important to come up with a strategy that is reliable and allows me to sleep well.

During late Feb and early March of this year, I bought over $1M in stocks that I plan to hold through retirement. My current allocation is 70% equities, 15% commodities, and 15% bonds. Even though I bought after stocks had entered a bear market, I was still down $500K for the year at one point. That sort of decline is highly discouraging. What is the point of working and saving if you can lose it all so easily?

Remarkably, stocks have rebounded sharply and I'm at breakeven YTD. To get comfortable with the ups and downs, for planning purposes, I have started to focus on the dividend payout rather than the asset value. That's not to say I'm reaching for yield, but rather view the 3-4% yield on my ETFs (mostly value and international) as a sustainable withdrawal rate and less volatile than the price. Instead of using net worth to measure progress toward the FI goal, I'm tracking this dividend payout, with similar metrics for bonds and commodities. The goal is to visualize financial health in a way to reduces some of the daily noise, so I feel like I'm making long term progress with my savings, while taking enough risk to fund a retirement that could last several decades.

All of this is just to say that saving and investing has been a struggle for me my entire adult life. I have only had some success by earning a top 1% income and living a (merely) upper middle class life. Hopefully in the second half of life, I will become a better master of money, rather than a slave to it. This includes stopping the habit of checking stocks daily, reducing discretionary trading, becoming more generous, and relying on my investments to support my own creative efforts.

[itsmeagain]

Congratulations on your growth in wisdom, market timer. Know thyself.

[james22]

Thanks, mt.

[PurpleArc]

During late Feb and early March of this year, I bought over $1M in stocks that I plan to hold through retirement. My current allocation is 70% equities, 15% commodities, and 15% bonds. Even though I bought after stocks had entered a bear market, I was still down $500K for the year at one point. That sort of decline is highly discouraging. What is the point of working and saving if you can lose it all so easily?

Curious.

For commodities, what do you own?

[whodidntante]

Now I think there's a sweet spot because it's not generally recommended to hold back investing just to dollar cost average. But it might also not be recommended to invest most of the money you were planning on investing in stocks in your lifetime, today. So perhaps a sweet spot, investing immediately as you get money from income, is best.

Any thoughts?

The lesson to me is to dial back the leverage. It's not difficult to avoid bustout if you have a decent income, and access to additional money, and you avoid high multiples of leverage. A lot of Bogleheads do this without even realizing it. They take low interest mortgages that they don't prepay, or buy cars with a low interest car loan in spite of owning hundreds of thousands in securities. That's leverage on your portfolio, all things being equal. It's a spending problem if you do it to buy a car or a house that is too expensive for you.

You can do the same with futures if you don't own a house, or if you do and you just want to increase risk. Also, right now, futures offer leverage at less than 1% borrowing cost. Good luck getting a mortgage that cheap. Rack up some ETFs and then apply modest leverage with futures contracts. This will almost certainly beat an unlevered portfolio over a lifetime. You can use higher multiples but at some point the risk of ruin becomes a legitimate concern.

[Horton]

Remarkably, stocks have rebounded sharply and I'm at breakeven YTD. To get comfortable with the ups and downs, for planning purposes, I have started to focus on the dividend payout rather than the asset value. That's not to say I'm reaching for yield, but rather view the 3-4% yield on my ETFs (mostly value and international) as a sustainable withdrawal rate and less volatile than the price. Instead of using net worth to measure progress toward the FI goal, I'm tracking this dividend payout, with similar metrics for bonds and commodities. The goal is to visualize financial health in a way to reduces some of the daily noise, so I feel like I'm making long term progress with my savings, while taking enough risk to fund a retirement that could last several decades.

All of this is just to say that saving and investing has been a struggle for me my entire adult life. I have only had some success by earning a top 1% income and living a (merely) upper middle class life. Hopefully in the second half of life, I will become a better master of money, rather than a slave to it. This includes stopping the habit of checking stocks daily, reducing discretionary trading, becoming more generous, and relying on my investments to support my own creative efforts.

Thanks for your honest assessments.

FWIW, I find it’s often helpful to look beyond the assets to the liability itself - future spending. I think you do this too?

David Merkel wrote a good piece a long time ago about calculating an IRR of your current assets and future saving/spending:

https://alephblog.com/2008/01/26/person ... ings-rate/

I like to take a step back occasionally to understand the “creditworthiness” of my plan. Is it consistent with rates of Treasuries, investment grade, below investment grade, junk, or worse? I also like to consider a variety of scenarios - save less, spend more, poor returns, etc.

[EAD]

MT,

Building a $2mm nest egg by age 40 after being in debt in your early 30s is a tremendous accomplishment. I would be interested in hearing more details about your career path / income trajectory after getting your Econ PhD if you are willing to share.

[market timer]

For commodities, what do you own?

IAU for gold, SLV for silver, and long term crude oil futures.

[market timer]

FWIW, I find it’s often helpful to look beyond the assets to the liability itself - future spending. I think you do this too?

David Merkel wrote a good piece a long time ago about calculating an IRR of your current assets and future saving/spending:

https://alephblog.com/2008/01/26/person ... ings-rate/

I like to take a step back occasionally to understand the “creditworthiness” of my plan. Is it consistent with rates of Treasuries, investment grade, below investment grade, junk, or worse? I also like to consider a variety of scenarios - save less, spend more, poor returns, etc.

Yes, I do something similar. With the drop in long term interest rates over the past 18 months, the present value of liabilities has increased sharply. When you view financial health in this way, it makes long term bonds appear very low risk, while cash is highly risky, due to the asset-liability mismatch.

[market timer]

MT,

Building a $2mm nest egg by age 40 after being in debt in your early 30s is a tremendous accomplishment. I would be interested in hearing more details about your career path / income trajectory after getting your Econ PhD if you are willing to share.

On the career side, I'd rather not get in the details. It has been highly varied across functions and verticals. In terms of income, I started around $200K and just had my highest grossing year at $725K. I'd say my most useful skill is to help executives to pose the right questions to their teams.

[nisiprius]

MT,

Building a $2mm nest egg by age 40 after being in debt in your early 30s is a tremendous accomplishment. I would be interested in hearing more details about your career path / income trajectory after getting your Econ PhD if you are willing to share.

On the career side, I'd rather not get in the details. It has been highly varied across functions and verticals. In terms of income, I started around $200K and just had my highest grossing year at $725K. I'd say my most useful skill is to help executives to pose the right questions to their teams.

One of the arguments made for leveraging when young, or for taking high financial risk when young generally, is that the young have more human capital. Translated into human terms, that means they have more ability to take financial catastrophe in stride because they have time to pick themselves up, dust themselves off, start all over again. Ayres and Nalebuff found in their simulations that some people following their strategy would have experienced financial ruin, but argued that it didn't matter because, given their financial recuperative strength, statistically a group following their strategy would have done better than a group following a more traditional strategy.

I would very much like to hear whatever you, as a person who has experienced financial ruin at a young age, might be willing to share about the experience. I was worried during the time period you were using Raskolnikov rather than Don Quixote as your avatar.

[jeffyscott]

MT,

Building a $2mm nest egg by age 40 after being in debt in your early 30s is a tremendous accomplishment. I would be interested in hearing more details about your career path / income trajectory after getting your Econ PhD if you are willing to share.

On the career side, I'd rather not get in the details. It has been highly varied across functions and verticals. In terms of income, I started around $200K and just had my highest grossing year at $725K. I'd say my most useful skill is to help executives to pose the right questions to their teams.

One of the arguments made for leveraging when young, or for taking high financial risk when young generally, is that the young have more human capital. Translated into human terms, that means they have more ability to take financial catastrophe in stride because they have time to pick themselves up, dust themselves off, start all over again. Ayres and Nalebuff found in their simulations that some people following their strategy would have experienced financial ruin, but argued that it didn't matter because, given their financial recuperative strength, statistically a group following their strategy would have done better than a group following a more traditional strategy.

I would very much like to hear whatever you, as a person who has experienced financial ruin at a young age, might be willing to share about the experience. I was worried during the time period you were using Raskolnikov rather than Don Quixote as your avatar.

I think it's pretty easy to recover from "financial ruin" and accumulate $2 million, when one is earning a top 1% income. I do give MT credit for having acknowledged this as the "secret" to success.

All of this is just to say that saving and investing has been a struggle for me my entire adult life. I have only had some success by earning a top 1% income and living a (merely) upper middle class life.

[market timer]

One of the arguments made for leveraging when young, or for taking high financial risk when young generally, is that the young have more human capital. Translated into human terms, that means they have more ability to take financial catastrophe in stride because they have time to pick themselves up, dust themselves off, start all over again. Ayres and Nalebuff found in their simulations that some people following their strategy would have experienced financial ruin, but argued that it didn't matter because, given their financial recuperative strength, statistically a group following their strategy would have done better than a group following a more traditional strategy.

I would very much like to hear whatever you, as a person who has experienced financial ruin at a young age, might be willing to share about the experience. I was worried during the time period you were using Raskolnikov rather than Don Quixote as your avatar.

This forum gets many questions from people looking to apply leverage while young, and I continue to get messages on this topic. There are many who would like to tilt toward these windmills. I started this adventure inspired by people like Taleb and Niederhoffer. Like them, I hoped to become wealthy by trading and perhaps write a memoir on how I achieved glory. The sky was the limit.

On a long flight several months ago, I watched "The Man Who Killed Don Quixote" (2018), and started thinking about the parallels between Don Quixote and my own adventures. When I started this thread, I firmly believed I'd become wealthy by trading. I'd be a knight-flaneur, doing battle on trading platforms in cafes around the world.

It was of course difficult to lose money, but it was really depressing to give up on this dream of becoming a knight-flaneur. When my memoirs were finally published as part of the Ayres & Nalebuff book in 2010, they were titled "Contraindications". I failed so spectacularly that I'd become a warning to others.

Ten years pass between Part One of Don Quixote and Part Two, when Quixote regains his sanity. I guess that is where we are in the story today. Like Quixote, or Quixano, I have renounced my ambition of becoming a knight-flaneur, and will disinherit my children if they marry one. If we are honest with ourselves, I believe most who would employ leverage tend to fall into the knight-flaneur camp, and will struggle when hit by reality.

[Elysium]

OP is obviously a high IQ individual who has tremendous skill sets that pays well, and his net worth of $2 million is an underachievement compared to his earnings. If he had done a simple buy & hold portfolio with very minimal tinkering, he would have had at least $3 million to $3.5 million by now. His high IQ in other areas did not translate into investing, because investing is supposed to be a game where you win by not making mistakes as in a "losers game", you win by the actions of the loser in other words who are the active traders trying to win. OP explained with so much candor how hard it was for him when it comes to his investing life, this should not have been like this, if he was passive with investments and active with career. Fortunately, he didn't lose his career, and kept a cooler head to come out still unscathed by keeping that part of his life in control. Not everyone who do this will be able to do so. There is a lesson in this for us all.

[1789]

Clearly, this is of the best threads in BH forum. I spend 2 weeks to read entire story of market timer. And i agree that there is a ton of learning here for everyone. Thanks for sharing this live along the way.

[james22]

My take: Bogleheads are probably too quick to take the wrong lesson from this and MT may be too quick to plead guilty. He actually had a good strategy but was dealt poor cards.

[HEDGEFUNDIE]

My take: Bogleheads are probably too quick to take the wrong lesson from this and MT may be too quick to plead guilty. He actually had a good strategy but was dealt poor cards.

Not so much that he was dealt a bad hand but rather that he used the wrong type of leverage.

[james22]

We can speak of diversification all we want, but we are still very much subject to the period we invest.

There are many periods (the last ten years, for example) when MT's strategy (or most any other) would have made him very, very wealthy.

[HEDGEFUNDIE]

We can speak of diversification all we want, but we are still very much subject to the period we invest.

There are many periods (the last ten years, for example) when MT's strategy (or most any other) would have made him very, very wealthy.

If the strategy is not robust to downturns that happen once every ten years, it’s just not a good strategy.

[james22]

We can speak of diversification all we want, but we are still very much subject to the period we invest.

There are many periods (the last ten years, for example) when MT's strategy (or most any other) would have made him very, very wealthy.

If the strategy is not robust to downturns that happen once every ten years, it’s just not a good strategy.

Don't care enough to argue the definition of "good" strategies.

Just suggesting to keep in mind the resulting fallacy, that's all.

[HEDGEFUNDIE]

We can speak of diversification all we want, but we are still very much subject to the period we invest.

There are many periods (the last ten years, for example) when MT's strategy (or most any other) would have made him very, very wealthy.

If the strategy is not robust to downturns that happen once every ten years, it’s just not a good strategy.

Don't care enough to argue the definition of "good" strategies.

Just suggesting to keep in mind the resulting fallacy, that's all.

Which fallacy is that? You’re trying to argue that MT was an astute investor. He clearly wasn’t.

[james22]

We can speak of diversification all we want, but we are still very much subject to the period we invest.

There are many periods (the last ten years, for example) when MT's strategy (or most any other) would have made him very, very wealthy.

If the strategy is not robust to downturns that happen once every ten years, it’s just not a good strategy.

Don't care enough to argue the definition of "good" strategies.

Just suggesting to keep in mind the resulting fallacy, that's all.

Which fallacy is that? You’re trying to argue that MT was an astute investor. He clearly wasn’t.

You're trying to argue good strategies can't experience bad results?

And you might review MT's background.

[HEDGEFUNDIE]

We can speak of diversification all we want, but we are still very much subject to the period we invest.

There are many periods (the last ten years, for example) when MT's strategy (or most any other) would have made him very, very wealthy.

If the strategy is not robust to downturns that happen once every ten years, it’s just not a good strategy.

Don't care enough to argue the definition of "good" strategies.

Just suggesting to keep in mind the resulting fallacy, that's all.

Which fallacy is that? You’re trying to argue that MT was an astute investor. He clearly wasn’t.

You're trying to argue good strategies can't experience bad results?

And you might review MT's background.

Of course good strategies can experience bad results. MT's strategy was not a good strategy. It was built off leverage that put him deep in the hole - fatally flawed from the beginning. Contrast that with my leveraged Excellent Adventure - I can't lose more than what I put in.

[james22]

I'm only suggesting that you might reconsider an argument that ends with the conclusion that MT, a doctoral student of economics, was clearly not an astute investor, that's all.

Were Ayres and Nalebuff, Yale professors both, clearly not astute as well?

[market timer]

To avoid this thread getting locked, let me try to settle the debate.

My strategy differed from Ayres & Nalebuff in several ways, but importantly in that I did not reset leverage back to 2x as the market declined. A market decline in excess of 50%, though uncommon, was enough to wipe out my account. Many strategies have these sort of built-in fragilities. Notably, the massive oil ETF, USO, recently had to deviate from its strategy of buying front month oil contracts--at significant loss to its investors--when the possibility of negative crude prices became a reality with the May 2020 WTI contract. The current pandemic is exposing many fragilities in our supply chains and corporate leverage. Indeed, any retirement withdrawal strategy that depends on equities to fund basic living expenses has considerable fragility.

We often dismiss fragilities in life and investing as unlikely, or something we'll deal with when the unlikely happens. In my case, I initially resorted to 0% introductory rates from credit cards, and finally my parents. During the volatile days in September 2008, following the Lehman bankruptcy but before the real carnage in October, my mother had agreed to help me meet potential margin calls with a family loan until I started working and earning a high income. We did not discuss the size of the loan required until the panic of October 2008, when the market fell another 20% in a couple weeks and I lost my last $100K. To maintain exposure in the vicinity of $400K, I would have needed a family loan of $200K levered 2x to have some robustness against margin calls. Hearing of these amounts, my family stopped viewing me as someone who was astute and instead a gambler and a dangerous force that the family needed to protect itself against. My stepfather agreed to a $25K loan on the condition that I never ask anyone else in the family for a loan again. Those were the terms. I lost all of that in less than a month.

I think a good strategy should not cause such stress. The required return to balance my future expenses against income has never been high. We live in a time of tremendous surplus, where the problems we have are not due to material scarcity but which we create for ourselves. MYR created many unnecessary problems for me.

[rossington]

Of course good strategies can experience bad results. MT's strategy was not a good strategy. It was built off leverage that put him deep in the hole - fatally flawed from the beginning. Contrast that with my leveraged Excellent Adventure - I can't lose more than what I put in.

But he put it all in. Would you be as confident if you did the same?

[james22]

Thanks, MT.

I shouldn't have described the strategy as (objectively) "good" when really just meant well-considered.

Assuming the risk of losing it all in the event of an uncommon market decline in excess of 50% (against wealth and glory) may be acceptable to some and not others.

That you've has done well despite the bet going as badly as possible argues the risk was acceptable, though it sounds like the stress made it not so.

Have you gone back and looked at how many historical starting points the strategy would have succeeded?

I appreciate it might be a little painful, but maybe helpful?

[HEDGEFUNDIE]

I'm only suggesting that you might reconsider an argument that ends with the conclusion that MT, a doctoral student of economics, was clearly not an astute investor, that's all.

Risk management is a core part of any investment strategy. Managing downside risk and considering the impact of a black swan worst case scenario is a core part of any strategy. There is no such thing as a “well-considered strategy” that throws you out onto the street if it goes south. It should never have put you in that position in the first place. I have clearly stated in my thread the risk mitigation tactics I take as part of the Excellent Adventure. Did MT do the same when publicizing his adventure?

I’m not even sure what we’re debating at this point, MT has already admitted that he has deep-seated problems with money and with investing.

And as far as his credentials go, I am happy to put mine against his any day. My first job out of college was at one of the the top 5 hedge funds on this list, hence my screen name. https://www.institutionalinvestor.com/a ... ll-Time-Is

But what do credentials have to do with anything?

[HEDGEFUNDIE]

Of course good strategies can experience bad results. MT's strategy was not a good strategy. It was built off leverage that put him deep in the hole - fatally flawed from the beginning. Contrast that with my leveraged Excellent Adventure - I can't lose more than what I put in.

But he put it all in. Would you be as confident if you did the same?

I would never have done so in the first place, that’s the point.

[EnjoyIt]

I'm only suggesting that you might reconsider an argument that ends with the conclusion that MT, a doctoral student of economics, was clearly not an astute investor, that's all.

Risk management is a core part of any investment strategy. Managing downside risk and considering the impact of a black swan worst case scenario is a core part of any strategy. There is no such thing as a “well-considered strategy” that throws you out onto the street if it goes south. It should never have put you in that position in the first place. I have clearly stated in my thread the risk mitigation tactics I take as part of the Excellent Adventure. Did MT do the same when publicizing his adventure?

I’m not even sure what we’re debating at this point, MT has already admitted that he has deep-seated problems with money and with investing.

And as far as his credentials go, I am happy to put mine against his any day. My first job out of college was at one of the the top 5 hedge funds on this list, hence my screen name. https://www.institutionalinvestor.com/a ... ll-Time-Is

But what do credentials have to do with anything?

MT would have appeared a genius if the crash did not come so quickly or he started just a few years later. We see some very famous investors make their name because of getting lucky and making it big once and then never being able to replicate that success.

The lesson to be learned is that for most investors buy and hold is better than tinkering.

In my line of work I see some very smart people constantly making irrational investment mistakes. Being smart does not equal being able to time the market or pick stocks successfully. One of the brightest people I know with Ivy League credentials including an Ivy League business degree falls into this category. Because she has always been top of the class and makes low 7 figures, she thinks she knows better than the market and despite consistently being proven wrong she continues to battle it out. She know all about index funds but still picks individual stocks.

[occambogle]

I just want to give kudos to the OP for sharing it all with us... it's easy to shout about gains, less easy to share about losses... but as a new investor it's equally important (probably more so) to hear.

[oneleaf]

MT,
Thanks for sharing your latest updates. I thought you had reached some level of comfort with your investment style (as active it continued to be) shortly after MYR blew up for you. However, it sounds like the journey continues to this day.

I'm curious about a few things:
- How much did tracking error regret (vs a cap-weighted mostly US buy-and-hold strategy) affect you over the past decade?
- How did you arrive at a 70% equity allocation, given your substantial net work?
- How active do you plan to be going forward? Do you intend to tactically change asset allocation? Do you have an IPS that will limit what you will allow yourself to do?
- Did you recently have an epiphany regarding your struggles with money and investing? Given your update a week ago, it almost sounds like you might finally be a Boglehead. I feel like I am seeing evidence of more transformation in your recent update than I ever witnessed in the aftermath of the GFC.

BTW, I feel honored to have witnessed this thread in real time. I'm so glad the thread has survived for 13 years and has stayed civil. Kudos to you for taking punches with grace and being so candid about your struggles. I still tell people the story of the guy on the Bogleheads board who threw up in his mouth at some point during the GFC while being 10x-levered. Again, thanks for sharing the more sobering details (having to borrow from family and how they viewed you) in your recent post... I think it's a great lesson to share.

[HomerJ]

In my line of work I see some very smart people constantly making irrational investment mistakes. Being smart does not equal being able to time the market or pick stocks successfully. One of the brightest people I know with Ivy League credentials including an Ivy League business degree falls into this category. Because she has always been top of the class and makes low 7 figures, she thinks she knows better than the market and despite consistently being proven wrong she continues to battle it out. She know all about index funds but still picks individual stocks.

This is why doctors are such easy marks for financial advisors.

I worked at a High-Frequency Trading company for 5 years (as an IT guy, not a trader, but I talked to the owner and a lot of traders over those 5 years - I know more than people here think I do)

Anyway, the owner had EVERYONE who worked at his company get their Series 7 and Series 63 for some crazy reason, even us IT guys...

During the class they sent us to, the INSTRUCTOR told all the budding little financial advisors how doctors are the easiest people to sell to, because they are SURE they are smarter than the average bear, and can easily beat the market.

The instructor LAUGHED as he told us this...

I wish I had recorded it to put on YouTube today to warn all doctors away.

[james22]

There is no such thing as a “well-considered strategy” that throws you out onto the street if it goes south.

Of course there is. I'll play Russian roulette right now for $1B.

Presumably MT believed wealth and glory was worth the risk.

Now he may have underestimated the odds (and failed to consider the stress), but he was in good company.

And again, MT 's strategy went about as south as possible and yet he wasn't thrown out onto the street.

I’m not even sure what we’re debating at this point, MT has already admitted that he has deep-seated problems with money and with investing.

I'd hope MT doesn't suffer from resulting too.

But what do credentials have to do with anything?

It seems fair to me to assume someone with MT's credentials considered his strategy.

[HomerJ]

There is no such thing as a “well-considered strategy” that throws you out onto the street if it goes south.

Of course there is. I'll play Russian roulette right now for $1B.

That is not a "well-considered" strategy. That's a moron strategy. There's no other way to state it.

You've got a good chance to win, but that doesn't make it a good strategy.

[HEDGEFUNDIE]

There is no such thing as a “well-considered strategy” that throws you out onto the street if it goes south.

Of course there is. I'll play Russian roulette right now for $1B.

That is a not a "well-considered" strategy. That's a moron strategy. There's no other way to state it.

You've got a good chance to win, but that doesn't make it a good strategy.

HomerJ we agree on something! Man the world really must be coming to an end...

[james22]

There is no such thing as a “well-considered strategy” that throws you out onto the street if it goes south.

Of course there is. I'll play Russian roulette right now for $1B.

That is not a "well-considered" strategy. That's a moron strategy. There's no other way to state it.

You've got a good chance to win, but that doesn't make it a good strategy.

Everyone should weigh risk and reward similarly, Homer/HF?

Objectively, would it not be moronic for someone mortally wounded/terminally ill/sentenced to death/etc. to not play (assuming loved beneficiaries)? Someone who would otherwise die without $1B medical care (assuming not already a billionaire)? A saint/matyr (assuming their human capital worth less to their cause than $1B)? Etc.?

And a "good chance" to win is not what matters. The first two examples should play whatever the odds.

Definitionally, as long the strategy is "thought about or decided upon with care," it is be well-considered.

You know this, right?

[HEDGEFUNDIE]

There is no such thing as a “well-considered strategy” that throws you out onto the street if it goes south.

Of course there is. I'll play Russian roulette right now for $1B.

That is not a "well-considered" strategy. That's a moron strategy. There's no other way to state it.

You've got a good chance to win, but that doesn't make it a good strategy.

Everyone should weigh risk and reward similarly, Homer/HF?

Objectively, would it not be moronic for someone mortally wounded/terminally ill/sentenced to death/etc. to not play (assuming loved beneficiaries)? Someone who would otherwise die without $1B medical care (assuming not already a billionaire)? A saint/matyr (assuming their human capital worth less to their cause than $1B)? Etc.?

And a "good chance" to win is not what matters. The first two examples should play whatever the odds.

Definitionally, as long the strategy is "thought about or decided upon with care," it is be well-considered.

You know this, right?

Man, BH standards have really gone down since I published the Execellent Adventure a year and a half ago. Nowadays it appears I could have gotten away with 100% UPRO, downside be damned!

[market timer]

I'm curious about a few things:
- How much did tracking error regret (vs a cap-weighted mostly US buy-and-hold strategy) affect you over the past decade?
- How did you arrive at a 70% equity allocation, given your substantial net work?
- How active do you plan to be going forward? Do you intend to tactically change asset allocation? Do you have an IPS that will limit what you will allow yourself to do?
- Did you recently have an epiphany regarding your struggles with money and investing? Given your update a week ago, it almost sounds like you might finally be a Boglehead. I feel like I am seeing evidence of more transformation in your recent update than I ever witnessed in the aftermath of the GFC.

The recent change in perspective and strategy is largely to do with having more capital to invest. It is one thing to trade with a balance that is 1x your annual salary. It is entirely different to trade with $2M when you might only have a couple years until retirement. This change is not due to tracking error regret.

The investments I made during this downturn, and which now have large gains due to tax loss harvesting in late March, I intend to hold for decades. Previously, I spent long stretches of time mostly in cash, waiting to sell puts during crises like we just had. Now I'm looking for something less active, because it is less stressful. Also, I'm looking for ways to visualize progress toward my goals in ways that reduce some of the day-to-day volatility in asset prices. The annual dividend payout is one method that is helpful: first, because it is doesn't vary day-to-day; second, because the dollar values are only 3-4% of the asset value. Maybe I'm irrational, but I feel that a forecasted dividend cut from $50K/year to $40K/year seems less painful to learn than a portfolio loss of $300K, from $1.5M to $1.2M, even if they are equivalent. It's also more actionable to focus on dividend payouts, in the sense that I would adjust my discretionary spending by $10K/year to offset the lower payout.

The evolution of this thread from 2007 to now is that I now have more of an eye toward withdrawal than accumulation. In accumulation phase, money is sort of like points on a scoreboard, detached from reality, while in withdrawal, performance is the difference between cooking at home vs. going out to eat. There are real implications that I will need to internalize through my habits.

Going forward, I expect most new savings will go toward such long term oriented investments, rather than active trading. The exact allocation will depend on valuations. I don't expect to rebalance toward some specific percentage.

[market timer]

Have you gone back and looked at how many historical starting points the strategy would have succeeded?

I appreciate it might be a little painful, but maybe helpful?

Things would have worked out well aside from 1929-32, 1973-4, 2000-2, and 2008-9. In their book, Ayres & Nalebuff ran the numbers with constant 2x leverage, and as I recall it always improved risk-adjusted returns.

[jeffyscott]

Have you gone back and looked at how many historical starting points the strategy would have succeeded?

I appreciate it might be a little painful, but maybe helpful?

Things would have worked out well aside from 1929-32, 1973-4, 2000-2, and 2008-9. In their book, Ayres & Nalebuff ran the numbers with constant 2x leverage, and as I recall it always improved risk-adjusted returns.

That's 4 starting points in about 80 years, once every 20 years, so might make it a 5% failure rate? Or maybe it's higher, if say starting within a 2 year period around each of the 4 periods results in failure, that would seem to make the odds of failing about10%, presumably.

[grayfox]

... To get comfortable with the ups and downs, for planning purposes, I have started to focus on the dividend payout rather than the asset value. That's not to say I'm reaching for yield, but rather view the 3-4% yield on my ETFs (mostly value and international) as a sustainable withdrawal rate and less volatile than the price. Instead of using net worth to measure progress toward the FI goal, I'm tracking this dividend payout, with similar metrics for bonds and commodities. The goal is to visualize financial health in a way to reduces some of the daily noise, so I feel like I'm making long term progress with my savings, while taking enough risk to fund a retirement that could last several decades.

...

That's the way to do it. Stocks are productive assets. You want to know how much your assets are producing. The price only matters when you are buying or selling. So instead of watching the portfolio balance, watch the dividends and/or the earnings. Then you can say, " I own businesses that produce $50,000 per year in earnings. I can either re-invest it in more businesses to increase my annual profits or spend it to pay for my living expenses."

I read a book about Warren Buffet and it said that he calculated the amount of earnings produced by all the businesses he owned. This was his measure of how successful he was. Look at the older shareholder letters he wrote, say 2000-2010.

In the table at the very top of the letter, he would show "Annual Percentage Change in Per-Share Book Value of Berkshire" by year. From basic accounting, Book Value increases every period by the retained earnings. Since Berkshire payed no dividend, Book Value shows the cumulative earnings. He did not show the Market Value in the earlier letters. (Later, in 2014 he included the Market Value. In 2019, for some reason, he only showed the Market Value.]

After I read that about Warren Buffet c. 2005, I started doing he same thing, i.e. tracking the earnings and dividends produced. Dividends is somewhat easier to do because you just have to count the cash received. Plus you can just add dividends received to interest received to get total income from investments.

[crystalbank]

This is definitely a thread everyone should read. I really appreciate 'market timer' for owning his losses and also the candid assessment of his investing and dare I say personal shortcomings.

I'm also very intrigued by the whole Taleb/Knight-Flaneur complex. As a huge admirer of Taleb I too get the temptation to delve into options and other complex derivates, but so far was able to resist it mainly due to my limited knowledge on such financial instruments.

[james22]

I'm looking for ways to visualize progress toward my goals in ways that reduce some of the day-to-day volatility in asset prices.

Have you looked at BAC-L and WFC-L?

[superx]

Margin is like the Climbing for Dollars scene in The Running Man

https://www.youtube.com/watch?v=ntz0_besT04


It's tough to resist the urge to margin up, but the genius of all the great speculators is in finding ways to make more and more money while taking on less and less risk of a permanent (as opposed to temporary) loss of capital. It doesn't matter whether you're trading commodities or picking stocks. The secret is to learn to find situations that have enormous upside and little downside, and to reject situations that do not give you that overwhelming edge.

A good speculator uses the analytical tools of an investor, but the mentality of a professional gambler in that he sits out unless and until he has an edge.

I made the OP's mistakes, albeit on a much smaller scale and somewhat later in life. It was only when I was able to finally undertand that it's not just a question of having a high reward potential, but rather both a high reward potential and yet with low risk, that I began to succeed. Speculation is in a sense no different from a game of cards in that you win over the long run by having an edge. The difference is that it's possible in stocks to maintain a massive edge over the market which is impossible in games against the house or in games against equally good card players.

And once I got good at that, the money just started to flow in. Jesse Livermore is not someone to duplicate or maybe even admire, but he was 100% right when he said (as quoted by Lefevre), to paraphrase, "It is literally true that millions come easier to a trader once he learns how to trade than hundreds did in the days of his ignorance."

[absolute zero]

... To get comfortable with the ups and downs, for planning purposes, I have started to focus on the dividend payout rather than the asset value. That's not to say I'm reaching for yield, but rather view the 3-4% yield on my ETFs (mostly value and international) as a sustainable withdrawal rate and less volatile than the price. Instead of using net worth to measure progress toward the FI goal, I'm tracking this dividend payout, with similar metrics for bonds and commodities. The goal is to visualize financial health in a way to reduces some of the daily noise, so I feel like I'm making long term progress with my savings, while taking enough risk to fund a retirement that could last several decades.

...

That's the way to do it. Stocks are productive assets. You want to know how much your assets are producing. The price only matters when you are buying or selling. So instead of watching the portfolio balance, watch the dividends and/or the earnings. Then you can say, " I own businesses that produce $50,000 per year in earnings. I can either re-invest it in more businesses to increase my annual profits or spend it to pay for my living expenses."

I read a book about Warren Buffet and it said that he calculated the amount of earnings produced by all the businesses he owned. This was his measure of how successful he was. Look at the older shareholder letters he wrote, say 2000-2010.

In the table at the very top of the letter, he would show "Annual Percentage Change in Per-Share Book Value of Berkshire" by year. From basic accounting, Book Value increases every period by the retained earnings. Since Berkshire payed no dividend, Book Value shows the cumulative earnings. He did not show the Market Value in the earlier letters. (Later, in 2014 he included the Market Value. In 2019, for some reason, he only showed the Market Value.]

After I read that about Warren Buffet c. 2005, I started doing he same thing, i.e. tracking the earnings and dividends produced. Dividends is somewhat easier to do because you just have to count the cash received. Plus you can just add dividends received to interest received to get total income from investments.

I have never heard of this or thought of it either. But it’s a very interesting concept. It’s something I’ve struggled with as my portfolio has increased. How can I see progress towards my goal if the market swings obfuscate my progress? It sucks to get excited about keeping my spending in check or increasing my income, only to see that my net worth went down because of volatility.

That said, the downside to tracking dividends/income is that while it makes progress exceptionally clear, there’s not a clear target.

[grayfox]

... To get comfortable with the ups and downs, for planning purposes, I have started to focus on the dividend payout rather than the asset value. That's not to say I'm reaching for yield, but rather view the 3-4% yield on my ETFs (mostly value and international) as a sustainable withdrawal rate and less volatile than the price. Instead of using net worth to measure progress toward the FI goal, I'm tracking this dividend payout, with similar metrics for bonds and commodities. The goal is to visualize financial health in a way to reduces some of the daily noise, so I feel like I'm making long term progress with my savings, while taking enough risk to fund a retirement that could last several decades.

...

That's the way to do it. Stocks are productive assets. You want to know how much your assets are producing. The price only matters when you are buying or selling. So instead of watching the portfolio balance, watch the dividends and/or the earnings. Then you can say, " I own businesses that produce $50,000 per year in earnings. I can either re-invest it in more businesses to increase my annual profits or spend it to pay for my living expenses."

I read a book about Warren Buffet and it said that he calculated the amount of earnings produced by all the businesses he owned. This was his measure of how successful he was. Look at the older shareholder letters he wrote, say 2000-2010.

In the table at the very top of the letter, he would show "Annual Percentage Change in Per-Share Book Value of Berkshire" by year. From basic accounting, Book Value increases every period by the retained earnings. Since Berkshire payed no dividend, Book Value shows the cumulative earnings. He did not show the Market Value in the earlier letters. (Later, in 2014 he included the Market Value. In 2019, for some reason, he only showed the Market Value.]

After I read that about Warren Buffet c. 2005, I started doing he same thing, i.e. tracking the earnings and dividends produced. Dividends is somewhat easier to do because you just have to count the cash received. Plus you can just add dividends received to interest received to get total income from investments.

I have never heard of this or thought of it either. But it’s a very interesting concept. It’s something I’ve struggled with as my portfolio has increased. How can I see progress towards my goal if the market swings obfuscate my progress? It sucks to get excited about keeping my spending in check or increasing my income, only to see that my net worth went down because of volatility.

That said, the downside to tracking dividends/income is that while it makes progress exceptionally clear, there’s not a clear target.

Well, you can try to track earnings, but where can you find out what the earnings were for the fund you own? The only earnings that I know how to look up are S&P 500. If I only owned an S&P 500 fund I could track earnings. But I own other funds. So all I know how to track is dividends.

Now why would tracking dividends not be a clear target? Suppose you want to withdraw $2000 per month from your portfolio. Target $24,000 per year in dividends and interest. Sounds pretty simple and clear to me.

[Ben Mathew]

Well, you can try to track earnings, but where can you find out what the earnings were for the fund you own? The only earnings that I know how to look up are S&P 500. If I only owned an S&P 500 fund I could track earnings. But I own other funds. So all I know how to track is dividends.

I like the perspective of viewing stocks as businesses and focusing on its earnings. But in spite of Buffett's preaching about it for decades, it's not the standard view. How else to explain why there is so much statistics about the price history of funds on their websites, but so little about earnings history! It's really unfortunate. I posted about it in this thread, and it doesn't seem like the information is available. As far as I know, the best you can do is that for Vanguard funds, they list the fund's P/E ratio. Using P, you can back out E, which gives you earnings over the last 12 months. For example, on VTSAX's Portfolio and Management tab, you get P/E ratio as of 4/30/2020 as 20.9. Using price history, we get price at 4/30/2020 was $71.07. So earnings over the last 12 months must have been P / (P/E) = $71.07 / 20.9 = $3.40/share.

[absolute zero]

... To get comfortable with the ups and downs, for planning purposes, I have started to focus on the dividend payout rather than the asset value. That's not to say I'm reaching for yield, but rather view the 3-4% yield on my ETFs (mostly value and international) as a sustainable withdrawal rate and less volatile than the price. Instead of using net worth to measure progress toward the FI goal, I'm tracking this dividend payout, with similar metrics for bonds and commodities. The goal is to visualize financial health in a way to reduces some of the daily noise, so I feel like I'm making long term progress with my savings, while taking enough risk to fund a retirement that could last several decades.

...

That's the way to do it. Stocks are productive assets. You want to know how much your assets are producing. The price only matters when you are buying or selling. So instead of watching the portfolio balance, watch the dividends and/or the earnings. Then you can say, " I own businesses that produce $50,000 per year in earnings. I can either re-invest it in more businesses to increase my annual profits or spend it to pay for my living expenses."

I read a book about Warren Buffet and it said that he calculated the amount of earnings produced by all the businesses he owned. This was his measure of how successful he was. Look at the older shareholder letters he wrote, say 2000-2010.

In the table at the very top of the letter, he would show "Annual Percentage Change in Per-Share Book Value of Berkshire" by year. From basic accounting, Book Value increases every period by the retained earnings. Since Berkshire payed no dividend, Book Value shows the cumulative earnings. He did not show the Market Value in the earlier letters. (Later, in 2014 he included the Market Value. In 2019, for some reason, he only showed the Market Value.]

After I read that about Warren Buffet c. 2005, I started doing he same thing, i.e. tracking the earnings and dividends produced. Dividends is somewhat easier to do because you just have to count the cash received. Plus you can just add dividends received to interest received to get total income from investments.

I have never heard of this or thought of it either. But it’s a very interesting concept. It’s something I’ve struggled with as my portfolio has increased. How can I see progress towards my goal if the market swings obfuscate my progress? It sucks to get excited about keeping my spending in check or increasing my income, only to see that my net worth went down because of volatility.

That said, the downside to tracking dividends/income is that while it makes progress exceptionally clear, there’s not a clear target.

Well, you can try to track earnings, but where can you find out what the earnings were for the fund you own? The only earnings that I know how to look up are S&P 500. If I only owned an S&P 500 fund I could track earnings. But I own other funds. So all I know how to track is dividends.

Now why would tracking dividends not be a clear target? Suppose you want to withdraw $2000 per month from your portfolio. Target $24,000 per year in dividends and interest. Sounds pretty simple and clear to me.

I guess the issue for me is that the target would have to be a number at which I could safely retire. If tracking total investments, it's (somewhat) clear. Once I get to 25-30X expenses then I've crossed the finish line. For dividends, it's a bit more murky. With dividend yields averaging 2% over the past couple decades, if I waited until dividend income = expenses, then I would be aiming for an extremely high target. I would end up saving more and working more years than necessary.

[davidsorensen32]

Earnings are 100% gamed by all S&P 500 companies. GAAP is highly misleading (even Buffett says this).

Dividends can be gone in one fell swoop. Its completely based on whim of management. Lots and lots and lots of tremendously profitable companies with massive growth don't pay out a cent in dividends.

IMO, dividends and earnings are pretty poor proxies. YMMV

After I read that about Warren Buffet c. 2005, I started doing he same thing, i.e. tracking the earnings and dividends produced. Dividends is somewhat easier to do because you just have to count the cash received. Plus you can just add dividends received to interest received to get total income from investments.