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TomB16 investing blog

Discussion in 'Investing' started by TomB16, Aug 7, 2019.

  1. TomB16

    TomB16 Active Member

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    This thread is going going to be an investing blog. It will only be updated when I can add something I feel is of value. Do not expect daily updates, like the excellent thread WXYZ maintains.

    The goal is to provide a view into the thoughts behind a successful retail investor. Further, the goal is to not dilute this thread excessively.

    This thread will cover real estate, market investments, retirement strategies, etc.

    I am part of a couple that is working on retiring. As we wind down our real estate and business, we will need to live off our investments and nest egg. This is a terrible time to retire, from the perspective of the global financial situation, but this is the time that is right for us.


    Investing Ethos:

    - based on our life expectancy, we have 35 years to fund
    - we have a long term investment horizon
    - I don't trade
    - we will work toward independence and freedom ahead of absolute returns
     
    T0rm3nted likes this.
  2. TomB16

    TomB16 Active Member

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    For the last four years, I've held the belief that interest rates will not go up voluntarily.

    The fed has tried to gently push up interest rates but this is going to be difficult in a consumer society that rides on debt.

    Interest rates will go up, at some point. They will go way up. It will be a response to severe economic conditions, not a well thought out choice.

    I currently see a lot of economic strength. This is why I feel the markets aren't responding to traditional indicators that would have huge market impact in a weaker economy.

    Still, I see a weakening global economy so we have been buying medium term bonds and debentures the last few months. That phase is now over. I have no interest in bonds and debentures but our bond holdings are now worth a nice premium.
     
  3. TomB16

    TomB16 Active Member

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    On the market side, we have been building cash for the last few months.

    We have left our corporate drips in place (they are difficult to start and stop) but turned off synthetic drips and other reinvestment plans. Corporate DRIPs will remain in place across any market crashes or circumstances I can imagine.

    I have no intention to sell off due to fear of a market crash. The most aggressive response I will engage in, and am currently engaged in, is to build cash.

    Historically, selling due to fear of a market crash has caused far more opportunity cost than just holding through any crashes which might occur.
     
  4. TomB16

    TomB16 Active Member

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    A couple of months ago, I was happy to take an 8% discount on any of my core value stocks. We picked up quite a bit of stock at great prices at the end of May.

    At this point, we still have more than an average amount of cash but it would take more than an 8% discount to be interesting. I'm prepared to let our cash build to a pretty high level before we return to regular buying.

    At the current rate of cash growth, we will reach my upper comfort limit on cash in mid 2020 but I expect some excellent discounts between now and then so I doubt we will hit it with regular cash flows. We are far more likely to hit an excessive cash situation with our next real estate sale.
     
  5. TomB16

    TomB16 Active Member

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    Let's have a look at the Buffett Index (BI).

    I use a variant of the Buffet Index (BI) of Wilshire 5000 to US GDP. While not identical to the BI, it is close and Wilshire 5000 quotes can be tracked using automated techniques. I shall call this the WBI.

    - the political situation is ripe for market instability
    - WBI is currently around 138%

    A couple of weeks ago, the WBI touched just over 150%. That's a really high value.

    The trick to understanding the BI is to consider what the BI means in comparison to interest rates. In a zero interest situation, stocks would be valuable at an infinite price since they are the only thing that would provide a return. As interest rates increase, stocks become less attractive.

    If interest rates were high, the BI would be a strong crash indicator at current market valuations.

    The WBI is currently near historic highs but we are also in a low interest rate situation with further cuts apparent.

    I suspect interest rates are falling in an attempt to prevent a major market crashes. We've never seen that before but that might be what we are seeing. The Germany interest rate is currently negative.
     

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  6. TomB16

    TomB16 Active Member

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    This is an unstable market. The WBI shows an elevated risk of crash but I don’t think it’s extreme.

    I’m basing my optimism on low and falling interest rates. If rates were higher, we would be ripe for a crash. With low interest rates, there isn’t much incentive to pull out of equity markets and into money markets. We are more likely see migration from growth to distributing stocks.

    From experience, patience is rewarded in a volatile market. We have not been reinvesting for a couple of months and I don’t currently see any reason to return to reinvesting distributions and fixed income before November. That will likely change so I am monitoring it.

    Over the years, I’ve learned I cannot predict a crash with sufficient accuracy as to make it worthwhile to withdraw from the market. For that reason, I modulate my level of cash based on various indicators but do not sell assets.

    At this point, we could top 15% cash and I would be fine letting it rot in the corner for many months.
     
  7. TomB16

    TomB16 Active Member

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    Investing versus gambling

    It's clear I've raised the ire of many folks around here by calling trading gambling. I wish those who trade well but I will stand behind those words.
    I also believe that buy and hold of companies, without having an ability to value companies, is also gambling. Again, I don't wish harm to anyone but this is how I see it.

    Buying individual stocks is for people who understand companies, understand how to value companies, are familiar with influences such as seasonal trends, etc.

    For people who either don't know this information or aren't prepared to do the work to find it, they would be best served by index investing. Let's be clear, this is almost everyone.

    This is why I don't re-balance between companies. This is why I don't add companies into my portfolio for the reason of diversity. If I know a company and feel it has value, I hit it hard. If I have money that I'm not comfortable sinking into the companies I know but I wish to invest, I will sink it into an index.
     
  8. WXYZ

    WXYZ Active Member

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    AMEN BROTHER........on many levels.

    Yes, we are in an unstable market, at least at the moment. The so called professionals are jumping in and out with NO reason and program trading is driving the markets up and down with no reason in reality other than following a micro-second trend line. At the same time the media is trying to drive the economy into a recession with their current political hissy-fit. Add in the shorts and traders that are constantly trying to influence the markets and the shallow August situation and you have an unstable market situation. The ONLY good thing is this current STUFF should scare the sh*t out of the Fed and if they are smart they will keep their big mouths shut and not do anything.

    Agree with you completely......day trading, trading, most sorts of technical analysis mumbo jumbo are nothing more than gambling. The end result is no different than gambling addiction. Those doing this stuff, if they were not addicted would easily be able to run the numbers and see that their returns are no where near the SP500, especially when you take into account income taxes on short term gains, trading costs, etc, etc. Although, if you have the money, and wish to challenge yourself, and are operating in reality, and enjoy the mental side of it, there is nothing wrong with allocating some small amount of money to trading.

    ALSO agree completely that the vast majority of investors would be better served by simply investing in an Index Fund like the SP500.

    AND.........yes.......I DO NOT believe in portfolio re-balancing or diversification.

    For those with cash there should continue to be some good buying points. We should see some slight return to normal after Labor Day when everyone comes back to work from their ELITE seasonal rentals and second homes.

    I like the BLOG.
     
  9. TomB16

    TomB16 Active Member

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    I appreciate the comments, WXYZ.

    Lets go back and finish investing versus gambling so I can not mention it again.


    The odds of becoming independently wealthy by age 50.

    Trader: 0.0000001%
    Classic value investor: 98%

    I won't do the mathematical foundation but those interested can read Jack Boggle's Little Book of Common Sense Investing.


    Background.

    Trading is a redistribution of wealth. If you buy $1000 of stock, sell it within a few days, and make $50, that $50 did not come from the company. That money came from the market. The market is other investors. The company did not produce 5% in a couple of days.

    In cases where wealth is redistributing among investors, not everyone can make money. It's simple math, exactly the way not everyone can win at a poker game. 5 people show up to play poker, each bring $100, and the maximum combined winnings cannot exceed $500. That $500 will be redistributed based on poker outcomes. That is also how the short term market works.

    If you buy a REIT (or any company) that distributes monthly to an annual trailing yield of 7%, that 7% annual return is coming from corporate earnings. It's possible, but not guaranteed, that 7% annual return is sustainable indefinitely. If you reinvest that monthly dividend using a DRIP, compounding will make that return closer to 7.75%.

    In this case, you can double your money in 8.5 years without the stock going up one cent. What's more, everyone who owns the REIT can double their money in the same period of time. Everyone can enjoy the same gain, if they are wise enough to do it.


    Let's consider objectivity.

    The investing world is full of people who are extremely smart and will tell you they make returns beyond market returns. Have you ever heard of anyone claiming to make less than the S&P 500 index? Everyone claims to outperform the S&P and yet we know that everyone cannot outperform the average. When you consider commissions and other loads, extreme few can outperform the S&P. This can be proven with extreme simple math.

    Legions of fund operators have plenty of swagger and make claims of great performance while a nearly effortless fact check indicates almost all of them underperform the S&P.


    Objectivity is the key to success.

    An objective analysis of any of our retail stock investing returns will have a 99% certainty of under-performing the S&P.

    An objective person will respond by moving money into the more lucrative investment. An objective person will prioritize returns over ego.

    * Note: The S&P 500 is not the only worthy benchmark but it is the primary one. Any benchmark can be used to analyze performance over a reasonable period of time. If you regularly outperform the benchmark... great! If you do not, you should consider buying the benchmark.


    Proof.

    How many day traders become independently wealthy by the age of 45 and live comfortably the rest of their lives? How many 60 year olds do you know who cite "day trading" as the key to their comfortable retirement? I know 0. The day traders I know are all on the cusp of becoming wildly wealthy. I expect they will remain on that cusp until they eventually run completely out of money.

    Consider the same questions from the perspective of long term investing? I know several personally.

    Off topic but... I know about the same number of people who have gained independent levels of wealth through R-E as I know who did it through long term investing.
     
    #9 TomB16, Aug 14, 2019 at 10:50 PM
    Last edited: Aug 14, 2019 at 10:57 PM
  10. TomB16

    TomB16 Active Member

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    Where does the money come from for a long term investor?


    Let's consider Microsoft.

    Let's assume you purchased Microsoft for $21 per share at IPO in 1986. Your investment would now be worth about $1.8M.

    In 1986, Microsoft was the maintainer of a mediocre operating system that they purchased from another company. They were starting to expand their development effort but they did not have a big impact on the IT world.

    By 1990, Microsoft released Windows 3.0. Like the products before it, Windows 3.0 was buggy and performed terribly. It did not look like a product that would take over the world. Word was barely usable, compared to the excellent WordPerfect.

    Meanwhile, IBM had OS/2 v1.2. OS/2 was extremely stable, had more and better network stacks, and was a platform that nearly every bank machine was built around. OS/2 heads of the day scoffed at Windows.

    While Microsoft had some extremely smart people in 1990, IBM had legions of people who were just as smart or more so.

    Today, Windows is an excellent platform. Word is an outstanding word processor. The power of Microsoft software has changed the world. People have long forgotten about OS/2.


    How did Microsoft get here?

    Hard work.

    No other reason.

    Hard work and tenacity will beat out intelligence, every time. You can't be a moron but people are quick to underestimate the intellect of others. The person who works hard will always win.


    How I value companies.

    Valuing companies is the key to investing so don't expect people to share their secrets. I will share mine at the highest level.

    I look for and prioritize the following three characteristics, from most to least important:

    - honesty
    - hard work
    - smart


    Back to Microsoft.

    The $1.8M of stock that was originally purchased for $1000 got to it's current value through the effort of a relatively small group of people who worked hard for decades. Excessive money was not siphoned off by executives. The company invested operating capital wisely.

    It wasn't magic. It didn't come from the market. It wasn't luck. It was hard work.
     

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