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Go over to the Retire Early Home Page and read post # 127782 by Intercst. Now. The rest of this post is just a poor copy.

OK, if you need convincing...Intercst ran safe withdrawal rates (SWRs) over every 30-year period from 1871-2002. He wrote "I calculated the maximum inflation-adjusted SWR that would have survived in each individual 30-year period for asset allocations of 0% stock to 100% stock in 5% increments. In 74 out of the 100 30-year periods 100% stock provided the highest SWR."

I would argue that, during one's accumulation mode, there is an even stronger incentive to be 100% in eqities. FIRE Wannabes should be in accumulation mode. Our ability to stay the course with equities over longer periods of time should be greater. I would make a big exception for any other kind of investment you have deep knowledge of and/or a commitment to like rental real estate.

Intercst is a wonderful, awesome resource at TMF when he writes about FIRE. This kind of post is why it can be worth reading the REHP board despite the poor signal to noise ratio at times. Go read his post and give him a rec, please. You can stay and start looking into Monte Carlo simulations, portfolio mixes and all that if you want to take the time.

Cheers,

JohnH
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No. of Recommendations: 9
John3haha writes:

OK, if you need convincing

No convincing needed here. Exceptional long term returns are to be expected as a possible result of taking exceptional risks. The returns intercst quotes are theoretical. They assume that mere mortals can withstand the kind of volatility associated with such a portfolio. Perhaps there are some who can, but I know of few people who have held a 100% equities portfolio for 30 years.



I would argue that, during one's accumulation mode, there is an even stronger incentive to be 100% in eqities.

It all depends. Do you want to be certain of retiring early? Do you want your plan to have a high probability of actually working? What if after holding for 20 years, you discover that your portfolio of equities has returned only 3.3%? (This has happened in the past) or perhaps watching 50% of your portfolio dissappear over a short period of time causes you to question the sanity of following such a course and you bail out. (you will not be the first who underestimated his tolerance for risk) So much for early retirement. By diversifiying out of equities you may have to wait a little longer to retire early, but you may have a much higher probability of succeeding.



FIRE Wannabes should be in accumulation mode.

Can't argue with that.



Intercst is a wonderful, awesome resource at TMF when he writes about FIRE. This kind of post is why it can be worth reading the REHP board

Yes, he has predicted the past with remarkable accuracy. By remaining single, living in a small apartment and having the good sense to retire just before the greatest stock market boom in history, intercst has managed to stay retired. May you be as lucky.

Regards,
FMO
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>>Yes, he has predicted the past with remarkable accuracy. By remaining single, living in a small apartment and having the good sense to retire just before the greatest stock market boom in history, intercst has managed to stay retired. May you be as lucky.<<

More power to him, but I think you allude to a very good point.

At least as I understand it, Intercst made his money by saving and a few fortuitous investments in small companies that became large companies. I'm in the same boat as he is, as I am 36 and retired. I also saved money and made an end run around the process by catching that one big stock which gave me critical mass. I certainly don't recommend that as I took a major risk and I very easily could have lost it all.

All this talk about retirement calculators and performance of indexes seems irrelevant for someone who really wants to retire early. What people who want to retire should be focused on is how to beat the market by at least 20% per year. That involves understanding businesses, judging risk accurately, and a lot of effort in picking stocks. No doubt it's hard work, but one who's successful at it is in pretty good shape.
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What people who want to retire should be focused on is how to beat the market by at least 20% per year. That involves understanding businesses, judging risk accurately, and a lot of effort in picking stocks. No doubt it's hard work, but one who's successful at it is in pretty good shape.

GHS,

If your profile is up-to-date, I notice that you invest in a number of individual small cap stocks. Would you be willing to share how you discovered and decided on the stocks you've listed, or generally what your process for evaluating such stocks is?

thanks in advance,
dan
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No. of Recommendations: 17
It's Dialog time! I want to try some "back and forth" with FoolMeOnce. So...

I have a bone to pick with "Exceptional long term returns are to be expected as a possible result of taking exceptional risks. The returns intercst quotes are theoretical."

These are not theoretical returns. If you take actual historical results over the past 100 rolling 30-year periods, it was better to be 100% in equities for 74 of 100 such periods. No other approach did better than 4 out of 100 historical. Please, tell me if I am wrong on this point. It matters.

I think it a judgement call to equate holding a diversified portfolio of 100% equities with "taking exceptional risks". I own my home and have bonds in an e-fund. My retirement portfolio is 100% in equities. This does not seem exceptionally risky to me. Everyone will be different, which is how the world should be.

I am generally a numbers guy. The average American lives about 77 years. I personally hope for more, with some reason. I started investing at age 21 and hope to be FIRE at 50. That gives us about 30 years to build up a portfolio followed by another 30+ to spend the money. These numbers make it easier for me to stay 100% in equities for 30+ years.

If you have not worked through what compound returns mean over time, do it. The difference between earning 11% over 30 years and earning 9% is incredible! This is another reason we are comfortable in 100% equities.

I completely agree with FoolMeOnce's next point. He or She notes Intercst's excersize implicitly assumes "that mere mortals can withstand the kind of volatility associated with such a portfolio. Perhaps there are some who can, but I know of few people who have held a 100% equities portfolio for 30 years." If going with 100% equities will keep you from sleeping at night, don't do it. Period.

It is fine that 100% equities looks way too risky for at least one poster. It takes all kinds. We even have an earlier poster on this thread apparently suggesting you need to swing for the fences and take a huge bet on a small cap in order to achieve FIRE.

It's funny. I got slammed on the Berkshire board as a timid little sissy man for dollar cost averaging into Vanguard's total market index fund in recent weeks. The logic there is that if I was "confident" of a given equity I should commit more than 10% of our portfolio to that equity position. My wife and I set up rules for outselves, to help remain comfortable with our 100% equities approach. One rule is that no single stock other than Berkshire tops 10%. We let Berkshire go to 20% because we love it so.

In my opinion, consistently putting 15-20% of your gross income into a portfolio of 100% equities over very long periods of time is an outstanding approach for a FIRE wannabe. We have done this for 16 years and have done very well. We have never beaten the market, defined as the SP500, by 20% per year. Nevertheless, at age 38 my wife and I are well on our way to FIRE despite having three kids and doing the SAHM routine. We are big fans of dollar cost averaging into index funds and LTBH equity positions.

It worked for us. I thought Intercst's work a valuable exercise that supported why this approach might work for others. If you're a real FIRE wannabe, educate yourself thoroughly. After that, think for yourself (but let us know so we can learn from you).

Cheers,

JohnH
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No. of Recommendations: 12
<All this talk about retirement calculators and performance of indexes seems irrelevant for someone who really wants to retire early. What people who want to retire should be focused on is how to beat the market by at least 20% per year. That involves understanding businesses, judging risk accurately, and a lot of effort in picking stocks.>


Your post implies that with some hard work everyone can beat the market by 20% per year. Producing individuals who have managed to do that does not prove the point for a larger pool of people. I will grant you that someone focused on FIRE should fare better than almost all of the rest of the general population over the long haul. I will also grant you that there will always be individuals who take on a lot of risk and manage to hit Barry Bonds type home runs.

I really think you are talking about a small subset of FIRE types. Some of these types may get their nest egg up to 50k or 100k and decide to put it all into 1 or 2 companies that they think will really pay off for them. If they are right, they won't have to worry about beating the averages each year. If they are wrong they have to be mentally tough enough to start at the bottom of the hill again.

I could be wrong, but it is my perception that most FIRE people are their most agressive in socking away as much as they can while keeping a firm handle on their expenses. Knowing all of the hard work that goes into pursuing a goal of FI, they are usually reluctant to "let it all ride" even on a story or company they strongly believe in. That is not to say they cannot be agressive in their investment strategies. It merely shows that steady measurable progress towards a goal is often preferred over double or nothing strategies. I think there is a big difference in risk assessment between those two branches of FI people. For every startup that has become a grand slam home run, there are lots of strikeouts, even for very promising ideas. Most of us are looking for the singles and doubles with the hope of hitting one over the fence every once in a while.


BRG
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No. of Recommendations: 6
John3haha writes:

These are not theoretical returns. If you take actual historical results over the past 100 rolling 30-year periods, it was better to be 100% in equities for 74 of 100 such periods. No other approach did better than 4 out of 100 historical. Please, tell me if I am wrong on this point. It matters.

Agreed. The historical performance of the market is factual and is not in dispute. Unfortunately, markets don't retire early, people do. The theory that I am questioning is that it is likely for more than a few FIRE Wannabes to actually garner 100% of such returns going forward. It is one thing to say that your ancestors would have done just fine holding such a portfolio through thick and thin. You have the luxury of looking backwards at the historical data. It is quite another thing to take inflation-adjusted withdrawals from a portfolio that is being ravaged by a multi-year bear market with no knowledge whatsoever about what the future may bring.

Regards,
FMO
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JohnH -

Out of curiosity, how do you interpret the fact that according to the post, 100% stocks has not been the optimal allocation in any of the 11 most recent 30-year periods?

As for the accumulation phase, I can give one counterexample of when you wouldn't want to be 100% stocks: when you are very close to your target. If you've only got 1 or 2 percent to go, it might make sense to work a few extra months for the sure thing rather than taking a big volatility gamble just to get the higher expected return of stocks.

dan
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Why have 100% in Equities? ... <paraphrase> Because that allocation has done better than one with bonds in 74/100 30 year periods </paraphrase>

I'll note that there is a strong correlation between high stock market valuation and the start of periods in which stocks underperform. We are in a period of very high stock market valuation.

I'll also pipe in to second FMO's caution about real investors' ability to stick with a 100% stock portfolio through multi-year bear markets. People's risk tolerance tends to be lower than they imagined when they've just lost 50% of their stash and there is no sign of the decline stopping. If you're sure, then you're sure, but you never really know until the poo hits the fan.

A 90/10 portfolio with periodic rebalancing gives up almost no performance to a 100% equity portfolio and has lower volatility.

Just a few counterpoints. Personally I currently have substantially more of the stash in fixed income options than I would if the market had a better valuation (or if I had some better options like emerging markets or small cap value in my 401k). I will increase my equity allocation when/if it comes down. If it doesn't come down, then I expect I won't lose out by too much given the horrendously low dividend yield on the S&P 500 these days.

If somehow the market (S&P 500) from here on out were to average the current valuation, then the expected return is the dividend yield plus the real growth in dividends. Dividends: 1.5% Historic real growth: 1-2% Expected real return: 2.5 - 3.5% . The stable value fund in my 401k is paying 4.1% nominal: with inflation at 2% I'm not losing to stocks much and have the potential to buy stocks much lower ...

Ben
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Oh boy.. I think I found each one in a different way. It could be industry experience, reading an article, personal and internet friends, brut force plowing through stocks. Good investments are all over the place if you keep your mind open. Having said that, I've probably looked at over a 1000 companies in the past year, so I am rather selective. If I was looking for new investments now, I'd find it very difficult as most of the crap that I like is up quite substantially this year.

My mental thoughts regarding each stock are substantially different. Some are asset plays. Some are high margin businesses that are money losing. Some are more abstract value/probabilistic plays. It's an ecclectic mix.

If you want to ask me specific questions about my rationale for some of them, feel free. A number of them should be obvious once you do some investigation.

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These are not theoretical returns. If you take actual historical results over the past 100 rolling 30-year periods, it was better to be 100% in equities for 74 of 100 such periods. No other approach did better than 4 out of 100 historical. Please, tell me if I am wrong on this point. It matters.

In some important ways these are theoretical returns. There were no low cost index funds for the general public before Bogle brought one out in the 1970s. The widespread availability of cheap mutual funds for the general public is likely a contributing factor to stocks being so much more expensive now than in the past. Higher purchase price relative to dividends and earnings means lower returns.

Ben
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What you describe is not what I suggest. What I suggest is buying between 5 or 10 companies with excellent risk/reward characteristics. Because a small investor can invest in small companies without having liquidity problems, they can have a significant advantage over "professionals" (hahaha).

According to one of intercst's studies, many FIRE's are the myers-briggs personality type INTJ which would probably be the best personality type to be a stock picker, and I would assume that the other predominant FIRE personality types could be good as well.

I would encourage people here to explore how to pick small and microcap stocks with excellent upside potential and minimal downside. I've seen some excellent analysis skills in many of the posters here - perhaps that skill could be put to work on some really lucrative activities..
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my wife and I are well on our way to FIRE despite having three kids and doing the SAHM routine.

...I can only hope we'll be so lucky! We're doing everything we can to get there.

--AF
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Re: Why have 100% in Equities?

I don't want to sound like a complete idiot, here, but..

exactly what are equities?

Stocks?
Bonds?
Mutual Funds?
Index Funds?

I feel stupid..

Stetson20

Thanks in advance....
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There are NO dumb questions! This is the simplified version, but it's how I keep things straight in my mind.

Equities = stocks (i.e., you own part of a company)

Bonds = uh, bonds (i.e., you loan money to a company or the government)

Mutual funds = a bunch of stocks, bonds, or both

Index funds = a bunch of stocks or bonds that track a selected benchmark (e.g., the S&P 500, the Wilshire 5000, etc.). They're usually managed by a computer program and contain, or have a reasonable approximation of, the stocks/bonds that make up the index (e.g., the Wilshire 5000 contains all publicly-traded companies).

Managed funds = a bunch of stocks, bonds, or both that are managed by a real live person who decides what and when to buy/sell. The goal is to beat a selected benchmark.

Does that help?

CK
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Someone asked what I thought about Intercst's data showing that a portfolio with less than 100% stocks would have done better than a 100% stock porfoltion over each of the most recent 11 30-year periods. You might want to look at his chart for reference, post #127782 on the REHP message board. Good question. I am tempted to start a thread on this, but will try a meandering response here.

My first reaction is to worry that I might be fundamentally wrong. My second reaction is to worry about data mining, looking at a small sample and reducing the quality of analysis. Even expanding the sample to the 23 30-year periods from 1950+ suggests an average portfolio of 75% stocks and 25% bonds. Two common dates used to differentiate the "modern American economy", whatever that means, are 1950 and 1965 which is why I took that arbitrary date.

There have been a couple other periods when there appear to have been a cluster of 30-year periods when holding fewer stocks was good, followed by a number 30-year periods when 100% equities were better. From Intercst's chart, 30-year periods beginning in 1881-1887 and 1902-1910 and 1928-1931 look a bit similar. Still, the cluster of periods starting in 1962-1972 look darn poor for stocks relative to bonds.

Remember, one benefit of being a FIRE wannabe in accumulation mode is that bear markets offer stocks at a discount. Consistently buying through downturns, say using dollar cost averaging, would presumably give much better portfolio returns for a 100% stock portfolio than these figures. Intercst's figures represent a portfolio in pay-out mode, and he is estimating what you should be invested in and what safe withdrawal rate should be used. The 11 30-year periods from 1962-1972 all got wallopped by the nasty Bear market of the 1970s. This happened to be the period when Warren Buffet made incredible returns buying stocks other people had come to despise, e.g. bank stocks back then.

As an aside, I think the consensus on the REHP is to hold a portfolio with a mix of stocks and bonds to limit volatility. I want to say a 75% stocks / 25% bonds mix is often thought a good approach. As a FIRE wannabe, my family has been at or near 100% stocks for quite a while.

One of the many problems with stocks is the fluctuation in price. If you are smart, like my investing hero Warren Buffet, you know when a given stock is being offered at a bargain price and when you should not hold 100% equities.

I have difficulty being that smart. I understand a bunch of ways to measure how pricy stocks are, from P/E to comparisons with GDP, but do not have a good consistent benchmark that will tell me when to be in the market and when to be out of the market. I saw my dad convince himself he was smart enough to decide when to go in or out of equities and fail miserably. My family's approach to date has been to be 100% in equities, use dollar cost averaging into broad indexes, and add long term buy and hold stocks as our confidence in picking them improves. Whatever gets set aside for FIRE stays in stocks until at least 7 years before retirement. I should probably think about it some more, though.

Cheers,

JohnH

PS: On Stetson's question, I am sorry to have been unclear. Equities just mean stocks, which can be either U.S. or International. Stocks can be held individually or through an index fund. Bonds are not equities, but debt instruments you purchase in return for a given coupon or return paid out on the I.O.U.
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What you describe is not what I suggest. What I suggest is buying between 5 or 10 companies with excellent risk/reward characteristics. Because a small investor can invest in small companies without having liquidity problems, they can have a significant advantage over "professionals" (hahaha).

*****************

This is basically my investment approach in a nutshell.
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brewer:What you describe is not what I suggest. What I suggest is buying between 5 or 10 companies with excellent risk/reward characteristics. Because a small investor can invest in small companies without having liquidity problems, they can have a significant advantage over "professionals" (hahaha).

*****************

This is basically my investment approach in a nutshell.


This and the previous thread have both been excellent. It's too bad I have been too busy to chime in until now. I have a few thoughts:

1. Early in the accumulation cycle it is relatively unimportant whether you index, invest on your own, or keep it all in cash. You don't have so much money that increasing your return will make a big difference. Increasing your earning power should be your primary focus. That will make a bigger difference at this point than a higher return on investments.

2. After you have been accumulating for a few years this changes. I would say that once your yearly deposits are less than 10% of your total nest egg you have definitely crossed over to the point where returns are more important than increases in salary. It's a sliding scale, though, and investment returns probably start to be pretty meaningful when deposits are down to 25% of the total. Right now my yearly deposits are 40% of my nest egg, so I have a ways to go.

3. Ownership, ownership, ownership. You have to own stuff that makes you money to get rich. Stocks, bonds, real estate, whatever. The only way to FIRE is through ownership, and savvy management of that ownership stake. Pick something and do it very well. Value, growth, TA, FA, No A (indexing), real estate, apartment complexes, duplexes, single family residences, etc. There are many roads to wealth but you can only get down them when you are knowledgeable enough to do so.

That's all I have for now... What do you think?

st
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Your post implies that with some hard work everyone can beat the market by 20% per year. Producing individuals who have managed to do that does not prove the point for a larger pool of people. I will grant you that someone focused on FIRE should fare better than almost all of the rest of the general population over the long haul. I will also grant you that there will always be individuals who take on a lot of risk and manage to hit Barry Bonds type home runs.

I really think you are talking about a small subset of FIRE types. Some of these types may get their nest egg up to 50k or 100k and decide to put it all into 1 or 2 companies that they think will really pay off for them. If they are right, they won't have to worry about beating the averages each year. If they are wrong they have to be mentally tough enough to start at the bottom of the hill again.

I could be wrong, but it is my perception that most FIRE people are their most agressive in socking away as much as they can while keeping a firm handle on their expenses. Knowing all of the hard work that goes into pursuing a goal of FI, they are usually reluctant to "let it all ride" even on a story or company they strongly believe in.


As someone who FIREd on a "Couch Potato" type portfolio , I have to chime in and say "Yeah, what he said".

I neither had the inclination nor the ability to try to beat the market. I've only bought two individual stocks in my life--and one was the stock of a former employer!

Just like there are very few baseball players with Barry Bond's ability, there are few investors who can manage to beat the market consistently--even with hard work. The great thing is that unlike the Major leagues, even the mediocre investors get to play ball.
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I would encourage people here to explore how to pick small and microcap stocks with excellent upside potential and minimal downside. I've seen some excellent analysis skills in many of the posters here - perhaps that skill could be put to work on some really lucrative activities..

This is sort of what I do, but not quite. Right now, I have 33% in individual stocks. 28% in bonds or bond funds, and the rest is either in REITs or indexed mutual funds. OK, 5% is in REIT's and 7.5% is in cash. I am going to slowly work this into 10% REIT, 25% Bonds or Bond funds, 15% individual stocks and the rest in inexed stock funds. I will work to pick the stocks you desribed above with 15% of my money, if I hit it big great, if I don't, it's not that large a hit. The rest of the prtfolio will be on auto pilot. I feel pretty comfortable with that. I may keep the companies I have already established DRIPs with, but I'll have to think about that some more.

Volucris
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>>I will work to pick the stocks you desribed above with 15% of my money, if I hit it big great, if I don't, it's not that large a hit.<<

Ever hear the saying that if you are sitting at a poker table and you don't know who the sucker is, then you are probably the sucker?

I don't mean to sound disrespectful, but if you don't know the odds are in your favor, you probably shouldn't be playing the game.
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>>Ownership, ownership, ownership. You have to own stuff that makes you money to get rich. Stocks, bonds, real estate, whatever. The only way to FIRE is through ownership, and savvy management of that ownership stake. Pick something and do it very well. Value, growth, TA, FA, No A (indexing), real estate, apartment complexes, duplexes, single family residences, etc. There are many roads to wealth but you can only get down them when you are knowledgeable enough to do so.<<

I like the way you put your post. I tend to think that a person who is adept at understanding what value is has the best chance of accumulating wealth the fastest. Therefore, my inclination is to weed out at least one of the items you listed. But, the goal is simply to make money with investing, so I really don't care how someone does it so long as they find a way to do it.
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GHS: tend to think that a person who is adept at understanding what value is has the best chance of accumulating wealth the fastest. Therefore, my inclination is to weed out at least one of the items you listed. But, the goal is simply to make money with investing, so I really don't care how someone does it so long as they find a way to do it.

That is a very polite response, you usually don't see that on TMF when TA is mentioned.

I would argue, though, that understanding the value of a company and understanding the value of its stock are two different things. FA helps with one, TA with the other.

Of course, you may have taken issue with something else in the list, so what do I know.

And yes, the goal is to make money, so the end justifies the means in investing methodology. Tea leaves or TA or balance sheets, it's the return that matters.

st
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I would argue, though, that understanding the value of a company and understanding the value of its stock are two different things. FA helps with one, TA with the other.

The whole TA/FA thing seems to me like the classic nature vs. nurture arugment. While there are people on either side arguing vigorously, the truth is probably somewhere in the middle. I think that most Fools recognize that there is something to TA, in that it is an attempt to analyze the psychology of those trading a given equity. In the short term, the value of anything on the open market is only what someone else will pay for it, and that involves psychology. That said, I think there are very few who can play the TA or FA game well.

Getting back to the original point, I agree that you should invest in whatever earns you the most money. I think the individual investor should find an investment style that suits their abilities, risk tolerance and temperment, learn everything about it and stick with it. Jumping from one investment style to another is probably the biggest mistake an investor can make.

Adenovir
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<<I think it a judgement call to equate holding a diversified portfolio of 100% equities with "taking exceptional risks". I own my home and have bonds in an e-fund. My retirement portfolio is 100% in equities. This does not seem exceptionally risky to me. Everyone will be different, which is how the world should be.
>>


Interesting discussion.

I began investing in stocks in 1979 when the Dow was around 850 and lot of good companies were selling for 4X earnings. I thought I saw an opportunity, and I saved and invested all the nickels and dimes I had in stocks. What did I have to lose? At the time, not much.

That proved to be smart. I've had stocks up more than thirty fold that I bought then.

I'm more cautious now. I have a lot more to lose, and more importantly I don't see a clear argument for loading up heavily on stocks. I continue to hold much of the portfolio I bought in years past, and continue buying a half dozen stocks with DRIPS as I have for years. But I also have substantial money in money market funds.

Is this market timing? Yes, in part. My experience is that the real opportunities that scream "BUY!" are rare. When they do come along, you need to be prepared to take advantage of them.

Similarly, the opportunities when the market is screaming "SELL NOW!" are also rare ---we've experienced that in 2000-2001 or so as well.

After the fact, such opportunities seem obvious, but everything contrives to hide that fact from you when you are living through that time.


So I accept moderate risks by holding stocks I buy, dollar cost averaging with DRIPS and holding money market funds as a reserve. But I also keep an eye out for the next big opportunity. They tend to come along from time to time, and the hard part is recognizing them. If I am fortunate enough to recognize another, I'll take the chance and use a chunk of my cash to buy in.


That's my strategy, anyway.



Seattle Pioneer


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Ever hear the saying that if you are sitting at a poker table and you don't know who the sucker is, then you are probably the sucker?

IIRC, it was Warren Buffet that said that...
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But I also keep an eye out for the next big opportunity. They tend to come along from time to time, and the hard part is recognizing them.

************************

Right on the money here. I don't know about you, SP, but if I see a big opportunity, I don't care whether it is bonds, stocks, real estate, commodities, gold, South American guinea pig farms or whatever. If I can recognize the opportunity and be confident in my analysis, I'll take a swing at it.

The hard part, as you mentioned, is realizing that you are looking at an opportunity. Its pretty hard to make the leap sometimes, and often I will not be confident enough and pass. I foolishly passed on Petmeds less than a year ago and missed out on a 6-bagger. Why did I pass? Its hard to tell what will work and what won't, and I decided the risk was high enough that I wouldn't spend that much time looking at the upside.
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<<The hard part, as you mentioned, is realizing that you are looking at an opportunity. Its pretty hard to make the leap sometimes, and often I will not be confident enough and pass. I foolishly passed on Petmeds less than a year ago and missed out on a 6-bagger. Why did I pass? Its hard to tell what will work and what won't, and I decided the risk was high enough that I wouldn't spend that much time looking at the upside.
>>


I agree. This is complicated for me by the fact that I consider myself to be excessively risk averse. So I tend to hesitate before taking the plunge, and risk never taking it. Of course I can avoid problems that way as well.

It's a balance of terrors.



Seattle Pioneer
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I don't mean to sound disrespectful, but if you don't know the odds are in your favor, you probably shouldn't be playing the game.

Duh. What makes you think I don't know what the odds are?
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I began investing in stocks in 1979 when the Dow was around 850 and lot of good companies were selling for 4X earnings.

SP -

As you say, perfect investing times always seems obvious in hindsight.

I was 9 years old in 1979, so all I know of the time is from vague memories and history. Inflation was high, interest rates were high, gold and silver were through the roof, oil prices were high, and stock prices were depressed.

So my question is this: how did you feel when you saw the opportunity? Was it an easy call, or did you have to fight yourself to make yourself invest?

I ask because it seems to me that the times that are (in hindsight) the best times to invest are when emotionally it's hardest for me to pull the trigger. I'm wondering if you experienced the same thing back then.

Also, if I recall correctly, there was another downturn until 1982, when the bull market really turned up in earnest. Do you remember how you felt about your investments over the first few years?

thanks,
dan
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There are NO dumb questions! This is the simplified version, but it's how I keep things straight in my mind.

Equities = stocks (i.e., you own part of a company)

Bonds = uh, bonds (i.e., you loan money to a company or the government)

Mutual funds = a bunch of stocks, bonds, or both

Index funds = a bunch of stocks or bonds that track a selected benchmark (e.g., the S&P 500, the Wilshire 5000, etc.). They're usually managed by a computer program and contain, or have a reasonable approximation of, the stocks/bonds that make up the index (e.g., the Wilshire 5000 contains all publicly-traded companies).

Managed funds = a bunch of stocks, bonds, or both that are managed by a real live person who decides what and when to buy/sell. The goal is to beat a selected benchmark.

Does that help?


Yes, it does. Thanks!

Stetson20
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<<I began investing in stocks in 1979 when the Dow was around 850 and lot of good companies were selling for 4X earnings.

SP -

As you say, perfect investing times always seems obvious in hindsight.

I was 9 years old in 1979, so all I know of the time is from vague memories and history. Inflation was high, interest rates were high, gold and silver were through the roof, oil prices were high, and stock prices were depressed.

So my question is this: how did you feel when you saw the opportunity? Was it an easy call, or did you have to fight yourself to make yourself invest?
>>


After having a chance to do my dream job, and failing at it due to a poor personality match, I more or less retired early at age 26 for three years spending off my modest assets while going hiking, climbing backpacking and such. When I got to the point of being broke in 1979, I got a job as an office clerical working for a utility company in 1979.

As soon as I started getting paid, I instantly recognized a big opportunity in the stock market ---no hesitation at all. I saved all the nickels and dimes I could gather and lived my usual frugal lifestyle, which produced a high rate of savings even on a modest income. And I found a decent stockbroker and shoveled everything into the market, which paid off handsomely.

<<Also, if I recall correctly, there was another downturn until 1982, when the bull market really turned up in earnest. Do you remember how you felt about your investments over the first few years?
>>

Good recollection of history for you, and good question. I did suffer some reverses in that downturn, and they didn't slow me up. I still saved every nickel I could manage and was shoveling it into the market as fast as I could. Not using margin, though.


My fellow office clerical employees, mostly women, all thought I was nuts. I brought in the Wall Street Journal every morning and read it cover to cover during breaks and lunch, getting calls from my stock broker from time to time. The idea that ordinary people had stock brokers and bought stocks was a completely foreign idea at the time. My supervisors also thought I was nuts, and so did the managers, for similar reasons.

Some of the company vice presidents did not think I was nuts. I had occasional friendly visits from them once in a while, inquiring about what I was buying and why. They were encouraging in a quiet way.

By 1985, stocks were at such lofty prices (what, Dow 1200 or something) that I turned some of my savings into buying a house, then a duplex rental property in 1986 and paying cash for a rental house in 1987 (liquidating some stock to do that before the October massacre).


I continued to buy stocks, but not as aggressively as earlier, and turned savings into paying down mortgage debt instead of buying more stock. Not a bad use of money, but I underestimated by a lot how far stocks still had to go.


I continue to hold a lot of the stock I bought in those early years, and buy a half dozen stocks each month on DRIPS.

Perhaps I should add that my father had a long history of stock market investing. At the time, he was putting all of his money into buying very heavily discounted corporate bonds that had been devastated by fifteen years of inflation followed by VERY high interest rates. He bought everythin he could, and margined himself up to the eyeballs. That did cause him problems during the second siege of high interest rates under Reagan. When interest rates dropped though, those bonds skyrocketed in price because corporate bonds with a 4-6% coupon weren't going to be called. They rose in price from perhaps $250 for a $1000 bond to perhaps $1200-1500. I think you only had to put down 20% margin on corporate bonds at the time, so that was a BIG jackpot.

That was my dad. He took much bigger chances than I did, and he was seventy in 1981. I was a chip off the old block, but not much more than that.


Anyway, there's a long answer to a couple of good questions.



Seattle Pioneer




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<All this talk about retirement calculators and performance of indexes seems irrelevant for someone who really wants to retire early. What people who want to retire should be focused on is how to beat the market by at least 20% per year. That involves understanding businesses, judging risk accurately, and a lot of effort in picking stocks.>

Your post implies that with some hard work everyone can beat the market by 20% per year. Producing individuals who have managed to do that does not prove the point for a larger pool of people. I will grant you that someone focused on FIRE should fare better than almost all of the rest of the general population over the long haul. I will also grant you that there will always be individuals who take on a lot of risk and manage to hit Barry Bonds type home runs.



A few thoughts:
-We can't ALL outperform "the market," since collectively, we ARE the market.
-If it were really possible to outperform by 20%, I think that you'd have to spend an enormous amount of time in analysis and management of your investments. That's a second job. If you realize that, fine, but it's not a direct comparison to some mix of stock/bond indices. It's like real estate...you can find some good local deals and rent them out, but if you devote time to finding and managing the real estate, it's partly income from your "second job" rather than passive investment.
-If it's realistic to beat your benchmark index by 20%, why are 75% of managed funds trailing theirs? (And it was more like 88% trailing back in the "good times.") You're not just "competing" with uneducated schmoes and neophytes, but with the people who do it for a living, and have access to corporate officers and a research staff.
-Finding one or two people who have outperformed doesn't prove that people can do it consistently. After all, several people "outperform" each year by winning the lottery, but we all recognize that it's chance rather than any formula that can be repeated.
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>>-If it were really possible to outperform by 20%, I think that you'd have to spend an enormous amount of time in analysis and management of your investments. That's a second job.<<

Actually, 50% is quite possible in my estimation. Absolutely it takes a lot of work - if you don't love that work, you shouldn't be doing it. Some people want to do it, some don't.

>>-If it's realistic to beat your benchmark index by 20%, why are 75% of managed funds trailing theirs? (And it was more like 88% trailing back in the "good times.") You're not just "competing" with uneducated schmoes and neophytes, but with the people who do it for a living, and have access to corporate officers and a research staff.<<

I see this argument all the time - and it's an enormous misconception. Here's their biggest problem - money. They've got too much money in their funds. That means they have to buy stocks that have a lot of liquidity, since they have to be able to get in and get out of investments quickly and they simply can't do that in small stocks. Meanwhile, all mutual funds are in the same boat. Research of these companies is largely irrelevent, since the market is virtually efficient for those stocks - so funds spend a bunch of money on something that is relatively pointless. You also have a problem in that a mutual fund manager is evaluated every quarter, thus they can't be true long term investors, which is what they need to be.

The individual has none of these issues constraining them. I can buy illiquid securities (microcaps/nanocaps) that are extremely cheap - I don't have to worry about potentially having to sell them tomorrow. Maybe the company is having short term difficulties and the market threw the baby out with the bath water - which often happens. Maybe the company is in the midst of a cyclical downturn in their industry, and they have the financial resources to survive for quite a while. These types of scenarios are where the true value is in the market, but mutual fund managers can't touch them for the reasons I described above.

I think you can play this game up to a portfolio of around 10mill. Then it gets considerably tougher. But the individual doing it needs balls bigger than brains, and a willingness think independently and stand on their own.

>>-Finding one or two people who have outperformed doesn't prove that people can do it consistently. After all, several people "outperform" each year by winning the lottery, but we all recognize that it's chance rather than any formula that can be repeated. <<

Yep. :)
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>>Duh. What makes you think I don't know what the odds are? <<

Someone who only puts 15% of their money in their stock picks with the implication that it's a gamble probably doesn't feel very confident in their stock picking abilities.
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<<-Finding one or two people who have outperformed doesn't prove that people can do it consistently. After all, several people "outperform" each year by winning the lottery, but we all recognize that it's chance rather than any formula that can be repeated.>>


The above statement reminds me of a question which has never been answered.

Why do some people choose to work as stock brokers? Wouldn't their time be better spent devoted to market research and investing activities? Think about it.

VL - would LOVE an answer to that one :)
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<<Why do some people choose to work as stock brokers? >>


They are morning people, have natural sales ability and want to make a lot of money.



Seattle Pioneer
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Why do some people choose to work as stock brokers? Wouldn't their time be better spent devoted to market research and investing activities?


As a stock broker, it doesn't matter if they are right or wrong, they still get paid, and paid well. It's a no brainer, really.

;)

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<Why do some people choose to work as stock brokers? Wouldn't their time be better spent devoted to market research and investing activities?>

Because there are way too many fish in the barrel who insist on paying him or her to take a nice vacation several times a year, own several late model luxury cars, live in an upscale house in a prime neighborhood and provide him or her with all of the trimmings that go along with it.

Much like the contracts that most athletes have, the payments they "earn" are not predicated on performance. Even with all of the scandals and three years of down markets, it is still too easy for all but the dumbest and/or the most honest of them. Most Americans (excluding almost all of those who would actively pursue FI as a goal) have no desire to invest the time in their financial educations. This happens in many other areas of life in this country too. Most elections are not about the real issues. Only about half of those eligible to vote bother to register. In most elections less than half of those registered will vote. Of those that vote, only a small percentage understand the issues.

In my state property taxes on an average home are in the 5-6k range. Many people have bills over 10k. I am not talking mansions here, just average homes in the NY-NJ metro area. In every town, more than 50% of the bill is for schools. Yet when the budgets are voted on it is not uncommon for turnouts to be in the single digits of eligible voters. It is human nature to complain. It is not so common for people to do things to remedy the complaints.

When you go into a relationship with an "advisor" you should have done your homework ahead of time. As we all remember from our grammar school days, doing your homework was usually a PITA. As adults nobody can force us to do it like they could when we were kids. However, if you don't bother to ask specific questions that show you have a decent working knowledge of the subject, you too will be thrown into the barrel. At that point saying "the dog ate it" won't work. Come to think of it, it didn't work too well back then either.<grin>


BRG
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Yes, some of these can be practical reasons why a person would become a stockbroker, but my point is why bother trying to sell something when you can ostensibly make more money just by owning it? (tongue in cheek here)

Doesn't the fact that brokers exist further prove the inherent risks associated with counting solely on the stock market to provide consistent and healthy returns?

I'm not suggesting that stock market investing can't be profitable, just that putting all your eggs in that basket and then sitting back for the long haul might not work out the way you want it to.


VL - purveyor of the mundane
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TheBreeze:We can't ALL outperform "the market," since collectively, we ARE the market.

If 75% of all mutual funds underperform the market then isn't that a lot of money to one side? And therefore an opportunity on the other side?

If it were really possible to outperform by 20%, I think that you'd have to spend an enormous amount of time in analysis and management of your investments. That's a second job. If you realize that, fine, but it's not a direct comparison to some mix of stock/bond indices. It's like real estate...you can find some good local deals and rent them out, but if you devote time to finding and managing the real estate, it's partly income from your "second job" rather than passive investment.

You are exactly right. But like FMO says that his real estate investments, once set up, take very little time; I would argue the same is true with stocks. Once you get educated and have a methodology laid out, it is less than 10 hours/week.

-If it's realistic to beat your benchmark index by 20%, why are 75% of managed funds trailing theirs? (And it was more like 88% trailing back in the "good times.") You're not just "competing" with uneducated schmoes and neophytes, but with the people who do it for a living, and have access to corporate officers and a research staff.

You have already had some responses about small-caps and their potential. Another thing is that a mutual fund is very highly restricted in the amount it can buy on any one day, amount it can hold of any one company, and the amount of cash it can have on hand. I, on the other hand, can go from 100% cash to 150% stocks in only one day, and I won't move any of the stocks I am investing in. OTOH, in a period like March 2001, I can go from 150% stocks to 100% cash in a day, or maybe even an hour. Speed and size, that's our advantage.

Finding one or two people who have outperformed doesn't prove that people can do it consistently.

That's a very good reason not to try. Investing is like anything, and practically requires its own self-study degree. Again, not for everyone. For those willing to do the work, though, it can be very rewarding.

st
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Someone who only puts 15% of their money in their stock picks with the implication that it's a gamble probably doesn't feel very confident in their stock picking abilities.

You're right. Even though I have been owning individual stocks since 1988, and have had some amazing successes (MSFT, KO, MRK), my picking was haphazard at best. (HGSI, XEL) So, I will start with 15% to ensure to myself that I have learned very well what I am doing. Then I will increase my percentages.

Volucris
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It is human nature to complain. It is not so common for people to do things to remedy the complaints.

I think the Declaration of Independence sais it best:

"...and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed."
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I read the Declaration through recently and was really amazed at the grace of Jefferson's writing and the elegant turns of phrase he uses. I recommend everyone read it (text widely available on the Web) and just be appreciative of just what a great country that document has sparked.

My favorite phrase is:

"He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only.

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Oops, missed the bolding somehow:

"He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only."
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<<I read the Declaration through recently and was really amazed at the grace of Jefferson's writing and the elegant turns of phrase he uses. I recommend everyone read it (text widely available on the Web) and just be appreciative of just what a great country that document has sparked.
>>


While I regard the Declaration of Independence as a propaganda tract, I do like the part about:

"He has erected a multitude of new offices, and sent hither swarms of officers to harass our people and eat out their substance."


And if you imagine the Supreme Court as standing in for George III, how about:

"He has refused his assent to laws the most wholesome and necessary for the public good.

He has forbidden his governors to pass laws of immediete and pressing importance unless suspended in their operation till his assent should be obtained; and when so suspended he has utterly neglected to attend to them."



Seattle Pioneer
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