Financial Freedom Sloth

achieving financial freedom one lazy step at a time

Special circumstance investing

So after having explained my general views on investing. And why I really, really like the combination of our low interest rate environment, CfD’s and Lynx (a reseller of Interactive Brokers). I will now go into a bit more detail of what I did in 2016 with the newly discovered tools and what I am on the lookout for at the moment.

2016

I covered most of this in my post about the origin of my stash. But I’ll try to give a bit more explication on why I did it and the difference leverage made.

The first opportunity I had to use leverage was when AB Inbev made a take offer bid on SAB MILLER. They offered 44 GBP but the market had doubts so the SAB MILLER stock traded at 40 GBP. This was a 10% gap. I had no doubts that a) the take offer bid would materialize and b) this would happen in less than a year. So what I saw was the possibility to borrow at less than 3% to make around 10%. I was confident because I knew AB Inbev for more and a decade, this was the final piece of puzzle they had been putting together for a long time and they had successfully done the take over/merger with Anheuser-Busch. But I also looked at the downside and there the picture looked good as well: SAB MILLER had actually grown more in the last years than AB INBEV, the markets they operated in had more promise, they promised to apply the cost cutting culture of AB INBEV if the merger did not go through and they actually paid a dividend that almost covered my financing fee. The downside was actually not all that bad. Sure, the stock of SAB MILLER would probably drop to around 34 GBP (the price before the offer) but looking at the economics of SAB MILLER I felt confident they would be at 40 GBP within 2 years. So merger goes through: I make a nice and quick profit, merger does not go through: I’ll still make a profit but it will probably take 2 ears or more. So I bought 5000 CfD’s on SAB MILLER at around 40.50 GBP. The brexit and a change in margin requirements would force me out of the trade but in the end I still made a net profit of 8366 GBP. Less than I had anticipated but since the leveraged position was about the size of my total stash it did add a nice 4% extra return. And I made it between the end of December and mid June. the leverage made all the difference. Without it I would have been forced to find some free cash or sell other stocks. Berkshire was around 130 USD when I started the leveraged position and it was 140 USD. It had actually gone up 7% in the same time period. Not using leverage would have made me miss this run up in Berkshire Hathaway.

With the SAB MILLER position active and me not needing to work at the time I grew bored. So I tried my hand at day trading. Technically it was day trading because I was buying and selling on the same day. But actually I had identified some stock that was cheap and I wanted to buy some. I just didn’t feel too comfortable with already having a 200.000 GBP leveraged position so as soon as I made some profit I closed the position (and thus the extra leverage). I practiced a bit with Berkshire Hathaway and Coca cola. And then when Google went down to 730 USD I really had some fun with it. Real day trading is off course have dozens or even hundreds of trades and playing both an uptrend and downtrend in stock price. I just bought stock I thought was cheap and then sold with a small profit. Sometimes I only did 1 or 2 of these trades, and some days 6 or 8. I found it to be way to much work and also too much stress but I did make around 2.500 USD in profits from it (another 1% added to the stash). But it would have been much more profitable to just buy Google at 730 USD, keep it for a few months and then sell it around 780 USD. I just wasn’t very comfortable with that amount of leverage at that time.

But a friend of mine had combined everything we had learned about investing and the possibilities that Lynx offered and found a very interesting construction one could set up. I will not go into detail because it uses around 2X leverage (very, very dangerous!) and you should only do it with some very specific stocks (1 in particular is well suited for it) at certain price points. No need to feel left out as at present prices, one most definitely should not do it!

But in June 2016 the price was right and with the leverage of SAB MILLER gone I myself set up a similar construction. This would net me around 10.000 USD a 12.000 USD. With the leverage involved and the long period of the construction it is a bit difficult to determine the exact profit (or I should start keeping more detailed records, for which I am way too lazy! The construction was wildly profitable and that is good enough for me).

In-between all of the above, and because I was now making profits with my leveraged positions I also wrote a few puts on Berkshire Hathaway, none of them called because Berkshire Hathaway had a really good 2016! I would have liked to buy extra shares at a lower price but the 1 500 USD in premiums was nice as well. I did pick up some Berkshire Hathaway shares to hold and add to my collateral (all that profit had to go somewhere).

Looking at 2016, it may seem as I was all over the map. But if you discount the ‘day trading’ activity I actually did not do a whole lot of trades and I was only active in 5 different stocks. All of which I have known for years, or even decades. For me, most of the work is in identifying good companies to invest in. Once that is done, doing trades in them, even if that is with options or via CfD’s does not take a lot of time or effort. It is my long held belief that an investor only needs a handful of quality stocks he knows really, really well and a good understanding of all the possibilities of options to do very well for himself.

Thanks to the smart use of leverage I added a bit more than 10% extra return to my stash.

2017

Early in 2017 I could repeat the construction from mid 2016. This will add around 24.000 USD to my stash, or an extra 10% return. The price point at which I could do it was stretching my comfort zone somewhat. A sharp drop in stock price is the only risk I have, stock price remaining equal or going higher do not make any difference (I do have around 5% downward protection, but after that, things become dicey). At 2 times leverage I have felt a bit unsettled but we are now one month into it and prices have risen another 6% so that does give me another safety cushion!

Setting up the construction only took 5 minutes (10 if you add the time i spend on my parents stash) and then left me with not a whole much to do. i grew bored. I also came to the realization I like investing. I like it a lot. I have literally zero need to keep reading financial and economic stuff but yet I continue to read, read, read.

I miss being active and when I find something really, really smart I am not ashamed to admit I drool over it.

I am drooling over UVXY. it seems to be a product designed to go lower in price over time. Financial velociraptor found it. Which makes it ideal to short it (or buy puts on it). With the construction it is prudent to keep a decent amount of cash at hand. Especially in the beginning. At the moment that is around 40.000 USD. Over time, the leverage is going to cost me around 12.000 USD.

So me being bored, having found this really cool stock to play with and having a lot of cash available. Well, I had to try a trade in it! I copied Velociraptors last trade. It is not beneath me to copy somebody’s cool idea! So I bought three contracts of UVXY190118P00013000. We will see how it turns out. It is ideal to familiarize myself with it. The longer the construction runs, the less need to hold large amounts of cash. So starting slow with not too much cash and slowly building my confidence in these trades and making them larger as time goes by is ideal for me at the moment.

Prices of most stock are pretty high but I am looking at some stuff.

Resilux, there is a takeover bid at 195 euro and the stock currently sits at 188.75 euro. Takeover bid has the support of current management and there is a fair change it will go through. At 185 euro it would be a nice CfD play. Doubtfull it will go so low, and volume is also low but I have set an e-mail alert on it at 185,50 euro.

Vandevelde got knocked down to 57,5 euro. They pay a net dividend of 4.2% at current stock price (3.5 bruto – 30% taxes). But I do not like them paying full free cash flow in dividends, or being geographically limited (bulk of their sales profit come from Belgium and France and with the upcoming presidential election in France, 2017 may be bumpy). Still, good company with a nice product (Belgian men know what I am talking about) and well run. But too many doubts.

I almost wrote some puts on coca cola when they stood at 40,50 USD last week. I wanted a slightly higher premium and also visited some friends on the day I was planning to do it (and I forgot t take my log in information with me, doh!). Here is hoping they go back down. Last time Coca-cola was around the 40 USD price level I made around 15% in a 4 month time frame. Would like to repeat that if at all possible! Set another e-mail alert at 40,80 USD. I would write 5 put contracts at strike 40 and an expiry 5 to 6 months away. Can stocks please go a bit lower? It’s starting to become a bit ridiculous!

And then there is another takeover arbitrage possibility. Bayer wants to pay 128 USD cash for Monsanto but Monsanto is only trading at 110,70 USD at the moment. That is a nice 15% gap. It is also an arbitrage Buffett is apparently playing and he is seldom wrong. But I need to do my homework on Monsanto first. Would I mind holding the stock for some time at current price if the deal falls through? Since I am already at the max leverage I want to tolerate, this would actually be something for the girlfriends stash. So I really need to do my homework. She still hasn’t decided if she wants to actually make a profit of Monsanto as she doesn’t like the company or its products. Personally I am amoral if it comes down to investments but like I said, I really need to read up on Monsanto before risking any of the girlfriends money. If I do it, I will limit the leverage to 1X or even only 0.75X of her stash.

So this what I have done in 2017 and what I am currently looking at. Did anybody make it all the way to the end?

A holy trinity

As I already mentioned in my post about the origin of my stash, I changed my investment approach at the end of 2015, early 2016.

The catalyst for this change was a new tax the Belgium government had passed. The speculation tax would tax any profits made on stocks you both and sold within a 6 month time frame. The tax did not take losses into account. As a value investor this tax would not have a really big impact on my investments. Although I never said no to a quick win either. There is on occasion a free lunch to be had on the financial markets. But it was the general principal. We already had a stock order tax when buying and selling stocks (0.27% of value when you buy and sell stock) and the dividend tax had gone up from 15% to 27% (30% now). It felt as our government had been gunning for the private stock investor for a few years now and this new tax was the proverbial last drop in the bucket. It pissed me off. It royally pissed me off and when the tax was announced, I started looking for a way around it. Fortunately for me, I found more than just a work around, I found what amounts to the holy trinity for a quirky guy like me.

That holy trinity for me is Contract for Difference (CfD’s), the low interest rate environment + Interactive brokers (or in my case their local re-seller Lynx).

Contract for Difference

CfD’s is a very special product. You see, it behaves exactly as a the underlying stock but it isn’t a stock. It is also a contract between you and your financial institution meaning they’re not actually traded on a stock exchange (but it does behave in the same way).  This means the speculation tax was not applicable. The stock order tax is not applicable either. And the cost of buying or selling a CfD is ridiculous low. Especially for CfD’s on US stocks where it is 0.01 cent per CfD. An almost perfect product. There is off course a catch. When buying CfD’s, you actually borrow the money from your financial institution. And that of course has a cost. It is an overnight fee which means that you are only charged interest if you keep your position overnight. Buy and sell (or sell and buy as you can also go short with CfD’s) in the same day and no interest will be charged. This is why CfD’s are mainly used for day trading. It is also the reason why I never looked closer at this financial product before the end of 2015 although I had been aware of its existence before that.

Enter our current low interest rate environment

The low interest rate environment

When rates are high you would be a fool to keep a CfD postion for a long time. Paying a 6% rate to make perhaps 8 or 10% profit is not a very attractive proposition. Better close that position during the day! But interest rates are low now. Close to zero, and for the euro even negative. The interactive broker rates can be found here.

Borrowing at around 2% to make around 8% to 10% profit? Well that’s very attractive. Especially since you have stocks paying a higher dividend than that!! When I came to this realization I was drooling more than that time Alyson Hannigan appeared as lesbian vampire willow in Buffy the vampire slayer.

It was about the become even better (yay , a threesome!).

Collateral at Interactive brokers

You see, brokers are not willing to have just anybody borrow large amounts to buy CfD’s. They need collateral so they are sure you can cover your losses if the trade should not go as you planned and you have a loss. Most brokers will offer leverage on that collateral letting you borrow more than the collateral. But I am not that big a fan of leverage. Collateral is a lot like lesbian vampire Willow: great in small doses and for an occasional fling in the woods but you do not want to take her home to meet the parents or be married to her. Most brokers want you to put up cash as a collateral. But cash does not offer any decent returns. Meaning you have this pile of dead capital just lying there, except if you would take on leverage and buy CfD’s. Not a very appealing proposal! It forces you to be leveraged all of the time or have 0 return on your cash. You do not want to be leveraged all of the time because just like being married to vampire Willow, sooner or later you will wind up dead.

But Interactive brokers also accept stocks as collateral! They especially love A list stocks like Berkshire Hathaway. You see, this right here? This is the moment where you are fooling around with lesbian vampire Willow and normal Willow turns up, gets exited and ask you if she can join the fun!

What this means is that you can plow everything you have in Berkshire Hathaway. Enjoy a better retrun than the index (well, perhaps not at current prices, but I am speaking early 2016 here, the price was right) on this position. And then, when a decent opportunity arises you can use CfD’s and your leverage to get a bit of extra return. Since Berkshire already gives you an average return of 9% a year, this means you only need one nice trade a year to push your return to 12% or higher. It doesn’t need to be Berkshire stock, and index fund is also accepted. Beating the index all of a sudden became easy!

In my next post I’ll explain how I used this holy trinity to achieve a 39% return last year and what I am contemplating at the moment … And now you have to excuse me because there still seems to be a lot of vampire Willow images on the internet …

On investing

Contrary to many people in the financial independence/early retirement community I have always been a stock picker and have no interest in becoming an index investor. I really do believe that for an individual investor it is certainly possible to beat the index and thus achieve financial independence sooner.

This does not mean the FIRE community has it wrong. On the contrary, I think they are very right to promote low cost index investing for the majority of people. It is a sure way to financial independence.

Investing in individual stocks is only something you should do if you love it and have the personality for it.

For the love of the game

You really, really have to love it. You have to love reading books about it. Reading even more about companies you think to invest in. Read their annual reports, their balance sheets. Read about the CEO of a company. Or books about past great CEO’s so you can identify current great CEO’s! You have to love it, because in the beginning your efforts will be in no way compensated by your profits. Investing is something where you have to do the bulk of your effort in the beginning. But that is also the moment where you have the least amount of money so your reward for all that effort will be the smallest. Getting a return of 10% on a stash of 30.000 euro is great but it is only 3.000 euro. And there is a mountain of reading to do to just cover the basics. If you would calculate your hourly pay for all that reading you probably only made a dollar per hour …

Fast forward 10 years and your stash might have grown to 300.000 euro. Making 10% then is 30.000 euro. And since you have already learned most in the early years and have a few companies where you have done your extensive homework, the work you need to do is little to none.

Because of this reversed compensation structure you really need to love investing and stock picking to get you through those first couple of years.

The right personality

Not only do you need the type of personality that loves reading about all the stuff I mentioned above. You also need to be the type of person that loves numbers. There’s the balance sheet of the companies. There is the stock price, your return, the risk you run … Numbers, numbers, numbers.

And then you need to be able to see past the numbers. Recognize trends but also be able to determine which companies have a big moat, which numbers are relevant for which sector. Which company has an excellent management and which has a crap one. Does the story the company tells you in its annual report and in its balance sheet match? And does it all make sense or is it a reincarnation of Enron?

Are you disciplined enough to stick to your own rules and not be influenced by the daily noise the stock market generate every day? Can you handle the up and down swings of stocks? To give you an example of the latter: I had a 60.000 euro position reduced to around 24.000 euro in a matter of a year! I was earning 2.000 euro a month by working, and here I was losing 36.000 euro in one year! I can tell you it hurt. It physically hurt! It would talk 7 years before I could exit the position profitable. And it is in large part thanks to some fancy option work (and luck) that after 7 years I could walk away with a 41% profit. But 41% on a 7 year period is only a compound annual growth rate of 5.14%. Believe me, I paid for those 5% with pain and a tenacity I really did not know I had (if there is any interest I will dedicate a seperate post to this ‘very painful’ investment). So the question is: do you have the right personality for it? If not, well as mentioned before, index investing is a perfectly fine way to achieve financial independence.

Beating the index

In my opinion it is certainly possible for a private investor to beat the index. I also believe it is very difficult for an actively managed fund to beat the index. The reasons are very simple.

– Professionally managed funds have a very high cost basis. They have insane overhead and personnel costs, eating up a nice chunk of return. Your cost structure is close to zero.

– they have tons of government rules to follow, and then a shit load of internal rules to follow. You have absolute flexibility.

Private investors can take advantage of the career risk of professional investors. Lyn Alden in a guest post over at amber tree leaves explains this well. She also explains option trading pretty well. I too like writing options and her post is well worth the read (personally I keep my distance from commodities and precious metals, but I agree with everything else she wrote).

-financial velociraptor just wrote a fantastic post about three different asset classes that should return above 10% at the least (selling or writing options is one of them, hmm great minds think alike). Go read this post people! it is really brilliant in my humble opinion. And after you are done with that post, read everything he ever posted about UVXY. That is a truly horrible financial product and he found a way to profit of it! Another brilliant find!

Conclusion

If you love it and you have the personality for it you should definitely become an active investor. It will turn into a livelong obsession that will probably change the way you look at the world. Figuring stuff out. Or discovering a great investment opportunity can give you an incredible rush! The money is just a nice extra!

Monthly expense report: January

A bit late as we are already 7 February but illness (there is currently a flu epidemic in Belgium) had me off the computer for most of last week. As the misses can attest, a very rare occurrence! Circumstances must really be dire to pry me away from the holy LED screen!

Even worse, it had me miss the second Belgian Dutch meet up!

On friday I had high hopes to be well enough to make it. But saturday had me waking up with a headache for the fifth day in a row and a throat that felt like a hedgehog had take up permanent residence down there. Waking up around 8 I lay in bed have an internal debate about just rolling over and be sick or actually drag myself out of bed, under the shower (most definitely needed a shower) and then off to Antwerp. But then I coughed something up that will be starring in the upcoming remake of the 1988’s classic ‘The blob’ and decided to not expose my fellow financial travelers to these horrors from the deep ….

How I felt for most of last week

But anyway, on to the expense report of January!

As mentioned in December, these are without any investment gains taken into account. Principal payments on the mortgage are also viewed as an expense. Once paid off this will off course have the huge benefit of living mortgage/rent free but as this is something that will only happen after I am financially free I do not take it into account.

Personal account:

Income: 2 134,09

Expenses: 1 524,93

Savings: 609,16 or 28,5%

Significantly lower than last month but there were a few exceptional expenses:

-hosting costs for this site (113 euro) have been paid for the full year. As I paid with Visa the bill landed this month

-doctor visit and medication: 45 euro. I will get some money back from the doctor visit, and I actually found a few older certificates I never bothered to give to my health insurer so next month I should have a nice amount back.

-too much snacks at work (50 euro!) especially bad as I really should lose weight

The results of the joint bank account are:

Income: 2 326 (1 100 euro each and some meal tickets)

Expenses: 2 019,49

Savings: 306,51 euro. Adding this half to my savings amount and my savings rate for the month of January was 35,7%. I think this still ok for a month in which I fell sick and we bought a 500 euro chest freezer.

Groceries were 420 euro but we did start to stock up a little bit in the chest freezer and car expenses 146 euro. No repair bill just all gas.

Taken into account the savings on the joint account my budget for January was again under 1.500 euro which is the main reason for me to be running a budget.

2017 will be interesting and challenging in many respects. With a stash at 240.000 euro I know that will take care of itself (well a little bit of effort here and there). What I need to do is not touch it for a few more years and in the mean time get the house renovations finished and lay the ground work for the second half of my life. I will be prioritizing this above generating income so I fully expect this savings rate to drop even more.

A most frugal purchase

If you look at my expenses in December you will have noticed that food is my second largest expense.

We could trim this some more by shopping more at Aldi and Lidl (and me snacking less at work!). But this whole financial freedom journey isn’t only about getting a big enough stash as quickly as possible. It is also to try to improve the quality of our life.

Part of that is eating healthier (and losing weight). Reaching financial freedom as a burnt out, overweight husk of a man with no hobbies does not appeal to me.

So I want to:

  • lower my food bill
  • improve the quality of food we eat
  • spend less time cooking on average

Luckily there exists an appliance that makes all of the above possible.

It’s called a chest fridge!

Waste less money, less time and eat better with this new magical contraption!

It will lower our food bill since we will now be able to buy in bulk, which often gets you a nice discount. I will also profit more from temporary promotions. We already do this for non perishable goods (toothpaste, shower gel, shampoo) and stock up on these items when they are 10% or 20% off.  Thanks to the chest freezer we will be able to do the same for food as well!

Especially our meat will be better quality as we will now be able to participate with sites like share a cow. This way we get our meat directly from the farmer and are sure of the quality!

We will also spend less time cooking since we will be able to do batch cooking. Cooking 4 portions does not take twice the time it does to cook 2 portions. So now we will cook more portions. Freeze them and thus save time at a future date.

The frugalwoods just posted a very timely article about eating healthy for less and they seem to be completely in love with their chest freezer!

The chest freezer is also a good example of cheap not being frugal. There was a cheaper, slightly large model available. And I almost pulled the trigger on that one. it was a savings of 100 euro!. And then I looked at the energy efficiency. Our final pick is 40 euro a year cheaper in use than the cheaper model. A 100 euro expense that results in a 40% annual savings? You can sign me up for that type of return every day! We did wait until January to buy it as January is the traditional sales promotion period in Belgium. We off course did compare prices on various sites to find this model. Even buying brand new and not going for the cheapest model, you can still be frugal about it 😉

So tip of the day from this sloth: check the energy efficiency of your freezer and fridge and compare it to the newer models. The energy efficiency really improved over the last years. It might be that the most frugal option is be to buy a brand new A+++ model to replace your old energy hog as it will make up for its purchase price in a few years.

Life after achieving financial freedom

When I think about my ideal life after achieving financial freedom and there is no longer a need to work full time I imagine it to be a lot like my student years.

I am old enough to have done my studies when Belgian universities still used a yearly system. I liked that yearly system!

The university years

From October until April you had classes, May was reserved for studying and preparing for the exams and June was exam month (about 3 exams a week, so plenty of time to get some extra studying done). If you passed all your exams you had a three-month summer holiday period. I always worked one of those three months so I had some extra spending money for the remaining 2 months and during the next university year.

I only had around 20 hours of courses a week during the October – April period which left plenty of time to hang out with friends, smoke some joints (hey, I was a student and the Netherlands were only about 30km away, what can I say?) and spend time with the girlfriend (nudge, nudge, wink, wink). I found most of my classes interesting so I did not mind going to them: overall I found those 7 months very, very agreeable.

All in all I had 3 months of ‘work’ (1 month of studying, one month of exams and 1 month of summer job), 7 months of doing interesting stuff part time (going to classes, keeping notes up to date, some tasks) and 2 months off doing absolutely nothing (well there was the girlfriend and the weed …). Yes, life was nice as a student.

Now due to the social security system we have in Belgium, quitting the system completely is not really the best (or easiest) to do. You would need a bigger stash (a lot bigger, around 600.000 euro for one person) and it would make some stuff more complex. Nevertheless, our social security system does leave quite some wiggle room. Enter plan A and plan B.

Lets start with plan B

Plan B would be to go the full unemployment route. Being full time unemployed, the Belgian government will send me money each month! The first year this would be a decent amount but then it would gradually decline to about 500 euro a month.

Now our government does not like giving money to its citizens. They very much prefer it to be the other way round. So I expect to be contacted by the government agencies to get my lazy ass back to work! 20 years of full time work is apparently not enough for the Belgian government although our elected representatives are eligible for a full –and rather big- pension after only 20 years of ‘service’ in our parliament. Talking to government agencies is not high on my to do list once I have reached financial freedom. Actually, it is low on my to do list now as well. However, going job hunting and sitting at a desk for 40 hours a week is not very high on that list either.

Therefore, I started looking for a sector with a low barrier to enter and that uses lots of temporary contracts. And preferably does not involve to much hard label. Enter the security sector! In Belgium you need a license for this. Getting the license involves a one month course, which is free for the unemployed, but once you have it, it is dead simple to find a job in this field. As a student, I have worked back stage at several festivals and shows. So the plan: unemployment until the agencies start contacting me, and then a three month security contract, preferably in the summer months so I can do the festival circuit in Belgium.

A year would then consist of:

  • 6 months of very relaxed living (more time with friends, more ahum ‘quality’ time with the girlfriend, learn a new skill – might be going back to university for three months and follow a few courses, slow travel)
  • 3 months for a project, which might involve ‘working’: profit or pay would not be the main objective here, more for the experience. If the project involves employment, I would of course skip the security gig below.
  • 3 month ‘summer job’ at the Belgian music festivals: paid work to get myself of the radar of our unemployment agencies

I also think that having a more busy 3 months during the year will let me appreciate the 6 to 9 lazy months during the rest of the year.

I could see myself spending 20 years of my life (until reaching the official retirement age) in the above regime.

How about plan A?

I am kind of working on plan A at the moment so we will see if I succeed or not. However, plan A would eventually involve working for 4 months and three weeks, getting paid 1.000 euro a month and not having to deal with any government agencies at all since I would still be employed.

A year would then consist of:

  • 5 months of working
  • 7 months very relaxed living during which I would then do a project. If the project turns out to be profitable or involve any wages, I could then ask for unpaid leave of absence at the ‘main job’ and reduce ‘working’ for the current or next year even more.

The fun thing of this approach is that it greatly reduces the size of your stash needed (reminder: the goals is to have 1.500 euro/month to live of). By working three to five months in a year a stash that normally would only sustain 1 person can then provide enough passive income for two persons (and avoid any hassle with government unemployment agencies as a bonus!)

plan B   Plan A  
3 months working 1500 euro/month 4500 12 months working 1000/month 12000
9 months unemployed 500/month 4500    
total income 9000 total income 12000
       
income necessary from stash 9000 income necessary from stash 6000
necessary stash size 225000 necessary stash size 150000

 

Since my current temporary job contract is done the end of this month I could launch plan B in February but my stash is only just above the amount necessary and we still need to do some renovations at our house (and in the next couple of years, we need to buy a new car as well). Those renovations will cost around 50.000 euro max so I do not have enough money yet. I also would prefer to have a steady paycheck while renovating the house. I would feel a lot better launching plan B only after these big expenses are behind me.

Plan A will take some time to get off the ground. Since it would at the very least involve 2 to 3 years of working full time before I could reduce the work time to less than 5 months/year this is something I can lay the groundwork for now! During those years of full time work at a decent wage, the stash can grow bigger and I can finish renovating our house.

With some luck, I will land that full time job in February and have it evolve into plan A after 4 years. Fingers crossed, as I apparently suck very much at this whole ‘interviewing for a job’ process.

In 4 years’ time, the stash should be big enough that the girlfriend would also be able to reduce her work time to half AND even continue to grow (be it very slowly). A few more years later, she might choose a modified version of plan B for herself and me remaining in plan A, further reducing the time she needs to work.

If you are interested in the gritty details of plan A and B, I will combine this post + my financial freedom in Belgium post into one big presentation I will give at the next Belgian Dutch blog meeting in Antwerp on 4 February. The meet up is organized by cheezy finance and Amber tree leaves. I will probably post most of the presentation on line afterwards but not everything. And a few other bloggers will also give a presentation.

Cutting your own hair: Running the numbers

In one of his earlier post Mr Money moustache sang the virtues cutting your own hair with the help of a hair trimmer or multigroom kit. Here in Belgium, we usually use the French word tondeuse which does have a nicer ring to it than grooming kit.

ceci n’est pas une tondeuse

Now he makes the bold claim of it saving over 30.000 usd but actually never runs the numbers in detail. If you do that, it is easy to see why he was so excited over such a simple device and an equally simple change in one’s habits.

Going to a barbershop every month would set me back about 300 euro a year.

Paying for this means, I need to amass a stash of 300 x 25 = 7.500 euro.
Replacing it by a device that costs around 50 euro eliminates this need completely! Right of the bat, I have just made a size-able reduction in the amount I need to retire!
However, it gets even better! Factoring 10 euro a year to replace the tondeuse every 5 years I only need a stash of 250 euro to pay for it. Buying it, means that even in the first year I can make a big enough savings to pay for a replacement for the rest of my life! Yeah, that is indeed something to be excited over! I know of very few other things that are such a powerful help in achieving financial freedom. It is unfortunate that this does not scale to other parts of life. If this were possible to do for food, transport, housing, clothes and such everybody would be able to retire after only one year of working!
It off course does not stop with the reduction of 7.250 euro in necessary stash.
If we say you need to work about 20 years in Belgium this will also add another 5.700 euro in savings (19 x 300 if we do not count the first year, as those savings will finance the purchase of a new grooming kit for all eternity).
Savings you can invest and accumulate over the years. So that one time purchase of 50 euro has a value of at least 12.950 euro, not counting any investment gains you will make on your savings…
It might be basics for the more frugally inclined people but with those kind of numbers I found it justified to bring this powerful financial freedom tool one’s more to the forefront! Want to retire early? Cut your own hair! Small things do add up over time.

Needs versus wants

A need is something that you have to have. A want is something you would like to have.

A lot of people will say that needs are different from person to person and that the distinction between the two is not always easy to make. I am not one of those persons. After seeing a documentary about shaolin monks in Nepal more than 25 years ago I came to the realization that the bare basics needs of a human being are: a brick (which is used as a pillow to rest one’s head on when sleeping), 1 piece of clothing and some food. Anything above this is a want. End of discussion.

Two legs! We don’t need that kind of luxury to stand!

Everything above this is comfort and luxury. Now I am a lazy slob so yes I have more than two bricks, one piece of clothing and a bowl of rice (anybody who has seen me will attest that I definitely have more than a bowl of rice a day). And I sometimes have been known to really, really want a completely ridiculous item (like a 1.000 euro DJI phantom 2, and then hardly flying it). But now and then I remind myself that we all live in a totally ridiculous amount of wealth. And it has made us soft.

How much swarovski kristals does it take to be happy? one?, A thousand? A million?

When I was younger (and single) I was a lot more hardcore. Saving was something you did until it hurt. And then you saved some more.

I just found all this stuff to be, cumbersome. I also did not have a car so dragging stuff to my place (or getting rid of it again) WAS cumbersome.

I did not have chairs in my place: I had a sofa I could sit in when eating or relaxing. Chairs just seemed decadent to me. I had a hard time explaining this to people. They just could not wrap their head around this fact.

For all of you thinking this is too crazy: this guy now sleeps in a van with even less stuff then I had. My youthful life was decadent compared to his.

So the bare basic needs in our western society are a place to sleep, some clothes, food and a bike. Everything above this is a want. Understanding this is the first step.

Really, really understanding this will help you limit your wants. Material possessions will not make you happy. I was perfectly happy with not owning chairs, I am not happier owning 6 of them now (if anything they annoy me when I have to move them – again- while cleaning). And somewhere in San Francisco is a guy sleeping in a van who is perfectly happy.

Step two is trying to fill in your (limited) wants in a frugal way. Being frugal does not equal being cheap.

A cheap person will always go for the cheapest. A frugal person will try to get the best value for his money. This can be the cheapest product or service but sometimes it can be expensive. Some products that will last a lifetime are worth it to spend some decent money on them. What these products are will be different for each person but even different for the faze of your life you are in.

If you only go camping once or every 5 years a cheap little tent is all you need. When camping is going to be your main travel style for the next twenty years it is best to pay for quality camping gear It off course might be interesting to search the internet for secondhand material from people who bought quality camping gear and then discovered they do not really use it and decide to get rid of it. Buying quality does not always mean paying full retail price either…

So one frugal person will spend 20 euro on a tent and another person might spend 200 euro on a tent. And both will have made a frugal purchase.

Those two persons might actually be the same person, but just at a different point in his life!

When young, a cheap tent might be the best purchase because it is only used two or three nights at a festival. But if 10 years later the same person goes on regular two week camping trips it will definitely be better to get some quality gear.

Frugal means looking at your want, then determine what is necessary for that want and then try to get it at the best possible price.

If you ever find yourself lusting about something, remember your true needs are: a brick, a piece of clothing and a some food. Everything else is a want. How much of your limited time on this earth are you willing to sacrifice for this something you want?

Monthly expense report: december

As mentioned previously, achieving financial freedom is not all that hard. Keep your expenses low, work, save a lot, invest wisely and then after X number of years: Boom! You have enough investments to retire on!

It really is THAT simple.

If you have bothered to click the link you will get a nice graph that shows you how long you need to do this. It is pretty compelling stuff. The only thing I do not agree with is the assumption of a 5% market return. This should be higher in my opinion but since he is more of an index investor and beating the index, although possible as a retail investor, does takes work.

This approach also means keeping track of your income and expenses and trying to get that savings rate as high as possible. Being lazy, I never really budgeted. If I would make a wild guess, based on my savings, I would guess I have save around 35% to 40% of my income over the years. According to his graph it would then take me about 22 years to achieve financial freedom. Add in a return that is on average a bit higher than his assumption of 5% and that would put me on track for financial freedom after 20 years of working. More or less what I am aiming for! As I said before, it really is not all that difficult (I mean, if I can figure it out …).

Since I am approaching the final years of stash building a more detailed view on my expenses is necessary. When choosing early retirement, ‘guessing’ is better replaced by: ‘knowing for damn sure’.

Hence the monthly expense report.

Without shame I ‘borrowed’ No more waffles budget sheet.

It only needed a few tweaks to also work in google sheets so now I can immediately fill in every expense I make via my smartphone (because remembering to do it later is hard!). December is a bit of a base line, although naturally frugal I never really did a disciplined effort in tracking my expenses and trying to lower them. During 2017 I will be making this effort and sharing the results with you guys. I am genuinely curious what the result will be off this more focused approach.

I will only be looking at income from work (all investment gains are excluded).

Personal account:

Income: 2 092,86

Expenses: 1 339,40

Savings: 753,46 or 36%

But the biggest part of my expenses is the 1 100 euro we each contribute to our joint bank account. This money is used to pay for the mortgage, utilities, grocery shopping and such.

The 240 euro above that is what I spend on buying food personally (which actually equals snacking at work. Bad, bad! Especially since I really need to lose some weight.), my personal cell phone bill (which was 16 euro last month) and some random fun items (it was December after all).

The main savings will be made in the joint account (since the main expenses happen there). But no more snacking and cutting my own hair should be able to shave another 60 euro of my personal spending.

The results of the joint bank account are:

Income: 2 299 (1 100 euro each and some meal tickets)

Expenses: 1 729,49

Savings 569,51 euro, half of which would be mine. Adding this half to my savings amount and my savings rate for the month of December was 49,6%. I am pretty pleased by this.

Biggest expenses in the joint account are:

– mortgage: 935 euro (at 2.7% fixed rate not a lot can be done to improve this at the moment, we

already refinanced this down from a 3,6% rate in 2016)

-groceries: 381 euro (we should be able to lower this by shopping more at the Lidl and Aldi)

– car: 142 euro (we didn’t spend that much on gas but did have a small repair bill of 50 euro)

– gas & electric: 219 euro

– internet and television: 44 euro

December was a pretty frugal month (although we did go to the cinema together). But since it was the first time we were closely tracking our expenses it actually felt like we were spending a lot!

Here is hoping for another frugal January!

 

The stash – an origin story

In this post I determined that to be to be financially free in Belgium you need an investment between 325.000 and 525.000. I will now tell you how, at age 42 I am well on my way to reach this.

In the beginning there was nothing.

Save, invest, the two strongest financial superpowers known to man!

Well, actually lets scratch that: In the beginning there was nothing. My parents had, as most parents do, saved some money for me. Around 8.000 euro which 24 years ago (and 18 year old, me being able to make around 1.000 euro at a summer job), was a decent amount of change.

I had played a bit in the stock market as a student. But not really knowing what I did, this was more or less a wash.

Raised by pretty frugal parents I was never a spendypants.

In the year 2000 I entered the work force but continued the cheap ass lifestyle of a student: cheap housing, no car. I was saving a lot of my pay check (estimates are somewhere between 35% a 40%) without really knowing why.

The job was boring and crap but paid reasonably well, although below the average net wage of Belgium. Only for about 5 years out of my, at this moment, 16 year old career I would be making the average wage. Most years I was a little under it (being a sloth does have its consequences …). But at that first job I could get my 8 hours work done in about 6 hours, which left 2 hours a work day to muck around on the internet.

During one of those,” let’s see if there is anything interesting to read on the internet”-moments I stumbled upon Warren Buffett’s letters to the shareholders. I had finally found a decent foundation upon which to build my own investment approach! I have always been an all or nothing kinda guy (with a strong preference towards nothing) so the more I read about value investing the more confident I felt to go all in. Not being a complete idiot (there are many, many people who are more than willing to testify – with extensive proof – that I actually am a complete idiot in many, many area’s, luckily money is not one of those area’s!) I decided to hedge my investment. I went all in, but half of my money I invested in Berkshire Hathaway. The other half I would invest myself according to the value investing principles (O, the arrogance of youth!).

Up until 2005 I remained my frugal self: biking everywhere, not going on holidays (current amount of holidays: 9, two of which when I was a student, and involved driving a cheap old mobile home through France and the U.K with 5 friends) and basically living like I did when I was a student.

Around 2005 I moved in with my girlfriend and even though my housing costs went down I starting living a somewhat less frugal life. Still no car for myself but she had one, she also dragged me on holidays to foreign countries (the horror!) or wanted to go eat at a restaurant sometimes (the restaurant thing never really worked: I still find the experience unpleasant). Savings rate must have dropped but I never really budgeted so no numbers to back up this feeling.

In 2006 my employer decided that they were really overpaying us for the type of work we did so they moved about 20 of us to an even more crap department. They either hoped we would find another department in the company (hopefully with a job content more aligned with the pay we received) or leave the company altogether.  But one provision of this restructuring was that if we did not like the new department and did not find another job within the company, after 6 months we could ask to be terminated with full benefits. Using the power of FU-money for the first time I took this way out. Less than 2 months later (November 2006) I had a better paying job and could put about 13.000 euro of my severance pay in investments.

In 2008 I moved to another company and was finally taking home about the average net wage in Belgium. Still no car. Still living with the girlfriend, so I now had a few ‘real’ vacations under my belt. I found the experience to be OK (more for the not having to work than the holiday itself). In true sloth fashion I was not a big fan of all this moving around a vacation apparently involves …

Around 2010 my girlfriend was really sick of living in a bad part of the city and I started to come round to her viewpoint so we became serious about looking for a house to buy. My iron rule: I refused to sell any of my investments to fund the purchase. Finally bought a car together: the girlfriend had sold her car when she was unemployed and studying again; so we had been a no car couple for a few years. Her studying did keep both off us pretty frugal.

In 2011 we bought our current house. Because of my rule not wanting to sell any investments we had to look intensively for something we liked in our price range (and also 115 km away from friends and family). We finally found an old farmhouse with a decent size garden. Because off our budget, the house needed a lot of work. Despite this, I kinda forced my girlfriend to invest a chunk of her profits from selling her house in the city in stocks (forcing somebody to invest, luckily for me, has never become a punishable offence in Belgium). It is one of the reasons why we are still renovating the place. It forced us to continue to life a somewhat frugal life but now all available cash was thrown into the house and no longer into my investing. Those investments off course kept appreciating as I turned out not to be that bad at finding undervalued stocks and Buffett kept hitting balls out of the park. The girlfriend also was 1 year unemployed. We normally split everything 50/50 but during 6 months of her unemployment I had to compensate a bit to make up her reduced income.

Due to some new laws our government passed (they passed a tax on ‘speculative gains’, not their smartest move and as of 2017 this tax will be terminated again as it was costing them more in losses on another tax) I had to reassess my investment approach. In December 2015 I moved to another broker who offered CfD’s (which provided a way around the new tax). Prior to this move my investments were scattered over different brokers. Putting everything in one place gave me a better view. I had a total of 176.000 euro in investments. But I hadn’t really done any better than Buffett had (better than the index, worse than Buffett). With the new tax in effect and the new tools provided by my new broker I decided to change my approach. Since the new broker made it possible to have a margin account guaranteed by stock, I would keep everything in Berkshire and only rarely do an investment on margin when an opportunity arises. Special circumstance investing I would call it.

I needed not wait very longer. AB Inbev, the world’s largest brewer and a Belgian company I had known for decades (we take our beer very seriously here in Belgium) made a take offer bid on SAB MILLER. They offered 44 GBP but the market had doubts so the SAB MILER stock traded at 40 GBP. I had no doubts. Remember me being an all or nothing kinda guy? Yeah, I bought 200.000 GBP worth of SAB Miller CfD’s on the underlying stock. The brexit vote would force me out of the trade since my broker changed it margin requirements (receiving that mail was a bit of a surprise, unwinding the trade in my account, my parents account and my girlfriends account gave me about 2 small heart attacks). The brexit vote did cost me some profit but in the end I walked away with over 10.000 euro on a trade that was in effect less than 6 months. I decided I liked this special circumstances investing!

In March 2016 I was also terminated at my employer. A restructuring provided a way to leave the company on very favorable terms. From September 2015 till march 2016 I was still paid but only needed to attend some outplacement classes; in March I got full severance. Over 25.000 euro, which went a long way in paying our kitchen and bathroom renovation!

Since I no longer needed to go to work at that moment and my SAB Miller trade was unwound I decided to have some fun and daytrade google when it was beaten down to the 730 USD level. A profitable experience but way too much work (and stress). During that time, I also stumbled upon Mr Money moustache.  I liked what I read!

Since I had decided to squander my severance pay on a new kitchen and a bathroom (the girlfriend did not agree with the ‘hooker and blow’-route) I also needed another job. On May the first I landed a temp job (until January 2017) which has payed the bills until now. But I was once again below the average wage of Belgium. Still I must not complain. To recap 2016: payed by old company until 9 march, severance pay until 9 December. 1st Of May until the end of December paid by temp job. That’s 19 months and 1 week of wages for a grand total of 8 months real work (at the temp job). I could get used to that, but alas will not be able to repeat this in 2017!

Somewhere in June I stumbled upon another special circumstance investing opportunity which has brought in another 10.000+ euro of profits and which I will be able to repeat in January for another 20.000 euro profit (except in the case of global thermonuclear war).

All this special circumstance investing and the rise in stock price of Berkshire Hathaway has brought the investments up to almost the ¼ million mark: present value (before the opening of the US market) on 30 December 2016: a cool 244.000 euro. A gain of 68.000 euro or 39% in one year. I think it is safe to say I will not be repeating this performance in 2017 (actually I hope not as this would indicate a gigantic bubble run in stocks, stock prices being flat over 2017 would be nice). Fun little fact: the company that terminated me in March 2016? Yes, it was a financial company. Life can be funny that way …

But there you have it. A somewhat frugal person, making below average wage in Belgium and getting a little bit above market returns has over 16 years of working build a stash of 244.000 euro. Do not let the performance of 2016 fool you, all in all I have beat the markets by perhaps 2% or 3% over those 16 years. Ok, it makes a difference. But I could have made more money at work: several co-workers of those early days are being paid quit generously at the moment. I could have been more frugal: I went on 7 holidays in the last 12 years! I have had a car for the last 5 years! I spend a 1.000 euro on a quadcopter I hardly use and decent money on other electronics and whiskey (everybody has his weaknesses).

Honestly, in many aspects I have been a true sloth over the last 10 years, 20 years, all my life! And then I look around me, see people making lots more money than me and have almost no investments. Which has me thinking: am I that smart or are they so stupid? It really is not that hard: save a big part of your paycheck, buy index trackers (or learn a bit about investing yourself), rinse, repeat for around 20 years and boom you are done! Are restaurant visits, expensive clothes or a shiny new cars really worth working an extra 20 to 25 years? Because I do not see the allure of it. I never have.

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