Why I do not like dividends

Since the dutch-belgian meet-up is upon us tomorrow I thought it a good time to throw a stick in the chicken coop (this is actually a litteral translation of the dutch saying: ‘een knuppel in een hoenderhok gooien’, the English equivalent would be ‘to stir the pot’).

You see, contrary to a lot of other finance bloggers I do not like dividends. I would even go as far as to say I hate dividends and have been trying to avoid them as best as possible for my entire investing time.

There are two reasons for this. The first is taxes.

The taxman cometh

Tax on dividends in Belgium is currently 30% and if you happen to own foreign shares you will most probably be taxed twice: once in the country where the company has it’s headquarter and once more in Belgium! So for me dividends of Royal dutch shell will be taxed 15% in the Netherlands (that is after I fill in some paperwork to lower it! Ugh, paperwork!) and then what is left will be taxed at 30% in Belgium! So a dividend of 100 euro gross will end up being only 59,5 euro by the time it hits my account. That is a 40% total tax level. I prefer my companies to keep this money and invest it themselves thus avoiding all this tax nonsense

Laziness

The second reason is laziness. Finding good companies at an attractive price is not easy. Shortly after the 2008 – 2009 financial crisis you had your pick of top quality companies at bargain prices. But over the years prices have risen. Once more, you need to look at a lot of coal to find a diamond. That is a lot of work. And my name is not financialfreedomSLOTH because I like working! I find it much more pleasant if the company I invest in would do this in my place. They are usually a lot better placed to do it.

– By doing this they avoid taxes. As said above: if Royal Dutch shell pays a dividend I could only have 59,5 euro after taxes to invest. Which means their rate of return can be lower than mine and still produce the same value for me!

– They also have economy of scale. Finding a good company to invest in takes a lot of work. But once you have found a good investment opportunity investing 2.000 euro, 200.000 euro or 2.000.000 euro does not take a lot of extra effort. (There is sometimes a little bit of effort to avoid influencing price and illiquid stock can put a limit on the amount that you can invest but this is easy to avoid by only looking at companies of a certain size).

– Private equity investments are also possible for them.

– They have the best knowledge of their own sector. If market size is too big to acquire additional companies within their sector they can always look at their suppliers and clients. Here again they have an information knowledge advantage.

It is the reason I like holding companies and within them absolutely love Berkshire Hathaway!

Other stock I like mostly for option plays. Buy it by writing a put, then sell it with some capital gains by writing a call. All of which is tax free in Belgium! Dividends are then something that sometimes happen by accident (like the time I held Coca-Cola shares just when they happened to pay out a dividend, doh!).

Profitable minority

I know I am in a very small minority with this (and I might change my approach once I achieve financial freedom). But it has been a profitable viewpoint up until this point.

A small anecdote on how being too focused on dividends may cost you money. Years and years ago I noticed that the price of Artwork systems (a small, local software company) would fluctuate. It would go higher when the dividend was near and then reach a low point about 6 months later. This was because it was a very small stock, nobody followed it and liquidity dried up. But the swing in stock prices was more (almost 2x more) than the dividend paid. And liquidity near the dividend date was also higher! So I accumulated a position in the down months. Sometimes being the only one in the market, my bid price became the market price. Ooh, fun times! And then when the dividend approached and liquidity returned I sold it all before the dividend was paid (let somebody else pay those taxes!).

Since the general assembly was in the same city I lived in at the time I even went to it and explained why I would prefer them to keep the dividend and use their profits to turn Artwork systems into a holding company! This was against my direct financial interest but my long term wish to be as lazy as possible won over my wish for short term profits. I mean, all that buying and selling (sometimes 5 or 6 trades In a single year, in a single stock!) was very tiring 😉

The president of the board explained to me (in a somewhat belittling tone) they had no interest becoming a holding and the other shareholders almost skinned me alive (how did I dare to threaten their sweet dividends!!). The next year I visited again, kept my mouth shut and just got very drunk on the excellent champagne they provided for their shareholders. Even smuggled one bottle outside under my coat (there can be other advantages to being a shareholders). It was one of a very few times I was truly and completely drunk!

A year later my very profitable strategy came to an end as artwork systems was bought by Esko, which was at the time owned by Axcel A/S a Danish private equity investment company. This private equity firm used the profits of Artwork systems to build out their graphics group and then sold the complete group to Danaher, which is for all intense and purpose a holding company …

Through all of this, the president of the board stayed on …

Danaher is a public company and pays a dividend. Perhaps I should go and try to explain my viewpoint again? Does anybody know what quality of champagne they serve?

Exit strategy

For some months now I have come to the conclusion that for me financial freedom in Belgium will always entail some work
The reason for this is very simple: taxes and our social system
Due to our social system we have high taxes in Belgium which means you will be building your initial stash by earning money that is taxed at 50%!

Taxbracket   Income                                             Tax level
Schijf 1           € 0 tot €10 860                            25% (yes dear American readers, our taxes start at 25%!)
Schijf 2           € 10 860,01 t/m € 12 470     30%
Schijf 3           € 12 470,01 t/m € 20 780     40%
Schijf 4           € 20 780,01 t/m € 38 080     45%
Schijf 5          above 38 080,01 euro             50% (Yep, they go all the way to 50%! Did I mention the 21% sales tax?)

Dropping out completely will add costs to your retirement (since you no longer qualify for any of the social systems you paid into for many years) AND which will add to the amount you need to save, savings that you will need to get by working and being taxed at 50%!

The setup of our social system is such that you will have very little choice than to stay in it. But staying in the system means you either need to be an employee, independent or unemployed. You, per example need to be any of those three for 30 years to qualify for a pension.
Now I know this might be a bit of a bummer to some of you but it shouldn’t be!

The big benefits of working a little bit

A big plus is the tax free amount one can earn and currently sits at 7.130 euro (a mortgage will add to that, children as well, full table below). An extra is that for those earning less than 26.510 euro a year that tax free amount is pushed up to 7.420 euro!

How long would it take me to earn 7.420 with my current job if no taxes would be applied? Around 2 months and 2 weeks! Getting to the 24.000 euro mark will take a full year. So to get my earnings 3.2 times higher I need to work around 5.2 times longer. The difference between those two numbers is due to taxes.

One child will add 1.510 euro to this tax free amount, two children add 3.880 euro in total and three children 8.700 euro.

Our mortgage adds another 2.280 euro to this tax free amount so actually I could earn a total of 9.700 euro tax free! Because this will different for everybody (mortgage reduction in your taxes has become one of the most complex parts of our taxes in Belgium due to lots and lots of changes in the last few years) i will continue to work with the basic amount of 7.420 euro untaxed since this is the same for everybody.
Earning those 7.420 untaxed Euros has a few very powerful consequences.

First off, using the 4% rule it lowers the stash you need by 185 500 euro! With spending 18.000 euro a year, earning 7.400 euro a year by working, your stash only needs to be 265.000 euro. Add in some cash for the down years: 300.000 euro and you are done! You essentially exchange work taxed at 50% before financial freedom by work taxed at 0% after financial freedom. Due to the tax free nature of that last work, total time worked will be shorter than the scenario in which you keep working until the stash is big enough to quit completely. And you will have more free time when you are younger. A big plus in my book!

Second: you will remain in our social system which is always a good thing (extra security and income in the form of a pension later on, health care is also sorted!)

Third: by still working a bit you keep at the very least some employable skills up to date. A lot of people wonder about having enough stash to call it quits. Working three months a year (I’ll assume those short term jobs will pay less than my current one) eliminates this worry. If unexpected expenses do happen you can always work a bit longer until the expenses are covered.

The exit strategy

But all of this means you need a good exit strategy. Just pulling the plug is not going to do it since you will need to transit into some type of paid work. The problem is finding a job that enables this. I doubt my current employer would like the idea of me still working here but taking unpaid holidays for roughly 9 months, each and every year (i might get away with one year by using the ‘big trip in Asia’ as an excuse).
There do exist small jobs, only a few hours a week that might get you the 7.500 euro a year. But most of these are low paid and then you have to work most weeks of the year. I would like to have it done in the least possible time.


Possible solutions:

-security sector: easy to get a short time job. But since these are temporary contracts you would be unemployed for the remainder of the year. While this is free money some people might have ethical problems with this. At the very least there is a big change that after a while you will be hassled by the government agency to go to work again. Especially since the security sector is always looking for people. The extra work would mean extra money, but that isn’t the idea is it?

– find an employer who only needs people for a short duration but will need them every year. Big plus of this is that you do not need to look for a short time job every year. Personally I was thinking of the event industry as I liked working back stage at festivals when I was a student. The rest of the year you would be unemployed again, creating the same problem as with the security sector.

– find an employer who is ok with you taking 9 months unpaid leave every year. Chances for this happening are low.

-find an employer where you can work half time and add two months of unpaid leave to it. This is probably not going to fly either. Most employers apparently want their employees to work all year round. Even if you find an employer that is ok with it, you would most likely need to work half time during at least 8 months and only have 4 months you do not need to work at all. If I could find something near my house I would be ok with this.

– find a side gig now that you can transform into a ‘job’ after FIRE. The side gig would only need to bring in 7.090 euro. You would need to go the independent route for this, which will have an impact on your pension later. But it would avoid any hassle from the government. The issue remains that I would like to be done with the work in three months (untaxed you would only need to be making 2.400 a month gross) and then not have to work the remainder of the year. But to swing this you would need decent skills in a specific area. And since you would need to do this for the following 20 years, you are going to run into the issue of having to keep your skills up to date to stay relevant in your field.

These examples show that if you try to get the work done in three months or less you will always run into the same issues. Employers, or your own side gig, probably necessitate work the year round. If you do not do this as an employer you will be unemployed for 9 months, which will result in hassle from the government. If you do not do this at your side gig, you probably will not have a lot of side gig left after a few years …

The solution might be found by getting some location independent work (work you can do from a laptop from anywhere in the world). This might be the best route to go. Twelve hours a week of working but with zero commute and the possibility to travel anywhere anytime I want? Sign me up!


I welcome your input because as off now I have not yet an exit strategy in place. That is ok since I just started working at the new job and I will need to work for another 5 years. On the other hand, if I would identify a location independent side gig now, I could start implementing it as soon as next year. Thus reducing the time I need to work by a year AND have a secure exit strategy in place by the time I will be able to quit.

Bicycle, I want to ride my bicycle

Mr. money mustache pushed the use of a bicycle very hard and with good reason. Cars are expensive and bicycles offer the cheapest substitute while still offering a decent speed.

We Belgians, always had an extra incentive in the form of a bicycle compensation. Use your bicycle to go to work and your work can choose to pay you 0.23 cent per kilometer.

With a normal bike the practical distance to do this for most people is around 10 km. Further than that would take too much time and would in most cases also involve arriving at work pretty tired and sweaty (companies also need to offer shower facilities but most people prefer to shower at home and not at work it seems).

The advent of the electrical bicycle changed this somewhat. Distances up to 25 km become now feasible. I myself biked regularly to my previous interim job which was at 20 km distance of my home. This took about 50 minutes, 15 longer as with a car but I got some healthy exercise and around 160 euro a month extra for my troubles.

Electrical bikes that provide assistance up to 45 km are road legal in Belgium but because the law qualifies them as a motorcycle they are not eligible for the tax free bicycle compensation. Our government has now promised to change this and make the necessary legal changes so these fast electrical bicycles will also qualify!

I cannot stress enough the importance of this for us mustachians!

It means that a distance of 30 km will be now completely feasible to cover by bicycle by everybody! This distance will add almost 300 euro to your net pay. The average net wage in Belgium is around 2.000 euro so this one change will mean a 15% increase.

My current work is 50 km from home and it takes me 1 hour and 30 min to get to work with public transport. With a 45 km/h electric bicycle I should be able to cover this distance in about 1h 15 min. so I will save time, get 2 hours of exercise a day and earn around 500 euro extra per month! That would mean  a 25% pay increase and earning back the investment in a decent e-bike in 3 to 5 months.

The law still needs to be changed and then your company will need to adapt its policy so this is something that will probably only go into effect at the end of the year. The government did say they wuld make it retroactive as of 1st of January of 2017. But I would not bank on that and wait till the law is indeed in effect. For me personally it doesn’t matter as I am at the moment working as an interim and i want my employer to realize he is going to need to pay me an extra 500 euro a month after I got a indeterminate contract 😉

Unemployment and financial freedom

As mentioned in my monthly expense report I am currently unemployed. there was a time not that far ago when this would have annoyed me. Not because off the fact that less money is coming in but more because I had a plan and things are not going to plan!! Grr, Hulk mad, hulk smash!

Growing as a person

Part of my personality has always been that I am a planner. I think most people in the early retirement community are planners. You need to be to achieve financial freedom (well, at the very least it helps)! And there are a lot of positives with being a planner. The thing is, as with all things, you should not overdo it. And I did make that mistake. My future vision was too strong and often stopped me from enjoying the present. I worried too much. Both about things I could not control and about things I could control. When I was home last year I didn’t enjoy it (I’ll delve deeper into this in another post). Things not going to plan annoy me still. But I try to limit its impact on my mood or on me enjoying the present.

Not working costs me around 750 euro a month. There is no way I would have spend almost 3.000 euro on a Vespa while being unemployed last year. This year I did. And I have enjoyed it immensely! What changed is my perspective.

Another perspective

The plan, in general terms, is to work another 5 a 7 years in a decent paying job so I can save enough money from work to finish renovating our house. These years would also give the stash enough time to grow big enough so it would reach the point where I could limit my working time to a couple of months a year and live of investments for the rest of the year.

Previously, I would have seen being unemployed as a derailment of the plan. Being unemployed and having less income each month would mean I would be older when I could stop working full-time.

Now I see this period of unemployment as a test run for later. I see it as a temporary mini-retirement because at the moment I DO NOT HAVE TO WORK. if I truly enjoy this time, it will be a mini-retirement! if I spend all day worrying and being annoyed because I am not following my plan it will not be a mini-retirement. So I chose to enjoy it.

Enjoying unemployment

That is why I did decide to buy a Vespa. It gave me a lot more mobility and it finally got me to go swimming again. I have to say, I really enjoy going to the swimming pool when almost nobody is around and having a lap all to myself.

I enjoy planning and preparing a little retro house party with a few friends at our place. Did you know that for 39 euro you can buy a pretty nice laser for your home! My inner gadget freak squealed in delight with all the new fun little toys that exist now (apparently I am not the only one who enjoys some techno in his living room).

And it was great fun hunting down all the classics from my youth. Did you know winamp still works on a windows 10 machine? Yes, I mean it when I say I am going retro!

A little bit of cheating

Now, most off you will be thinking: ‘that is really great Mr. financialfreedomsloth. Fantastic that you have not only identified a personality trait that stood in the way of your happiness and are trying to work at it. Kudos!’ And you should be thinking that! I am really happy with the evolution I have made in the last year. Yeah for me! I could stop here. But I want to be honest with you guys.

And the thing is, I am now enjoying being home so much I kinda want to have the house finished as soon as possible. I want to be able to sleep more people so I can have more guests at the techno parties I will organize. I want to have our office room finished so I can turn it into a chill out room for the party. I want the roof and attic finished so I can have my own private cinema-room because I already  enjoy the hell out of running my own Synology NAS with the Plex server connected to our flat-screen. Having a big ass screen, surround sound and perfect darkness is going to be heaven for the movie geek in me (and I know I can do it under a 1.000 euro once the attic is finished).

So I have been day trading again. I did it last year and well, my brain is pretty good at pattern recognition. It might not be day trading like the professionals do, but I did make 2.450 USD last year. That money stayed in the investment account. The goal now is to at least make up the difference between unemployment and my previous job (I am at 1.200 USD at the moment) so I can hurry up with the home renovations!

Some might say I just found a way to reconnect with my original plan and that is why I am actually enjoying the unemployment and not because I have found a new perspective. But I swear on the heads of my pet pigs (didn’t see that coming did you?) that I was already enjoying it before I started day trading again. I actually enjoyed it more before I did the day trading. I do not find it particularly fun to do: it is staring at a computer screen for hours on end. But for me, it is easy money.

Gentleman of leisure

There was some debate on the money moustache forums on what to say what you do once you are early retired.

And although I firmly believe that financial independence in Belgium will always involve some work and I am not yet retired I still felt the need to add my favorite answer: gentleman of leisure.

Although I usually say it in mocking tone I am actually not really kidding.

I love the definition: a gentleman who is of independent means and so does not need employment, one who is free from duties and responsibilities, a dilettante.

I actually, really love the word dilettante: gentleman tinkerers who experimented with steam engines and flying machines which they conducted in the barn behind the manor house.

I love the Georgian and Victorian era. There is a reason why steampunk gets it inspiration in that bygone era. There was a great feeling of optimism and love of science.

I find it a pity that we now live in an era of unparalleled scientific discoveries and yet there is so much pessimism all around us. The possibilities that are available to people with a median income are unparalleled: my girlfriend flies to Porto, Portugal for the sole purpose of attending the Primavera festival. It’s bonkers! If I want a specific book I can download it in less than a minute on my phone!  We can build buildings 1 km high! We can clone and genetically manipulate living organisms. The list is endless and yet we think our future will be bleak!

So I might say I aspire to be a gentleman of leisure in a half mocking tone, but I am actually pretty serious about it. Then again, I also waited until I owned 1 500 Berkshire Hathaway class B shares (the equivalent of 1 class A share) before getting engaged to my long time (as in 14 years long time) girlfriend  because part of me thinks one should be a man of considerable means before getting engaged. Yes, I am strange man and lucky to have such a wonderful and patient girlfriend …

I think our world needs more gentlemen of leisure and more people who aspire to become a dilettante once they have achieved financial freedom!

Personally, I want to build a 90 meter wall at one side of our property, I want to participate in the Mongol rally, visit Japan and New Zealand for a few months, tinker with a raspberry pi and explore the world of gridcoin and Boinc, there is the biohacking community (who doesn’t want to be able to feel electromagnetic fields?), do it yourself genetic engineering (I want my gargoyle god damn it!!), work on an oldtimer Vespa or just party hard like I am 19 again!

Last week I got my first glimpse on how it would feel to be a gentleman of leisure. With the carnival in Aalst I partied and got pretty drunk Sunday night. Monday night was a repeat of Sunday. Tuesday was vegging out on the couch. Wednesday was more recuperating on the couch (my age is showing here, I just do not recuperate as I used to do in my youth) when I got a text message from a friend saying Berkshire Hathaway was setting new record highs. Logging into my broker account for the first time in a few weeks I discovered my stash had gone up with more than 10.000 euro. I know these short term stock movements are meaningless. But I have to say: two nights of partying and two days of being a couch potato and then discover you actually gained 10.000 euro? A fucking good feeling!

Now, if you excuse me, I have some tinkering to do ….

Ps. the drunken debauchery that is known as Aalst carnaval? Cultural heritage recognized by the united nations. I just did my part to keep this old heritage alive (it’s a dirty job, but somebody has to do it 😉

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!

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?

It’s about the journey, not the packing of your bags

Originally this was going to be a post about my stash. How big it is and how I got there.

And then I read this post by 1500days.

Especially Phase 3 (What am I running to?) and Phase 4 (Figuring the rest out) spoke to me. Because, to my own surprise it has been those parts of the financial independence journey that have appealed to me the most.

I was drawn to the financial independence community because I was naturally frugal and already obsessed with investing for over 15 years, a natural fit. I thought my main interests would be frugal tips and investing ideas (and I do love reading the trading updates of financial velociraptor) but what attracted me the most, to my own surprise was the psychological journey. I especially enjoyed the experiences of the working world Livafi described.

I should not have been surprised. When you go read a travel blog or a friend will tell you about this epic world journey he has done, there will be a few bits about packing his luggage (how to fit the essentials in a back pack) of arranging passports, a place to sleep and stuff like that. But those things will not be the main content because those were not the main goal of the undertaking! They are side effects, consequences of the big travel undertaking. One does not go on a world journey just so he/she can become a bag packing expert. He/she will probably end up a bag packing expert because of the journey but it is not the point of the whole undertaking. The journey, the experience is the point.

not why we travel

And that (to my surprise and luck) is the same with this whole financial independence community. It is actually not about finance or frugal living. Those things are the practical parts. The ‘how do I get everything I need for a 1 year world trip in a backpack under 10 kg’ part. And yes, it is challenging seems challenging (but actually it is not) and I will devote some posts about it. But a Fi blog should be about the journey. And the journey is life itself. How to live and enjoy it without having to sacrifice 40+ hours a week tied to a desk in an office to pay for it.