Financial Freedom Sloth

achieving financial freedom one lazy step at a time

Category: the stash

The stash: the 2017 overview

In December 2016 I mentionned in this post that on the 30th December 2016 the stash stood at 244.000 euro. This after an impressive gain of 68.000 euro or 39% in 2016. This gain was due to the fact that Berkshire Hathaway had a brilliant performance, my first ever leveraged construction worked out great and the USD got stronger compared to the EUR (as I am mainly invested in USD).

So how did I do in 2017?

On December 30th my stash stands at a somewhat dissapointing 286.000 euro. A gain of 42.000 euro or 17,21%. Add in the 1 750 EUR I withdrew this year and I stand at a gain of 17,93%. Not bad, and for the second year in a row the stash grew more than what I have spend in the year. Which technically makes me financial independent.

But still, looking at those numbers I am somewhat diappointed. Let me explain. I am almost 100% invested in Berkshire hathaway. On 30th December 2016 it stood at 162,98 USD and it closed the year at 198,22 USD or a gain of 21,6%

I had my leveraged construction working out fine and giving me around 20 000 USD in profits.

I wrote several puts that all were profitable.

And I made 7 500 USD in daytrading profits.

So how the hell did I underperform Berkshire Hathaway? The reason is simple, almost all of it was in USD and the USD got a lot weaker against the EUR in 2017. I had strong currency head winds. EUR USD was 1,0522 at the start of the year and ended the year at 1,2016. And I was fully invested and leveraged in USD: ouch. Had the currency rate remained the same my stash would have been worth 326 600 euro  or a 33,85% gain!!

So all my effort, and then some, was wiped out by the lower USD. It didn’t really off course. Everything is all there. I started out the year with almost no cash and am now able to plow 33 500 USD in UVXY puts. It’s just when you report it in EUR, the ‘loss’ appears.

While it is no fun, I rather have the USD drop while both Berkshire Hathaway and my leveraged construction work out fine than have everything at once work against me. At least I still made a decent profit.

It also proves that when you are an active investor you shouldn’t really be bother by currency fluctuations. Despite the falling USD and being fully invested in USD, I still made more money (in EURO’s) off my stash than my annual spending! It would only be when I need to exchange USD for EUR that the lower exchange rate would hurt me. But I didn’t need to this. My 1 750 EUR withdrawal from the stash did not come form converting dollars but came from puts I sold in euro’s!

Since my new leverage construction is in euro’s (more because of the lower intrest rates then low confidence in the strength of the USD). In 2018 I should at least have a 20 000 euro cashflow generated by a portfolio almost completely in USD. As an active investor, forget about the currency and just go where the investments are the most attractive (with the possible exception of places like Zimbabwe or Venezuela).

I am a creature of two worlds

I was originally going to write a short post about the fact that I love outlet centers. Real outlet stores like D’store in Bierbeek which sells last year’s sports outfits at a very nice discount. I snagged the walking shoes below for 35 euro (50% off) and had I found a second pair in my size I would have gotten 75% off on that second pair! Shoes are a necessity of life and I love to get that at a low low price because it means I do not need a lot of money to provide for it for the rest of my life. If they last me 2 years of daily wear and I would need 2 different pairs to cover the different occasions in life, that would mean an annual financial burden of 40 euro a year x 25: 1000 euro stash and my feet are covered in early retirement!

So there I am, being all happy to have saved 35 euro on shoes. And then I come home and access my broker account and see my stash moving around a couple of 100 euro per minute. And it is strange.

Normally I ignore my stash. It’s there, I do not touch it and now and then I do a trade. But I am lazy so I do not do a lot of trades. Thus it is easy to ignore it. It is easy to ignore the day by day fluctuations if you do not see them. In my day to day life I am like anybody else. I have my -limited- resources and I try to cover my bills with it. It is in this day to day life that I am happy with a savings of 35 euro. Because in this life those savings matter. In my day to day life I am down to 900 euro in my accounts (we replaced our bathroom and kitchen a few months back and I just prepaid my holiday for September). And with a few renovations still necessary, I will need to continue to life within my – very narrow – limits for a few more years.

And then I access my broker account. 90% of my stash is in 1 stock: Berkshire Hathaway class B shares. For a grand total of 1500 of them. If that price moves by 1 USD, it makes a difference of 1.500 USD right there. But a movement of 1 USD  on a stock price of 166 USD. That’s a movement of 0.6%. It is going to move more than that! Actually, I have a leveraged position that makes movements even worse! My stash went up 30.000 USD in something like 2 months. Then it went down by 20.000 USD in one month. Hell, my leveraged position costs me 43 USD in interest EACH AND EVERY day (do not worry, the position earns around 90 USD per day also, so I am making a profit on it).

All this is easy to ignore when I do not see it. But as mentioned before, I am again doing a little bit of day trading again. Not only do I now see the stash (and it’s fluctuations) on a daily basis. The day trading actually makes matters even worse. Just today I have bought 100 CfD’s on Google 6 times and sold them (and made a small profit each and every time: yeah me!). I have bought and sold for 558.000 USD in Google stock!

So day to day life: 900 euro in the bank and really happy when I make a 35 euro savings on shoes.

My investment life: daily fluctuations of 1.000’s of euro’s in the stash, bought and sold more than half a million USD in Google stock in half a day!

Like I said, a creature of two worlds.

I have to say it is weird. But it must be weird for all mustaschians. I read blogs of people living on 50.000 a year but where the stash sometimes moves 100.000 USD in a month because their stash is over 2 million. It is this strange spa-gate between big stash and frugal living all of us will need to learn to handle. Ignoring the stash usually works. So time to get back to work where a 100 euro still equals a full day of work and not some small movement in the google stock price (even if I would love to be behind my screen when it crosses the 1.000 USD mark for the first time!).

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 …

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.