On investing, being lazy, cumulative returns and scalability

I love investing. Which is good because I believe to be any good at it you need to love it (link). When I figured out my leveraged construction I was ecstatic. If it worked (and it does!) I only needed to do a roll over once a year and be done. It was the ultimate lazy approach to investing and an almost guarantee to beat the market for 4 out of 5 years (backtracking over the last 25 years showed 5 out of 25 years where it would have not worked). So about half way 2016 I really believed my active investments days were behind me. My inner sloth was very happy!

But then, well a curious thing happened. I kept reading financial stuff. ‘Old habit’, I thought. ‘It will tapper out’, I thought. Then I got a bit more active in the whole FIRE community and some people do really cool stuff. And I grew restless. I may not have needed to be an active investor anymore but I really wanted to! You see, it just tickles my brain in all the right places.

My weird mind

My mind likes numbers (I am crap with names, hell, I am bad with people). It also likes to figure stuff out. Find loopholes. Find errors in reasoning. It’s perfect for finding stock that is cheap but shouldn’t be. It would probably be good for shorting too but I rather have the stock go up (guess I rather am optimistic).

I just love to know how a company makes its money. Why it is better at it than other companies.

When I am bored I like to replay old trades in my head. See where I could have done better.

I often use sexual references to describe the attractiveness of a certain company at a certain price point or of a particular ‘cool’ construction. I don’t do it too shock or amuse people. It’s just that this is the connection my brain makes. An attractive young lady in a la fille d’o outfit or writing a nice put option: they have me both drooling. I know this is not normal but that is how deeply imbedded in my brain the investing stuff is. I could be completely, utterly drunk. So drunk that walking or uttering one coherent sentence is completely out of the question. But walk up to me and say ‘coca-cola below 40’ and my slurred drunken response will probably be: write put now.

So I started to dabble with puts and such again. Just because I was bored. Sure, the money is always welcome but I know it will at the very best only reduce the time I need to work with one year. It’s peanuts compared to my overall portfolio. But it is so much fun!

My lazy, lazy side

The other reason I like investing is because you can be very lazy at it and still make the big bucks. If done right it’s a one-time effort for a life time of profit. Do your homework, find an excellent company at a reasonable or cheap price and done. Buy it, hold it, go do something else (except if you have my weird brain).

Now this is a very, very exceptional thing. With almost everything else you need to redo the effort to get the same reward. But not with investing. Actually, the reward can even increase while you do nothing. Most companies try to increase their dividends over time. A 10% increase on a 100 EURO stock gives you a 10 EURO reward. But hold onto that stock for many years and it might increase another 10% when it is worth 200 EURO, giving you a reward of 20 euro! Cumulative returns for the win!

The only thing I can think of that came close to this was the music industry (before the internet and MP3’s). Make a record once and then have income of it for the rest of your live. For most of us, becoming a successful music artist is out of grasp. But ETF’s provide a good way to all of us to profit of this unique aspect of investing.

This makes for some truly ‘fun’ consequences. My first real job was at a telecom operator. My total wages there for those 6 years will have been around 144.000 euro (around 1.800 euro a month but holiday money, 13month and profit bonus ..). With savings averaging around 500 a month this means I saved 36.000 euro in total. Add in another 12.000 euro I was able to save from my severance package (a story for another post). And my total savings for that time are 48.000 euro. Investing this sum at a 7% average return will have this amount double every 10 years. Give it 20 years and it should become 192.000 euro. Deducting the original investment from this means that my investments on my savings from that job will equal my TOTAL pay I ever made at that job! The higher your savings rate and the higher your return rate, the less years it will take for your investments to eclipse the total wages of the job! If that prospect doesn’t excite you and gets you investing I don’t know what will.

Scalability

The last great quality of investing is that it scales so easily. Investing 10.000 euro or 100.000 euro takes the same amount of effort. It’s just typing in an additional zero. Yes, there are some limits where having to deploy too much money can become a hindrance. But you are talking about hundreds of millions of euro’s before you start encountering  that issue. And even then it depends on how the stock market in general is doing. When the overall market is setting record after record (like now) it may be difficult to deploy large sums of money at favorable returns. But for us, small time investors, for all practical purposes the scalability of investing is limitless.

I love scalability. I wish that housecleaning or doing the dishes was scalable!

I find we do not talk enough about scalability and cumulative returns in the FIRE community. This whole early retirement thing is, in my mind, only possible thanks to the combination of these two powers. Savings also have a certain scalability to it. Once you have developed the savings ‘skills’ you soon discover you can apply that skill set on a wide variety of items/events. And savings also have a certain cumulative return where making a saving in one area often has knock on effects in other areas. Buying a hair trimmer and no longer going to the hairdresser saves money. But it reduces your car use, thus unlocking additional savings in gas cost and wear and tear on your vehicle. It also frees up time which you can use to find additional savings … But savings alone is not enough. You then have to invest these savings so they can benefit again from the cumulative returns of the market. Both of them together is what enable you to achieve financial freedom.