achieving financial freedom one lazy step at a time

Category: Special circumstance investing (Page 2 of 2)

Special circumstance investing – June update

Another month has passed. If you sell options this is a good thing because the more time elapsed = the more money in your pocket!

What did I do

I sold the UVXY puts! I bought 3 puts on 16 February this year. I bought them at 8 USD and sold at 8,82 USD on the 26th May
After all costs I made a 9,6% profit on 3 months and 10 days. In % this is impressive but in cold hard cash it is only 231 USD as liquidity is an issue with this product. I would love to be able to plow tens of thousands into this but with liquidity being low and bid ask spread being high I still have my doubts. But a guaranteed profit is hard for me to ignore so I’ll probably continue with it but perhaps in the girlfriends or parents portfolio so it annoys me less.

The ADM put I sold in May expired out of the money. This means I pocketed the 151 USD premium. A 0,75% return in 1 month is not that fantastic but it is on cash that I hold to unwind my leveraged construction if necessary. The leveraged construction should net me around 8% on my entire portfolio so this really is extra. And anyway, it’s a whole lot better than the 0,11% A YEAR people are getting on their savings account.
It actually is a bit better as that option only expired on 16 June and I already wrote a new put on ADM with expiry in July on the 6th May. So for 10 days the cash was pulling double duty, covering both the put with expiry 16th of May and the put with expiry in July. Premium was a little bit better and I should get 1.2% return but on a slightly longer time period : 1 month and 10 days. I am too lazy to calculate the annualized returns. If this one expires out of the money it will be another 238 USD in the bank account. We’ll see in July.

I actually really like my cash pulling double duty (the harder my money works, the less I need to work!) so on the 26th May I sold another 5 puts on ADM. This time with expiry in august. A little longer time period and a little higher premium again: 2.09% on less than 2 months. it will be another 418 USD I can once the put expires out of the money.
All puts have been written at strike 40 USD and I expect them all to expire worthless.
It also means I will probably do no trades in July. I might double up again after the July put has expired but probably only do that in august. It’s July, there are festivals and BBQ’s to attend!

Day trading a few times in June earned me another 300 USD.

So 450 USD in extra profits (and another 650 USD on their way) because I was not a complete sloth this month.

The girlfriends portfolio

I liked the put I sold on ADM so much I did the same one in my girlfriends portfolio. So another 5 puts sold on ADM with strike 40 and expiry in July. She too will be getting an extra 238 USD in premium.

I actually liked it so much I did it in my parents portfolio too. This is why the low liquidity of the UVXY puts annoys me so much. I want things that can scale. So that if I like something. If I am convinced of the attractiveness of an investment I can scale it up and not only put more of my money in it but also plow some money of the girlfriend and the parents in it. I am way too lazy to find 10 good investment opportunities in a year. Two or three is more than enough for me, but when I find those I want to be able to go big.

Like I said, I like cash working hard so I was contemplating of also writing a second put for august on ADM when the price of AB Inbev dropped below a 100 euro. I like AB inbev at the 100 euro mark a lot! So I did double up in the girlfriends portfolio but with a 2 puts on AB Inbev. Went for a longer time period: expiry December 2017. It will be a 7,7% return in under 6 months. Not exactly UVXY put territory but close. And scalable and liquid. In cash terms it means a 1546 euro premium for the girlfriend.

It also means that if AB Inbev doesn’t move a lot at opening on monday I can do the same in the parents portfolio as well (I forgot to take the log in codes with me to work, sorry dad!).

 

Special circumstance investing – May update

Not a lot happened.

The UVX put is still not sold. Mainly because I just do not feel like logging into my computer when I get home after work (and my broker’s site is blocked at work). But I now am clearly in profit on this position so it will definitely go in June. Profit will be around 10% which is not bad for 4 months. Still not sure if I will do this again or not in the future for the same reasons I mentioned last month.

What did I do?

Like I said, not a lot.

The ABI put expired worthless. So the premium off 786,40 euro is now completely profit and in the pocket. I must repeat I really love my broker as he lets you trade on margin. My previous brokers insisted on having full coverage when writing puts and although I agree with this on principle it always annoyed me when I had to buy back a worthless position before being able to write new puts. just for this reason I would now always choose a broker which allows leverage. At my previous broker I would have need to buy back the ABI position at a cost of 20 euro (and a fee) before I could enter into a new position. Now I could just let the ABI put on the books until expiry thus not having to spend the 20 euro on something I knew was worthless and avoid another trading fee. It is not only that you avoid small costs but also that you gain a lot of flexibility. And having flexibility can mean big profits sometimes.

Also, it’s less work to do. Which lets me be lazy, always a big win in my book!

I am in profit on the UVXY put I bought. I am in profit on the ADM put I sold and I am in profit on the leveraged construction. Life is good.

Day trading grinded to a halt due to work. 1 May I was home due to it being an official holiday in Belgium and I made 95 USD with day trading that day. Then I started working and I only did one more day trade on 16 may. Made 20 USD, exited the trade because my head was not into it and that was it for the month. The girlfriend is going to a music festival in Portugal this week (yes I know, the decadence!) so I hope to get some day trading in on those days. Best laid plans and all of that ..

The girlfriends portfolio

Well, since I did almost nothing in my own portfolio you can guess what I did in the girlfriends portfolio: zero, zip, nothing. She should have received her dividend (around 2.000 euro) from her main position in May, still need to check that! I guess this is the best passive income you can have: just pocketing the dividend and the only thing you need to do is transfer the dividend or re-invest it.

The girlfriend got her current portfolio seven years ago. When we bought our current home together she sold her house in Ghent. She made a very nice profit on that sale but I decided we should borrow 100% of the purchase price of our new house. Part of her profit she wanted to use for renovations (with me putting up the same amount in cash for renovations) on the house but I decided she needed to invest a big part of it as well. She wanted dividends so ended up with a good stock (but not my first choice). After almost 7 years this position is now close to double the original worth (including dividends)! The downside of this was that for the next 7 years all our savings have been going to the house renovations (and we are still not finished). The alternative would have been to not do the investment and use all the money for renovations. And then start saving up to build a stash (in her case, or me to rebuild the stash). Well, after almost 7 years I can say that the profits on her stash are bigger than anything she would have been able to save! And I was a lot less active in her stash than I was in mine (so the difference for me would have been even bigger but not so easy to calculate). The only downside is that we are now still not finished renovating and that for a few years we were living on a construction side (although last year, with the kitchen and bathroom renovation, was the hardest). It just proves there is profit in being able to handle discomfort.

Special circumstance investing – April update

I am still waiting to be able to sell the UVXY put I bought at a profit. I know this eventually will happen as the UVXY is guaranteed to lose value. But I must confess I am not a fan of the product. The liquidity is so low and spread so big on the options on this, that selling it is not always a given. I find this annoying so once I exit this position I will probably not do it again. It is an almost certain way to make some profit. But the annoyance I have with the product and the fact that you can only deploy limited money in it (due to the low liquidity of the options) make it unattractive for me.

What did I do?

The two put options I wrote on ABI have expiration May. Strike is 100 euro, current price 103 euro, there is only two weeks left and the dividend has been paid. I am almost 100% sure these puts will expire worthless. So I am letting them run their course but I did write 2 new puts, again strike 100 but expiry July. I explained last month why I prefer not to get assigned but I do not mind picking up another 400 euro. And the cash I have is really working hard for the next two weeks. It is

A) insurance if I have to unwind my leveraged position -buffer there is still healthy-

B) covering the put that expires in May and

C) covering the put that expires in July.

I love it when my money works hard since it means I can be lazy 😉

Do not forget I earned this cash by creating a leveraged construction in January. So this is money I earned by borrowing money. This why I keep it in cash so I can unwind the leveraged position if necessary. But thanks to these puts on ABI the cash will have earned 5% in the first half of the year!

I have also been day trading a bit in April. I started with Monsanto as I found that very safe due to the offer by BASF. Volatility was a bit low in Monsanto so it didn’t make a very good day trading stock. But I did make a bit of a profit on it and by some dumb luck I happened to have a position in Monsanto when it went ex-dividend. Hooray for a lucky extra 210 USD! I switched to Google afterwards which turned out to be a good choice. Current total profits of day trading are 2.250 USD which is exactly the amount I needed to bridge the difference between unemployment benefits and my previous wages (not a coincidence!). Since I am now working again, day trading activity will be very sporadic (the evenings my girlfriend has to work until 22h). But I am going to try to continue, so I can speed up the home renovations a bit.

Update: the 2 new ABI puts didn’t actually go through so they have been replaced by 5 contracts on ADM (Archer Daniels Midland Company), strike 40 and expiry June. Full explication in the comments, grr how does work dare to intervene with my investing!!

The girlfriends portfolio

I did a merger arbitrage play on Monsanto in the girlfriends portfolio at 1x leverage. Now I have to confess, I can be a bit pushy when it comes to investment stuff. So I kind of just did it, and then went and explained it. Thing is, my girlfriends ethical side is a lot more developed than mine. Which means that ethics play zero role in deciding where the money goes. The only deciding factor is if I can make a profit at a low risk. Actually, if it didn’t carry those big expense ratio I would have bought a bit of the Vice fund for the sole reason to annoy some of my friends. It turns out that for my girlfriend it does matter where her money is invested.

So she actually wasn’t too happy to be invested in Monsanto and to profit of the merger. So after hearing her compalin about it for almost two months, I have unwound this arbitrage play. With a profit of course, and after the dividend pay out!! But at a lower price than the current one, so her ethics have cost her over 400 USD already. And it will cost her more as I am still convinced the merger will go through! But hey, a happy girlfriend makes a happy sloth. And a 1.200 USD profit in less than 2 months isn’t bad either.

Since she didn’t have any leveraged position any more I did do some day trading in her account also. Profits there are around 500 USD.

As said, I am working again so for May i just hope to finally be able to sell the UVXY puts and do a little bit of day trading if I feel like it after a loooong day at the office.

Special circumstance investing – march update

The UVX put I bought will take some time to move into a profit. And I am getting bored again.

What I did

So yesterday I sold 2 put contracts on ABI, strike: 100 and expiration in May.

This gets me a premium of 3,95 euro which is not a bad return for a 2 and a half month time period. Another 790 euro of cash added to the stash. This is actually less than 0,3% of the stash but if I can do it 2 more times I will have added another 1% to my return this year!

If I get assigned I buy a great company with a decent dividend at 96,05 euro a share. I chose the lower strike of 100 euro as I do not really want to be assigned. I do kind of have the money to pay for the shares. You see, my special construction (which I do not explain since it is highly leveraged stuff) pays me a lot of cash up front: around 38 000 USD. Financing fees will eat up around 14 000 USD during the life of the construction but in the end I should end up with around 24 000 USD in profits. I keep all this cash as cash as things can always go wrong and then I need to move fast and close the construction. But with the recent rise in stock prices I now have a nice little buffer and I abhor cash not working for me! These puts are a way to get some return and most probably still keep the cash buffer intact. I have to admit that I do like making money on money I made with money I do not own!

stack of stones

balancing my investments on top of each other

The risk of things going bump in the night

If everything goes well I’ll have made a bit off extra cash. If stocks start going down again I will close the construction (which I would do anyway) with a small profit. I will then not have enough cash for the 200 ABI shares. But if I do get assigned the ABI stock, I still have the ability to buy them with borrowed money from Lynx. This will then be the only leveraged position I have. It will be less than 10% of my total portfolio. Dividends of ABI would cover most of the financing fees for this leverage so I could keep it for a very long time. Most likely I would also write covered calls on the position, more than generating enough cash to cover the financing fees. With leveraged plays I always look at the possible downside and then determine if the risk is acceptable.

Variation on a theme

Whendoyouretire did a similar trade but at 110 euro strike. That’s actually pretty smart of him because he does want to get assigned since he is a dividend growth investor! If the stock does go higher, he will have earned one hell of a premium! Since I would prefer not being assigned I chose a much lower strike. But that is one of the main advantages of options. With put and call, sell and buy, moving the strike price or the expiry date, options actually offer you a very big pallet of possibilities for a whole lot of different purposes.

The girlfriends portfolio

I only figured out the construction in June of 2016 and I first wanted to test it out in my stash. This meant that the girlfriend was a bit late to the party. Her construction ends in March. At present prices I do not feel secure in repeating the construction for her. So yesterday I unwound the construction in her account. Total profit of it was around 7.000 USD. Not bad for 6 months. I also opened a new 1 x leveraged position (the construction was 2 x leveraged) in Monsanto with the use of CfD’s. Only 1 x leverage as I want to avoid any possibility of margin call on her portfolio in the small change that the merger between Bayer and Monsanto falls through. I am also keeping her construction profits in cash as an extra precaution and to cover the overnight financing fee’s of the CfD’s. When Monsanto moves higher and the risk of losing money on the leveraged position gets smaller I will look for a way to invest some of this cash. Financial Velociraptor did a similar merger arbitrage play but without the use of any leverage I think. The merger arbitrage of Monsanto first came on my radar when I read Berkshire Hathaway did it. But one should always do one’s own homework. I am not that impressed by the performance of Monsanto but the 2 billion USD breakup fee if the merger would not succeed convinced me. If the merger does not go through (and Bayer has 2 billion reasons to make sure it does happen) Monsanto will be sitting on a mountain of cash!

That is me done until I can profitably sell my UVXY put. Time to start concentrating on my diet!

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 …

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.

Newer posts »