a planter's garden

Where are you and where are you going?
plantingtheseed
Posts: 141
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a planter's garden

Post by plantingtheseed »

This will be a journal about improving minimum ERE through experiments in investing. I propose to record the fun and the progress to see where it goes.

Background:

THE SAVINGS PHASE
I reached MINIMUM ERE in 2020, a point where a minimum acceptable standard of living could be achieved without working.
This was accomplished almost exclusively through saving at a high rate, for over 7-years, working.

THE ACCUMULATION PHASE
The focus of this journal will be to record the journey and random thoughts as I enter the accumulation phase to reach PLUSH ERE.
The goal will shift from savings to accumulation, toward a higher standard of living.

As always, it will be a journey of a self-discovery and an adventure. https://i.imgur.com/qlsBznI.jpg

Quick rules (I know, I know)
- No politics
- Stay on topic
- Have fun

CURRENT STATS: 98% cash@~3%, 1% Gold LEAPS, 1% {CVX @ 60, 8.5% div} NW: 775k
Last edited by plantingtheseed on Sat Jul 04, 2020 2:35 pm, edited 21 times in total.

plantingtheseed
Posts: 141
Joined: Sat Mar 28, 2020 7:23 pm

Re: a planter's garden

Post by plantingtheseed »

Disclaimer
Let's be clear. This is a journal, not an investment advice. This journal is for fun and for informational purposes only. There is no warranty of any kind. Plus I'm new at this. Your common sense is greatly appreciated. You've been warned.

The Motivation
I love sports. (<- this is a joke)

The Road Map
First, examine the idea.
Second, try the idea.
Third, see how well the idea did.
Lastly, if worth doing, make adjustments and repeat.

The ideas
The Boglehead's guide to investing
Value
Dividend Growth
Last edited by plantingtheseed on Wed Jun 24, 2020 4:38 pm, edited 4 times in total.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Boglehead's guide to investing

The book is too wide in scope. For this journal, the focus will be narrowed to investing aspect only, namely:
-Asset allocation
-Re-balancing

Otherwise, it's a good introductory book that covers a wide gamut providing the big picture.
I'm in full agreement with the book in that before one can begin investing, one must be ready to do so.
The book states,

"What most young people don’t understand is that SAVING is more important in the beginning than finding the best performing investment. Having the ability to “Pay yourself first,” manage your debt load and determine a vision of what you want to accomplish is vital to your success. I read an article last week that stated 40 percent of Americans don’t know where their earnings go. The simplicity of saving, coupled with the power of compound interest, is something to be very happy about."

There are many great resources for this vital first step, from simple to complex and practical:

Library
The richest man in Babylon
The Wealthy Barber: Everyone's Common-Sense Guide to Becoming Financially Independent
The Milionaire Next Door: The surprising secrets of amerca's wealthy
Your money or your life
Poor Richard's Almanack
The Total Money makeover
The bogleheads guide to investing
etc.

On this site, the following articles were helpful
Manifesto
How little do you need to retire?
Can I retire young?
Why so few succeeed?
How I became financially independent in 5 years – Parts 1-4.

Next stop
Asset allocation.
Last edited by plantingtheseed on Wed Jun 24, 2020 4:39 pm, edited 3 times in total.

Smashter
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Joined: Sat Nov 12, 2016 8:05 am

Re: Seed's journal

Post by Smashter »

plantingtheseed wrote:
Sun Jun 07, 2020 5:06 pm
The Motivation
I love sports.
I also love sports. Can you explain how it's your motivation? Do you mean you want to retire early and play sports all the time? Watch sports? Get a career in sports without having to worry about making a lot of money at it?

plantingtheseed
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Joined: Sat Mar 28, 2020 7:23 pm

Re: a planter's garden

Post by plantingtheseed »

Ahh... It was a joke. :D
But if I may ask, was that the only thing that stuck out at you in the posts so far? Should I quit while I'm ahead? What do you think? :cry:
Last edited by plantingtheseed on Wed Jun 24, 2020 4:39 pm, edited 5 times in total.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Asset Allocation
First the book presents observations from academics that not only do the market prices fluctuate randomly, the prices reflect their true value at all times and people are generally horrible at predicting where the prices will be in the future. Clearly, the thing NOT to do is to invest the whole lot in just one company and throw caution to the wind. What if the company goes bankrupt years from now? Happens often enough. It would be safer to invest the lot in multiple companies then average the returns. And prayers to the various gods of randomness that none will fail.

Averaging though, tends to bring down results. The averaging of a basket of high and low numbers always ends up somewhere in the middle. Therefore, to achieve a higher average, choose a basket consisting of higher numbers. And there’s the rub. A company must be profitable to expect a higher stock price. For a company to achieve an exceptional profit, it must gamble on a venture that may or may not be successful, often at the risk of its own demise. Apple gambled on the iPhone to rise out of the ashes of an essentially dead computer company. The relationship between higher the reward, higher the risk is established.

If the premise of "higher the risk, higher the return must be" is accepted, is there a way to invest the lot into groupings of multiple companies such that in individual groupings the premise holds true but as a combination, the premise is altered for our betterment? Is there a way to create a combination of groupings to keep the higher average return but reduce the higher risk associated with it?

Book states that asset allocation is that process of dividing up the investment in different groupings to prevent a total loss and having a chance at maximizing the return while minimizing the risk taken to achieve that return. It’s still a chance. The market after all, is random - under the boglehead investing praemissus.
Last edited by plantingtheseed on Wed Jun 24, 2020 4:39 pm, edited 11 times in total.

Smashter
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Joined: Sat Nov 12, 2016 8:05 am

Re: Seed's journal

Post by Smashter »

Haha, got it. That's what jumped out at me, but that doesn't mean you should stop! It's your journal and your idea playground :)

If you are interested in learning more about asset allocation and playing around with different asset mixes, I can't recommend the site portfolio charts enough. It's created and run by frequent forum contributor Tyler9000.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Thanks! :D I'll be sure to check it out.
Last edited by plantingtheseed on Wed Jun 24, 2020 4:39 pm, edited 2 times in total.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

So what does this all mean?

Investors are horrible at predicting the future.

Therefore, they usually don't invest everything in just one company and face the possibility of ruin in case that sole company fails.

Instead, they diversify, by investing smaller amounts into multiple companies so that even if some companies fail, it does not lead to ruin.

Rather than diversifying blindly with unpredictable results, it was found that right proportions of certain groups of companies could result in the most chance of profit with the least chance of loss.

This was possible by recognizing that in certain groups of companies, price relationships exist that could be used to further reduce the overall loss risk of the chosen diversification as a whole.***

This meant, an investment portfolio could be created for a chance to maximize the profit at a given loss risk level or minimize the loss risk at a given profit target.


Asset Allocation Percentage of Stock/Bond and Exposure to Maximum Loss

Stock % / Bond % / Potential Maximum Loss Exposure

20/80/5%
30/70/10% - Sweet Spot for Retirees Rick Ferri**
40/60/15%
50/50/20%
60/40/25% - Sweet Spot for Long Term Investors (60% Stock / 40% Bond with 25% Potential Maximum Loss Exposure) Peter Bernstein*
70/30/30%
80/20/35%
90/10/40%
100/0 50%

*http://web.archive.org/web/200612140619 ... in6040.pdf
**https://www.emiratescapitalassetmanagem ... tirees.pdf

***One can also create a portfolio consisting only of individual stocks that does exactly this.
Last edited by plantingtheseed on Wed Jun 24, 2020 4:39 pm, edited 2 times in total.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

I myself do not necessarily subscribe to mean variance portfolio theory nor its extension in Capital Asset Pricing Model (CAPM) and their often shared belief in Efficient Market Hypothesis (forming the Modern Portfolio Theory) to accept them with blind faith.

As Buffett often states Carveth Read's quote, "It is better to be vaguely right than exactly wrong", I believe MPT is vaguely right not necessarily because it is right but more so because of the sheer number of people that are using it.

So it will sort of work, until it doesn't - when people discover some of the problems in its underlying assumptions and how inadequate it is to be applied directly in real life.

As George Soros is believed to have stated in the 90's:

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited."

My interest is to examine idea, apply the duck test and if it looks and sounds like a duck, ride the lies and step off before the truth is revealed.

It starts with risk.
Last edited by plantingtheseed on Wed Jun 24, 2020 4:40 pm, edited 2 times in total.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Those of us that give money some purpose


The Frugal Man (Video)
https://www.facebook.com/EricJohnsonKOM ... 417452596/

From duct-taped shoes to $11M: Man leaves surprise donations
https://apnews.com/7116c179308a4e8eb2a83693e4f3750a

Social Worker Led Frugal Life To Leave Nearly $11 Million To Children's Charities
https://www.npr.org/2018/12/29/68088377 ... -charities
Last edited by plantingtheseed on Wed Jun 24, 2020 4:40 pm, edited 2 times in total.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

To measure return, one can simply measure the difference between the initial invested amount to the final amount.

If we start with $10 and end with $12, the increase of $2 is the return on investment. This is a 20% return ($2 gain on $10 investment or $2/$10).
If we start with $10 and end with $8, the decrease of $2 is the return on investment. This is a -20% return ($2 loss on $10 investment or -$2/$10).

Simple return = ( current price - initial price ) / ( initial price )


Because the price of an investment (i.e stock) is continuously changing, it is said, a continuously compounded return is a better measure of return.

Continuously compounded return is calculated as:

P(current) = P(initial) x e^(Rate of Return) ** or; CP = IP x e^R
P(c) / P(i) = e^(CRR)
ln [ P(c) / P(i) ] = ln e^(CRR)
ln [ P(c) / P(i) ] = Continuously Compounded Return

Simply put, the natural log of the ratio between current price to the initial price is the continuously compounded return:

ln [ P(current) / P(initial) ] = Continuously compounded return.

If we start with $10 and end with $12, the CRR is: ln ( $12/$10 ) = .18232155 = +18.23%
If we start with $10 and end with $8, the CRR is: ln ( $8 / $10 ) = -.22314355 = -22.31%

+++++++++++++++++++++++++++++++++++++++++++++++++++
** Note, a 10% return on $100 invested will add $10 to the original investment, ending with $110.

Adding 10% return to the original investment: (100% + 10%) or converted to decimal, (100%/100% + 10%/100%) -> (1 + 0.1)
Starting with $100 initial price, adding 10% return will result in $110 current price : $100 x (1 + 0.1) = $110 Therefore;
Current Price = Initial Price and adding the return: CP = IP x (1 + Rate of Return)

This is a simple return. When the return is compounded, or given multiple times, then:

Once a year (simple return): CP = IP x [1 + Rate of Return]
Twice a year (semi annual): CP = IP x [1 + (Rate of Return/2)]^2
Four time a year (quartely): CP = IP x [1 + (Rate of Return/4)]^4
Every month (monthly): CP = IP x [1+ (Rate of Return/12)]^12
Every day (daily): CP = IP x [1 + (Rate of Return/365)]^365

and so forth...

When the return is continuously compounded then, naturally:
continuous compounded return (infinite): CP = IP x [1 + (Rate of Return/infinity)]^infinity

Compounded return: CP = IP x [1 + (Rate of Return / Number of times compounded)]^Number of times compounded or;
Compounded return: CP = IP x (1 + R/N)^N

Turns out that as N approached infinity, [1 + (1/N)]^N, approaches the constant e or 2.718281828... Therefore;

by algebraic substitution: let Temp = N/R then as N approaches infinity, Temp approaches infinity and;
N = Temp x R and;
1/Temp = R/N

Compounded return becomes: CP = IP x ( 1 + 1/Temp )^(Temp x R) then as N approaches infinity, Temp approaches infinity and;

Continuous (infinite) compounded return becomes: CP = IP x e^R
Last edited by plantingtheseed on Wed Jun 24, 2020 4:40 pm, edited 2 times in total.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

I had planned on covering the weighted average return and showing the expected return on a given investment using its return distribution and calculating the variance and standard deviation (while at the same time showing that the distribution isn't always normal) then leading into how the risk of a portfolio can be less compared to the sum of risk of the individual assets that comprises the portfolio by obtaining the covariance and correlation to show how covariance reduces portfolio risk due to correlation and then using different asset weightings to show the risk return relationship of portfolios and ultimately leading into portfolio optimization by either maximizing the sharpe ratio to obtain the optimum weightings or using a somewhat structured monte carlo by using step-wise increasing and decreasing A/B portfolio to find the optimum weightings near maximum sharpe ratio.

Then I was going to show that blindly trusting asset allocation is a problem, because of the assumptions involving the poor definition of risk (i.e. there must be more to risk than just stock prices), that past correlations does not guarantee future correlations, that over diversification may actually increase risk, that return distribution itself is dynamic and is not always normal, that high risk does not always translate to high reward, etc.

But I am finding that because I don't know the audience, the presentation itself is taking more effort than the material, in a sort of a diminishing return conundrum kind of way. If I continue the way I've been going, it will probably take months before I am through with the bits and pieces sessions to cover just the theory. And it probably isn't worth it, because I'm using asset allocation as a flawed example not to trust, but to take advantage of. And it's easy to do, as the way to do that is to buy the index fund and let it ride, but sleep with both eyes open and pull the trigger to sell when it falters and don't buy and hold.

If I am going to spend the time, I'd rather cover the value investing, as not only is it more interesting, in my experience, it works fairly well. I believe I can try to cover the basics.
Last edited by plantingtheseed on Wed Jun 24, 2020 4:40 pm, edited 2 times in total.

jacob
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Re: Seed's adventure

Post by jacob »

plantingtheseed wrote:
Sun Jun 14, 2020 1:53 am
As Buffett often states Carveth Read's quote, "It is better to be vaguely right than exactly wrong", I believe MPT is vaguely right not necessarily because it is right but more so because of the sheer number of people that are using it.
Yes. I like Mark Twain's quote that "What gets us into trouble is not what we don't know. It's what we know for sure that just ain't so." IOW, the only way to consistently profit is from market inefficiencies created by people who are wrong yet believe they are right. It is this belief that imposes a level of unrandomness (structure) that one can target. Good targets are human psychology, academic training, government policy, and laziness.

However, all this exists on levels in the sense of a Keynesian beauty contest. Regular profit is only made in the interaction between two adjacent levels. For example, one can not profit from value investing (or mean reversion strategies) in a market driven to insane valuations by momentum. The reason is that prices are at a point where there's nothing to buy and moving in a direction that just causes further losses. It doesn't work because the Keynesian levels are too far apart. In order to profit consistently (rather than once a decade) the key is to be slightly less wrong than wrong---because insisting on being right makes it impossible to engage. (This is a hard art to master.)

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Good targets are...
I think I get the first three, but care to expand on the last one? :D
Last edited by plantingtheseed on Wed Jun 24, 2020 4:40 pm, edited 2 times in total.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Saturday 22 July 1989

Tom Petty And The Heartbreakers

Shoreline Amphitheatre, Mountain View, CA, US

Friday 29 September 2006

Tom Petty And The Heartbreakers

Greek Theatre, Berkeley, CA, US

Friday 08 August 2014 – Sunday 10 August 2014

Tom Petty And The Heartbreakers
Outside Lands Music & Arts Festival 2014

Golden Gate Park, San Francisco, CA, US



Long live the Heartbreakers!

https://pbs.twimg.com/media/EbAIbp-U8AA ... name=large

https://www.youtube.com/watch?v=I6lyaolPIOc
Last edited by plantingtheseed on Wed Jun 24, 2020 4:40 pm, edited 2 times in total.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

There is a different aspect to the Mark Twain's quote, which many know by instinct and yet are not rational about.

Being right or wrong in the market is in a lot of ways irrelevant.

One can be absolutely right about something and yet still lose money because the market was wrong. One can be absolutely wrong and make money for the same reason.

There are plenty of highly educated smart people in investing that simply don't do well. Some of the reasons already mentioned are psychology, personal bias, economic policy, laziness (?) :D, etc.

Clearly it's not the intelligence. It's that there are plenty of ways for investors to lose money in the market. And they're not going to post danger signs at every cliff edge for you. (They will be happy to nudge you over, maybe?)

If you're going to play the game, you have to know the rules. Not knowing, is what really gets people into trouble. Because not knowing, allows for consequences to really burn those caught unaware - often badly. Simply put, risk is not knowing.

Therefore, the best use of knowledge is to understand what the risks are then focusing on reducing them. Because losing less is by far more imporant than making more. (sound familiar? spending less is far more important than earning more)


No Limit Hold'em for instance, is much like investing. It is the type of a game where money management essentially governs all aspects of the game to win. If loss is not managed well, one will lose.

Also, there are plenty of second and third guessing and beyond in the game to satify a hardcore Keynesian.

The result of the game is an outcome produced by a cumulation of decisions made over time. Likewise, the outcome of an investment is measured by "averaging wealth growth over time". (Peters, Gell-Mann)

"Any gamble effects what we may be able to do after the gamble. If we lose our house, we cannot bet the house again. The typical decision problem only makes sense in the context of a notion of irreversible time and dynamics - we cannot go back in time after the gamble, and our future will be affected by the decision we make today."

And one sure way to lose this game is by betting the farm at every hand played. (https://www.youtube.com/watch?v=UI6pSkIs_tc)


Know the consequences of each risk. Weigh them as how each applies in one's own specific situation. Does one always have to be exposed to market risk to be financially sound? Which is the bigger risk, the inflation or the market risk?

It depends - on the person. A lump-sum retiree with $500,000 may see inflation as the bigger risk. A 50k/yr pensioner with some savings may be in the middle. A 100k/yr working person may choose the market risk as the bigger threat.

It is the difference in the availability of lifetime cash flow, that causes the pressure to be applied differently, to force some to take on the market risk as a necessity, and others not.

Making life choices within one's sphere of influence, to rationally alter risk in one's favor, may work out better than being completely in the harm's way of total market risk.

Monte carlo simulations of game theory and back-testing stock price history may be a glorious tech prowess ad infinitum, but reality has a way of taking us to what really works in reality - and away from the casino.
Last edited by plantingtheseed on Wed Jun 24, 2020 4:41 pm, edited 1 time in total.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Did some re-arranging of the journal to have a clearer focus of its goals. I find that making journal entries in a diary like fashion helps in clearing up thoughts and organizing ideas when there is a set objective or a goal. Being able to throw in random thoughts or ideas was always a plus in this format.

I had intended to structure the journal as a learning platform for a full time investor in retirement. But the diary format was better, providing a unique space away from everyday distractions and responsibilities as well as shielding electronic noise that are so prevalent today. It was just a better tool to ponder ideas towards a goal to achieve it.

Having had covid19 coincide with a financial milestone also provided sort of a glimpse into the future, and I have to admit, after 3 months of pseudo-retirement, there are second thoughts about retiring. I have slowly begun to realize that, working isn't so bad. :lol:

It seems, 3 months was about the right amount that was needed to decompress.

I am fortunate in that, what I do at work has an impact on the community which provides a sense of purpose and fulfillment. We also have several major projects coming up with a need for a lead with the knowledge of technical history that can direct these projects with a purpose to completion in the next 5 years. I've been asked of my intentions to fill that role.

While pondering, I realized that there would be reasonable improvements to the finances. Retiring after the project completion, would still be considered too early by most. And after a short taste of freedom, I realized that it was a little too much freedom a little too soon.

The goal of the journal will remain the same, but I will now be able to add leverage, as the incoming cash flow will remain at the pre-retirement level. And the timing of the market, I believe, is favorable.

I still intend to cover bits and pieces in value investing, as this will be the approach that I will be taking, along with short term trades in options. I was able to make my first acquisition under value investing criterion not too long ago. It is becoming apparent that the market is shifting.

I was fortunate to have taken a course in investments from a professor who taught value investing in Buffett fashion. I had to juggle work schedule to make this class every week and it turned out to be a very worthy decision.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Entering the month 4 of the lockdown, still haven't set foot in the office except maybe for an occasional day trip here and there for those necessary tasks.

The procedure to entering the building reminds a person of a tight airport security, as temperature checks and handwashing prior to entry is followed up with hand sanitizers at every elevator, door and restroom in strategically placed locations. Strict social distancing is observed and masks must be worn at all times.

It's a very gentle reminder that the good old days aren't coming back any time soon.

Traveling under these restrictions will be a grueling process after a while. Much of the traveling amenities will be about long lines, masks, hand sanitizers and social distancing. Some localities may not even want visitors.

The elevated legal, logistical and medical risks mean international travel is probably best avoided until some sense of normalcy is restored. A minor mishap could easily turn into a major catastrophe in another country, coupled with a language barrier under such circumstances.

Even before financial considerations, retirement under such conditions is not what was envisioned.

If person no longer works for a necessity then that time must be replaced with something else. For a planned traveler after retirement, this is indeed yet another dilemma.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Took profit on the short position as I did not want to hold it over the weekend. Contemplating a call position, but waiting to see what happens on Monday may also be wise as well. Will decide by the end of the day.

Funny, have a co-worker that trades and loves risk, as we compare our trades often besides work. In the last 3 months he has made 150k and lost 170k. Keep telling him to watch the leverage as one of these days it will bite him back.*

*to his credit, he has managed to pay off the house through trading so at least he has diversification away from market risk

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