Running with scissors

Ask your investment, budget, and other money related questions here
WFJ
Posts: 416
Joined: Sat Apr 24, 2021 11:32 am

Running with scissors

Post by WFJ »

This is a question for older FIRE or those who have been FI for 5+ years (no Ape traders or crypto bros). Have any of you achieved FI due to you stock picking abilities/market timing?

If I were to estimate my own FI journey, the stock picking or investing skill would be almost useless in economic power in my own FI achievement. Based on below simple formula, I'd estimate the economic power of B1 would be 1000X more powerful in explaining FIRE than B2.

FIRE = a + B1(Earnings/Spending) + B2(investing skill/timing relative to S&P 500 index) + e

I'm curious if those who achieved FIRE had to go through a process of discovering this for themselves or do individuals who focus on B2 eventually give up and capitulate on FIRE? If there are no B2 FIRE successes, why do individuals still attempt this strategy?

Among the individuals I know who attempted to B2 their way to riches have almost nothing. I see several (assume younger) individuals on this forum "running with scissors" in their investments yet experience posters don't warn them of this folly. This is either due to the futility of telling someone not to run with scissors until they lose an eye or some other bias of inaction.

zbigi
Posts: 978
Joined: Fri Oct 30, 2020 2:04 pm

Re: Running with scissors

Post by zbigi »

I think you can only claim successful FIRE if you manage to go through entire retirement without privation (i.e. don't end up in a poorhouse at say age 80)... In regard to your question, skill in investing may not be most important factor re: how quickly one reaches their number, but may be important in avoiding risk of ruin in the decades after that.

User avatar
unemployable
Posts: 1007
Joined: Mon Jan 08, 2018 11:36 am
Location: Homeless

Re: Running with scissors

Post by unemployable »

I started making real money, as in enough to sock away multiple years of living expenses per year, around 1999-2000. I never went into tech. Stuck with low P/E stuff and Series I savings bonds. I still own most of these holdings and will soon be loaning the government money at nearly thirteen percent.

Most important thing was going to about 60% cash in 2007 and keeping all new savings in cash through the summer of 2009. Bonds would've been better, but the crucial decision was to stay out of stocks. Between mid-2009 and mid-2011 I gradually increased my stock allocation back to around 80%. Effectively I "sold" around SPX 1500 and started buying back in in the 900s.

This afforded me the ability to quit my job in summer 2010 and I haven't had a real job since.

More recently, I started buying oil companies in mid-2020, continuing through mid-2021. YTD for 2022, the performance gap between my net worth and the SPX is some 22 points, like +5 versus -17 as of today's close. I remain strongly bullish on oil. I do have some recent disasters in my portfolio, such as airlines and B&M retail, but they weren't as big an allocation as oil is, they're still a double or triple from when I bought them and again I never owned any speculative tech.

I do believe one can time/frontrun macro trends. You only need to be right once or twice in your life for it to really pay off.

To be fair, I underperformed through much of the 2010s due to an overallocation to international stocks and lower-beta US stocks and funds. The research says to diversify internationally and I spent a lot of time waiting for a putative mean-reversion but eventually decided Europe in particular was a continent-sized value trap. That was a few years ago; I've made several statements on this board to that effect and it still seems a valid assessment today.

So my "B2" has long periods of being slightly less than one but short periods of being substantially greater than one, with the latter coming at times when being <=1 would have been notably lugubrious. In the meantime I've been gradually improving my "B1" as well.

User avatar
Sclass
Posts: 2791
Joined: Tue Jul 10, 2012 5:15 pm
Location: Orange County, CA

Re: Running with scissors

Post by Sclass »

I have been unemployed ten years. This month is my tenth anniversary of my resignation. I signed on here a couple of months after pulling the trigger.

So yeah, I’ve been FIRE for more than 5 years. I got there primarily from stock returns. My savings from income has never made up much of my total NW. I did save a lot compared to my coworkers but it never was much of my NW. This is probably because my career only lasted 13 years and because my stock returns were good on average.

If I understand your equation (I don’t) I think my B2 is many times B1. I am an outlier among my peers and family members. Using this anecdote as inspiration is a dangerous game.

Which brings me to the question - what difference does it make to you if somebody else wins the game you and everyone you know personally lose at?

Yes, running with scissors comes to mind.

zbigi
Posts: 978
Joined: Fri Oct 30, 2020 2:04 pm

Re: Running with scissors

Post by zbigi »

unemployable wrote:
Wed May 25, 2022 3:51 pm


I do believe one can time/frontrun macro trends. You only need to be right once or twice in your life for it to really pay off.
Unfortunately, the converse is also true - you only need to be wrong big once to add many extra years of work to your life (as your resources evaporate and you need to work extra years to go back to the original number). Hence, ultimately it seems a lot like gambling.

User avatar
Jean
Posts: 1890
Joined: Fri Dec 13, 2013 8:49 am
Location: Switzterland

Re: Running with scissors

Post by Jean »

I don't understand you question, but maybe a summary of my ERE story could answer it.
I started my career in 2012, I hated it, i saved a lot (50-75%) because i wanted to quit, after about a year i wanted to live in the forest, i had no real plan. So i started looking for a forest to buy. This gave me a good idea of market price for real estate and in 2013, i bought a house. I then renovated the house and quit at the end of 2014. I then kicked my ec gf out of the house and started renting out one room. After maybe one year, i realised i could rent the entire place and live somewhere else for nearly free (an unfit for public renting house, bound for demolition, where we only had to pay utilities, most people would call that a squat, but we weren't technically squatting). Living arrangments have changed since, but i never had to work again since. I worked a few time for limited period of time when i wanted to pay for expensive hobbies (travel and hunting license).

From it i would say that I was lucky, or that both B1 and B2 where quite high.

jacob
Site Admin
Posts: 15907
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 77
Contact:

Re: Running with scissors

Post by jacob »

At typical ERE savings rates over 75% the return rate makes very little difference in terms of how quickly FIRE is achieved. This is what makes the extreme savings strategy so robust. All that's required is a positive real return. See Fig 7.14 in the ERE book.

Lower savings rates require more years to accumulate enough working capital to turn alpha into significant dollars. On top of that compounding requires many years to show much of a difference between rates (e.g. market and market + alpha) and most of that difference shows up late and so the question is more pertinent to slow (20y+) approaches to FIRE.

As to running with scissors, I take the cue from Confucius: "If I raise one corner for someone and he cannot come back with the other three, I do not go on." Very few ever come back. I don't really care if "someone is wrong on the interwebs" when it comes to investing as long as they're being polite about it. It's their money to do with what they want. In particular since each trade requires a counterparty, diversification in agreement/disagreement is actually good for the overall health of the market system.

User avatar
unemployable
Posts: 1007
Joined: Mon Jan 08, 2018 11:36 am
Location: Homeless

Re: Running with scissors

Post by unemployable »

I interpreted the question as asking about the B2 part, and suspect what was meant is β₂ (beta sub 2) given the allusion to the CAPM. Anyway, over the years I've reduced my expenses to the point that it's not at all unusual for me to gain or lose a year's worth of living expenses from a one-day move in the stock market. Or put another way, gain or lose a car in my price range in a day. Which I consider a capital expense, as a car is an "investment" in my lifestyle (traveling, hiking, living out of said vehicle which needs to hold all my stuff while I'm doing it) that I "capitalize" over multiple years.

Having a lower B1 has made me more comfortable taking risks on the B2 side compared to indexing. Some of my B&M-store stonks melted down last month among other things and I went from say 60x living expenses to 55x. So what? (They're having a good day today.)
zbigi wrote:
Thu May 26, 2022 4:01 am
you only need to be wrong big once to add many extra years of work to your life.... Hence, ultimately it seems a lot like gambling.
I don't disagree with the premise but I think one can learn to identify screaming buys or sells and allocate in ways that minimize the downside if you're wrong. And oil, as an example, didn't look like a screaming buy in late 2020, but a standing-under-a-747-engine-at-takeoff buy. I've mentioned a couple of my mistakes and I've made others -- HUGE ones if you're interested -- but over the years I think my biggest mistake has been not taking enough of my own advice and not having enough conviction in my best ideas. And just buying and holding VTI seems boring as hell, doesn't really fit my spending needs anyway and we have all sorts of threads here on what our investment ideas are and should we buy gold or crypto instead of stonks and whether society's going to collapse next Thursday. This is supposed to be fun.

WFJ
Posts: 416
Joined: Sat Apr 24, 2021 11:32 am

Re: Running with scissors

Post by WFJ »

Using words, the question is why it appears many younger FIRE aspirants spend a lot of time on investing strategies that are not abundant or completely absent among those who have achieved FIRE. Only have my experience where abnormal returns relative to S&P 500 returns are nearly 0% (maybe 5 out of 25 years where the last three years providing marginally positive nominal benefits to AUM). Have abundant experience with investors absolutely blowing up their accounts with non-index portfolios (10,000+ margin calls on individual investors), know of many blowups in RE (100's) and just wondered why many younger investors with the specific aim of FIRE (non-random sample of people on ERE forum) are pursuing, at best, interesting alternative investing strategies. I would expect this in Reddit message boards, Meme stock forums, but not in FIRE.

When I haphazardly forged my FIRE strategy due to a mix of disdain for work and pleasure of leisure, there were no FIRE, ERE, MMM or other guidebook (rough alternatives were Random Walk Down Wall Street and Millionaire Next Door) had to walk up hill in the snow to and from school and would have shaved a few years off my journey had FIRE resources been available. Today there are thousands of "View my ads/use my referral links to retire young" blogs/YT videos, yet a significant number of investors don't follow this and choose to follow "magic beans" investing strategies.

If we actually collected the data to run above regression, nobody would have a positive or significant B2 variable (many biases induce individuals to believe they are outperforming the index when data shows otherwise), while B1 would be positive, significant and have a massive explanatory power for 100% of FIRE individuals. Having a positive B2 is the equivalent of someone claiming they could make an NBA team or hit .300 against MLB pitchers, but just don't do it because they don't like the travel or want to spend more time with their family.

IRL, if asked for investing advice I start using big words like correlation/heteroscedasticity/efficient frontier/hypothesis testing and this usually ends the conversation. A few follow-up and will offer my analysis, few follow. On these forums, I see several, assume younger, individuals running with scissors down a slippery slope into a dumpster fire of scissors and just musing why they are pursuing this strategy when there is abundant evidence of how this will end.

candide
Posts: 432
Joined: Fri Apr 08, 2022 9:25 pm
Location: red state America
Contact:

Re: Running with scissors

Post by candide »

WFJ wrote:
Thu May 26, 2022 3:13 pm
just musing why they are pursuing this strategy when there is abundant evidence of how this will end.
It seems to me this is a question of different selective pressures.

If the pre-FIREd here were the type that would just smile and nod at conventional wisdom, they probably wouldn't have made it to the ERE forum. And as indexing is the biggest bad-boy on the block, it is going to get the most push back from the iconoclastic.

As someone gets close to the amount they need to FIRE or beyond it, the selective pressure becomes more about capital preservation. Again, if someone was interested in getting richer for conspicuous consumption, they probably wouldn't have kept posting to ERE. . . So after that filter is passed, what's the upside of a more aggressive strategy?

FWIW, I agree with the implicit criticism, especially here in a rising interest rate environment. . .

I wish everyone well and hope they don't blow up, but, yeah, that does require the humility to bits off when things are running too hot to be real.
Last edited by candide on Thu May 26, 2022 9:22 pm, edited 1 time in total.

white belt
Posts: 1452
Joined: Sat May 21, 2011 12:15 am

Re: Running with scissors

Post by white belt »

WFJ wrote:
Thu May 26, 2022 3:13 pm
Using words, the question is why it appears many younger FIRE aspirants spend a lot of time on investing strategies that are not abundant or completely absent among those who have achieved FIRE. Only have my experience where abnormal returns relative to S&P 500 returns are nearly 0% (maybe 5 out of 25 years where the last three years providing marginally positive nominal benefits to AUM). Have abundant experience with investors absolutely blowing up their accounts with non-index portfolios (10,000+ margin calls on individual investors), know of many blowups in RE (100's) and just wondered why many younger investors with the specific aim of FIRE (non-random sample of people on ERE forum) are pursuing, at best, interesting alternative investing strategies. I would expect this in Reddit message boards, Meme stock forums, but not in FIRE.
I'm not sure if you are referring to me, but since I seem to be one of the most active with posting in the Investments Trade Thread and I am young, then I will give my perspective.

First off, my trading portfolio is small in comparison to my overall investing portfolio. At any given time, my active trading portfolio only makes up maybe 5-10% of my overall portfolio. I don't use margin. It's hard to blow up my portfolio with positions of that size. I've read most of Jacob's startup curriculum in finance and spend a lot of time consuming various macroeconomic research. I will be the first to admit that I don't consider myself an expert and am still learning.

At a certain level, you are absolutely correct that my investment returns matter much less than my savings rate. My net worth at this point is ~$450k and my annual spending averages out to $22k (spending is also inflated due to expenses related to my job). I have an ~80% savings rate from my job, which I am legally obligated to work in for at least another 2 years. If you do the math on my trajectory, I don't need any exceptional returns. I also doubt it very much that I'll never make another dollar in my next ~50 years of projected life expectancy after I leave my current employment.

I do active trading because I find it interesting. I like strategy games, I like puzzles, I like having skin in the game, and I can do all that with trading. The fact that I could make a money doesn't really matter that much because frankly, money is a solved problem. I also have a ton of time at my current job I can spend learning more about things, but only things I can do sitting at a desk while on a computer. In that way, trading offers much more flexibility than other pursuits. I started this journey after COVID happened because I wanted to understand what was going on with the economy and the world.

Edit: In almost every other FIRE discussion space, the dogma about passive indexing is by far the most dominant theme. This is one of the few places I know of where FIRE people even discuss alternative investing strategies.

User avatar
unemployable
Posts: 1007
Joined: Mon Jan 08, 2018 11:36 am
Location: Homeless

Re: Running with scissors

Post by unemployable »

candide wrote:
Thu May 26, 2022 4:23 pm
Again, if someone was interested in getting richer for conspicuous consumption, they probably wouldn't have kept posting to ERE. . . So after that filter is passed, what's the upside of a more aggressive strategy?
  • Because I want to lower my withdrawal rate
  • Because on some level I want nice things, and what I've been doing won't get me those nice things anytime soon
  • Because I want resiliency from a money/markets standpoint but need to take some risk for awhile to get there
  • Because I want to mitigate the risks of some of my lifestyle hacks/inefficiencies I'm taking advantage of disappearing
  • Because it's a risk I'm comfortable taking
  • Because I've seen similar scenarios play out before and am pretty confident it'll play out again in a similar way
  • Because I have nothing better to do
What the hell should I do instead, find a job?

The "market portfolio" is a fiction anyway, as a friction-free "risk-free rate" is. Everyone is concentrated somewhere. If you work for Apple you are implicitly correlated to the performance of AAPL. If you own a house in Dallas you are long the Dallas real estate market. If you drive a Tesla you're short electric utilities. If your portfolio is denominated in US dollars... OK, you get the idea.

As much of your pelf as possible in broad US stock indices was certainly the winning strategy for some 12 years. But naive broad stock indices have languished for long periods. Decades at a time. In the 1970s you would've been much better off in smallcaps and yeah, commodities. Right now SPY or VTI or QQQ or whatever is still top-heavy and this is causing the declines so far this year to look especially bad. Meanwhile SPLV is only down 5% YTD and VYM is nearly flat net of dividends. What bear market?

candide
Posts: 432
Joined: Fri Apr 08, 2022 9:25 pm
Location: red state America
Contact:

Re: Running with scissors

Post by candide »

@unemployable

i-bonds and value stocks are not exactly what I meant by aggressive.
unemployable wrote:
Wed May 25, 2022 3:51 pm
I never went into tech.
So you can understand the wisdom of avoiding some parties. I interpreted OPs point as about people using crypto, NFTs, maybe even something as prosaic as growth stocks to try to juice returns.

User avatar
Sclass
Posts: 2791
Joined: Tue Jul 10, 2012 5:15 pm
Location: Orange County, CA

Re: Running with scissors

Post by Sclass »

WFJ wrote:
Thu May 26, 2022 3:13 pm
If we actually collected the data to run above regression, nobody would have a positive or significant B2 variable (many biases induce individuals to believe they are outperforming the index when data shows otherwise), while B1 would be positive, significant and have a massive explanatory power for 100% of FIRE individuals. Having a positive B2 is the equivalent of someone claiming they could make an NBA team or hit .300 against MLB pitchers, but just don't do it because they don't like the travel or want to spend more time with their family.

IRL, if asked for investing advice I start using big words like correlation/heteroscedasticity/efficient frontier/hypothesis testing and this usually ends the conversation. A few follow-up and will offer my analysis, few follow.
Well given your approach here I’d say you may be running off anyone with anything useful to contribute. From my point of view there’s nothing to gain discussing investment strategy on this forum. Waste of time. A headache. I mean, what exactly am I going to get besides abuse?

I don’t think I’m alone. The people you need to listen to are probably less than 1% of the population. Of those even fewer will take the time to answer. So we are talking a very small number of people here. I’m not surprised you haven’t heard their voices here or anywhere for that matter.

User avatar
unemployable
Posts: 1007
Joined: Mon Jan 08, 2018 11:36 am
Location: Homeless

Re: Running with scissors

Post by unemployable »

I took a broader interpretation of "anything that significantly deviated from indexing". Yeah, that's Macy's instead of Gamestop in my case.

I do have one stonk I consider a yolo, that is, something I hope to 10x on, but it's an oil company.

prudentelo
Posts: 173
Joined: Sat Jan 22, 2022 8:55 am

Re: Running with scissors

Post by prudentelo »

Reality is most 'index' people are over invested in stocks compared to pre-boom advice on indexing. So is this active strategy? Did well for a career-lifetime so far.

Market capital weighted stock/bond portfolio would be, IIRC, 90% bonds ~permanently.

User avatar
Lemur
Posts: 1612
Joined: Sun Jun 12, 2016 1:40 am
Location: USA

Re: Running with scissors

Post by Lemur »

Unemployable

Yeah it is quite evident...
What bear market?
SCHD YTD: -5.78%
VTI YTD: -17.47%

I too have a yolo pick - SOFI :lol: It was unfortunately a grenade but similar to White Belt - only a small % of my portfolio now. I'm mostly index funds.

I've gotten pushback from BogleHead Types that SCHD has no significant advantages overtime due to "total return" that counts more in the long-run. But I would think an index of dividend companies would filter for value / those with secure balance sheets and what not...I think this is another topic though perhaps.

If it hasn't been said yet, most people "live lives of quiet desperation." Getting lucky on a trade is a potential way out and a form of escapism; that could be part of the allure to some FIRE types to try their hand at individual stock investing. Will note some projection here - I do not think it is a coincidence that I made my own yolo pick last year when I really hated my last job. But in a final analysis...savings rate really is key. Return matters more as your expenses increase.

User avatar
unemployable
Posts: 1007
Joined: Mon Jan 08, 2018 11:36 am
Location: Homeless

Re: Running with scissors

Post by unemployable »

Lemur wrote:
Fri May 27, 2022 11:02 am
Yeah it is quite evident...

SCHD YTD: -5.78%
SCHD 12.31.21 close 80.83
SCHD 05.26.22 close 77.91
Paid dividends 0.52

(77.91+.52) / 80.83 = .9703, so more like -3% as of yesterday's close, and it's up about another percent today.

Bogleheads strike me as always being terrified about never having enough, and never doing enough analysis, while worshiping a strategy designed to minimize worry and analysis. And wouldn't they be going with VYM (as of this moment, down less than half a percent YTD with dividends) over whatever Schwab is selling anyway?
most people "live lives of quiet desperation."
Yeah, that sounds like your typical Boglehead.

WFJ
Posts: 416
Joined: Sat Apr 24, 2021 11:32 am

Re: Running with scissors

Post by WFJ »

No individual was in mind, just a general observation.

I assumed it was some kind of "iceberg effect", where most experienced FIRE individuals don't post anything and just let the banter about alternative investing strategies go on without comment despite the downsides but had nothing to base this assumption upon and posed the question.

jacob
Site Admin
Posts: 15907
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 77
Contact:

Re: Running with scissors

Post by jacob »

WFJ wrote:
Fri May 27, 2022 2:58 pm
I assumed it was some kind of "iceberg effect", where most experienced FIRE individuals don't post anything and just let the banter about alternative investing strategies go on without comment despite the downsides but had nothing to base this assumption upon and posed the question.
Pretty much. But it also cuts the other way. If you're an experienced investor who is not in index funds, the constant barrage of "nobody can beat the market", "if anyone claims... they were lucky/they didn't adjust for risk/haven't proven themselves for enough time", "Nobel prize winners have statistically proven", "All you need is DCA into VTSAX",... are let go without comment as well for the same reasons.

I do know that some would like to have a legit discussion about other investment styles, but such threads are quickly overwhelmed by people who are looking for quick tips to beat the market and people who repeat the slogans above or demand elaborate proof instead of using it as an inspiration to do their own work.

There's basically zero upside to engaging with it. In other words, one should never try to teach a pig to sing. It's irritating to the pig and frustrating to the teacher.

My advice is to ignore the lazies and the zealots, but there are always a few forumites who will engage before they eventually (re)realize how pointless it is. I suppose this is how investment threads keep getting killed and reborn with no hope. What this means is that in order to have an deliberate debate, I would have to spend energy moderating it. I have no interest in that. For Bogleheads and much of the mainstream FIRE-sphere, indexing has become the hill they live and die on. This is not really the case for ERE which depends much less on investment performance.

I'm not sure what a good solution would be for those who want investment threads to thrive. The best I can think of is if the OP requests that the their thread be kept clean from ("There's only one true way to invest")-zealots or ("What's alpha?")-neophytes or welcome such comments or questions accordingly. That is, basically establish the rules that they wish their thread to have when starting it. Then report with the "!" when violations happens. Rules are of course only a first defense.

Post Reply