Early Retirement Extreme Forums

jacob wrote: ↑

Mon Sep 14, 2015 7:30 pm

A: "I pay $150 every month for my cell phone data plan"
B: "I set it up so my telecom stock dividend so it pays my phone bill. Clever, huh?"

Is this feasible at a larger scale? For example:

Paying property taxes with municipal bonds.
Paying for electricity and water with utility stock dividends.
Paying for food with agriculture and/or grocery store stocks.
Paying for gas with oil stocks.
And so on...

The idea is to own the means of production for the things you consume, in proportion to actual consumption. Every expense is matched to a capital income flow from that same supplier. You own just enough to recover what you pay into the system to purchase your needs.

On the surface, I like the concept because it provides a more tangible connection between investment and needs. It's one level closer to reality than the normal FIRE game of collecting asset income to pay the bills. Instead, you are a part-owner of many small businesses that produce the stuff you consume. If these businesses are managed well and produce profitably, as the owner you take your cut of production and all is well. As an example, 300 shares of XOM is good for a gallon of gas every day if I did the math right. Instead of thinking of money as the resource and investments as a source of free money, this approach establishes a more concrete relationship between asset ownership and satisfaction of needs.

Now the downsides. Low yields mean this is a much longer path to FI than a Trinity-inspired approach which sells off shares. For example, if you spend 5k/year at Costco, the 1.3% yield means it will require nearly 400k of COST shares to be perpetually FI of that expense. Not many people have the luxury of investing at such a low yield. Does this mean you should shop at Kroger (2.1%) or Walmart (2.5%) instead?

Another problem is the lack of diversification if spending is concentrated in a few areas. Furthermore, the additional coupling of asset income to needs will make an investment failure all the more painful. For example, if your local government gets into serious financial trouble, this could result in a default on your municipal bond payments AND an increase in property taxes. Double ouch! But the coupling gives you a vested interest in good long-term management... not just because you own it, but because you also need it. It discourages reliance on things that are not sustainable.

Ultimately, the expenses-based investing approach makes for an interesting visualization, but is impractical for FIRE due to the high cost of yield. The quick-FIRE solution is to substitute cheaper investments in a riskier/higher yield part of the economy to pay for needs in a different area.

I would agree. It's an interesting concept, but I guess beyond the fun/novelty I don't see an inherent advantage to it and it seems like it could unnecessarily complicate investing, and create some risks which you've alluded to. You also want to have money to cover situations where you do business with non-publicly trades companies/businesses and non-dividend payers.

There's a popular saying that comes up a lot in dividend versus total return debates: "Money is fungible." Among it's purpose is to facilitate trade across resources. So it seems like the prudent thing to do is to deploy assets to most efficiently balance between stability and income/growth (not an exact science) and use the resulting distributions/withdrawals without consideration of their source.

Costco is not really relevant here, because as you said, "the idea is to own the means of production for the things you consume". Thus it would make more sense to mostly invest in the companies whose stuff you actually buy (let's say JNJ, KHC, local/regional farm coop ...). The supermarket's margins are not a large part of your expense.

"Ultimately, the expenses-based investing approach makes for an interesting visualization, but is impractical for FIRE due to the high cost of yield. The quick-FIRE solution is to substitute cheaper investments in a riskier/higher yield part of the economy to pay for needs in a different area."

This was my conclusion when I looked into the same strategy. Jacob's example of telecom is really one of the only expenses you can get away with covering through small investments because telecom stocks have really high dividends. Indeed, this strategy originally occurred to me after I too purchased enough T and VZ for the dividends to cover my internet and phone bills.

Controlling the means of production, through a controlling ownership or some other arrangement, is more robust. Typical examples of this are :

- Sustainably farming your own food
- Developing the skills to fix and build/rebuild your own transportation.
- Owning and maintaining your own property, developing skills to fix the structure you live in etc..

I think these examples are closer to the "loosely coupled, complex system of the financially independent Renaissance man" that ERE is about.

Obviously there are some useful products and services you won't be able to produce yourself, like Internet and cellular network access. That stuff has to be purchased. Being a customer and being a common shareholder have totally different risk profiles, the common shareholders can get wiped out in a bankruptcy, customer sjust have to switch suppliers. This is where diversification comes in very handy from an investment perspective.

I have given this notion some consideration. I think it best applies to goods you consume on a regular basis that are clearly outside of your skill set or resource base and more in the Want than Need category. For example, every month I purchase a box of Garnier Nutrisse Extra Light Natural Blonde for approximately $6.99. So, it would make rough sense to cover this expense with dividend income from L'Oreal stock holdings. I could just accept that a world of the future which included the collapse of this giant corporation would also be a world in which I would no longer be able to "have more fun." (sigh)

Otherwise, I agree with BlueNote, and I am currently leaning towards skill set being more important than owning basic resources or tools of production. For instance, I trim my own hair and usually wear it in a braid, so all I need in the realm of hair care beyond the box of magic chemistry is a pair of scissors, a wide tooth comb, something to secure my braid, and something like shampoo. I carry my own comb, but never necessarily have to carry or purchase the other items, because easy to borrow or scavenge or concoct.

Trivial example, but I think can be generalized.

I've given this a bit more thought and I am coming to the conclusion that this is a kind of "imaginary resilience" and therefore a bad idea. Consider Jacob's example of the telecom stock dividends paying the phone bill. There are two relevant processes here:

Stocks -> Money
Money -> Stuff

Abstracting this to Stocks -> Stuff takes it a step away from reality that the money is an essential intermediate product that makes the overall system work. Just because the money cancels out doesn't mean those transfers no longer exist and you're somehow money-independent.

However, as iDave mentioned, money is fungible and the process that converts money to stuff is indifferent to the source of that money. If anything, taking an ownership stake in your supplier concentrates risk. If something goes wrong, you're stuck having to replace the missing income source while finding an new supplier for the stuff you need. It's a tight coupling that doesn't provide additional value.

I'm with Bluenote and 7w5 that Skills -> Stuff beats Stocks -> Stuff.

...

Fish wrote:Abstracting this to Stocks -> Stuff

A systems diagram involves stocks and flows. The first stock market in 14th century London sold fish and meat. I used to have an inventory stock of over 10,000 used books. When I shipped my book inventory off to be stored and distributed through Amazon's warehouse system, it became just as abstract as shares traded on the modern stock market, but I could have paid to have some of it shipped back to me, and then it would have become concrete again, but I liquidated it into money (actually credit then money), so it stayed abstract.

classical_Liberal wrote:Assuming one could provide everything with only one "leg" of the plan; skills, social capital, or financial capital, it would be very robust.

I agree, but would note that "skills" are inherently different than "capital." A person could possess financial skills and social skills vs. financial capital and social capital.

7Wannabe5 wrote: ↑

Tue Aug 15, 2017 7:00 pm

A systems diagram involves stocks and flows.

Here is my framework for understanding personal finance at a more general level (that is, going beyond the pure money-dimension that typifies FIRE). I submit that there are 4 relevant stock parameters, and 7 flows of interest. The stocks are assets, money, stuff, and waste. Assets are what we usually think of as capital, which in traditional PF is financial, but in generalized PF can be extended to social, human, sexual, etc. Money is currency that is used to transact in the market. Stuff is a stock of goods and services associated with consumption (food, shelter, books, and so on). Waste is a stock of the byproducts of consuming stuff, which is normally valueless to the holder and for which no market exists.

Here is a picture which will put the following in perspective:


The normal consumer cycle is Earn-Spend-Consume. "Earn" is a flow from Assets to Money, such as the exchange of labor for a wage. "Spend" is a flow from Money to Stuff, what we normally call expenses. Finally, "Consume" is a flow from Stuff to Waste which results from lifestyle and how one interacts with stuff. If these are the only flows (and they are for typical consumers), then consumption is limited by spending, which in turn is limited by earning. Because the size of each flow is dictated by the quantity of the input, or the efficiency of the process, we can think of 6 basic strategies to improve quality of life (which I am defining here as the volume of stuff consumed): earn more, earn efficiently, spend more, spend efficiently, consume more, consume efficiently. Our systems thinking insight reveals the limits to these strategies because there is nothing to close the loops in this ecological process. Now suppose the goal is retirement. If Earn-Spend-Consume is the extent of your PF framework, the only way to retire is to accumulate enough money to last a lifetime (or alternatively, earn a pension that will provide income for life). This explains the retirement savings goals at Wheaton levels 1-3. Readers at a higher level of PF insight will also note that application of "Tightwad Gazette" (efficient spending) and "Voluntary Simplicity" (low consumption) can also be effective. But quality of life is limited due to the implications of not closing the loops.

The flows on the inside are less common, but become obvious with systems thinking. "Invest" is the main enabler for FIRE, indicated by the flow from Money to Assets. The yield earned from financial assets can replace earned income from labor. However, this does require savings, i.e. that the size of the "spend" flow is smaller than the "earn" flow. The limitation of extreme early retirement and FIRE is that this is still market-dependent, where quality of life depends heavily on obtaining stuff with money. Resilience can be added by making use of the other flows: "Sell" converts unneeded stuff back into money. "Salvage" converts waste back into stuff. And last, but perhaps the most important to ERE, "Produce" makes stuff directly from assets, bypassing the market entirely.

From this framework, we can neatly categorize anything PF-related. "How to Survive Without a Salary?" Produce+Salvage. As 7w5 likes to bring up, "Discards: Your Way to Wealth" appears to be Salvage+Sell. (Inferring this one since I have not read this one yet.) Most everything else is targeted at consumers and targets the outer ring of Earn-Spend-Consume. I would categorize ERE as follows: Diversification of income (multiple types of assets/capital). Spend wisely by using the market (and social capital) where it is efficient, and use skills to produce where it is not. Consume efficiently. This will allow most of earned income to be invested instead of consumed. And close the loops with the Salvage and Sell flows.

Now, this was all an unnecessarily long-winded but interesting way to set up the point I have been trying to make on the subject of buying the means of production as financial assets. If I buy VZ to pay my Verizon phone bill, I can abstract Verizon (the company) as an asset in which I have an ownership stake, that has the net result of providing my phone service with no external money input required. However, the "physics" of the situation still relies on the Earn-Spend cycle, even though I have constructed a layer of abstraction that goes from Assets -> Stuff. Money makes it work. All else equal it's no more resilient than getting dividends from any other source, and spending it to pay the phone bill.

@CL - I get your point about human capital also having a single point of failure. It's definitely preferred to have the lifestyle supported by multiple "legs" as you mention. My assessment of Skills -> Stuff beating Assets -> Money -> Stuff was speaking in a somewhat strict sense that the former does not rely on the market (has 1 point of failure) while the other is market-dependent and has 2 points of failure (Assets can fail to provide income, or the market can fail to provide stuff). I prefer using human capital when I have the option. But doing both is undoubtedly more resilient.

Great post!

One thing I just learned from "A Systems Theory of Life" is that something like literal quality of life is maintained and improved through a dynamic process of "eating" order and "excreting" disorder outside of the boundary of the system. So, it's like if you are Consuming "crap" most of it will be processed right back through as Waste with no possibility for Salvage, but if you Consume something of value, high complexity, or order, then it is more equivalent to Investing in Assets. Sort of the science behind the common sense of what we mean by crap food, crap book or crap relationship.

I think it might also be the case that you shouldn't waste your energy producing or salvaging anything that is less ordered than what constitutes healthy food for you, because then you will die sooner and lower your quality of life. Simple example might be something like digging through dumpsters to salvage and hoard empty plastic bags. Kind of like your bottom pay grade should be subsistence gardening.

...

Attempting to fill out the stock-flow diagram made me realize that it's an incomplete model, because it's not a closed system. (@7 - Thanks for all the clues!) I've made the following revisions:

1. Added outflows for taxes in the Earn and Spend flows. The lossy part of Earn can be thought of as income taxes. On the Spend side, taxes include property and sales taxes, and intangible products that you're required to buy by regulation, like insurance. Jacob was at least a step ahead of me here when defining neutral spending in the ERE indicator thread.

jacob wrote: ↑

Tue Oct 18, 2016 4:40 pm

3) Services you're practically forced to pay for just because you're alive / expenses, e.g. "head tax", or own stuff that must be insured to operate. This includes all insurances, which are here considered part of being a responsible citizen i.e. health and driving (in some countries this is covered by taxes or culture). It also includes RE taxes and rent.

I'm not so sure I agree with including rent as a tax in this sense. For the purpose of this stock-flow diagram, I would argue that rent is more of a "service" (a consumption item) rather than a "tax" on spending. I've left imputed rent out of the calculation, figuring that part of "quality of life" is in having the stock of stuff, and value need not flow out to generate a benefit. The taxes coming out of Spend also originally included cash gifts, but I decided that was less of a "tax" and more of an investment in social capital and my community so I added that back into the investment stream going into Assets (and recalculated all of the stocks and flows since Spend was reduced).

2. Separated consumption into goods and services. Goods add to waste (which has a chance of being recovered) while services have no residual value.

3. Added a flow from Assets to Waste called "Scavenge." Made it a dotted line since it's less common behavior. This is intended to represent taking discards from others (their waste) which can then be salvaged into stuff.

4. Added an outflow from Waste called "Trash." In the original diagram, I tried to use nouns for stocks and verbs for flows, but it didn't work so well here so I broke from that convention in the interest of clarity.



Including numbers really helps illustrate the concept. One of the first things that jumps out is the importance of tax optimization (particularly for those in the accumulation phase like myself), because it's a huge outflow of value. Another observation is that the inflows and outflows are matched on 3 of the 4 stocks (Money, Stuff, Waste), while this is not true for Assets. That's because there is a spontaneous value generation (from work, from return on capital) which is like an inflow of value into the system. This property is unique to assets and is why they are so important! Value generation from assets sustains the cycle even if the loops are not fully closed.

Is it said somewhere that children desire stuff, adults desire money, and wise people desire assets? After making this diagram, I'm more convinced than ever that I want to own assets.

3. Added a flow from Assets to Waste called "Scavenge." Made it a dotted line since it's less common behavior. This is intended to represent taking discards from others (their waste) which can then be salvaged into stuff.

Brilliant! I was having some trouble applying the diagram to my personal anecdotes, but you just totally fixed it. For instance, I am kind of earning my shelter this month by bartering services with my mother and BF, but I am occupying space that would otherwise be running through air conditioning cycles while empty or causing another human to feel more lonely, rather than more intruded upon, so it's really more like I am mostly scavenging shelter that would otherwise be wasted. The elder care I provide for my mother, and the assistance with building a shed I provide to my BF, maybe I will consider to be more like Work I do in exchange for shower water at my Mom's apartment and food at my BF's build-site because that represents clear money flow out of their pocketbooks.