Early Retirement Extreme Forums

For the past 5 years, I’ve been investing-trading for Capital Growth (just stocks), not Income. Done OK so far, but haven’t reached my target, so I don’t really feel qualified to give advice. (Many apologies to the user "dragoncar" for not replying sooner – this was one of the main reasons.) But since I do think Capital Growth can be a viable & very helpful option for some on the ER path to freedom from wage slavery, I’ll share my own experiences & views - some of which may be very controversial, so take what you will. Not interested in debates = poor investment of Time & Energy. Much rather work on investing-trading. Better returns.
Stumbled on ERE 1-2 months ago while researching early retirement & financial freedom (FF) targets. I’m a 38y/o expat American; been in Taiwan for 12 years, mostly teaching ESL. After hardcore saving for 8 years (for an ideal future family), got tired & switched to part-time in 06 with 90K. Sacrificed saving Money, but the Time I regained is worth it. Never want to go back to full-time - not even for a family.
My first target is basic FF: 300K @ 5% yield = 15K/yr. (My expenses are lower, but I prefer a 10-20% margin of safety. And I prefer round numbers.) Not interested in being a Worker or an Entrepreneur, so I rely solely on investing-trading to Grow Capital. I don’t invest for Income since I’m still far away from my target.

Since inception in 07, Fidelity calculates the personal rate of return (money-weighted), as +100% cumulative, +20% annualized. Exact numbers seem too high, but I care more about absolute dollar returns anyway. Total Invested Capital of approx. 70K; started 2011 @ 142K. (I keep another 20K permanently banked for emergencies/expenses, and own no other current or future assets.) The 5-year breakdown, using only Realized Cost-Basis Gains/Losses:
2006 25% 10 round-trip trades, mostly energy & industrials

2007 8% 4 trades, exited the market in 2H (1 year early)

2008 7% 1 trade, put 25% in a gold miner (GG)

2009 27% 50 trades (25 daytrades in Jan, +10%), mostly oil-correlated

2010 35% +25 trades, mostly oil-correlated
These numbers may seem spectacular, but frankly, if you only invest for yield, or mainly in mutual & index funds, you should probably expect lower returns – that’s the trade-off price you pay for more secure dividends (income), professional management (mutual), or market diversification (index). There are many investor-traders more successful than me (which is why I don’t consider my numbers spectacular), and I’m sure most of them didn’t get there via yield or funds. But if your goal is Income, then you’re successful if you consistently get your targeted Income – regardless of annual return & portfolio growth.
Obviously, I don’t Diversify, Asset Allocate, Dollar Cost Average, or Buy & Hold - the conventional, “safe” advice given to“average investors” (who often don’t want to invest the necessary Time & Work to become above average).
I’m not very sophisticated - no options, shorting, leverage, Level II, or special indicators that aren’t on any stock quote page. I use Google Finance, Yahoo Finance, Seeking Alpha, & Google Search.
Never owned any type of fund, since funds are “too slow”(much lower betas), and I also prefer keeping control & responsibility – I am my own fund. I spent years saving up my capital, so no fund will manage it with more care, thought, & vigilance than I will. Frankly, I detest the idea of buying funds.
My normal number of positions is 5-10 spread unequally over 1-3 sectors, and the holding period depends on the price actions & sentiment of the Market-Sector-Stock. (I guess I'd be classified as a "position trader".) I currently have 5 mostly residual positions over 1 year, the other 5 are all newer. Most have little or no yield. Growth comes at the expense of Income – and vice versa.
Btw, I have no career or school background in finance or econ. (That's why I believe anyone can succeed in investing, in theory.) My major = sociology, interests = life philosophy & future/world studies. Conventionally regarded as useless, unprofitable, & ridiculed fields, but I mainly credit these 3 to any investing success I’ve had.

So what triggers a trade for you?

Thanks for sharing and being so open with your financial returns. You gave far more details than I personally would be comfortable with. One suggestion I would have is to report your returns by market value and not realized gains -- this would make it more comparable to what others are customed to seeing (i.e., total value of portfolio)
From your narration, it looks like you are making a couple decisions regarding investing as follows:
(1) capital growth vs dividend investing vs total return

(2) small concentrated bets vs diversified (with lots of stocks)

(3) active selection vs passive buying in indexes
One thing to consider is that much of the return may not be due to choices in 1,2 &3 but rather the timeframe 2007 -- 2011. During this time from, the stock market tanked and recovered so basically anybody buying stocks throughout did quite well. For example, I'm a lowly buy & holder in index funds investor and my portfolio also close to doubled in this timeframe as well. I would bet that there are dividend / value investors on this blog that have done equally well.

@ george:

I'm a discretionary investor-trader, not systems/indicator-based. As a result, it's difficult to use words to describe my own decision-making process. But the basic short answer is, in order:
0) Market Assessment

1) Charts (multiple-time frames)

2) Basic Fundamentals

3) "Story" & Sentiment

4) Intuition
I'll post a more detailed description tomorrow. Didn't finish editing it yet.

@sky2evan

Aside from your relative success with your investments and my lack thereof we have several attributes in common- both being American Expats with similar FF goals. I wonder if you invest in an exchange outside the US (in Taiwan in your case) or though a US institution? I haven’t found much information on good investment strategies for US expats yet, or how to report capital gains made outside the US.

I also didn’t realize the cost of living in Taiwan was so low- less than 15K is great – I’m in Fiji and my costs are a bit higher- maybe Asia is the next place to head to.

I’m looking forward to your more detailed description of what triggers a trade for you- I’m all ears

Cheers

@pka222:
Nice to see another expat!
I only invest in NYSE/Nasdaq-listed stocks, via US brokerage, Fidelity (great customer service). More English information on the net. Can’t really help with investment strategies for ex-pats (I just do US-listed stocks, and all those Chinese solars are US-listed ADRs). Don’t know about capital gains outside US either, because up to date I’ve been filing in the US. It’d be better for me to file internationally, but I’ll get around to that next year.
Yes, TW cost of living isn’t that bad (I’m surprised Fiji would be higher - what's your estimate of the average local person's expenses?) It depends on personal standards of living. Other expats here tend to want higher standards of living. Their income = 2X mine (they work full-time), and most of it is spent. I currently live on income & expenses of about 11K/yr, so $0 savings/yr, so I have no margin of safety from income right now. 11-13K/yr = average for middle/lower-class locals. I’ll be moving this summer to a smaller town next to the beach, so I expect expenses to drop significantly. If I don’t like it there, I’m thinking of moving to a beach in another cheaper country. Not sure where yet.
If you want to know some basic TW prices, feel free to ask. I think a Big Mac is about $3. A 32oz. can of local beer in 7-11 = $1.

I have about 7-8 posts in the pipe, covering my views of capital growth investing-trading basics, written for novice investors as a reference. No plans or time to set up & deal with a blog. The post re: trading decisions is near the middle-end, so I’d rather put up the other stuff first. (They were meant to be read sequentially.) Some unplanned posts may also appear, if inspired by certain questions or comments. Then it’s back to investing-trading for me. I’m not good at multi-tasking.
Sorry for delays. These posts take many, many hours. It’s personally very important for me to organize the ideas & express them as thoroughly, thoughtfully, clearly, & succinctly as possible. I write stream-of-consciousness, so I have to do a lot of editing.
With investing-trading, I feel an even stronger responsibility to be careful with ideas. Predominantly false ideas, or true ideas conveyed poorly & subsequently misinterpreted or dismissed, can have significant financial consequences.
For example, photoguy believes:

1) change in portfolio market value = investment performance

2) his index portfolio has close to doubled in 2007-2011 due to investing

3) “there are dividend/value investors on this blog that have done equally

well”
I wonder how many would believe these statements are true.
If you buy & hold these 3 statements, there are significant financial consequences. Because if these statements are False, then these opinions are actually dangerous & irresponsible. If other “investors” accepted them, they would have an overly optimistic, inflated, false perspective of their true investing performance, and they would have illusions (mental bubbles) about future expected returns for indexing/dividend/value.
The ability to determine the truth on your own without hearing a counterargument is vital in investing. If sufficient factual Knowledge isn’t available, then Logic & Intuition must be used.
I prefer others to arrive at the Truth by themselves. The ability to discern what is more true or false by yourself (and the humility to accept that one may not know) is critical in investing-trading. Analyst reports, commentary, or opinion for investment X are diverse, and usually in conflict (maximized in bull vs bear arguments). Indexes or individual stocks? Stock A or B? If you can’t figure out the Truth by yourself, you’ll likely get financially screwed.
Since I mentioned Intuition as an element of decision-making, and because it’s a rather vague concept, I’ll use Intuition to show how #3 is highly certain to be false. (#1 & #2 are more quickly disproven through Logic.)

If you have an index portfolio, using Intuition means “feeling” why, if it doubled in the past 5 years, it doesn’t mean you achieved a 100% investment return. If this were true, you’d be very, very happy. But if you were honest with yourself, you’d know that if your index portfolio did happen to double, it’s because you kept adding money into it during the last 5 years. Total portfolio market value – all the money you put in = the money you made from investing.
If you don’t have an index portfolio, you can still arrive at a higher probability Truth by “feeling” the sentiment, atmosphere, and mood of the indexing community. The larger the community, the easier it is to “feel”, and indexing is huge.
If it were normal for an indexer portfolio (or dividend/value) to achieve a 100% rate of return over 4 years, the positive sentiment would show up in articles, commentary, the blogosphere. etc. People would be happier (bubblier) & more optimistic (bullish) about their index portfolios, and since they are a large % of the country, that positive sentiment would affect the mood of the country – and this forum. You would be able to “sense” if, in the last 5 years there were several indexers/dividenders or whatever, on this blog who had 100% investment returns.
This is why I believe Intuition can be developed, because nearly everyone can sense the relative mood of the country, just like most people can sense the mood of their spouses, family, or friends. The ability to Intuit a general mood comes with familiarity & targeting your attention outwards to the mood of the target (instead of dwelling on your own mood, which is what most people & investors naturally do).
If you want to improve your ability to assess the market, you have to “develop a relationship” with it, spend time with it, and pay attention to it. Just like a relationship with any person (be it partner, co-worker, friend, etc), the more Time & genuine attention you spend, the faster you learn. The market is just moodier & more sensitive than most people – like a drama queen that’s prone to overreacting to unexpected outcomes or surprise events. The market is human after all, the sum activity of all investors-traders. The market’s behavior only seems Irrational & Random to those who don’t live with it or interact with it on a frequent basis.
That’s why, without any other evidence or proof to support my argument, just Intuition, I’d bet money (as if it were a stock) that there are very few, if any, investors on this blog (and only a few investors-traders in the world, definitely less than 5%) who’ve achieved 100% investment returns throughout the last 4-5 years. (Note that if you only started investing in late 2008-2010, it’s of course more possible to achieve 100% returns, but highly unlikely if you use a dividend/value approach.)

@ photoguy:
In my case, Realized Cost Basis Gains/Losses = annual return. I do tax selling at year end, so usually have no unrealized losses. If any, they’re less than unrealized gains (which I do prefer to carry some over). So the real annual returns are actually slightly higher. Any true investor should be “comfortable” with annual return.
1) Why you can’t use “change in portfolio market value = investment return
No true investor uses portfolio market value to measure their investment returns, because otherwise they’d be counting all added money during the time frame as part of the investment return. Likewise, if you kept withdrawing money, you clearly wouldn’t use declining market value as your investment rate of return.
So you have to use personal (internal) rate of return (IRR). This isn’t a matter of my opinion; just google “how to measure investment returns”. No one uses change in market value.
A 100% growth in portfolio market value is totally different from a 100% IRR, and IRR is almost always less. If your portfolio started with 50K, and you added 10K a year, and after 5 years your portfolio = 100K, then market value growth = 100%, but your IRR = 0%. Your investments were flat, but your portfolio market value grew because of the money you kept adding. If you add no extra money, then your IRR = market value growth.
IRR is hard to calculate with multiple additions. But nowadays, your brokerage should list your IRR (they didn’t before, and you should be able to guess why). Excel also has an XIRR function. For me, it’s easier because I only have 1 account, and I’ve only made 1 addition to it in the last 5 years. As I said, I don’t save, so I don’t add. So in my case, IRR and market value growth are about the same. This isn’t true for anybody who makes additions – which is most people.
Any indexer who is honest with themselves, knows they don’t have a 100% rate of return on their investments, even if they don’t know their IRR or what IRR is. Btw, not knowing is not a coincidence. That’s because no fund will ever tell you to pay attention to IRR. They’re very happy if you just focus on total market value – because you & most people tend to make additions. Which is, of course, what they want you to do.

@ photoguy:
2) Why it’s nearly impossible for an indexer portfolio to 2X in the last 5 yrs
It’s nearly impossible for any indexer on the planet to have a near 100% IRR over the last 5 year period, because any index like the S&P 500 only gained 100% from one specific point in time over the last 5 years, and that was Mar 09. Look at the S&P 500 chart – it doesn’t lie. (Or Google S&P 500 100% gain) And if you’d bought any other type of index, the results would still be similar – all indexes went down significantly in 2008. So the only way was to invest the majority of Money around that Time, and make almost zero additions before OR since (because any additions would have raised average buy price & lowered the IRR). That would be stellar Market Timing – which indexers claim is nearly impossible, and any success = Random Luck. And because you are an indexer, I’m sure that’s not what you did.
Mathematically, there’s no other way you could have doubled during the last 5 years. Or the last 10, which is why it’s called the Lost Decade - unless you traded the indexes, buying low pre-2006, selling high in 07, and buying low again in 09. Again, look at the 10yr chart. While an index is marketed as being “diversified” with 1000s of stocks, it actually functions as a single stock.
So if you or any other indexer’s portfolio has doubled in the last 5 years, it’s because you’ve been infusing it with cash – which masks & airbrushes the true picture of your investment performance. Everything doubles in 5 years if every year you keep putting in 20% of your starting dollar amount (with the underlying investment ending at least flat). Even a bank account. That’s why every fund tries to sell Dollar Cost Averaging and regular cash infusions. Then your market value grows – but the main engine is your labor & saving, not your investing.
Actually, a 5yr 100% IRR is beating the market by quite a lot, +80 points. (Allegedly yet another nearly impossible feat where success = Random Luck.) So what you’re saying is that many indexers, even some on this blog, have beaten the market over 5 years, the very benchmark they invest in. You definitely need to reconsider the source of your returns – not me.

@ photoguy:
This is the last part of my response. Bear with me if you’re still able.
3) beating the market
I listed annual returns of 25%, 8%, 7%, 27%, and 35% for 06-10. Any true investor would have seen right away that all those numbers beat the market in their respective years, and would have called me out on that. So feel free to change the time frame to 4, 3, 2, or 1 year. Or any 2-3-4 combinations of years, consecutive or not. The results beat the market. Now, if I had a 100% rate of return, and you did too, then we both beat the market. Your index portfolio beat the market that it invests in during the last 5 yr period!
I anticipated some skepticism (especially from indexers, because they’re the ones who are skeptical of anything that beats the market over a multi-year period), so I also listed the annual trade breakdown to show annual turnover, and that I didn’t just buy & hold one stock, like an AAPL. (It also shows that good returns can be achieved whether you trade more or less.) The Total Invested Capital of 70K out of initial net worth 90K, should also show that this is not a small gambling portfolio of dart money that I can afford to randomly throw at high-risk stocks like a blindfolded monkey. It’s my past life savings, future FF, and much of my present life, so I’m willing to go to extreme ends to protect it at all costs - even unto death. Perpetual Slavery is worse.
I first didn’t explicitly mention that I beat the market every year, because that wasn’t my point – it’s not my focus, goal, or motivation. I only care about investing as the sole engine moving me towards future ER & FF in a timely, consistent manner. And that’s why I’m sharing my experiences & views here, as a reference of what is possible – not what everyone should do, because many capital growth investors don’t consistently beat the market.
I feel empathy & sympathy for those who’ve had subpar returns, because I suffered a -50% portfolio loss myself during the .com bear 10 years ago. “Fortunately”, I was younger and had much less money, so I made back most of my total losses in the 1st year back. But it was traumatic enough that I quit investing for 4 years, which is why my current performance only goes back to beginning 2006, when I went back in.
But +8 years of saving 50-70% on average income of 18K/yr wasn’t getting me anywhere. Being an Entrepreneur is about as repulsive to me as being a Worker. Both have to Sell themselves to other people (whether products, services, or ideas), Conforming to & Supplying what their respective markets Demand. In a capitalist society, every single job is one or a combination of Worker, Entrepreneur, and Investor. So I feel I have no choice but to Invest, the most minimalist one because it produces no physical Crap, and requires no Self-Selling, Supplying, or Conforming to flawed people or organizations.
And I came back with Never Lose Big Money So Avoid Buying & Holding Through Bear Markets, burned into my psyche as my #1 priority. The close #2 = Grow Money or Else Be A Wage Slave Forever. But if I had to choose, I’d rather Not Make Money than Lose Money. The Wall Street saying is true (many of them are), “The first loss is the best.” Which is why I exited the market in 2007 @ Dow 12000, when a lot of people were too optimistic, talking about Dow 20000+, and buying & flipping houses everywhere because prices “were going to go up forever”. This sentiment was very similar prior to the .com bust.
Besides, the market is no place to rest on past laurels. Pride comes before the fall, which occurs quickly in the stock market. And past performance doesn’t guarantee future results - although they’re sometimes good indicators. I just use beating the market as a performance review tool. If I’m not consistently beating the market over any given significant time period, there’s something seriously wrong with my Timing & Selection, and I’d need to seriously reassess & restructure. There’s no point for a capital growth investor to do individual stocks if they can’t consistently beat the market. Worst-case scenario is capitulate to indexing. But I’d rather day-trade than do that.
So for me, beating the market is basically a necessity. So, sure – I’ll definitely take you up on your “bet that there are dividend/value investors on this blog that have done equally well”. Beat the market every year (or a 100% IRR) for the last 5 years. How many were you thinking?
It’d be great to share investment philosophies with those who have consistently beaten the market. Not sarcasm. Unfortunately, the probability of this being True is extremely low.
Brokerage statements typically don’t list personal rates of return; but they should be available online under a Performance Tab (for Fidelity). I know Vanguard lists personal rates of return. The relevant page can easily be downloaded, critical personal information airbrushed out, and then posted. I don’t mind sharing. I’m willing to back up my record with records, and not just words. That said, I regret having to accept your bet; my initial intention in posting obviously wasn't to post my records online; but to protect my "honor", I will. It's too bad that seeing is believing for many people - their beliefs prevent them from considering anything could be true outside those beliefs.
I strongly recommend you retract your statements & your bet. I’ll consider silence as a retraction. Silence when you're unsure of what is true is always a good thing - it's talking too much when you think you know what is true that causes people trouble. Or talking too much about what is true, but many believe is false - which is my situation with you. I'd much rather spend time doing investing-trading, rather than debating about it. But for the sake of Truth, I will go to great lengths to defend it.
Best of "Random Luck" with your index investments.

Post your current positions and future trades, please

Let me clarify a few of my points. I am certainly not claiming that change in portfolio value is investment performance. Nor am I claiming my investment performance is 100% return. What I was saying is that my investment returns + some new money added lead to my portfolio nearly doubling.
What were my investment returns? My XIRR is running a little more than 11% (from 2001) which doesn't work out to +100% over 5 years but is close (+70%). Vanguard reports my IRR as 13.4 and 9.4% for 3 and 5 year for my brokerage account which is only a subset of my investments (it's not correct for the rest of my holdings and obviously not for stuff held outside)
With respect to how much you could have made in indexes -- S&P 500 is not the only index. From the bottom in 2009, you could have made +160% (Vanguard small value), +160% (Vanguard EM), +177% (vanguard reit), +147% (vanguard mid value) to today (not including dividends). Obviously hard to get the exact bottom, but there certainly is leeway there to do well.
"I anticipated some skepticism (especially from indexers, because they’re the ones who are skeptical of anything that beats the market over a multi-year period)"
I have no skepticism at all about your returns -- I'm sure they are exactly as you state. My point is that it's possible to get similar results by investing in index funds with a well diversified, low cost, portfolio. Are the results typical? Probably not as most folks don't stay the course nor do they invest much in the riskier asset classes. But when you look at portfolio result for various slice&dice index portfolios you see results ranging from 9-13%+ per year over multiple decades (13% would be +84% over a 5 year timeframe).
Another important consideration is taxes -- for my own situation buying and selling individual securities would have resulted in a huge chunk of profit lost. This is easier to minimize with a buy and hold strategy (I paid very little in taxes relative to gains although my marginal rate was high).
Re "In my case, Realized Cost Basis Gains/Losses = annual return. I do tax selling at year end, so usually have no unrealized losses." Ok that makes sense. I did not realize that you were liquidating your portfolio at end of year.

Clarifications noted.
- Different 5-yr periods can't be compared with each other. I also still find it hard to believe an 84% return over the last 5 years is possible. The S&P 500 only returned about 6% during that period. Yes, the S&P 500 isn't the only index, but many indexes do track each other - especially downwards during bear markets, & upwards during bulls. A 9-13% annual return over multiple decades pre-2000 may or may not have been true; but it certainly wasn't true for the vast majority during 2000-10. If that's what you got, then you're one of the Randomly Lucky few. Called the Lost Decade for a reason; most people lost money or came out flat. Articles everywhere about that.
- So a 13.4% & 9.4% return for the last 3 & 5 yr periods is very good for a passively managed portfolio. But to say that these results are similar to mine isn't accurate (+20% annualized, as previously stated). However, there is a tradeoff with active management - I need to spend more Time & Work, and a higher annualized return isn't guaranteed (either in my case, or for a "passive manager"). But I'm still willing to do it for a variety of reasons.
- The Vanguard returns of +150% you state are only from the bear market bottom, which would mean that an investor would have had to1) sold nearly everything before 2008, and then 2) dumped all their Money in at that Time (near Mar 09) in order to get 150% on that money. That would be intentional Market Timing, which isn't what Vanguard recommends. They recommend, as do you, "staying the course", which is what most indexers did. And most indexers didn't get a 100% return.
- You're right about taxes. Always should be taken into consideration.

- I don't liquidate everything. Mostly just the losers.
You seem like a gentleman. If it works for you, then stay your course. I'm just saying that it won't work for everybody at all Times (and neither will what I do). Saying that it does is untrue. That's all.