full time private investors who left their day job

[cubsfan]

I started with $1.4M - and a high burn rate - around $150K per year. If your burn rate is significantly

lower than mine - it may work with your amounts.  But I figured I needed to make approx 10% in order to stay even.

I think this implies that you need to make a decent bit more than 10% to stay even because of the volatility in your net worth. If you get a bad year that $150K withdrawal is a lot bigger than after an up year, and you would need to make a lot just to earn that back. If the first year would be a -40% year you would start the second year at 0.84 million. Spend 0.15 million and you need to get a 21% return just to get back to 0.84 million. That's why I linked to that Monte Carlo calculator a few posts above. Volatility matters!

 

I stated this poorly - I figured I needed an 18 month startup period - and I could lose money, but I needed to be able

to see that this would work. I knew 10%/yr every year would not happen like clockwork - and a better way to say it -

I figured success would be a 10% annual return over 5 years.  That would be a MINIMUM for being able to do this full time.

In reality my own personal goal was to beat the S&P every year by 10% - which has happened.

 

So volatility may matter - but the focus needs to be LT, not annual.

[StubbleJumper]

So volatility may matter - but the focus needs to be LT, not annual.

 

 

No, for the withdrawal phase, the focus needs to be annual not, LT. 

 

A quick review of historical returns (ie, Siegel) will demonstrate that any average investor has a solid expectation of a 6% or 6.5% in real inflation adjusted returns over the long-term.  However, that does not mean that any average investor can simply withdraw 6% or 6.5% adjusted for inflation annually. 

 

Historically, the killer for a withdrawal strategy is downside volatility.  An unlucky bear market in the first or second year after you retire, followed by a sideways market for 6 or 7 years is what causes portfolios to fail.  The reason for this is that you keep withdrawing from your portfolio even in the years that it is has been hammered.  Where you get into deep trouble is when your annual withdrawal ends up being higher than any return that you can reasonably expect to get.  At that point, your portfolio begins the death-spiral where its value declines in real terms every year. 

 

When that happens, you've got an unpleasant set of options to work with: 1) return to the labour market; 2) reduce your withdrawals by living a less extravagant lifestyle (ie, eat cat food); 3) sell some other assets which do not currently generate income (ie, sell the cottage at the lake or sell the Corvette).

 

Of course, if you can regularly and reliably thrash the S&P by 10 percent per year, then it's all academic.  But if that's true, then that would put you in the top 0.01 percent of investors?

 

In my case, I like to believe that I generate a small amount of alpha, but I worry that maybe I'm just a lucky coin-flipper.  I'll wait a few more years just to be sure!

 

 

SJ

[cubsfan]

Stubble

 

Look - I never said ANYTHING about a withdrawal rate.

 

I said I needed to see a 10% annual return over an extended period to be able to continue.

Otherwise, I should just go back and get a job.

And in the first couple years I withdrew no capital at all. When I did start withdrawing capital, it

was far easier mentally to set a large expense sum aside and just focus on investing.

 

 

 

[ERICOPOLY]

I quit at age 34 with a 7-month pregnant wife, and a 2 year old.

 

My salary+benefits at the time was comparable to a 4% yield on my net worth.

 

Eric are you looking gross pretax or net after tax? For example a $200k salary vs $2m saved I assume implies a 10% yield-- assuming the 200k number is fully baked with benefits, etc.

 

The value of my pretax_Salary+Benefits was equal to 4% of my pre-tax net worth the day I quit my job.  Some of my net worth was tied up in yet-to-be-taxed 401k and IRA -- so I'm comparing that pre-tax net worth with pre-tax salary (apples to apples).

 

 

[cubsfan]

Of course, if you can regularly and reliably thrash the S&P by 10 percent per year, then it's all academic.  But if that's true, then that would put you in the top 0.01 percent of investors?

 

 

That is a bunch of crap Stubble - so I beat the S&P for 5 years - that doesn't mean anything in  the long run - it's just a goal

that I set - otherwise I should just go back and get a job - and buy an index fund.

 

I never said a thing about being a great investor, which I am sure you are.

[ERICOPOLY]

By the end of 2013, my RothIRA hit a level equivalent to 100 years of my 2008 after-tax salary (at 20% tax rate).

 

Worked for 10.5 years.  Quit.  And six years later I've banked 100 years of peak-earnings. 

 

Okay, sorry.  Bragging  :D

 

Now I'll say something humbling.  It fell 10% in value during January when I decided that I didn't need the stress of managing it anymore.  So maybe it's only 90 years' now.

 

Eric, who did you farm out the management of it to?

 

Sanjeev/Alnesh got some of it.  Mohnish got some of it.

 

Back in the summer of 2006 I wrote to Mohnish that I didn't have enough to invest in his fund yet, but soon would (I explained to him that I had a lot of FFH call options).  Then I got carried away with things and it took me forever to let go and finally invest with him.

 

Same thing with Sanjeev -- I told him in late 2009 that I was soon going to invest with him but then got carried away again.

[StubbleJumper]

Stubble

 

Look - I never said ANYTHING about a withdrawal rate.

 

I said I needed to see a 10% annual return over an extended period to be able to continue.

Otherwise, I should just go back and get a job.

And in the first couple years I withdrew no capital at all. When I did start withdrawing capital, it

was far easier mentally to set a large expense sum aside and just focus on investing.

 

 

 

Fair enough.  You used what is known as a "cash buffer strategy" which enables to to avoid withdrawing during a down market.  There's a whole literature on that too:

 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969021

 

But ultimately, if you are not intending to go back to the labour market, you are effectively implementing some sort of a withdrawal strategy.  I would encourage everybody to review the literature on these strategies before selecting and enacting one.

 

 

SJ

[yadayada]

isnt the idea of being a almost full time small investor to beat the market significantly, and not just do 10%? I mean you cannot count on 20%+ returns, but isnt that kind of the goal anyway? It is probably easier then alot of people think, but it takes some discipline. The difference between 10 and 20% seems to mostly be discipline. Buffett isn't a genius, the guy repeats himself over and over again. Never says anything new, that should tell you what it really takes. If he says he could do 50% with 1 million...

 

What would variance be over 5 years? Seems to me that if you buy only really cheap, and look full time for those juicy special situations and micro and small caps, that doing north of 20% with a small amount of money isn't that hard. If buffett says he can do 50%? So if after 5 years, you dont beat the market by a wide margin, your probably better of to just sticking with it part time. Unless ofcourse you started at a market peak with barely any opportunities.

 

You have an edge over both institutional and most retail investors, so technically you should be the most likely spot to actually get those nice returns. Most institutions have size to worry about, and most retail investors dont have the time because of their job. You have both.

[StubbleJumper]

Of course, if you can regularly and reliably thrash the S&P by 10 percent per year, then it's all academic.  But if that's true, then that would put you in the top 0.01 percent of investors?

 

 

That is a bunch of crap Stubble - so I beat the S&P for 5 years - that doesn't mean anything in  the long run - it's just a goal

that I set - otherwise I should just go back and get a job - and buy an index fund.

 

I never said a thing about being a great investor, which I am sure you are.

 

 

Apologies.  I read that your objective was to beat the S&P by 10% or more per year, and then I mentally went a step further and assumed that you had been doing it for a sustained period (and on this board we do have a couple of people who have actually done this sustainably and who are in the top 0.01 percent of investors!).

 

As far as my own investing skills, I'm still undecided whether I am slightly above average or whether I'm just lucky.  For planning purposes, however, I only assume that I am average because the consequence of being wrong might mean that I'll end up eating cat food!

 

 

SJ

[cubsfan]

Of course, if you can regularly and reliably thrash the S&P by 10 percent per year, then it's all academic.  But if that's true, then that would put you in the top 0.01 percent of investors?

 

 

That is a bunch of crap Stubble - so I beat the S&P for 5 years - that doesn't mean anything in  the long run - it's just a goal

that I set - otherwise I should just go back and get a job - and buy an index fund.

 

I never said a thing about being a great investor, which I am sure you are.

 

 

Apologies.  I read that your objective was to beat the S&P by 10% or more per year, and then I mentally went a step further and assumed that you had been doing it for a sustained period (and on this board we do have a couple of people who have actually done this sustainably and who are in the top 0.01 percent of investors!).

 

As far as my own investing skills, I'm still undecided whether I am slightly above average or whether I'm just lucky.  For planning purposes, however, I only assume that I am average because the consequence of being wrong might mean that I'll end up eating cat food!

 

 

SJ

 

No problem.

 

In my case, I know I've been incredibly lucky.

I follow the Pabrai formula - I copy people far smarter than I am.

It works wonders.

 

[Otsog]

Not surprised to see other ER/MMM's here. 

 

I've been reading a lot about this lately and hope to pull the trigger one day.  I would do this with a higher emphasis on the retirement aspect than the fulltime investor aspect.  I'd read a ton more, but also look at picking up other hobbies. 

 

It's still at least 5+ years off but I am toying with the idea of moving somewhere very low cost for the first few years (SE Asia maybe?). I could get some cheap travelling in and if everything blows up I won't have to draw down a ton of capital.

 

[SharperDingaan]

You don't actually retire; the hobbies become businesses in their own right, & you end up with a number of partners working harder than you were before. Self correcting as well - as your investment in those partnerships also makes you poor again - & restores the incentive to work ;)

 

Used to be that when you retired you were washed up - these days you are just getting started.

Thank the boomers.

 

SD

[tng]

Depending on your current lifestyle and how well you can invest, you might need more than a million. For simplicity, say the SP500 returns 10% annualized, you have $1M, and you make $100k/yr with your day job. You can just work your day job and index to get $200k/year. To match that, you need to beat the market and earn 20%. But if you fail to beat the market by a significant percentage in the first few years, you would never catch up to the "work and index" strategy because under that strategy you would have saved a lot more money and put that money into the SP500. Compound/geometric growth is the 8th wonder of the world, but starting capital matters. Even with a lower compound rate, if you have extra money to put in because you have a day job while you are young, you will end up with more money at the end because we don't live forever. This is especially true if you intend to buy a house or some other big ticket item that will use up a significant percentage of your networth, because your compound period is actually a lot shorter than you think. You can make a spreadsheet of some sample scenarios based on how much you earn, a few annualized return rates for the SP500, and then you can see how much you have to beat the market by before it makes sense.

 

Also, keep the Monish Pabrai "cloning" principle in mind. You can beat the SP500 by buying Berkshire Hathaway or imitating the value guru's best buys. I put a huge portion of my networth in BAC (common and warrants) once Berkowitz, Buffett, and Munger (via DJCO) made significant investments into it. There's no buy signal stronger than that trifecta. I'm not sure if I could have done any better even if I spent 40 more hours each week on top of what I already spent. Cloning takes little time so you can work a day job and beat the SP500 by a significant amount.

 

So you either have to be able to really stomp the SP500 (ex. Buffett making 50% annualized with less than $1M), have a lot more starting capital (probably closer to $5M), or be in a very low paying job right now before it makes sense to stop working and become a full time investor.

[moody202]

 

For the record; I never quit my day job, but I never started a day job either. I'm now a part time poker player and part time private investor.

 

I'm curious to know if you apply any poker strategies to investing and do you generate any income in poker?

[Uccmal]

I am in the process of doing this right now.  I am not sure about the idea of investing full time - this may be hazardous to my wealth.  But the rest is in place. 

 

I am starting a one year leave from work at the start of April.  I recall Eric did something like this at the start.  The house is 80-85 % paid.  If BAc and AIg continue to come to value I will pay the remainder and eat the early payment fees. 

 

The house is in Toronto.  We could easily sell and live anywhere else in Canada for much cheaper, except BC.  I am pulling about 32 k per year in dividends.  My portion of living expenses is roughly 60 k including the mortgage.  My Wife has a good job she likes that pays well. 

 

The kicker is the taxes.  I will make about 30 - 35 k from my job this year after paying income tax on my salary, and my capital gains.  Working for a pay check is a bit of a mugs game at a certain point.  Anyway my drawdown may be as high as 40 k per year which gives me 5 years on the HEloc.

 

Other:  I am using an untapped HELOC for yearly financing:  220 k.  During down years I will use the Heloc, and pay it back in up years.  I expect the dividend number to rise as I add dividend stocks, and stocks increase their dividends.  Just converting warrants and Leaps on the major US banks should provide the difference.  Interest rates are also an interesting thing.  If they were to spike at the long end I could pull much more income without much risk.  Of course that is usually accompanied by inflation.

 

I also have a pension fund, that I dont use in my calculations,  with my employer that I plan to leave there.  It is held by an outside trust.  I cant access it for 11 years.

 

I am also fairly talented so I figure I could make money doing an assortment of things.  Plying my day trade on a consulting basis I could bring in 1000 per day, inconsistently mind you. 

 

I am going to spend the next year or two trying different projects, travelling, and learning some new things. 

[no_thanks]

I am in the process of doing this right now.  I am not sure about the idea of investing full time - this may be hazardous to my wealth.  But the rest is in place. 

 

I am starting a one year leave from work at the start of April.  I recall Eric did something like this at the start.  The house is 80-85 % paid.  If BAc and AIg continue to come to value I will pay the remainder and eat the early payment fees. 

 

The house is in Toronto.  We could easily sell and live anywhere else in Canada for much cheaper, except BC.  I am pulling about 32 k per year in dividends.  My portion of living expenses is roughly 60 k including the mortgage.  My Wife has a good job she likes that pays well. 

 

The kicker is the taxes.  I will make about 30 - 35 k from my job this year after paying income tax on my salary, and my capital gains.  Working for a pay check is a bit of a mugs game at a certain point.  Anyway my drawdown may be as high as 40 k per year which gives me 5 years on the HEloc.

 

Other:  I am using an untapped HELOC for yearly financing:  220 k.  During down years I will use the Heloc, and pay it back in up years.  I expect the dividend number to rise as I add dividend stocks, and stocks increase their dividends.  Just converting warrants and Leaps on the major US banks should provide the difference.  Interest rates are also an interesting thing.  If they were to spike at the long end I could pull much more income without much risk.  Of course that is usually accompanied by inflation.

 

I also have a pension fund, that I dont use in my calculations,  with my employer that I plan to leave there.  It is held by an outside trust.  I cant access it for 11 years.

 

I am also fairly talented so I figure I could make money doing an assortment of things.  Plying my day trade on a consulting basis I could bring in 1000 per day, inconsistently mind you. 

 

I am going to spend the next year or two trying different projects, travelling, and learning some new things.

 

Sounds like a really nice plan and an exciting few years for you.  If you ever travel to Atlanta, give me a shout.  And let us know how it works out.  Good luck.

[constructive]

Free Capital is a good book on retiring to invest full time, from a UK point of view. Discussed here:

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/tips-for-investing-full-time/

 

http://www.amazon.com/Free-Capital-private-investors-millions/dp/1906659745

[jay21]

Some things that have me worried about retirement are healthcare inflation and education inflation.  Unless something changes, I expect these to be much more expensive in the future and they can be more important to me as I age and if I have kids (especially more than 1).  I think that a few people I work with are working just to put their kids through private colleges that can run you a total of 200k+ per kid!

 

I'm not sure what "my retirement number" is.  I hope I can find a job I like that pays well and gives me enough time to read about investments.

[plato1976]

I won't feel comfortable to declare 'retirement' until I can rely on the dividend from stocks like PEP to have a decent life. That probably means I need 3M ......

 

Some things that have me worried about retirement are healthcare inflation and education inflation.  Unless something changes, I expect these to be much more expensive in the future and they can be more important to me as I age and if I have kids (especially more than 1).  I think that a few people I work with are working just to put their kids through private colleges that can run you a total of 200k+ per kid!

 

I'm not sure what "my retirement number" is.  I hope I can find a job I like that pays well and gives me enough time to read about investments.

[bmichaud]

Eric,

 

What made you outsource at this point in time?

 

Not sure where you are at, but for some reason $15MM sticks out. At that level and with your compounding abilities, $1B is within sight - 6 years of 100% returns will get you there. So why stop now? Yes $1B is completely unnecessary, but didn't the money become a non issue at $5MM?

 

If the reason is stress, why not just diversify more among "guru" sponsored picks instead of concentrating your upside so heavily in one stock?

 

Anyway - hopefully you have left yourself a large enough sum to make contributing to the COBF worthwhile :)

[StubbleJumper]

Eric,

 

What made you outsource at this point in time?

 

Not sure where you are at, but for some reason $15MM sticks out. At that level and with your compounding abilities, $1B is within sight - 6 years of 100% returns will get you there. So why stop now? Yes $1B is completely unnecessary, but didn't the money become a non issue at $5MM?

 

If the reason is stress, why not just diversify more among "guru" sponsored picks instead of concentrating your upside so heavily in one stock?

 

Anyway - hopefully you have left yourself a large enough sum to make contributing to the COBF worthwhile :)

 

"Never risk what you have and need, for what you don’t have and don’t need."  Warren E. Buffett.

 

 

[bmichaud]

I'm sure Eric doesn't "need" 10 out of 15 million...

[StubbleJumper]

I'm sure Eric doesn't "need" 10 out of 15 million...

 

Yeah, but have you seen his investing style?  He's an absolute genius with the biggest set of balls that I have ever seen.  But that's the source of risk.  Can he ever invest without going "pedal to the metal?"  Can he ever adjust to buy Procter and Gamble, Coca Cola, and 3M just to collect a 3% dividend and some modest capital gains?  If he had the temperament to do it then he'd certainly be set for life with his current capital endowment.  But I'm not sure that he could just do such lame investing.

 

The problem with his style is that there is always a tiny probability that one day he'll be wrong and the whole thing will blow up (like seriously, 12 months ago he was 100% BAC for Christ's sake!).  Last year he began to hedge against that, but....  Much better to get bright guys like Sanj or Pabrai to invest, and maybe keep a million or two of "play money" to do the crazy shit that has resulted in his accumulating so much wealth!

 

 

SJ

[ERICOPOLY]

I hit $10.3m in RothIRAs (including my wife's) at the end of 2013 -- that's what the closing statement was between my wife and I.  Then I have taxable money as well (which I still manage).  I'm only 40, so if these guys (Sanj and Mohnish) can do 10% a year... well... I'll be set.  Heck, how about just keeping pace with inflation.

 

Now here is what I wrote to somebody in private mail a few moments ago who was asking why I don't just keep managing it if I did so well:

 

Quoting myself:

 

I have a tendency to put it all on one idea with lots of leverage.  So it's risky if I put it on the wrong idea.  Once it was all in Fairfax calls.  At another time, all in BofA calls.

 

And what is the point of this really?  The government will take 40% of any further gains I make -- if not more.

 

4% yield on $9m is a thousand dollars per day, tax-free.  So will I need more than that?

 

So it's just sort of like... I don't need more, and I know I will eventually make a bad call.  And if I don't make a bad call, I don't need more money anyhow.

 

So it's useless to keep going.

[Guest]

Eric,

 

Perhaps this is a stupid questions, but where are you getting 40% taxes from? Aren't most of your holdings long term?