Your 2014 portfolio return

[Liberty]

How much a person feels he needs to retire is totally up to him. There is no right number. And not everyone wants to live the Mr. Money Mustache lifestyle.

 

True. But the Mr. Money Mustache lifestyle is probably more like retiring on 600k, so 4 million is more like Mr. Money Monocle :)

 

assuming a 4% withdrawal rate, $4mm = $160K isn't exactly champagne and caviar. that's just getting by (albeit nicely) in some parts of the country when you factor in housing/kids/private education a decent vacation here and there etc. I don't know what 40 yr old or 50 yr old wife'd and kids'd up  me will spend since that's 15 or 25 yrs from now, but it's probably a lot  more than $160K.

 

The median household income, 2009-2013, in the US was $53,046. That's usually two people working.

 

It can definitely be done on less than a million. It doesn't mean that you can do it, or that you would want to do it, but you certainly don't need 160k/year to live well (or 200k at a 5% withdrawal rate with 4 million).

 

And if you go into the frugal lifestyle of Mr. Mustache and co. (at least partly) and get a lot more money-efficient than the average US household which spends on tons of crap they don't need (and which would probably also include moving out of very high-priced cities like NYC...), you don't need much. It depends what it is that makes you truly happy; for me, it's being in control of my time, spending time with my family, good books, music, and TV series/films, internet access. Nothing very expensive. I won't work 10 extra years to have a nicer house and car if I know these things won't make me happier. But maybe people who grew accustomed to a very spendy lifestyle feel they need the finer things in life to be happy - I know that my wife and I have trouble thinking up gift ideas for each other because we have everything we need - to each their own.

 

Also, I was talking about retiring soon, which is what mrholty was close to doing, so inflation wasn't something I thought about in my previous post.

[enoch01]

Mrholty, welcome to the board.  I sympathize with your DIMEQ experience.  I lost 90% of my position.  I remember judgment day very well.

 

Thanks for your story.

[yadayada]

If you retire you still make a return on that 4m$.

[rkbabang]

 

Also, I was talking about retiring soon, which is what mrholty was close to doing, so inflation wasn't something I thought about in my previous post.

 

I get from mrholty's post that he was planning/hoping to retire at age 40 with $4M.  If you are planing to live off of your investments for 30-50+ years, you need to think about inflation.

 

[Liberty]

 

Also, I was talking about retiring soon, which is what mrholty was close to doing, so inflation wasn't something I thought about in my previous post.

 

I get from mrholty's post that he was planning/hoping to retire at age 40 with $4M.  If you are planing to live off of your investments for 30-50+ years, you need to think about inflation.

 

Of course. I was referring to this line: "I don't know what 40 yr old or 50 yr old wife'd and kids'd up  me will spend since that's 15 or 25 yrs from now, but it's probably a lot  more than $160K."

 

4 million in 15-25 years is different from 4 million today, is what I meant.

[writser]

 

Also, I was talking about retiring soon, which is what mrholty was close to doing, so inflation wasn't something I thought about in my previous post.

 

I get from mrholty's post that he was planning/hoping to retire at age 40 with $4M.  If you are planing to live off of your investments for 30-50+ years, you need to think about inflation.

 

I think 3 to 4% is a fairly conservative withdrawal rate that is taking into account inflation. Several sources 'out there on the internet' have been discussing this ad nauseum. Question is whether you can live on $160k annually. I could _easily_. But depends on whether you have a spouse, kids, lifestyle, where you live, etc.

[thepupil]

ya i agree that you can do it with a lot less and personally, relatively cheap things make me happy (and the very likely future mrs. pupil isn't exactly a profligate spender). I get by on lower than that median since I save a  high %.

 

But I still want to live in a safe, nice area and send my future kids to great schools debt free; education (private high school, college, grad school) can be well into the seven figures for a few kids.

 

a 4% withdrawal rate typically accounts for inflation (7% nominal return,  3% inflation = 4% real return, so at the withdrawal rate you maintain your wealth and don't dip into principal).

[oddballstocks]

How much a person feels he needs to retire is totally up to him. There is no right number. And not everyone wants to live the Mr. Money Mustache lifestyle.

 

True. But the Mr. Money Mustache lifestyle is probably more like retiring on 600k, so 4 million is more like Mr. Money Monocle :)

 

assuming a 4% withdrawal rate, $4mm = $160K isn't exactly champagne and caviar. that's just getting by (albeit nicely) in some parts of the country when you factor in housing/kids/private education a decent vacation here and there etc. I don't know what 40 yr old or 50 yr old wife'd and kids'd up  me will spend since that's 15 or 25 yrs from now, but it's probably a lot  more than $160K.

 

Either you live in a very high cost of living area, or you've worked in a high paying job for a while.  Earning $160k in most of the country (not the coasts) is a crazy high amount.  As Liberty posted the median family of four is living on $53k a year.  I have a family of four and up until recently our annual living expenses were in the $30-40k range a year.  We aren't extravagant, but we're not Mr Mustache either.  Kids are as expensive as you want them to be.  It's not like having an extra light on or two costs much, and when they're young they eat like birds.  They destroy clothes (boys do) so we have purchased ours second hand.  That way when they decide it's fun to slide on the carpet until the knees on the pants rip we don't feel bad because we only paid $3.

 

If you want to live a higher class lifestyle then it's going to cost a lot more.  Most families have a few 'leaks' in their budgets that are easy to close.  Eating out lunch and dinner daily is expensive.  I can't leave a restaurant for under $45-50, and I'm talking diner type places are that much.  Eat out daily for lunch/dinner, have kids in an expensive daycare and suddenly the salary starts to get pinched.

 

It's an expectations thing.  If you always expect to drive a BMW a Toyota will never be nice enough.  Some people can't imagine living in a smaller house, or not buying every new gadget.  For them more money is going to be necessary.  But I'm very satisfied with life and it hasn't been that expensive for us. 

 

Ah, one last piece of advice.  If you're not married (and your post indicates this) try to find someone who came from A) the same sort of money background and B) has the same outlook on spending.  You'll reduce a lot of fights that way.

[shhughes1116]

 

Ah, one last piece of advice.  If you're not married (and your post indicates this) try to find someone who came from A) the same sort of money background and B) has the same outlook on spending.  You'll reduce a lot of fights that way.

 

I couldn't agree with that last piece of information more.  My wife and I have our fair share of disagreements, but in general we both share a pretty frugal style when it comes to buying things.  This helps us to avoid most of the fights that I know our friends have about money (or lack thereof due to poor spending decisions).  I wish I could say that it was an intentional decision on my part to marry someone that is frugal like my wife, but in all honesty, it was not even something I thought about back then...I guess I just lucked out. 

 

So I would whole heartedly echo the advice from oddballstocks. 

[thepupil]

How much a person feels he needs to retire is totally up to him. There is no right number. And not everyone wants to live the Mr. Money Mustache lifestyle.

 

True. But the Mr. Money Mustache lifestyle is probably more like retiring on 600k, so 4 million is more like Mr. Money Monocle :)

 

assuming a 4% withdrawal rate, $4mm = $160K isn't exactly champagne and caviar. that's just getting by (albeit nicely) in some parts of the country when you factor in housing/kids/private education a decent vacation here and there etc. I don't know what 40 yr old or 50 yr old wife'd and kids'd up  me will spend since that's 15 or 25 yrs from now, but it's probably a lot  more than $160K.

 

Either you live in a very high cost of living area, or you've worked in a high paying job for a while.  Earning $160k in most of the country (not the coasts) is a crazy high amount.  As Liberty posted the median family of four is living on $53k a year.  I have a family of four and up until recently our annual living expenses were in the $30-40k range a year.  We aren't extravagant, but we're not Mr Mustache either.  Kids are as expensive as you want them to be.  It's not like having an extra light on or two costs much, and when they're young they eat like birds.  They destroy clothes (boys do) so we have purchased ours second hand.  That way when they decide it's fun to slide on the carpet until the knees on the pants rip we don't feel bad because we only paid $3.

 

If you want to live a higher class lifestyle then it's going to cost a lot more.  Most families have a few 'leaks' in their budgets that are easy to close.  Eating out lunch and dinner daily is expensive.  I can't leave a restaurant for under $45-50, and I'm talking diner type places are that much.  Eat out daily for lunch/dinner, have kids in an expensive daycare and suddenly the salary starts to get pinched.

 

It's an expectations thing.  If you always expect to drive a BMW a Toyota will never be nice enough.  Some people can't imagine living in a smaller house, or not buying every new gadget.  For them more money is going to be necessary.  But I'm very satisfied with life and it hasn't been that expensive for us. 

 

Ah, one last piece of advice.  If you're not married (and your post indicates this) try to find someone who came from A) the same sort of money background and B) has the same outlook on spending.  You'll reduce a lot of fights that way.

 

I'm an education snob. Sending 2 to my high school (or 1 to my college) would cost what you spend in total on your household. I'd like to provide the same privilege to my future kids. And while that expense is finite, it is still hefty. Can some public schools provide the same quality? Sure, but not all of them and if they do they are probably in a pretty high cost area with high property taxes.  I think that's the main delta between my view of a sustainable retirement amount at 30 or 40  (the proverbial "f you" money) and that of others. I also am a snob in other aspects of life, but less so than in education.

[cwericb]

mrholty that was one of the most interesting posts that I have seen here for quite some time. Thank you for posting.

 

To get back to the subject of concentrated portfolios, I think one really rolls the dice with something like that. Here’s a story I watched first hand. I may not have all the facts 100% as they happened, but here is the basic story. Some may recognize it. This occurred quite some time ago.

 

My father was a branch manager for a very reputable Canadian financial institution for 30 years and was on first name terms with the senior executives of the firm. During his time he took advantage of every stock option offered. While these investments cramped the family financially somewhat, it was an investment in the future.

 

The company was very successful to the point where there were expectations of a merger with one of the major Canadian banks. By the time Dad retired his holdings represented serious money which in today’s dollars would have eventually approached seven figures.

 

Then came a new CEO with sweeping changes in mind. He embarked on a major expansion into the U.S and the stock continued to climb. But things didn’t quite go as planned, the stock price stalled and then began to slide. By this time Dad’s health was failing and as he watched the value of his portfolio drop maintained confidence in the company he had worked with for 30 years. He assured me that the drop was temporary. It’s not that easy to sell off something you have confidence in, even when logic may tell you otherwise.

 

Unfortunately, not only did the expansion plans turn into a disaster, but other problems hit the company. At same time Dad started to show some mild symptoms of Alzheimers. And Dad wasn’t the only one with problems as shareholders began questioning the CEO’s mental status. The stock dropped to less than half its high. That may not seem too bad until you put it into dollars and cents.

 

He was very depressed about this and kept thinking it would surly recover and yet  the price continued its fall. He was losing sleep by now but the share price had dropped so far it was even harder for him to sell out and he just couldn’t make the decision to get out. After all this had been one of the more respected and successful companies in the country. I felt that if I continued to urge him to sell and then the price recovered I would never been forgiven.

 

To cut to the chase, when the CEO took the stage at the annual meeting attended by many VERY respected men and women, he went into a rant laced with four letter words that left his audience speechless. By this time the company had reached the point of near insolvency. A new CEO or trustee was appointed and the company was broken up. The shares weren’t worth enough to buy a new car. Dad passed shortly after and while this wasn’t the cause, the stress certainly didn’t help.

[rijk]

wow, these are some pretty amazing stories today, thanks for sharing, this provides some good balance with the concentration victories

 

unless you don't have to worry about finances, it makes a lot of sense to diversify so that you never ever end up in a situation where one or two unexpected developments can knock you out permanently or paralyze you in a manner that puts survival in danger, very happy to stay diversified.....

 

regards

rijk 

[krazeenyc]

wow, these are some pretty amazing stories today, thanks for sharing, this provides some good balance with the concentration victories

 

unless you don't have to worry about finances, it makes a lot of sense to diversify so that you never ever end up in a situation where one or two unexpected developments can knock you out permanently or paralyze you in a manner that puts survival in danger, very happy to stay diversified.....

 

regards

rijk

 

To some degree the opposite may be true. When I was younger (and had less money and responsibilities) I was far more concentrated and aggressive.  In my opinion as you get older, build more wealth, have kids, etc. it becomes a more daunting task to reset/start over. Once upon a time I had position sizes of 30-50%. Now, my max starting position size is 10% and that's rare.  When I was younger I almost always tried to achieve the best returns.  Now, even though I don't really need to worry about money,  I worry more about protecting it than ever. Now I try to make a decent return, but the primary focus is on reducing risk. 

 

[KCLarkin]

To get back to the subject of concentrated portfolios, I think one really rolls the dice with something like that.

 

When I talk about concentrated portfolios, I mean a core portfolio 6-10 stocks. That means a maximum of ~15% in any one stock. Anything above 20% is probably not prudent (unless you are WEB).

[rohitc99]

thanks for sharing these personal stories. Makes me feel better ..i was thinking i must be loser for being so paranoid about risk and not wanting to exceed a certain % in terms of concentration.

[Mephistopheles]

In my opinion, and I've mentioned this on the board before, concentration is not as aggressive as it looks on paper, depending on your age. I don't look at my portfolio or net worth as the dollar value of my account. Instead I see it just as I see the value of a stock: as the present value of all of my future cash flows, which in my case is far more dependent on my career than on my portfolio, at this point in time. Which means that even if I bet 100% on one stock and lose it all, my intrinsic net worth isn't affected by nearly that much. (I'm currently in my mid to late twenties)

 

 

[Hielko]

In my opinion, and I've mentioned this on the board before, concentration is not as aggressive as it looks on paper, depending on your age. I don't look at my portfolio or net worth as the dollar value of my account. Instead I see it just as I see the value of a stock: as the present value of all of my future cash flows, which in my case is far more dependent on my career than on my portfolio, at this point in time. Which means that even if I bet 100% on one stock and lose it all, my intrinsic net worth isn't affected by nearly that much. (I'm currently in my mid to late twenties)

This is exactly the point I wanted to make. When you are young and your portfolio is relative small betting 100% on a single stock is not necessarily risky since the net present value of your human capital could easily represent 90%+ of your 'instrinsic value'. When you are older the net present value of your human capital usually drops because your are getting closer to retirement while at the same time you hopefully converted your human capital from the previous years into a bigger stock portfolio.

[leeway]

 

To some degree the opposite may be true. When I was younger (and had less money and responsibilities) I was far more concentrated and aggressive.  In my opinion as you get older, build more wealth, have kids, etc. it becomes a more daunting task to reset/start over. Once upon a time I had position sizes of 30-50%. Now, my max starting position size is 10% and that's rare.  When I was younger I almost always tried to achieve the best returns.  Now, even though I don't really need to worry about money,  I worry more about protecting it than ever. Now I try to make a decent return, but the primary focus is on reducing risk. 

 

 

+1

 

I am in a similar situation, now aiming for 5% real on total investment portfolio. I prob diversify too much, with no single stock more than 5%.

 

I read on this forum a few months back that someone lost ~18mm overnight (on GTAT), got totally wiped out plus some. That's a too extreme case of concentration, but surprisingly did happen in real life.

[rohitc99]

In my opinion, and I've mentioned this on the board before, concentration is not as aggressive as it looks on paper, depending on your age. I don't look at my portfolio or net worth as the dollar value of my account. Instead I see it just as I see the value of a stock: as the present value of all of my future cash flows, which in my case is far more dependent on my career than on my portfolio, at this point in time. Which means that even if I bet 100% on one stock and lose it all, my intrinsic net worth isn't affected by nearly that much. (I'm currently in my mid to late twenties)

This is exactly the point I wanted to make. When you are young and your portfolio is relative small betting 100% on a single stock is not necessarily risky since the net present value of your human capital could easily represent 90%+ of your 'instrinsic value'. When you are older the net present value of your human capital usually drops because your are getting closer to retirement while at the same time you hopefully converted your human capital from the previous years into a bigger stock portfolio.

 

It assumes that if one suffers such a loss, it will not impact him/ her emotionally. I have seen some young guys lose quite a bit early on and then they were over cautious going forward. not everyone is emotionally mature to handle huge losses

[Liberty]

Great post, cwericb.

 

This line is so true: "I felt that if I continued to urge him to sell and then the price recovered I would never been forgiven."

 

That's why I don't want to give specific money advice to friends and family. I'm more than happy to share everything that I know about value investing and asset allocation, portfolio construction, how to read a 10K, what books to read, how to think about risk and value creation and such, but I'm always afraid to recommend company A or B or to recommend buying or selling at a specific time, because I know I'll always be tracking that stock to see how it does and thinking about how that person might be happy/mad about it. Even if things go well, I don't want the mental clutter, and if things go badly and significant money is lost - even if the person claims to understand that it's not my fault and that they made the decision themselves - I know that there'll be bad vibes, even if they're not on the surface or unconscious.

 

The only person I manage money for is my wife, and it's all in Berkshire and short-duration bond index ETFs...

[CorpRaider]

2014 performance frame of reference via a few funds that I use as measuring sticks (figures are from the respective sponsor's website):

 

RSV      14.07%

 

VO        13.75%

 

VLUE    12.29%

 

USMV    16.34%

 

PRF      12.63%

 

PRFZ      4.70%

 

VTI        12.57%

 

VIG        10.06%

 

VOE      13.95%

 

VBR      10.54%

 

IWD      13.21%

 

IWM        4.94%

 

RPV        12.27%

 

RFV          8.44%

 

EFA        (6.21%)

 

EFAV        4.61%

 

GARIX      9.31%

 

GENIX    17.05%

[innerscorecard]

2014 performance frame of reference via a few funds that I use as measuring sticks (figures are from the respective sponsor's website):

 

RSV      14.07%

 

VO        13.75%

 

VLUE    12.29%

 

USMV    16.34%

 

PRF      12.63%

 

PRFZ      4.70%

 

VTI        12.57%

 

VIG        10.06%

 

VOE      13.95%

 

VBR      10.54%

 

IWD      13.21%

 

IWM        4.94%

 

RPV        12.27%

 

RFV          8.44%

 

EFA        (6.21%)

 

EFAV        4.61%

 

GARIX      9.31%

 

GENIX    17.05%

 

Looks like for now at least, Greenblatt is giving people decent value for the high fees he charges in those Gotham funds. I wonder how big his funds will actually get, and how soon we'll see performance start to suffer for it. I guess the whole point of his Gotham strategy is that it's very scalable.

[innerscorecard]

It's fascinating to me how people think so differently about financial decisions in different areas of their life. You can want to buy only cheap stocks but then feel that life is intrinsically and necessarily so expensive that $4 million is far too little to retire on. I guess that's why few retire early even if they don't actually love working.

 

And then you have the even larger population of people that are decent financial managers at their jobs or even in private businesses but complete idiots when it comes to investing in public equities.

 

Of course it's all been said before. Peter Lynch wrote about how people would spend hundreds of hours researching a washing machine but would buy stocks just on a hunch or a tip. Walter Schloss said that Benjamin Graham told him to buy stocks like groceries, not perfume. All those statements hinted at this behavioral fact.

[sys]

I'm an education snob. Sending 2 to my high school (or 1 to my college) would cost what you spend in total on your household. I'd like to provide the same privilege to my future kids. And while that expense is finite, it is still hefty. Can some public schools provide the same quality? Sure, but not all of them and if they do they are probably in a pretty high cost area with high property taxes.

 

move to a smallish college/university town.  the public schools will be dominated by the children of the university employees and will be of high quality.  real estate prices are usually reasonable, at least in relation to coastal us cities.

[Uccmal]

Long time lurker (2+ years) without an account.  Decided to make my first post here. 

 

I ended this year down 13%.  This is my third straight year of underperformance to the S&P even though my picks are more in the Russell universe.  I've been investing on my own for the past 14 years.  In the early years (early 20s) I had no money and almost everything went to my 401k.  A small slug of $2k and due to transaction costs I invested in the industry that I worked in and felt I understood better than most.  Due to concentration that quickly became $10k and then $25k with some of the additions being additional capital added.  I often had years of over 50%.  After switching jobs I'd take my 401k and add that an increase the amount of money I was investing for myself.  I went short with leverage via options and when Lehman blew up those were good days.  That day I touched $800k and due to me rolling options and thinking the end was near I didn't close them out and ultimately went 100% flat with $250k.  I felt like a genius.  I spent 6 months flat and looking for deals.  I saw a lot of cheap but I was greedy and wanted free.  I started to wade into the distressed space and hit a few doubles with small amounts.  Then I did very well on Chemtura and HearUSA (HEARQ).  Accounts were nearing $750k and I was getting a big head.  My next few investments I went bigger with size as I wasn't enjoying my day job and I've had a goal that if I get to $4M I walk away from my job. 

 

My next investment was in DIMEQ and I took at 30% stake or $200k with an average purchase price in the low $.30s (600k shares) after spending several grand on PACER.  As the stock rose in 2010 to $.80 I was over a million and each day I felt like FV was $2-$3/share and the rulings were in our favor.  I felt like when we won and got $2.50/share I would be over $2M and I could get conservative and churn out 10% year for 7 years and retire by age 40 with $4M.  Granted at the time if asked I would have told you that I estimated the odds were 70/30 or 80/20 in our favor and realistically I was really thought it was more like 90/10 and thought the other side really had no case.  That Christmas my first son was just a few months old and I was supposed to be enjoying family, friends, my 2 month newborn and yet I had 60% of our investments in a judges hands.  My work output was crap for all of November and December and I was having ulcers from stress (but didn't know it).  I went up to my family hometown for New Years for a few days to clear my mind and made up my mind to sell half immediately upon return.  I started to liquidate half my position but the bid/ask was a few pennies and I didn't want to lose 10% on the spread so I was slowly selling the 300k shares I wanted to.  I only sold 80 shares when the ruling hit around 11 IIRC and the bottom fell out in minutes to $.40 and then down to $.13 within the hour.  After all that I was crushed emotionally.  My goal of retirement which I could see was gone. 

 

I dabbled and lost on my next two special distressed plays due to trying to be cute.  I had the story right and the prices but one doubled and one was up 4x and I broke even on both.  I then put money in two ideas that I liked (Ram Power - initially from a writeup on Seeking Alpha) and Axion Power (also seeking alpha).  Both are down 90% from when I bought and I double down on both as I thought I knew more.  On Axion Power I listened to the calls, I visited the plant, etc.  Q1 2013 call hit me.  A caller asked about breakeven and the CEO said they saw 300% revenue growth in the backhalf of the year.  I bought more as I thought he had visibility into upcoming orders as they were doing tests with BMW, other Autos and Norfolk Southern and had been for 2-3 years.  If they simply published an order from one of those the stock would double.  The next call he backtracked from the number and timing but still felt confident in the revenue growth.  An order(s) felt imminent.  Turns out the emporer has no clothes.  NS has had problems outside the battery that has slowed development by 18-24 months and shows that its really not a high priority for them as was led to believe in 2012.  I found shipping logs that Axion sent to a battery testing company in 2013 in Germany.  Surely that was a sign that BMW was going forward still as they were checking quality.  All wrong.  Q3 2013 a disasterous financing went off.  So bad that I felt that the only way mgmt. could have signed it was that they knew an order was imminent otherwise it was irresponsible.  I bought more.  Then CFO resigned.  New CFO hired and resigns to go back to old company with promotion after 3-4 months in early 2014.  CEO resigns due to health in summer 2014.  Prior CFO comes back from board to fill in and finishes up Reverse split and uplisting to Nasdaq to get off the OTC.  Stock is now one of the worst performers of the NASDAQ.  I usually have no problem selling when the story isn't playing out.  This one I couldn't as I love the idea and the tech seems pretty good.  I got too close to former board members to ignore the warning signals.  From 2011-2013 the CEO always spoke about new work being done in the caribbean with solar for storage and that business case would make sense due to high electricity prices but I could never find any test sites or anything but I trusted the CEO that stuff was going on and you would be hearing more soon.  I knew how long things take in these countries so I always accepted the delays.  Looking back the delays were too long in aggregate.  (I justified it as I myself was working on getting some documentation in Europe that took over 15 months to get a piece of paper approval so I felt I understood.  In early 2014 I finally found a guy who was working with the company and he told me all about the Caribbean work he was doing.  That 30 minute phone call told me that if they were counting on him that was a mistake.  I sold out half finally over the next month but I still owned a bunch as the RS/uplisting was a positive to me.  Something good was on the horizon.  At this point I would need a 20x to break even. 

 

My investments are now down to $250k in value.  Its been an amazing 14 years in which the first 10 I could do no wrong.  Now I can do no right.  I've learned a ton about all sorts of randon stuff that has made be a better investor the last few years.  I'm happy this thread wasn't here 10 years ago as I would have been the guy talking about 60-100% annual returns and concentrated positions.  I still run concentrated positions (10-20) but I have a checklist that I follow religiously.  I will also work until I'm 65.

 

This is worth its weight in gold.  Thanks much.