Brooklyn Investor latest

[coffeecaninvestor]

I was recently debating what to do as well. Having the concentration of risk in the S&P was bothering me. I diversified globally, and added some cash/bonds to hedge against any psychological risk of me selling. 
 

I think an easy step for the average person would be to trade out of the S&P 500 ETF into something like VT, and  have 10-20% short term bonds. 

[thepupil]

I think you're thinking of Bob, right?

 

https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

 

I've never checked the numbers/always taken it at face value.

 

I think Bob is a great lesson for those who don't need money for 30, 40,50 years and a terrible one for those who need (or may need) it in 1,3,5,10. 

 

 

 

[TwoCitiesCapital]

2 hours ago, 73 Reds said:

The example of the unluckiest investor who DCA'd the exact same amount each year into SPY/VOO at the exact yearly high price always comes to mind.  This "unlucky" investor still did better than most.

 

What I've started telling myself is that the worst 30-year return for US large cap stocks was ~7% per annum on a nominal basis. If I do ~7% for the next 30 years, I can replicate my income today in retirement without adding another cent. And I will be adding more cents. My salary today won't go as far in 30-years, but I'll be paying way less in taxes (assuming tax regime is similar between income/capital gains/qualified dividends), will also not have a mortgage, and will not be saving $40-50k/yr so I think I'd come out just fine. 

 

This has made me more forgiving of high valuations that have permeated most of my adult life. I still avoid indexing and select individual securities, but am less worried about starting valuations than I have been in the past.  I still own a hefty allocation to bonds because of my job in financial services means my income is largely impacted by fluctuations in the market just like my portfolios are but have stopped adding to them and have gone back to buying select equities with most of my savings cash flows despite my concerns on market valuations. 

 

I don't know what to tell my dad though. He hopes for retirement in the next ~5 years. The worst 5-year return is quite a bit different than the 30-year return and inflation matters a hell of a lot more so its real returns, and not nominal, that actually matters for him. That's is a much tougher nut to crack.

 

2 hours ago, Spekulatius said:

My simple take is that you need enough cash to survive a bear market without drawing down equities. About 2-3 years of expenses in cash or cash equivalents ( high grade bonds/ treasuries) should do it.

 

I agree with the above that having 2-3 years in cash and the rest be risk-on is not a bad approach, but I'm not sure 2-3 years is enough. Many U.S. stocks still haven't caught up to their nominal highs in 2021. That's 4-years of no price growth for many stocks even while purchasing power has eroded significantly over that period of time. 

 

We had a huge bear market in 2022, seemingly followed by a large recovery, but that large 'recovery' excluded a huge chunk of U.S. stocks. The indices have papered over that weakness by being ~20-30% in a handful of performing names. Stocks like Disney, Tyson, Nike, Target, Home Depot, Dollar General, Verizon, Proctor & Gamble, etc tell a very different story from SPY. There are A LOT of names in the S&P 500 with uninspiring performance and negative real returns over the last 4-years. And this is the exact opposite of what happened between 2000 - 2013 where the broad indices basically went nowhere while owning individual value stocks did fine. 

 

So do you index or not? Do you plan for 3-years for a recovery? Or 5? or 13? 

 

I'd think you'd want 2-3 years in cash equivalents followed with perhaps another 2-3 years in higher risk fixed income that can be replenish some of the cash as its being spent and be leaned on if your equities take longer to recover than 2-3 years. It doesn't have to be treasuries - can be things like IG corporates/mortgages, a slug to HY/EM debt, and a slug to gold/TIPS for real rate hedging. But we've seen multiple times in the last 30-years that 2-3 years was NOT enough time for a lot of names to recover, especially not in real purchasing power terms, and that is even with all of the passive flows/optimism/monetary policy/low interest rates supporting record valuations over that period. 

Edited Friday at 05:17 PM by TwoCitiesCapital

[73 Reds]

24 minutes ago, TwoCitiesCapital said:

 

What I've started telling myself is that the worst 30-year return for US large cap stocks was ~7% per annum on a nominal basis. If I do ~7% for the next 30 years, I can replicate my income today in retirement without adding another cent. And I will be adding more cents. My salary today won't go as far in 30-years, but I'll be paying way less in taxes (assuming tax regime is similar between income/capital gains/qualified dividends), will also not have a mortgage, and will not be saving $40-50k/yr so I think I'd come out just fine. 

 

This has made me more forgiving of high valuations that have permeated most of my adult life. I still avoid indexing and select individual securities, but am less worried about starting valuations than I have been in the past.  I still own a hefty allocation to bonds because of my job in financial services means my income is largely impacted by fluctuations in the market just like my portfolios are but have stopped adding to them and have gone back to buying select equities with most of my savings cash flows despite my concerns on market valuations. 

 

I don't know what to tell my dad though. He hopes for retirement in the next ~5 years. The worst 5-year return is quite a bit different than the 30-year return and inflation matters a hell of a lot more so its real returns, and not nominal, that actually matters for him. That's is a much tougher nut to crack.

 

 

I agree with the above that having 2-3 years in cash and the rest be risk-on is not a bad approach, but I'm not sure 2-3 years is enough. Many U.S. stocks still haven't caught up to their nominal highs in 2021. That's 4-years of no price growth for many stocks even while purchasing power has eroded significantly over that period of time. 

 

We had a huge bear market in 2022, seemingly followed by a large recovery, but that large 'recovery' excluded a huge chunk of U.S. stocks. The indices have papered over that weakness by being ~20-30% in a handful of performing names. Stocks like Disney, Tyson, Nike, Target, Home Depot, Dollar General, Verizon, Proctor & Gamble, etc tell a very different story from SPY. There are A LOT of names in the S&P 500 with uninspiring performance and negative real returns over the last 4-years. And this is the exact opposite of what happened between 2000 - 2013 where the broad indices basically went nowhere while owning individual value stocks did fine. 

 

So do you index or not? Do you plan for 3-years for a recovery? Or 5? or 13? 

 

I'd think you'd want 2-3 years in cash equivalents followed with perhaps another 2-3 years in higher risk fixed income that can be replenish some of the cash as its being spent and be leaned on if your equities take longer to recover than 2-3 years. It doesn't have to be treasuries - can be things like IG corporates/mortgages, a slug to HY/EM debt, and a slug to gold/TIPS for real rate hedging. But we've seen multiple times in the last 30-years that 2-3 years was NOT enough time for a lot of names to recover, especially not in real purchasing power terms, and that is even with all of the passive flows/optimism/monetary policy/low interest rates supporting record valuations over that period. 

As someone who invests in single equities high valuations don't matter because there is always something to invest in.  For younger folks and those just starting out, I have long ago come to the conclusion that discipline and patience are by far the most important factors for investment success.  Probably next on the list is cost-efficient, tax efficient investing.  Not far behind is a balanced approach to spending and saving/investing.  Only for a select few, like some here on this board do analytical skills even come into play.

[dwy000]

26 minutes ago, thepupil said:

I think you're thinking of Bob, right?

 

https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

 

I've never checked the numbers/always taken it at face value.

 

I think Bob is a great lesson for those who don't need money for 30, 40,50 years and a terrible one for those who need (or may need) it in 1,3,5,10. 

 

 

 

I'm a huge supporter of long term investing and I think it's one of the only ways that the average retail investor can have an advantage over managed money who get ranked every quarter.

 

The problem I struggle with when implementing it is that, other than indexing, when talking about individual stocks the proof is always in hindsight and the cost is the most valuable asset of all - time.  If i buy Costco at 55x forward earnings, yes after 30 years I will probably do okay.  But 30 years is a LONG time to judge any investment (heck, 5 years these days is impossible to figure out).  So if anything hiccups, not only do i have a poorly performing investment, but I've lost 30 years of investing that money at even a market return. 

 

Ive invested in many undervalued names that underperformed for 3-5 years while I railed at the market for being inefficient.  Then it doubled over a year or two and I felt so justified in my analysis that I ignored the fact that it was an average return for 5-7 years.

[Spekulatius]

3 hours ago, thepupil said:

I think you're thinking of Bob, right?

 

https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

 

I've never checked the numbers/always taken it at face value.

 

I think Bob is a great lesson for those who don't need money for 30, 40,50 years and a terrible one for those who need (or may need) it in 1,3,5,10. 

 

 

 

It also only worked that well in the USA. Same strategy in other countries would have let to much less favorable results. There is no guarantee that I’ve will get the same outcomes in the future.

[DooDiligence]

11 hours ago, Spekulatius said:

My simple take is that you need enough cash to survive a bear market without drawing down equities. About 2-3 years of expenses in cash or cash equivalents ( high grade bonds/ treasuries) should do it.

My thoughts exactly. I’m pretty concentrated and don’t want to sell my high conviction positions.

[MungerWunger]

hes back with another one: https://brklyninvestor.com/2025/02/15/the-magnificent-seven-mkl/

[villainx]

!

[Spekulatius]

On 2/14/2025 at 12:44 PM, 73 Reds said:

As someone who invests in single equities high valuations don't matter because there is always something to invest in.  For younger folks and those just starting out, I have long ago come to the conclusion that discipline and patience are by far the most important factors for investment success.  Probably next on the list is cost-efficient, tax efficient investing.  Not far behind is a balanced approach to spending and saving/investing.  Only for a select few, like some here on this board do analytical skills even come into play.

I think the 2-3 years in cash reserves are enough , if you have a diversified portfolio. My thinking is that within 2-3 years there will be stocks in my portfolio that will be close to fair value and that I could sell to replenish shrinking cash reserves. What to sell is of course a judgement call and may well be the wrong decision individually but this is how I would approach this problem.

[Dinar]

33 minutes ago, Spekulatius said:

I think the 2-3 years in cash reserves are enough , if you have a diversified portfolio. My thinking is that within 2-3 years there will be stocks in my portfolio that will be close to fair value and that I could sell to replenish shrinking cash reserves. What to sell is of course a judgement call and may well be the wrong decision individually but this is how I would approach this problem.

Actually, it all depends on how stable your cash flow is, and how large it is compared to how much you spend per annum.  If someone has say enough dividend income per year after tax to pay for all of one's yearly expenses, then why would you want to have 2-3 years in cash reserves? 

[villainx]

2 hours ago, Dinar said:

If someone has say enough dividend income per year after tax to pay for all of one's yearly expenses

 

Reading this is kinda tells me I've been either doing this investing thing really badly or just straight out wrong.

 

 

[Whensthepaintdry?]

Do many people here try to live of option income instead of dividends? I’ve been toying around with the idea of starting a very basic option wheel strategy and growing it overtime. 

[gfp]

19 minutes ago, Whensthepaintdry? said:

Do many people here try to live of option income instead of dividends? I’ve been toying around with the idea of starting a very basic option wheel strategy and growing it overtime. 

 

Sounds like @boilermaker75 territory

[james22]

On 2/14/2025 at 8:52 AM, Spekulatius said:

My simple take is that you need enough cash to survive a bear market without drawing down equities. About 2-3 years of expenses in cash or cash equivalents ( high grade bonds/ treasuries) should do it.

 

The Cash Cushion approach is really caught between a rock and a hard place. Either the drawdown is so long that you can’t possibly have enough cash to make it through or the drawdown is short enough that the cash cushion likely wouldn’t have made a big difference.

 

https://earlyretirementnow.com/2017/03/29/the-ultimate-guide-to-safe-withdrawal-rates-part-12-cash-cushion/

[73 Reds]

27 minutes ago, Whensthepaintdry? said:

Do many people here try to live of option income instead of dividends? I’ve been toying around with the idea of starting a very basic option wheel strategy and growing it overtime. 

What is an option wheel strategy?  One easy option strategy to beat the S&P 500 index is to own SPY and sell well OTM covered calls against the position.  If SPY rises too quickly so as to endanger assignment just roll the calls.  You'll achieve what most professional money managers strive to do but don't:  Best the index.

[Castanza]

10 hours ago, Spekulatius said:

I think the 2-3 years in cash reserves are enough , if you have a diversified portfolio. My thinking is that within 2-3 years there will be stocks in my portfolio that will be close to fair value and that I could sell to replenish shrinking cash reserves. What to sell is of course a judgement call and may well be the wrong decision individually but this is how I would approach this problem.

How many equities do you hold Spek? If I remember right you hold quite a few positions? If you don’t mind sharing. 

[Santayana]

11 hours ago, Dinar said:

Actually, it all depends on how stable your cash flow is, and how large it is compared to how much you spend per annum.  If someone has say enough dividend income per year after tax to pay for all of one's yearly expenses, then why would you want to have 2-3 years in cash reserves? 

Because dividends can be cut.  Interest income would be another story.

[Dinar]

11 hours ago, villainx said:

 

Reading this is kinda tells me I've been either doing this investing thing really badly or just straight out wrong.

 

 

No, that's not the implication.  Probably impractical for a 30 year old with three kids, should be doable for most thrifty people in their 60s, barring a catastrophic illness or if they are very generous in helping others.    Also very much depends on the lifestyle.  I know people who live in my neighborhood with 4 kids who spend $100K per year, and people with four kids who spend a million a year.   (The difference is private school  - $260K a year for 4 kids, $4K two bedroom 5th floor walk up vs $25K a month grand 4 bedroom apt, vacations, take-out & restaurants vs cooking at home, two nannies vs none, etc...)  

@Santayana, interest income can also be cut unless you are buying treasuries in nominal terms, and in real terms in the case of treasuries.   If you are long short-term treasuries, you run the risk that interest rates decline and so will your interest income.  If you are long long term treasuries, and then 2020-2022 inflation comes around, that's surely is a cut in interest income, albeit real and not nominal.

I am not against buying insurance (in this case having a cash cushion), my point is you cannot hedge against everything, so where do you draw the line?

[Whensthepaintdry?]

4 hours ago, 73 Reds said:

What is an option wheel strategy?

I would only be interested in the most basic version of it. Selling cash secured puts on stocks I would like to buy and if assigned selling the covered calls. Trying to make around a percent or so  a month. 

[dwy000]

1 hour ago, Whensthepaintdry? said:

I would only be interested in the most basic version of it. Selling cash secured puts on stocks I would like to buy and if assigned selling the covered calls. Trying to make around a percent or so  a month. 

That was exactly the Madoff strategy.  We'll, that and stealing people's money

[Value_Added]

7 hours ago, Whensthepaintdry? said:

Do many people here try to live of option income instead of dividends? I’ve been toying around with the idea of starting a very basic option wheel strategy and growing it overtime. 

In the U.S, If truly living off of the income from either strategy (sole means of income), qualified dividends offer a large tax advantage here (not too difficult to meet the criteria for qualified dividends).  As an example - if married filing jointly, you can make up to approximately $126,000 in dividend income and pay no federal taxes.  If using options, it is taxed as short term capital gains.

 

 Obviously, taxes shouldn’t be the primary factor, especially if you can earn a much higher return using an options strategy.

[villainx]

so maybe more dividends in taxable account, and run the option strategies in tax advantaged?

[Whensthepaintdry?]

@villainx @Value_Added That would make more sense. Let’s say you are still working a middle-class job and you’ve built up a good nest egg, but still need to let compounding work its magic. You don’t really think it’s time to sell off positions for income yet, and you don’t have many dividend positions. You want a little more income, but don’t feel like picking up extra shifts anymore at work. (This is where I think I am at.) Is it complete nonsense to think you can take, let’s say, a $ 100,000 and supplement $ 10-15 thousand dollars of income with options? And I’m not talking about crazy long shots. For example, I always try to do a few a year and this year I did one on hsy. I’m open to this being shut down for being a stupid idea because I keep telling myself to just invest it for the long term and go to work. 

[Gregmal]

1 minute ago, Whensthepaintdry? said:

Is it complete nonsense to think you can take, let’s say, a $ 100,000 and supplement $ 10-15 thousand dollars of income with options?

Nah that’s totally doable if you’re willing to sell them. Use some value investing instinct and find mispriced options and then just play in that sandbox. One of the best I’ve done was CLF coming out of Covid where you could grab $1-2 per share every 2-3 weeks selling OTM puts. MSGE last couple years has been great too. Sure there’s plenty of other securities where this happens too.