There is no way to sugarcoat this.

The UK is in a recession, and taxes are going up, as we were promised.

Here are the updates Jeremy Hunt announced in the Autumn Statement 2022.

• A freeze on income tax thresholds
• Allowances frozen until 2028: Personal allowance (£12,500), NI, Inheritance tax, Pension allowances
• Capital gains tax allowance from £12,300, down to £6,000 from April 2023, and then halved again in April 2024.
• Dividend tax-free allowance drops from £2,000 to £1,000 in April 2023, and £500 in April 2024
• Lower threshold for additional rate taxpayers (45% tax) from £150,000 to £125,140. That’s £1,243 more tax per year
• The state pension, benefits and tax credits will rise in line with inflation – 10.1%
• The government’s energy price guarantee will be kept for a further 12 months at an average of £3,000 for a typical household, up from £2,500 at present.
• National Living Wage will increase from £9.50 an hour for over-23s to £10.42 from April
• Increased schools budget, with an extra £2.3bn a year and NHS by £3.3bn
• Energy firms will pay an expanded windfall tax of 35%, up from the 25% already levied on their profits
• R&D relief for SMEs cut to 86%, and the credit rate to 10%
• And electric vehicles will no longer be exempt from vehicle excise duty from April 2025

Even though Hunt didn’t rise the income tax, he did this in stealth mode by freezing the tax thresholds.

This means millions will pay more tax as wages rise to keep up with inflation.

In a 10% inflation environment, this will be the biggest blow to the average person.

Hunt also said the UK is in a recession. These measures will make it shallower and quicker. The Office of Budget Responsibility said that despite the new support with energy bills, living standards are going to fall by 7% over the next two years.

Inflation is expected to be 9.1% on average in 2022. It will go down to 7.x% in 2023.

On 23 September 2022, the government announced that the threshold for paying stamp duty would be raised from £125,000 to £250,000. For first-time buyers, this will increase from £300,000 to £425,000. It means that first-time buyers do not have to pay stamp duty if their home costs less than £425,000.

Stamp duty cuts will remain in place until 2025.

Dividend tax allowances are going down:

If you are a business owner, that’s 1,000 less tax-free next year.

If your dividends come from companies in an ISA or pension, then your dividends are tax-free anyway. But for most business owners and self-employed, this is another blow.

The dividend rates will remain the same. I am not sure if the 39.75% will kick in at 125k or at 150k as before.

Even though the dividend tax allowance will drop by £1,000, the rates are not going up. Speculation had it that dividends or capital gains tax rates would match income tax, but no. Not yet, at least!

Worth mentioning dividend tax is paid AFTER businesses have paid corporation tax on it.

Businesses will first pay 25% corp tax before the owner pays dividend tax. Increasing dividend taxes would disincentivise entrepreneurship even more, in my view.

Corporation tax

There was no mention of corporation tax during Hunt’s speech.

This is because it will go ahead as planned.

From April 2023, corporation tax will increase to 25%.

See this article to understand how corporation tax will work in 2023, with examples and a free calculator.

Businesses with profits less than £250,000 will pay lower corporation tax.

2.5 As previously confirmed, the planned increase in the Corporation Tax rate to 25% for companies with over £250,000 in profits will go head. This will still be the lowest rate in the G7 ensuring the UK remains strongly competitive internationally. The Corporation Tax rise in April 2023 will only affect the most profitable companies because of the Small Profits Rate. The additional rate of income tax will now to be removed, and the basic rate of income tax will be maintained at 20%.

Full Autumn Statement Gov UK report

If your business profits are £50,000 or lower you will keep paying 19% (Small Profits Rate).

Businesses with profits between £50,000 – £250,000 will pay corporation tax somewhere between 19 to 25%, as I have previously explained here.

Working out the tax gets a bit tricky, especially if you own more than one company.

As successful business owners usually say: Focus on increasing your profits, not on taxes!

Additional rate taxes

Those with income higher than £100,000 were already heavily taxed. Personal allowance (£12,500) is reduced for any extra pound they earned after 100k. When the income reaches £125k, the allowance is completely lost.

This means the effective tax on income between £100 – £125k is 60%.

After £125,000, the income tax rate used to be 40%, and then 45% after 150k.

From April 2023, the 45% will apply from £125,140.

So if you earn more than £100k (gross), you will pay 60% (£100 – £125k), then 45% on £125,000+.

I still don’t get the 60% band in the middle but

Final notes

It was nice to see the national living wage increase by about 10% to £10.42 per hour.

This also comes after low earners had recently seen their National Insurance contributions zeroed up until the personal allowance threshold (£12,500). So that’s good.

If we are already in a recession, then the fact the labour market is still strong is a good sign.

I know it’s hard for everyone.

Things you can do to overcome the challenging situation:

• Try to stay employed / in business
• Become more valuable in your work – indispensable
• Increase your pension contributions (lowers your corp tax)
• Ask for a pay rise
• If you have a cash surplus, invest it to keep up with inflation
• Stay hopeful – 2024 is not (very) far, and the recovery will come
• Focus on the things you can control – spending, earning, side hustling, having fun, how you allocate your time

What have I missed? Keen to hear your thoughts on the Budget.

Stay positive! Thank you for reading.

Guest appearance on Rob’s podcast

I had a great time talking with Rob J, who runs the awesome Coffee & Coding podcast for freelancers and software engineers.

Here’s the link to the episode:

Building Wealth as a Software Developer (podcast episode)

In this episode, we discuss:

• Building wealth as a software developer
• Investment options for freelancers
• Putting your money to work for you
• How to get more out of your limited company
• and much more!

But today I am very excited!

A big guest is coming up for an interview.

Interviewing Rob Dix – Property Podcast

This week I will be interviewing Rob Dix from the Property Podcast.

Personally, I have learned so much from the Robs on buy-to-let investing and UK property.

Their property podcast is top class. 450+ free episodes and very well made.

He has written popular books, he is an entrepreneur, an investor and he’s recently launched an investing app for property.

Oh, and a business podcast (“Any other business”) on how they run the business.

To say he is very knowledgeable about the subject would be an understatement!

If you have any questions for Rob, please reply to this email.

Fear is back in the stock market

If you haven’t looked at the stock markets lately, well done. Just skip the noise and keep doing what you’re doing!

You might have seen the popular names down big. There’s a negative feeling, high inflation and higher interest rates coming.

Particularly tech and Covid stocks have taken a beating. Nasdaq -15% off all-time highs, Tesla -23%, Alibaba -57%, Zoom -73%.

And let’s not even talk about Bitcoin which is also down big, -50% as I’m writing this.

Let’s be honest. 2020 and 2021 felt too easy. Investing is not supposed to be like that.

When I wrote “Making money feels so easy and I’m worried” in Feb 2021, I certainly wasn’t expecting another +30% growth!

But anyway, this is why index investing is so powerful.

While some sectors are down, index investors benefit from the energy and financials boost.

We hardly felt any “correction”.

Just look at the World index, down just -6.4%.

Business as usual.

Particularly if you are a regular net buyer, those discounts are an opportunity to buy at cheaper prices.

It also gave me somewhat of a relief after the shock I got looking at my electricity bills………..

Ouch.

I have no idea where we’re going next. We might be in for a bigger shock, or it might be just a temporary blip.

No one knows. Sticking to the plan is the best strategy.

Limited company investing runs hot

We just had an ad-hoc session with a financial planner talking pensions, property and VCTs.

It was great to see so many of you there. Learning about all the different ways business owners can benefit from LTD company investing.

The January group was sold out but the next one starts in March.

If you are a UK business owner, please come and join us.

​
Stuff I’m consuming

I just started reading the American Kingpin: Catching the Billion-Dollar Baron of the Dark Web.

It’s a real story and I’m hooked.

I’ve also learned a lot about this dark world and how the American mail system works!

In other news, nope I’m NOT embarrassed to say I started watching Clarkson’s Farm on Amazon Prime despite the …pushback I received from the family.

Nature, farming and Cotswold. What’s wrong with that!

Farming is simple life but HARD work! Makes me appreciate even more how I make money by typing some stuff into the computer…

Alright, that’s it from me.

If there’s anything you want to discuss, just leave a comment.

Always happy to hear from you.

Thanks for reading!

Just wanted to write down my thoughts on the black swan year we just went through. Following each short section, I’m looking at what I can do to improve my life and investing in general. We cannot fix everything but at least we can work on those things under our control.

1. I cannot predict the market even if you tell me what events will take place in the world

I cannot even remotely predict what the stock markets will do. By March, we knew the virus is spreading out of China and that we’re getting into uncharted territory. It was only logical markets would crash. And they did by 30%. But where would the bottom be? Why not -60%?

Those who bought back then got rewarded handsomely. I was a bit too early but my £10k are now worth ~£13,000 while the economy is in worse shape. Sure, a lot of money was printed but nonetheless, the GDP took a hit.

Recovery following a crash has happened many times before. (So far) the market has always gone up. Eventually. This time it happened A LOT faster than I expected.

The number of cases was steadily going up and stock markets reversed their downturn trajectory. They started looking far into the future again. Madness, especially if you think we were hitting all-time highs in the absence of a vaccine and while everyone was expecting a more deadly 2nd wave. Which actually arrived as promised and didn’t affect the stock price levels!

Lesson learned: Timing the entry means you need to time the exit as well. This year taught me I would’ve been very bad at it. Better invest regularly and in different things like property and bonds and enjoy the free ride.

2. I enjoy guiding people around tax and investing

This blog started as a journal for me to document my process to financial independence. I really enjoyed the writing process. It articulates my thoughts and translates the noise in my head into words I can see. It’s not uncommon to see bloggers take action on a topic after writing a blog post. You should write even if you have no readers. I know I certainly did in the beginning.

Anyway, I soon found out that other people want to generate a passive income too, escape the 9-5 and share similar goals on life and career. I knew I enjoy writing but I hadn’t given teaching a chance.

Earlier in the year, I felt the need to add value to LTD company owners who like me, want to invest. I didn’t have time to do more 1:1s and something more organized had to be done. I know some of you own limited companies and like learning about ways to put your business cash to work.

So I launched the company investing academy and its online course to find out it’s a great new beginning. I like:

• Breaking down complex topics (i.e. tax, investing) into actionable steps
• Talking to different people around the UK with common goals
• Building a community and learning from each other mistakes
• Feeling a sense of achievement when hearing about the members’ success

Lesson learned: The course and the community are definitely something I will spend more time doing.

3. I’m not good at outsourcing stuff

Read any business book or ask any business people. The first thing they’ll tell you is that you need to scale your time. Time is a finite resource. Once you delegate a task you just ‘create time’ in exchange for money. And that’s gold.

I can think of plenty of things I should be outsourcing right now. Building my parents’ new e-shop. Tasks like video editing and technical aspects of my new page, like payment integration. Improving the speed of this blog (which should subsequently improve rankings). Even the editing and proofreading of long posts like this 3k-words monster.

But I have trouble doing it.

It’s not that I had a bad experience outsourcing or that I don’t want to pay. I had an OK experience in the past. The ROI is positive anyway. I just didn’t have a GREAT experience and given I have high standards for quality, I’m afraid I’ll get mediocre results. Last but not least, privacy becomes a concern every time I outsource. Mailing list access. Database / files access. Something that should not be shared but is, because the role-level access is not low enough.

If you have any tips on how to overcome my fear of outsourcing or where to start, I’m all ears. Also any good books?

4. Location independence is good, WFH fatigue is not

We’ve spent a few months working from Greece. I really enjoyed the sunny activities in the weekend and the relative freedom of movement without a (big) fear of infection. This worked out well. But I miss the social interaction with coworkers and the team.

I’d also rather live in a larger place if I am to be here 24/7. I think the property commentators call this ‘search for space‘ and it’s one of the reasons house prices keep going up in the midst of the pandemic.

If the Work From Home (WFH) trend continues after the virus is over, I’ll probably be in an office or a co-working space 2-3 days a week.

Lesson learned: Find a place to work with likeminded individuals. But we’re not out of the woods yet, are we!

4. Raising kids is amazing

I wasn’t really into kids. In fact, I was probably trying to avoid interacting with them. I just found it a bit awkward and never felt ready. Others get along just fine with them. Perhaps it’s the fact I score ISTJ on the Myers-Briggs test?

Anyway, what I wanted to say is this: Having kids is wonderful! You get to experience both frustration and awesomeness but more awesomeness than anything else :)

Especially when they start interacting with you, learning new words and see their personality being developed. They become your friends. It sounds stupid but it’s true, really.

Small things make your day, like when they’re trying to play hide and seek like an ostrich or when they ask you to take a photo of themselves before they can even spell it. Anything that’s worth doing once they want it done 30 times. They have their moments where you hate yourself for having one. It all has to be done according to their routine.

Once you have a kid you realise how much free time you had when you thought you had none. Take this blog, for example. You’ve probably noticed a longer interval between blog posts!

Paul Graham explains it better than I do, so go read his essay on kids instead. It’s probably the best piece on the internet on the topic.

People often ask me the #1 advice to get rich and I’ve finally found it: DO NOT HAVE KIDS!

5. My £3,000 gambling loss

Back in March when everything was crashing I wanted to take a punt in a speculative product. Everything was in free fall and cash was king. Bitcoin at $5k, EasyJet at -60% drawdown, negative oil. So many options!

I chose to gamble on the “black gold” because why not. It’s only a matter of time before people start taking aeroplanes again. Ok, maybe it’ll take years but I was willing to wait if I could 3x in 3 years. Obviously, it could go the other way too so I went in prepared I could lose it all.

So I put around £15k in the WisdomTree CRUD ETF. Known ETF structure, a big one too, 1.4 bn in assets under management. What can go wrong.

As I’ve mentioned in the Free Oil for everyone post, to invest in oil you first need to understand how the ETF sausage is made. These oil ETFs track the price of oil using 1-month rolling future contracts. In extreme movements like in March, the 1-month future prices are much much lower than the 2-month and 1-year prices. This means that the ETF has to sell this month’s contract at low prices and buy next month’s futures at higher prices. Continuously doing that means to sell low and buy high. The result is this:

See the problem??? That’s the contango effect. When I bought the oil ETF, oil (WTI) was trading at $20. I actually managed to almost call the exact bottom! WTI is selling close to $50 as I type this and my gamble bet is still not breaking even yet…! You could also translate that to a £30k loss if you think I was between buying oil or bitcoin back then. But woulda coulda shoulda!

Lesson learned: Gamble responsibly, as always. I’m in the fortunate position to not get seriously affected by the loss of £3,000. I also made some more successful bets on Biden after the election was over. Thank you Betfair, for keeping the market open after the election thanks to Trump’s conspiracy theories trying to overturn the “rigged” result :)

To a prosperous and healthier 2021

I want to believe the worst days are behind us and a brighter future will emerge in 2021.

Merry Christmas to you all.

These tests should all pass before something’s considered done. It even goes further than that. A certain philosophy demands that tests should be written before the working code is actually written.

Hence the acronym TDD – Test-Driven Development.

Even if they try to think of all edge cases, they’ll probably miss a few. Like this Windows 8 phone asking people to insert the installation disc. Or this monthly direct-debit increasing from £87 to £53 million by accident. So it’s not that software engineers are a superior species. I can provide many real-world examples they’re not!

But the trait of trying to cover all scenarios is necessary if you really want to succeed in writing quality code.

It’s not so much the act of writing tests that fool-proofs it. It’s the constant thinking of what can go wrong while you’re building it.

As a result, this “what can go wrong” mentality goes beyond coding. It usually follows them in other areas of their life too.

Checking for cars approaching from both sides when crossing a one-way street. Testing the baby water by hand, even if the digital thermometer says it’s ok. In other words, trusting themselves only gradually.

Constantly looking to prove yourself wrong is hard because it goes against human psychology.

Humans are looking for answers similar to what they believe is true. Confirmation bias is probably the most common of them all. It’s also one of the reasons Facebook shows you what you’re more likely to agree with. More time spent on Facebook means more profit for The Firm. Sure, maximizing shareholders value should not be the only goal of a corporation, but we are where we are with this one. But I digress.

Back to proving myself wrong argument, I find myself constantly trying to invalidate my portfolio despite the great returns. Past performance is not indicative… and all that.

• Is the market too expensive and am I overexposed?
• Can my investing philosophy break under extreme conditions (global pandemic anyone?)
• Gold has reached $2,000, why have I not owned any? what about BTC?
• Quantitative easing causing very high inflation, like the 1970s
• Long periods of stagflation because of technology and automation

The structure of index funds (which is my main vehicle for investing) is rewarding the US mega-caps. History tells us they’ll underperform after such a great run. There was no price too high for the Nifty Fiftys in the 60s. That didn’t end well in 1973-74.

If we’re heading for deflation because of technology and low-growth, is my portfolio really protected? Should I own more bonds despite the ultra-low yields?

After all, bonds have outperformed stocks over the past 20 years.

Sure, I’m cherrypicking time-periods but 20 years is 20 years.

Over the past few months, the most interesting read was from the value stock geek, outlining his contrarian philosophy. It’s basically a book but written as a blog post. It asks some good questions that make you think.

I’m not changing my investing philosophy after reading the post. But that’s not a guarantee I won’t be changing my mind in the future. Strong opinions, weakly held, as they say.

Investing

Wisdom from Larry Swedroe on why the stock market rises when unemployment is at all-time highs. Makes it a bit harder to time the market. As I’ve just mentioned, stocks have underperformed bonds from 2000 to 2020. They’ve also underperformed in other long-term periods. Which is why diversifying is like saying “I don’t know” – and hedging your bets.
The economy and the stock market are not the same – Larry Swedroe (6-min read)
Is it really stocks for the long run – Larry Swedroe (6-min read)

Probably the best article Housel has written. It’s a ski story but it relates to investing. Also, one to read if you want to learn how to craft storytelling ;) Speaking of which, I’ve bought a Storytelling book
The three sides of risk – Collaborative fund (13-min read)

What I mentioned in the intro. The Value stock geek is not a financial professional. He’s just another blogger with enough passion to build a personalised portfolio and manage it well. The Weird Portfolio is an “all-weather” portfolio with both offence and defence assets.
The Weird Portfolio – How To Avoid Bubbles, Limit Drawdowns, and Safely Grow Wealth (98-min read)

There was a bear market this year and a strong negative reaction to the pandemic. But it was only in the names that were cheap to start with. Fundamental developments have been similar for each group (stocks both in favour and dismissed) yet the ones that people already liked beforehand are actually up YTD. Like all the tech stocks. Thus, expensive stocks not only camouflage the poor treatment of the value names but hold up the broader index too. They’re making things look better than they really are.
Bubblicious – Albert Bridge Capital (8-min read)

What’s happening with internal combustion engine cars being replaced by electric Teslas has happened elsewhere with ice producing companies. The author makes the case that although Tesla’s stock has factored in all of that growth, the rest of the competition has lots of time to catch up.
A new ice age – Albert Bridge Capital (3-min read)

Now whether Tesla is a company worth investing in or not is one of the best ways to start a twitter war. Just look at the volatility of the stock. Makes bitcoin look like a short-term treasury.

What happened in the past does not predict the future. Large-cap stocks won’t go on forever. Gold shone again recently. A good read on contrarian investing.
Broken asset classes – Research affiliates (15-min read)

Why the stock market can go much higher despite being thought of as overvalued.
ZIRP, Inflation, QE and other animals – Plain English Finance (11-min read)

“Perhaps you should own some Gold”, says Nick. But “it’s not such a good idea” according to Larry. Gold was always a controversial asset. It’s now easier to justify owning gold after the recent rally in 2020. Personally, although I don’t like the fact that it does not produce any income and it just sits there, I think there is value in owning it as part of a balanced portfolio. Gold deserves its own article at some point. It does well in an inflationary environment when bonds are crushed (think the 1970s). It’s also uncorrelated to stocks and does well when they do badly. So from a rebalancing perspective, it helps you to “buy low sell high” between assets. Disclaimer: I don’t own any (yet).

With most government bonds paying less than 1% right now, why should I own bonds is a valid question. I think the returns we’ve seen from bonds in the past 40 years are unsustainable. This is because they’ve been riding the falling interest rates trend. And when interest rates fall, bond prices increase. That’s because they’re shinier compared to the lower-yielding new bonds. Right now, interest rates are close to zero (in some countries, they’re negative). This means price increases from falling rates are unlikely since rates can only go so negative before everyone keeps cash under the mattress as I’ve written before.
Do treasuries have a place in a modern portfolio? – Alpha Architect (12-min read)

Another piece supporting the case against bonds. Lower returns from bonds seem likely as they’re playing a different game than their 2000s counterparts. However, in my opinion, the benefits of risk reduction, good night sleep and better withdrawal rate in the de-accumulation phase are decent traits to consider.
No longer superheroes? Twilight of the bonds – CFA institute (6-min read)

The crypto-price innovation cycle. Although crypto prices are all over the place, the startups and developers are in constant growth. As I’m writing this, Bitcoin is around $11,000. Are we at the end of cycle 3 (peaked at 2017) and entering the 4th one?
The crypto price innovation cycle – a16z (5-min read)

Brain food

A debate with a friend on whether technology is destroying more jobs than it creates. What will the future hold if software does the majority of the work in most industries? What shape will our world take?
Jobs vs Robots – Foxy Monkey (6-min read)

Why nerds are unpopular. As a nerd myself I couldn’t have explained it any better. The education system lacks purpose. Unpopularity is a byproduct of that. This essay was written in 2003 and is as relevant today as it was back then.
Nerds – Paul Graham (26-min read)

The best and worst countries for raising a family. It comes as no surprise to me that the Scandinavian countries rank the highest when it comes to feeling safe, having a great educational system for free, quality healthcare and free time to enjoy it. Gearing towards socialism makes a difference. However, as with any data presentation, the answer lies in the metrics you use more than anything else. So let me tell you that Greece is not such a bad place to grow up ;)
The best and worst countries for raising a family – Reddit Infographic

Why do we doubt ourselves? We overestimate other people’s abilities and only see the end product. We’re also jealous and constantly comparing ourselves to our peers/family instead of being inspired by what they’ve accomplished. But people not so close to us who are way more successful don’t bother us. Self-doubt is here to stay but we shouldn’t quit meaningful work because of that reason alone.
Self-Doubt – More To That (14 min read)

Productivity is good, productivity guilt is bad. The answer to not feeling guilty is to understand you can’t do everything perfect. Picking a few goals means you’re not achieving others. And that’s ok.
What is productivity guilt and how you can prevent it – Pocket

From skimming to analytical deep dive, there are different approaches to read a book. Personally, 95% of the books I read are non-fiction and I regret not taking notes or synthesize and distil on a topic. There are better ways such as note-taking using tags and a new paid software called Roam. The personal knowledge management topic has got me into thinking lately. How do you organize information and keep it up to date as you roam through life? That’s only happening in spare Kindle highlights, this blog and in my head. It surely can be done better.
How to read a book – Farnham Street (7-min read)
Roam: Why I love it and how I use it – Nat Eliason (16-min read)

How Stanford, MIT and other prestigious universities will partner with big tech to disrupt education. I can’t agree more with the professor.
Campus culture and iStanford – Prof Galloway (7-min read)

Rather than trying to steer your output to a certain standard, what if you focused primarily on what goes in, and let the whole system process it naturally? This mentality shift is so useful to me. Stressing about the output is good but more important is to focus on the input. Do you want to understand a topic better? Focus on the number of books you read. You want to be more productive at X? Don’t just measure how much you’ve done, but focus on waking up one hour earlier consistently.
Focus on the inputs – Raptitude (3-min read)

Climate change: Who’s to blame? What we can do about it?

Business

Tiny is a holding company which buys internet businesses. Although they’re at a much higher level to starting a business, it gives you a nice perspective on company building.
My First Million Q&A – cofounder of Tiny [Podcast]

Everyone has something to say. Usually, what we have to say can be very useful to others but you just don’t know that. Although starting a blog that changes your life is probably the 1% here (or less), I tend to agree with the arguments Nat makes. Starting a blog helps you to:

• Articulate your thoughts in a structured way. I usually just have ideas floating around
• Hold yourself accountable to your goals
• Meet very interesting people (as I’ve done in Foxy Monkey meetups and in emails/comments)
• Make good money after a while if you treat it as a business
• Increase your personal “brand”, especially if the blog is relevant to your profession

How to start a blog that changes your life – Nat Eliason (26-min read)

Corporate culture, social connections, networking. Offices will be less of a prison cell and more of a collaborative area with colleagues.

Financial Independence

A former fire-sceptic is now fully on board with the FI part of the movement after speaking to a few FIRE leaders.
Confessions of a former fire skeptic – Morningstar (5-min read)

When MMM gives an interview I always listen. He’s inspirational despite having heard the same stuff multiple times. My favourite quote is this:

If you double your salary and then double your spending, you are not a single day closer to retirement, even if you are saving a higher number of absolute dollars. But if you can learn to be happy with less spending, things get interesting very quickly.

Mr Money Mustache

Here’s How to Retire Far Earlier (Even If Another Downturn Strikes) – MMM at Fool (13-min read)

Unsurprisingly, most of FI bloggers shared the same view: Keep investing during the pandemic if you can. It’ll only make you richer.
How FI bloggers invest during the coronavirus pandemic – Money Mow (3-min read)

He’s a big property fan and I always like to tease him that buying your own place is not the best use of your money. Especially while I own one and he doesn’t.

But there was this one time I vividly remember. We were arguing about how technology is taking our jobs. I’m a technologist by nature, he’s a mechanical engineer. I was trying to make a point that although technology is eliminating some jobs, it creates many others. Cars replaced horses. Tractors replaced hundreds of humans.

The engines went a step further with jet engines and helicopters. This created new industries and services around them. Then the personal computer, video games, genetic engineering are some of the best inventions of the previous century.

Sure, automation took some jobs but it created so many others – I’m a living example of that!

My point was that automation has always been here. There’s nothing different this time. This same fear was present 50 years ago when one factory machine replaced hundreds of shoemakers. The net effect has been to decrease the demand for low-skilled information workers while increasing the demand for highly skilled ones.

Jordan’s point was that this time is different and it’s much worse from the human labour point of view. In short, we’ll run out of jobs soon!

4 years have passed and I’m constantly thinking about technology and how it’s eliminating jobs in one industry after the other.

We have had an amazing century. Manufacturing, the Internet. All these inventions gave a massive boost to the economy, productivity and to people’s quality of life and wages.

But from now on, could it be that although technology is making our lives better (and much cheaper) it’s also destroying more jobs than it creates?

The phrase software is eating the world is now more true than ever. If you’re a programmer, watch this video, I dare you. The program is writing its own software after the instructor tells it what to build in plain English. An AI miracle, indeed.

As a coder myself, I can only see this massively helping me automate mundane tasks. But how long until this is smart enough to replace the middleman between the business and the deliverable i.e. Me?

Wix & Squarespace have done the same – replacing website code with drag & drop functions. This is fantastic as it makes simple websites super-easy and cheap to make while also looking professional. But it’s also deflationary. This inefficiency called human that was paid to translate your requirements into a website is now gone.

You can say the same thing about agriculture. The tractor completely changed how we grow crops. People lost their jobs. But although we lost the need for expertise in one area, we required an equal amount of expertise in another area.

On the upside, technology gave us so much more. Things we could not even imagine 20 years ago.

We have the chance to do more things, cheaper, faster and at scale. I can start a yoga studio from my room and offer classes online across the world. (Ok, maybe I won’t). I can open a multi-national shop selling to 100 countries with little effort. The products can be automatically sent and safely stored in an Amazon warehouse which handles the entire order fulfilment, returns and payments too.

How awesome is that!

Right now, you’ve got a travel agency, a map, and a phone “line” on your phone mostly for free. Those investing in renewable energy will soon get electricity, heating and car fuel cheaper too.

I’m starting to believe that the sacrifice comes not only as a loss of privacy. But as a loss of the ability to find work too.

These deflationary forces remove friction. Human = friction. The customer journey must be as smooth as possible. So I’m sometimes thinking: What sort of career paths would exist in 20-30 years from now?

In the current robot-era:

• You no longer go to a travel agency to book holidays. You can search on Skyscanner for free and probably find better deals too
• Placing your investments no longer happens on a call with a broker. You buy shares at a tap of a button on your phone (or on a desktop computer if you’re like me!).
• Soon we won’t be ordering an Uber with a driver in it anymore. Just the car, please.

5? 10 years? How many years until drones replace the Amazon driver delivering our parcel?

5 years ago I used to hire an accountant to file my company tax return. I just filed one for half the price (and half the effort to be completely honest) using online accounting software.

So if all these jobs are gone one after the other, how many more jobs can technology create? My guess is not as many as it destroys. Jobs growth is gradually distancing itself from productivity.

What this data tells us is that in the past, gains in productivity, innovation and GDP were reflected in people’s jobs and rising wages. This trend has stopped around 2000. Although productivity kept rising, private employment and median family income have stayed the same.

Up until 2000, American workers not only created more wealth but also captured a proportional share of the gains. That’s not the case anymore. I’d argue the shift is happening in all developed countries, not just in the US.

In their excellent video, Kurgezagt say:

In 1998, US workers worked a total of 194 billion hours. Over the course of the next 15 years, their output increased by 42%. But in 2013, the number of hours worked by US workers was still 194 billion hours.

What this means is that despite productivity growing by 42%, thousands of new businesses opening up and US population growing over 40 million people, there was no growth at all in the number of hours worked in 15 years.

It will be an interesting experiment. Our economies are based on the fact people spend money. 60-65% of the UK GDP is consumer spending. If the machines take our jobs, then there will be less and less money to spend for the majority of people. And since machines don’t ask for pay rises, more wealth will be concentrated on their owners – a few tech oligarchs.

If Marc Andreessen is right: “The spread of computers and the Internet will put jobs in two categories: People who tell computers what to do, and people who are told by computers what to do.”

This is not some science fiction. I’ve written a few paragraphs without even mentioning the word Artificial Intelligence yet. It’s making great steps and not only in the self-driving car space which is the first thing that comes to mind. It gives me back time by actually helping me categorise my business transactions. It knows my habits and therefore gets it right more times than not.

We have free time to read blogs like Foxy Monkey because the standards of living have improved enough so that we work 10 hours not so much for a loaf of bread anymore, but more for buying the next iGadget.

Technology providing the same goods/services as 20 years ago at a lower cost of living can be beneficial. Something to keep in mind if we stop the overconsumption and the creation of new needs.

Maybe we won’t need to work crazy hours if we get everything cheaper anyway. This will reduce inequality and drive poor people to basic living standards. The same people that now require a 40-hour work-week at a low wage job.

To sum up, the future of our jobs looks less bright due to the automation approaching from all angles. I might be wrong and we see a productivity growth in all sort of areas with more human jobs in it. A shift from humans doing less shelf-stacking to more highly skilled jobs in new industries like space and biotech.

I have changed. I think Jordan is right. This time is different.

I was hoping I might be allowed to do business a few days before they told me to take my trade somewhere else. I walked in.

It was a whopping big place and there must have been at least a couple of hundred people there staring at the quotations. I was glad because in such a crowd I stood a better chance of being unnoticed. I picked out the stock for my initial play.

If you want a bit of stock market action from the 1900s Jesse Livermore never fails to deliver. Reading the story of how a successful trader started winning against “bucket shops” 100 years ago, reminds me how little has changed in investor’s psychology.

People wanting to make a quick buck. To double their money and win against the house. But winning against the house is not easy. It can be done, but it’s really really hard.

It also reminded me how in every zero-sum game for every winner there’s a loser (or a couple of hundreds of them). The bucket shops back then used to wipe out people day trading stocks on margin. Our book hero found a way to exploit the market and kept winning. So shops started banning him from entering.

He had to travel to different states, change names and pull tricks to allow him to keep “gambling”. This also reminds me of the thousands of pounds I’ve made matched betting, effectively betting against the house. Well, there are only so many years you can win against the house before it eventually says: No, sir, we don’t want your business anymore.

I’ll take my ~£20,000 and leave, thank you very much.

But to my previous point, I see a dramatic rise of day trading in free-trading apps such as Robinhood and our own FreeTrade here in the UK.

The influx of young, inexperienced traders is benefiting Robinhood. In March the start-up said it saw three times its average customer trading volume compared to 2019. That uptick continued through April and into May, Bhatt said.

I guess furloughed people have more time to gamble when the sports are on pause?

Commission-free trading is amazing for the retail investor. I’m so glad I can buy my ETFs on FreeTrade for FREE instead of paying £12.50 each time. Trading on zero fees has the amazing effect of driving down costs across the whole industry too. So what’s there not to like.

But it’s also a double-edged sword for the inexperienced newcomer. It’s too lucrative and the short serotonin releases your body enjoys can make it addictive. Hell, a person even took his own life after thinking he had a negative $700,000 balance. I don’t need to explain myself further I guess.

I’m not worried about the risk of people taking their own lives because of day trading. That’s close to zero. But a burnt child dreads the fire.

The stock market as a whole is an amazing “platform”. it almost works like magic. It takes your savings and buys tiny ownership of future innovation and earnings.

It’s a shame not to take advantage of it because “you’ve tried it out and it doesn’t work”. Imagine having lost 50% of your starting capital. You’ll think twice before entering the stock market again.

Obviously, having a go at the stock market can also be a good thing. There are elements that you can learn even if you’re day trading, such as slippage, trend following strategies, how you behave under pressure, how taxes work etc. They can go a long way in order to build wealth later on.

You also learn what’s out there! In terms of asset classes, geographies, sectors etc. If you’re curious you dive deeper and learn how companies are valued, why some go bust, economics and interest rates. You learn how the system works.

You stop blaming the prices that always go up because there’s pay growth too, assuming you have a job, of course. It’s likely that you also own assets yourself so the rising prices can benefit you too to some extent. Especially, if you have good debt, like a mortgage.

So it’s not all time-waste. Eventually, you realise that day trading is way too much fun to yield a good risk/reward ratio. As a hobby, it must be great. As a consistent way to build wealth, I highly doubt it.

But I’m not here to judge. You wanna have a go, I’m all up for it. After all, high turnover is only making FreeTrade shareholders richer and I happen to own a very thin slice of that.

You may have seen your bank deposits earn anywhere between 0-1% interest. That’s nothing compared to the 4-5% we enjoyed before 2008.

Governments have adopted this zero-interest-rate policy (ZIRP) to boost growth. The idea is to punish savers for holding their savings in cash and make them pay down debt, invest in risky assets and create businesses. These actions help the economy.

Obviously ZIRP has pushed all risky asset prices higher. House prices, stocks, gold, you name it. These assets usually go up anyway, thanks to inflation. But if money is almost free, then they go up even higher.

Now I’m far from an economics expert but I read a lot. And lately, a what would otherwise be a far-fetched clickbait title has become an upcoming reality in my view.

You will pay money to hold cash.

One thing governments do to try to create growth is money printing. You may have heard the official economic buzzword quantitative easing.

But another way, perhaps stronger way to boost economic growth is to lower interest rates. The theory is this: Loans are cheaper, businesses can borrow at more competitive rates to start projects and create jobs. People then have money to spend which boosts business profits and so on. Also, mortgages get cheaper! ;) Dalio has a nice video on how the economic machine works.

The US government reduced interest rates by 5% during the 2008 crisis. But we’ve been running a zero-interest-rate policy for 10 years or so now. If rates are already near 0, what happens when you cannot lower rates any longer? This useful tool is now useless. And taxes can only increase so much before the ruling party becomes massively unpopular.

Some countries have gone to the extreme and have dropped rates to below zero. Switzerland, Germany, Japan, Sweden and more. And their bonds are trading in negative territory. So you lend money to the government and you get back less than you invested.

Obviously some people prefer to keep their money in cash. Cash earns nothing, so nothing is better than minus!

Now I’m not sure why we couldn’t have increased rates before shit hits the fan. It may be that growth was anyway weak so increasing rates would cause a recession. But we are where we are.

What do I care? These non-sense bonds are not affecting my wallet

Here’s why you should care. Have you noticed that banks now pay almost nothing to you as a saver? Me too.

As I’m writing this article in mid-2020, the highest-interest paying bank is Marcus Goldman Sachs at 1.05%. Which has just stopped accepting new customers because they’ve received so much money in deposits. My mortgage is also at its cheapest, around 2.2%. I know some readers will point out some better deals in the 0.70% territory.

How banks make money

One of the main ways retail banks make money is by charging interest on money they lend. This can be mortgages, credit cards, business loans, overdraft etc. They can fund the loans using customer deposits and pay a small interest, borrow from other banks (aka interbank rate) or from the central bank.

Now, everything is working fine when interest rates are positive. Paying 1% to attract customer money is not that bad when you can lend it out at 5% and make 4% profit. But what happens when Bank of England rates drop to -2% and you lend money at 1%? Suddenly paying 1% for customer deposits is just too expensive.

If a central bank attempts to move its policy rate significantly below zero, commercial banks will see their interest margin compressed as long as they do not charge negative interest on deposits. If they pass on negative interest to depositors, those may, in turn, decide to switch from (negative) interest-bearing deposits to cash, which could lead to a substantial outflow of deposits from the banking sector.

This risk of substitution from deposits and reserves into cash is at the core of the existence of a lower bound on interest rates.

Assenmacher, Krogstrup IMF Paper, 2018: Monetary Policy with Negative Interest Rates: Decoupling Cash from Electronic Money

In other words, there is only so low that the customer interest on deposits can go before you keep the cash under the mattress.

If they pass on the cost to us, the consumers, then no-one will use banks for stashing money there anymore.

Which is why it’s really hard for central banks to drop rates to deep negative territory. Retail banks will start charging customers/businesses for keeping their money or otherwise they will make no money, and eventually default. Bad, and bad. People would withdraw all their cash before the bank takes their share. Cash has an interest rate of zero after all.

If this sounds too sci-fiy to you, the majority of Swiss banks have now introduced negative interest rates to customers with deposits of one million Swiss Francs or more. I guess it’s harder to keep a million under the mattress so you’ll have to swallow the negative rates. I’d say it’s coming to us faster than expected.

Will governments abolish cash?

An cashless society paves the path to deep negative rates without the fear of customers keeping cash at home.

Another proposal is to abolish cash altogether. But cash is what makes money… money! Obviously, this depends on which country you look at. Some countries like cash more than others.

Also, older people transact more in cash than electronically so that will disrupt them. In Europe cash is still the main form of payment at the point of sale. Plus you may want privacy in your transactions. Or you want to avoid being hacked.

Maybe we will see one of the following:

• Expiry date on cash notes
• A tax when converting cash to electronic money
• a lottery scheme that declares a certain number of banknotes invalid at regular intervals (yes I’ve read that too!)

What the IMF paper is proposing is a dual currency system. One local using cash and one electronic. Similar to what we have today but decoupled from each other.

Imagine going to the till: Your Big Mac costs £5.00 but if you want to pay cash that’ll be £6.20 sir!

Sweden has already started a pilot project to issue central bank digital currency, an e-krona that can work as a complement to cash. They’ve also issued a press release which includes: The digitalisation of payment may lead to cash not being generally accepted in the future.

Projects like this will definitely pave the way to a cashless society. And good luck keeping cash under the mattress if this happens.

I don’t know to what extent governments will keep pushing to maintain inflation targets and growth rates. It seems to me like the theory behind technology removing jobs and causing deflation is true now more than ever.

I’m also wondering whether people will seek to hold riskier assets to maintain their spending levels. Will this drive stocks and property even higher? What’s next?

Resources:

1. IMF working paper (Assenmacher, Krogstrup) Monetary Policy with Negative Interest Rates: Decoupling Cash from Electronic Money
2. The Riksbank proposes a review of the concept of legal tender (Riksbank)
3. Technical solution for the e-krona pilot (Riksbank)
4. What to do with negative rates (Klement)
5. Pragmatic Capitalism – Cullen Roche

Most people won’t get rich. Most won’t even try to get rich. That’s understandable because trying involves taking more risk, embracing fear and failure until you eventually succeed. Perhaps.

I’m not talking £1 million rich. That’s the comfortably off. Or even £2-3m for that matter. That’s the lesser rich. The tallest dwarf.

I’m talking £10m+ or even hundreds of millions rich. Succession rich. The kind of money that a successful business, or in fact, businesses bring. Measured in liquid net worth, not in a £1m London home.

The How to Get Rich book is a fantastic read. Unlike most self-help books, Felix Dennis, the author, has a net worth of hundreds of millions. Which made it even more intriguing for me to read. I wanted to read a no BS, anti-self-help book, and this is exactly what it delivered.

I won’t get into details why you would want to get rich. That would be silly! The freedom of choices, the wine quality, the sex, the power to influence and the ability to make your own rules are amongst a few I can think of.

How rich do you want to be? Rich enough to be happy! I’ve written before that after a certain level money doesn’t make you happy. Felix repeatedly says being rich doesn’t make him happy. Maybe the only BS in the book? ;)

Money is a drug for him. The more he makes the more he wants to make. It’s not being rich that makes him happy. It’s the pursuit of money that brings him happiness. Not the end result. Funny I know.

But becoming rich means by definition taking the path least travelled. Being on your own when people around you have stable jobs, kids in good schools and nice cars. Not Ferrari nice, but maybe Range Rover nice. Like a doctor, a lawyer, or even a software engineer for that matter who practice their craft well but are not entrepreneurial about it.

It’s not easy. But it can be done and is being done by other people as I’m writing this article. But let’s get things first right. The road less travelled is less travelled for a reason. Because it’s harder.

If you want to get rich you’ll need to:

• work a lot more than almost anyone you know
• be ready to disrupt your personal relationships
• ignore what your friends and neighbours think
• be ready to lose it all if it doesn’t work
• Not be afraid of public humiliation
• Be confident enough and treat money as a game

If you think you’re the exception, think again. Obviously, doing it younger in life is easier to justify than later. But later in life, you’ve got so much experience. You know how the sausage is made. You’ve probably got 1-2 acquaintances who are self-made multi-millionaires but are not as smart as you are.

So smart doesn’t bring riches. So what does? Great ideas? Not really. An ok idea executed greatly is worth much more than a great idea executed ok. I quite like this graph from Sivers:

Being smart and better educated are not requirements either. Smart won’t bring millions. Maybe a few hundreds of thousands, yes. Not millions. Smart people and talent work at top jobs and get paid handsomely for that talent. In fact, a fat regular salary looks to me like the biggest obstacle for making real money.

You have something to lose. And probably an Instagram-friendly lifestyle to support already.

Not everyone wants to take risks. The higher the salary the harder it is to ditch it and go for the unknown. The opportunity cost seems simply too high. That’s my thinking, anyway.

It’s no surprise that people start businesses after a lay off, or during uni.

So if not being very smart or educated or equipped with great ideas can bring money, then what can? Below you’ll find my 7 golden rules for getting rich after reading this insanely good book.

Rule #1: Own what you build

You don’t need to look far to discover business stories of founders getting sacked from the company they started. Even Steve Jobs falls in the category.

Getting capital sometimes means giving away part of their business. In the startup world, VC money and dilution can drive owners out of their own game.

So one of the most important rules of getting rich is having ownership of your business. As much as possible. Every percentage counts.

Felix suggests you don’t even have partners if you can. Pay people handsomely but don’t give away the pie. Self-made rich people don’t start with huge amounts of money or they wouldn’t be self-made in the first place. They have to start somewhere. Businesses require money to hire talent, have good infrastructure, distribution, marketing and operations.

Taking money from the big guys usually means ownership sacrifice. You should always strive for borrowing money from people you love and love you. The least popular avenues first: Friends, relatives, ex-colleagues, small investors may be willing to lend you money without ripping you off.

Take money from people who don’t demand extreme ownership and limit your costs in the beginning.

Ownership isn’t the most important thing. If you want to get rich, it’s the only thing.

Felix Dennis

Partnering with others should be the last resort. You first need to learn to delegate to smarter people than you are. Negotiate hard but never give away too much pie.

Rule #2: You can be rich because not everyone wants to

People want job satisfaction, security and a nice paycheck. They want to be appreciated and like meaningful work. You can’t have everything if you take more risk. Not in the beginning anyway.

Some other people, usually some managers, want to have power over others far more than they want money. It’s just the way it is.

The pool of those who want to get rich gets smaller and smaller once you reduce it to those who TRY to get rich. I consider myself smart enough to start a business. I also have a couple of ideas, mainly around investing for companies. But I’m not trying, am I. Or at least not hard enough. That’s one less person reaching out for your treasure.

Luck follows the brave or whoever is open to receive it. This may sound cheesy but it’s true. By writing this article I open myself up to many of you who will reach out to me. Maybe a few of the e-mail exchanges I will have with you dear reader will lead to future business opportunities. I’m increasing my luck surface area.

Don’t go after luck but set yourself up for opportunities. Not everyone does!

Rule #3: Go where the money is

Software companies, not car dealerships.

Biotech, not magazine publishing.

The Internet, not television.

Either go to an industry that’s not mature yet, or to an existing industry with a brand new angle. Beer production was here forever. How did Brewdog with its anarchist mentality succeed so big?

Banking follows the same story. How did Monzo and Revolut become the new way to bank? The same thing is happening with FreeTrade and investing. The reason it achieved a £140m valuation after a few years of opening shop is that it offers a new angle to the cumbersome way of buying stocks.

Rule #4: Don’t try to get rich to be happy

Sure you can buy what you want. Freedom, yachts, mansions, sex, islands!

But the author has met so many rich people who are not happy. Now that’s his words not mine.

Being rich means having people ask you for money constantly. Not being able to tell if they’re just being nice or they want something from you (although eventually, you will find out). The only people you can trust are those who knew you before you get wealthy.

This leads to loneliness and isolation. By the time you’re rich, you will be spending too much time trying to defend your wealth.

That to me looks gloomy and dark. But enough schooling. Maybe rich readers can tell us it’s all a lie we tell people to keep them from rioting ;)

Rule #5: Embrace fear and failure

Learn to live with fear. Failure can come and you should be ok with it. What other people think is one of the most common reasons people don’t make it big. And if your goals don’t scare you they aren’t big enough.

Failure comes in all sort of ways, not just business. If you’re after work-life balance, then leave the road to riches to others. Focus and determination matter more than anything. Family, lovers and the kid’s first school day are just distractions for the purposes of getting rich.

Never yet have I met a self-made rich man whose family or personal relationships were not plagued by the burden of creating a fortune, even a small fortune. A rocky marriage; lack of time spent with their children; the substitution of expensive gifts to repress guilt created by their frequent absences from home; their concern that their children have grown used to privilege and are consequently slacking in their education or lacking ambition – all of these come as part and parcel of self-made wealth.

There is no escape although each of us believes we can be the exception to the rule. Is this a price you’re prepared to pay?

Felix Dennis – How to Get Rich

You have to give priority to certain things, which is in my opinion, where (young) partners can help. I don’t fully agree that you should own 100% of the business.

Rule #6: Pay your taxes

The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing

Jean-Baptiste Colbert, French politician, Minister of Finances of France from 1665 to 1683 

This means you can pay the least amount of tax that’s legal, but still pay it! Even as a contractor myself, I used to have the freedom of taking out as much money as I wanted from the business. But my business money is not really my money. It belongs to the business unless I pay taxes.

And god only knows how much I hate paying taxes. But it’s the law. I can imagine how many ways bigger corporations have to get around it. Felix suggests that if you start getting rich, stay rich by paying your taxes. Not following his advice is a dangerous game to play. The upside is money, the downside is jail. Pick one.

Rule #7: Avoid the most common mistakes

Being cheap on talent, acting big instead of thinking big.

Not focusing on cashflow. I believe this is common to all new tech startups. They start with huge ambitions burning money in the first few years. But eventually, reality catches up. If cashflow is missing then no VC money will save you.

Cashflow is different from net profit. A company may keep reinvesting all its profits for future growth and may never be profitable (hello Uber, WeWork). That’s a choice, and probably a good one if you want to make it big in the zero-interest-rate world. But having no revenue means that the ship will eventually sink.

Run a tight ship but reward handsomely.

Pay good salaries and bonuses. They will attract the best talent and return a higher ROI. Make bonuses metric-driven and focus on the company. If the company does well then everyone should do well. Then this will drive people to oust slackers and focus on metrics.

Praise people who deliver outstanding results and do it publicly. But only criticise in person, everyone has an ego. Sell early when you’re on the way up. Being emotional with your asset can damage your way to riches. Remember, you want to be rich.

Does this mean that I should sell this blog if they offer me a good price? Feels hard to think about it.

Time to get rich!

As I said, this is a no BS book. It won’t grant you a guaranteed way to riches. But it’ll show you what sacrifices you need to make and what it takes!

There’s no single mention of stock investing. Your company is the stock! There’s one mention of property investing in the whole book – accompanied by the comment that although you can get lucky quickly, the space is crowded for that reason.

If you want to generate a 50000% ROI then you better start a business (and not fail).

Are you ready to get rich?

Related reading:

• How to be happy and enjoy life
• Can money buy happiness?

The US oil price has now bounced back into positive territory overnight, with a barrel costing a whole dollar.

The Guardian, 21st of April 2020

(not a sentence one ever expected to write)

This is the definition of supply and demand in a market which swings anywhere between “free” and “fully manipulated”. You see, oil is a funny commodity. On one hand, we have the usual demand from airlines, factories, cars etc. This has taken a big hit because nothing moves in the COVID-land.

On the other hand, we have suppliers, countries such as Russia, Saudi Arabia, the US, Iran etc. These guys normally have an agreement between each other to limit their output so that prices stay high. You probably have heard the OPEC cartel which consists of 14 countries that come into these production-cut agreements.

Then you have Russia and the US who are not part of OPEC but still want high prices. It’s a win-win situation. Until it’s not. Russia saw the falling demand while the Americans increased their synthetic oil production (aka shale) and said: “No, we’re not cutting ours”. Which caused panic as the Saudis increased theirs.

Global production increased at the same time that demand falls. As if that’s not enough, storage is running out. So traders and producers are running out of storage space and want someone to take the oil off their hands. Who knows until when.

Looks like the market is closer to free than manipulated right now. And that ladies and gentleman has caused the oil price to be negative. So the producers are actually paying people to take the oil that’s delivered in May.

Who will pay me to fill up my car?

Oil prices have hit negative but no, no one will pay you to fill up your tank. Ever.

The oil is negative in the futures market, which is a type of market where you pay for something that will be delivered in the future. So people who have paid for oil delivery in May have nowhere to store it. Desperate traders who hold the May futures contract want to pay someone to take the oil and avoid taking physical delivery. They will pay less money than what it will cost them to store it!

But unless you can take physical delivery of the barrels in Cushing, Oklahoma this info is nothing more than catchy headlines. The active price of the (WTI) oil for June is around $17 at the time of writing (24th April). still low but there’s a $50 difference between -$37 and $17. Have a look yourself on Yahoo Finance.

But as Big Ern likes to joke around, if you want to make a quick buck, all you need is a place to safely store the barrels until next month.

Buy oil, it’ll surely go up after COVID?

If you want to invest in oil, you must first understand how the sausage is made.

I believe we will see higher oil prices when things start moving. But there’s a problem. Retail investors like us cannot easily benefit from the price increase. There are huge ETFs like USO that track the oil price but they use rolling forward futures and suffer from the Contango effect. That’s when future prices are higher than the spot price.

These oil ETFs track the price of oil but in extreme movements like this, the 1-month future prices are much much lower than the 2-month and 1-year prices. This means that the ETF has to sell this month’s oil at low prices and buy next month’s/year’s futures at higher prices. Continuously doing that means to sell low and buy high.

So higher oil prices won’t necessarily mean higher ETF prices. How to solve this? I don’t know. What you’re probably looking for is an ETF that holds actual barrels. Not sure if ETCs like CRUD:LN that have a different structure suffer to this. If dear reader you know better, please enlighten us.

On another note, I guess most of us are looking forward to the economy opening up again. Not sure how we’ll do this, there is no playbook. I guess gradually while monitoring that COVID cases don’t spike again while waiting for a cure.

The times we live in…

But fear not for humanity. I’m not willing to bet against us, just yet. We’ll find a way as we always do.

This Gemfinder lists plenty of links to read on investing, financial independence and some podcasts too.

In case you missed it, I recently wrote the following articles:

• Investing during a pandemic. Meet Bob the world’s worst market timer
• How much will IR35 cost you? Outside – Inside – Perm
• Why you Should Invest Even If you Have No Money
• How to open a business brokerage account with Interactive Brokers

Investing

Once stocks fall 20%, long-term returns start to improve with every leg lower:

Howard Marks discusses the similarities between gambling and investing. As an ex-pro gambler myself, I know that the most important takeaway is this: In probabilistic areas (investing, gambling) luck plays a role. Therefore, you should not judge the quality of your decisions based on the result. It could be that you made the right decision at the time, but ended up being unlucky. This does not necessarily mean that your decision was wrong. You need to improve the process by running it many times which should reduce the impact of luck on the outcome!
I’ve read Thinking in Bets which describes exactly that, taken from Poker.
You Bet – Howard Marks (20-min read)

Capitalism on the way up, socialism on the way down. Professor Galloway has a point saying that big corps want to share the pain with everyone when they go bankrupt but don’t share the profits on the way up.
Capitalists of Cronyists? Prof Galloway (5-min read)

Vanguard thinks the Coronavirus crash will cause a sharp GDP contraction and then an upswing. What some people call a V-shape.
A sharp contraction then an upswing – Vanguard (4-min read)

A list of ideas, in no particular order and from different fields, that help explain how the world works. Some of them are SO important and always relevant. Like the Pareto principle: The majority of outcomes are driven by a minority of events. Explains how 80% of the traffic in this blog comes from 20% of the post.
100 Little Ideas – Collaborative fund (13-min read)

Value investing is not dead yet. I’m a big fan of Rob Arnott’s work.
Reports of values death may be greatly exaggerated – Research Affiliates (60-min read)

It’s funny that passive investors do all the buying during such times, as I’ve mentioned before. The selling is done by institutions combined with a lack of buying from corporations. I think this is great news for us, passive investors as a community. We have been accused of causing the “index bubble” – if this makes any sense whatsoever. We will see what passive investors do when the market goes down. Here, we’ve just seen – they’re hanging in there.
Who fueled the fastest bear market ever? Schwab (5-min read)

Meb Faber is one of my favourite hedge fund managers. Buffet commentary, expectations management and history. Great gem.
How long can you handle underperforming? Meb Faber (6-min read)

Although gold alone is an asset not worth investing in, it may have its place in a portfolio for diversification purposes, especially in gloomy times. My own opinion is that we’ll see gold shine more if the QE and UBI efforts of central governments make fiat currency be worth less. More money chasing the same goods.
My thoughts on perma bears and gold – Value stock geek (19-min read)

Stunning data/analysis from Damoradan on equity risk premium, real estate and bonds.
Price of risk – Damodaran (9-min read)

Personal Finance

This mind-blowing article explains very well why Money is a subjective thing. When I think of the money I think safety, freedom, holidays and endless possibilities. In that order. Freedom as leisure, freedom in work. I’m also donating to this guy through Patreon because I think his work is of very high quality.
Money – More to that (30-min read)

Unsurprisingly, the average UK FI blogger has a 105-age stocks allocation and owns multiple assets. I’d say most of us are still in the accumulation phase.
The asset allocation of UK FI bloggers – Med FI (4-min read)

Some people here max out their SIPPs, ISAs, capital gains taxes and then look at VCTs. Here’s an article by Finumus saying that VCTs are structured with fees so high which makes the whole thing not quite attractive.
Don’t invest in VCTs – Finumus (5-min read)

Podcasts

James Clear, the author of Atomic Habits (great, great book) talks to the Choose FI guys (Podcast) about setting goals and building systems. This guy is very reasonable and I can see why his book is now a best seller. He also has one of the best twitter feeds ;)

City living: Is it healthy? Can it affect our mental health? Are there ways to offset the stresses of living in a big city? This is a new podcast from Thriva, the blood test service [get £10 off if you use my affiliate link]. It’s called “How does *blank* affects your health”.
Thriva Episode 02: City living

Dan’s firm does a lot of quantitative research to spot what works in the markets. In this episode he talks on the Invest Like The Best podcast about the assets they focus on.
Investing through a crisis – Dan Rasmussen

Damoradan, the NYU professor is the voice of reason both in calm and turbulent times. I quite like his data-driven approach. He even gives stock index estimates from a fundamentalist’s / fair value point of view.
Aswath Damodaran talks to Prof Galloway [Jump to the 18th minute]

And an article for fun:

If you want to know how pawn shops work, this is your article! The Hustle breaks down the economics of Pawn Shops in such an interesting way (also recently watched “Uncut Gems” and found it brilliant! If you can bear the unstable camera shootings).
The unpredictable economics of pawn shops – The Hustle (6-min read)

You can read the previous Gemfinder articles here.

As I’m writing this article, I’m stuck at home for about a month now, only going for the occasional walk and the visit to the grocery store. I would have skipped the big supermarkets too but online deliveries are a rare find these days here in London.

I was never a party person, quite an introvert to be honest. Hell, even my own meetups feel slightly uncomfortable to organise!

But even for someone like me, staying at home is tough. I occasionally have the so-called cabin fever and going for walks/exercise helps. Besides the difficulties of trying to work with a baby in the house, I think staying at home for a month changes how we think.

For starters, staying at home makes you realise what you miss and what you don’t. For example, although I was a regular restaurant type, I don’t miss it much, if at all. What I miss are the friends and our get-togethers but not the actual food or alcohol.

My social life is super important to me. I miss the home gatherings. The restaurants, not so much.

We used to cook at home a lot anyway so that hasn’t changed.

Then I miss playing football with friends. We have a great time which relieves stress and gives us a good type of muscle pain for a few days. Watching live sports is another one.

Staying at home forces you to spend so much time with the family. Not everyone likes it. At one extreme, domestic violence has sadly gone up during COVID.

I had never spent all day every day with them for a month and I must admit I quite like it. Sure, I miss some me time though. But as long as there’s a balance I’m quite happy. Even having lunch with them and a short walk in the afternoon makes life better.

I miss going to the office. I can speak all day about how post-FIRE must be better than pre-FIRE but going somewhere regularly still adds value. Maybe, like Morgan Freeman, I’ve become too institutionalised?

I don’t miss getting dressed for the office though.

One can argue that you can always find a regular “office” after FIRE. Can’t argue with that.

I can’t say I miss travelling, as it’s only been like that for a few weeks. But if you tell me I can’t travel until August, I’ll certainly miss that. We just cancelled a 2-week trip that could’ve been a very good experience.

So overall, staying at home makes me realise we live very simple FIRE-y lives. Life is centred around friends, family and experiences which means I should keep focusing there because this is what makes me happy.

What are some things you really missed during the lockdown?

Investing

Such a weird quarter. Many people have faced a “personal recession”, either because their businesses lost major income, they were made redundant etc. Which is why it’s so hard to keep investing during the crisis.

If like me, you’re one of the lucky ones to keep your income then you probably have a higher savings rate than usual. And more to invest at cheaper prices.

We experienced a -35% stock market fall. Property Partner has stopped paying dividends for 3 months. This doesn’t surprise me as almost half of UK companies have scrapped payouts too. No place to hide for risky assets. If people can’t pay, they can’t earn.

But the recent crash we experienced taught me that psychologically, I can withstand much bigger losses.

Sure, I was afraid but not too afraid to look at my portfolio, sell or change my strategy. In fact, I kept investing. Does this mean I should probably have a more aggressive portfolio going forward? If I’m not swimming naked, am I wearing too many clothes?

Then a 60% equity allocation is the maximum to go for if you want to FIRE in 5 years or less. Which means that from a sequence of returns risk perspective, I should not change my allocation. I’m not making any changes for now and sticking to the plan.

The unbelievable support of all governments to save the economy has surprised me. Governments around the world pay households and the businesses employing them. In the US, the Fed has effectively guaranteed that it’ll pour money as long as needed to provide bond liquidity. The markets took a very positive stance which is why the S&P 500 is only -17% from its pre-COVID levels. Astonishing.

This all comes at a cost and the magic money tree will have to be paid back probably in the form of future taxes. But that’s necessary as long as we kill the virus first. Can’t spend your money if you’re dead.

Michael Batnick got me thinking. What if the stock market has become less risky going forward?

If the stock market during the worst economic contraction in 90 years can be smoothed out by government spending and Fed actions, does this change the risk-return framework in the stock market going forward?

One can argue that this is a humanitarian crisis so they’ll do everything they can to keep the markets running smoothly. However, what if they don’t let businesses fail next time round when it’s a housing crisis, oil crisis etc? As Gallaway says, are we capitalists on the way up but socialists on the way down?

Should markets be more expensive because of that? In any metric, the stock market is overvalued compared to historical averages. Is the overvalued stock market justified because it’s safer from a 1929 depression-like fall?

All things considered and with negative rates all around us, is this another call for a more aggressive portfolio?

To conclude, I think the terrible situation we’re going through provided us with some positives too:

• Identify what we really value and what to change when we get back to normal
• Fine-tune our portfolio according to our true risk-tolerance

What about you?