Fear and Loathing on the FIRE Trail

My friend David Graham who’s opinion I greatly admire wrote a post called Fear Greed and FIRE. It poked a little fun at Star Wars while proposing a common investing point of view. I decided to counter with my own Hunter S Thompson-esque rebuttal proposing an alternative investing view point and a critique of common Bogglehead investing philosophy. Read David’s piece first as a set up to understand mine. Knowledge is best obtained against a backdrop of contrast. I didn’t want to litter David’s site with 3000 words of my own.

In reply:

You write 2 articles about peri-retirement risk and the notion that 10 years before and 15 years after you should “risk off” i.e. take some risk off the table. Then you come out with the mantra “stand tall young man/woman while the market mows you down, there is nothing you can do!!”

You are quite right, market timing when the horse has left the barn is stupid and deadly. It does not mean at some level, all market timing is deadly. Buffet is the ultimate market timer even though he likes to folksey up his analysis with “stand tall young man and let the market mow you down” His interest is in buying your shares after the crash. Buffet RIGHT NOW is holding a ton of cash. Why is that? There is nothing he is interested in buying AT THESE PRICES aka market timing, so he’d rather sit on cash than buy high. He does not DCA he buys low. I own a lot of BRK.B because I believe in Buffet’s market timing ability despite the rhetoric. You have to analyze what he does not what he says.

If you think about it and you go to work at 20 and retire at 30, according to your mantra you should start de-risking at 20 and stay de-risked till 45. So how do you make enough yield to cover 60 years of FIRE? How do you not run out of money? Are you using one of those double sided light sabers? Keep risk on, and Keep risk off?

The way money is made is you buy low and sell high. The thing you buy is risk. You buy IBM you are buying IBM’s risk, and you are hoping to reap IBM’s return but that return is not guaranteed by any stretch because what you own is risk. The reason Buffet is sitting on a pile of cash is he chooses to not invest in too much risk so he stays in less risky cash waiting for his entry into the risk pool, constantly analyzing risk opportunities. Essentially Buffet is waiting for recession. The chaf will go bankrupt, the strong will be beaten down, the naked will show themselves and he will buy low or GEICO will sell them a bathing suit. It’s that simple. When will buffet sell? Oh yes Buffet sells!! He sells a lot!! He sells HIGH!! That’s why Buffet is rich. BRK.B has outperformed the S&P 500 by 1.5 to 1. BRK.B is cheap to own Mine cost me $5 to buy it. BRK.B is well diversified they own 63 companies as well as a portfolio across many sectors. They are managed NOT passively and clearly outperform the market by a lot through judicious market timing yet the Boggleheads decry BUY PASSIVE, BUY CHEAP, YOU CAN’T TIME, STAND THERE AND TAKE YOUR LUMPS LIKE A MAN!! That advice is a load of crap IMHO. 2 times in my life I lost 1M in market value 2000 and 2008. I wish I had risked off before the crash. In 2000 some funds I owned (note “funds” not single stocks, supposedly diversified) essentially went to zero because the paper they contained was worthless, so don’t think standing tall can’t clean your clock. I made it back because in 2003 the week the Iraq war started I plowed a different 1M BACK into the market. I had the Buffet choice to make, be greedy when every one else is fearful. I asked my self this question”do you bet with America or against?” I bet with and bought low. 2000 was a different recession than 2008. 2000 was trading fairy tales. 2008 was trading unbelievable over leverage. 2008 was musical chairs. In some respects 2008 was worse, since in 2008 we could have and likely should have gone into depression but the FED and Hank Paulsen ginned up QE and moved 4T of bad paper off corporate balance sheets. It was either that or every bank, insurance company ad investment bank was going bankrupt and you can’t run a country without a financial sector. The ghost of Paulsen still haunts us because now it’s the fed’s job to bail us out aka we are living in the land of moral hazard. At some point the fed won’t work. The fed will pull the lever and it will break off in their hands. You can see it in Europe with 14T of negative bonds. Their lever already broke off. You can see it in Socialist Norway who went into default over free health care. Their lever already broke off. If you’re riding on a train and the lever breaks off and you can get off before you die GET OFF. (sell high scenario) If you’re riding on a train and the lever breaks off and you’re dead already, not much point in getting off, dead is dead (sell low scenario). No amount of levophed is going to do the trick.

The problem with FIRE is they are all worried about retiring early rather than worried about making sustainable money. Every year of retirement under the SS FRA, is adding leverage to your life. You are making a bet the economy will outperform, because you need out performance to survive, BUT your performance is linked to cheap passive funds which by definition can’t outperform. The economy out performance is your Millennial Falcon. No out performance you’re hosed. This MUST be the case since you own cheap passive funds that NEVER do better than the market by definition and you own them is some fixed AA and you own likely own TOO MUCH RISK and you pretend you are tough and can take a licking and keep on ticking. 50 years is a long damn time.

England once was the premier economy. That worked till the world wars, then the order changed and the US took over. Do not think the US is invincible. China is licking its chops If you own passive funds you also own the countries risk. It took 2 wars and a lot of dead people and huge deficits to settle the country risk pecking order in the last century. We are in the first phase of that war today.

I made a lot of money last decade. I study this extensively and personally I think the whole world is rolling over. There is too much debt. I’m concerned enough I sold some risk and invested in something less risky. I sold stock and bought gold and bonds. There is a second way to reduce risk and that is to diversify it away, using an efficient frontier plane. I’m in the process of applying that risk management process as well.

The efficient frontier calculates portfolio efficiency aka the most return for the least risk for a given set of non correlated assets. Correlated assets provide no to trivial diversity. Currently my asset classes are described by VTI BND BIL GLD and BTC. I own more sub choices than this but these describe in general my non correlated risk map. More than this the analysis becomes too complex to write about. Each of these are virtually uncorrelated with any other asset on the map, and exist in a specific asset allocation yielding the most predicted return for the least predicted risk.

There are other ways to manage risk except to stand there and take it like a man while your legs and arms get chopped off. If you’re a bogglehead you may get your head chopped off. That big old head is a tasty target.

I present this as point counter point comparison. It’s not about winning it’s about understanding.

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