Two things cause a stock to move- the expected and the unexpected. -Gary Helms

I recently finished reading Reminiscences of a Stock Operator by Edwin Lefèvre. It is a story about Jesse Livermore and his journey of learning the markets. It was not always a pleasant ride for young Jesse. I think he went bust (lost it all plus owed some) at least three times throughout the story. I was getting the shivers just reading those sections. It really made me want to trade again though. However, my taxable account with vanguard is still intact probably for the better. I had the money-suicide urge to liquidate it and go all in on NAT since it was very beaten down. The ever elusive double-bagger still escapes me. I am still in my boring index funds. I took away five points from this book that can be implemented even with a (boring) long term perspective.

1) Less is More

The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages. (Reminiscences of a Stock Operator)

Less is more sounds very yoda like, but what does it mean? A couple of things come to my mind. First, commissions can start to eat away at your account. Commission prices are relatively cheap these days compared to what they were before I was dabbling in the markets. However, if you have a small account or place a lot of trades then commissions could quickly become a factor. Next, is everyone’s favorite, taxes.  If you sell the security before a year then you will be taxed under the short-term capital gains rate as opposed to the long-term capital gains rate if held for greater than a year. As I am not a tax professional and taxes are not my forte that is all I will mention on that. I did get to experience that first hand this year. I am not a fan.

2) Know Yourself

A stock operator has to fight a lot of expensive enemies within himself. (Reminiscences of a Stock Operator)

There is a whole new(ish) field about this topic called “behavioral finance.” If you want the quick and dirty then check out the wiki page: https://en.wikipedia.org/wiki/List_of_cognitive_biases

A good easy to read book on this subject is Your Money and Your Brain by Jason Zweig. The book talks about heuristics which is just a fancy pants word for mental shortcuts that we all have. This is a good thing for driving your car down I-95 but not such a good thing for putting your hard earned dollars to work. I think one of my own problems with trading/investing is confirmation bias. This means I find information that supports my position and put up blinders to everything else. I am very glad that I didn’t liquidate my account and go all in on NAT. However, I am a glutton for pain and keep checking the price of it to see if/when it takes off to the moon!

3) Have a Plan

What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favored my play. (Reminiscences of a Stock Operator)

A “duh” point but few people survive that long in the markets without one. Many people take on too much leverage or have too much exposure to a single equity. Some try to time the markets. Some successfully time the market but most do not. There are many different plans with different time horizons that can all be used successfully if followed. Personally, I am focusing more on asset allocation with index funds. I am trying to keep:

  • 35% VTIAX
  • 35% VTSAX
  • 10% VSIAX
  • 20% VBTLX

I plan on re-balancing at +/- 5% of goal allocation. This will help me unemotionally ‘buy low, sell high.’  This took some tinkering and thinking for me to become satisfied with. I originally wanted 0% bonds! However, I have not experienced a snarling bear market yet so I finally convinced myself that it was prudent to have a portion of my portfolio allocated to bonds. I don’t expect to increase my bond position (of 20%) for a very long time. I have no idea if US or International stocks will outperform in the years to come. I have read points for both sides. “DOW 30k, DOW 50k, US Stocks have poor outlook, US stocks likely average 4% or less,  International stocks better value, etc.” There is no way Britain will pull out guys. Right? Right!?! That evening / next morning solidified in my mind how bad we are at making predictions.  I am no different. Oh yeah, and I like to tilt to small cap value with my VSIAX fund. Some will scoff at it being considered small cap value. It’s done right by me, and I kind of like the (lack of) fees too! Do you have a plan? If it can help you meet your goals, stay within your risk tolerance, and lets you sleep at night, then my friend, you have found a keeper!

4) Learn from Mistakes

There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn! (Reminiscences of a Stock Operator)

Even with the best plan, there will be setbacks and mistakes. As long as you can learn something from the mistake then it is not a complete failure. I have unsuccessfully shorted one stock that I do not even remember the name of. It was some pharmaceutical company that looked like it matched a set up for a short position from what I had been reading. However, before entering the position, I decided I would place a tight stop and only risk $38. I was able to get in the position at the price I wanted and then placed my stops. I got stopped out and lost…$38. I learned that a set up on a chart is by no means a guarantee that you will get the ‘expected’ result. I was happy with my money management in this scenario. Another mistake I have made a couple of times is buying the ‘value trap’ or trying to ‘catch the falling knife.’ The common phrase “it cannot go much lower than this” has probably broken a lot of brokerage accounts backs. KMI…

5) Market Timing

I have said many times and cannot say it too often that the experience of years as a stock operator has convinced me that no man can consistently and continuously beat the stock market though he may make money in individual stocks on certain occasions. No matter how experienced a trader is the possibility of his making losing plays is always present because speculation cannot be made 100 percent safe. (Reminiscences of a Stock Operator)

We have all read the stats about timing the markets. Many books like A Random Walk Down Wall Street talk about it. Why do we keep trying to do it then? I am more and more convinced it is  for the thrill and mental challenge of being ‘right’. However, if I want a thrill, I will go sky-diving (no thank you), and if I want a mental challenge I should do chess puzzles. The market is an expensive way to seek out thrills and an expensive way for self-discovery. I may eventually add money to my other brokerage for a mad money account. This will be a set dollar amount to play with (being honest it’s play). This will help me avoid the stupid urges I still get like liquidating my account to go all in on NAT. Reading this book made me want to do iron condor and butterfly trades, and I have no idea what those even mean!

Reminiscences of a Stock Operator is a classic that  will definitely keep your attention if you are a market enthusiast. Jesse Livermore had an interesting journey that can maybe help your own trading/investing results. Hopefully you will not have to go through the pain of losing it all to get on the right path.

 

“Take care of your pence, the pounds will take care of themselves.” -Andrew Carnegie

The standard age of retirement is 65 give or take a few years. Some people never even get to retire due to their circumstances. A lot of this is due to socially accepted expenses: student loan, mortgage, car payment, cable, phone bill, internet, etc. I am not here to say which is good or bad because it will depend on a lot of things. However, the book Early Retirement Extreme: A Philosophical and Practical Guide to Financial Independence by Jacob Lund Fisker will challenge everything that you spend your Washingtons, Lincolns, and Franklins on! (His website is http://earlyretirementextreme.com/.) (I will use (ERE) to quote the book mentioned above.)

From his ‘about me’ section on his site: “My name is Jacob. My greatest claim to fame and overall impact on the world is probably this blog and the concept of ERE. Before that I used to be a nuclear astrophysicist, but in reality I’ve done many other different and (to me) interesting things and my aim is to continue this way of life for the rest of my life. Never getting bored.” Yes, he has a PHD…in physics! If you read the book you will realize this because there were times he dove into very complex equations. I generally just skipped over those and just nodded my head. Also, this is not your typical fluff e-book that takes only an hour to read and offers little new information. Those ‘books’ are like thinking you are about to watch a new movie only to find out that it’s a 2 minute trailer! (I bought popcorn for this!?)

I will admit that I have not read heavily in the Early Retirement category when it comes to books. This is mainly due to my love of reading about the tactics (investing) as opposed to strategy (general money saving / gaining ideas) to reach the goal (early retirement / financial freedom). I thought I was dipping my toes into strategy only to find out that I had been pushed into the deep end of the pool.

The Opening Rant:

“Compared to people just 50 years ago, modern wage slaves live a life of material abundance. They’re consumers. They have big-screen TVs, movies on demand, microwave ovens, food processors, and 24-piece flatware. They own multiple pairs of shoes and enough clothes for more than a week without doing laundry. They have carpeted floors, matching furniture, and vacuum cleaners. They have expensive toys. They have car payments, college degrees, five-bedroom/three-bathroom mortgages, laptop computers, cell phone contracts, power tools with 108-piece bit sets, premium cable, air conditioning systems, blenders, food processors, pool tables, DVD players, and granite counter-tops. They redecorate, attend sporting events, go on vacations, and occasionally play with their toys (ERE).”

I know that was a long quote, but that sets the tone for the rest of the book. The philosophy that he proposes (and follows) is based off the 17th century Renaissance ideal and “the craftsmen of the 18th century who wrote the Constitution of the United States at the peak of the Age of Enlightenment (ERE).” He admits that not everyone will agree with or like this philosophy. This philosophy is challenging. It is extremely challenging for someone who loves consuming!

Be Prepared to be Questioned:

“There will also be resistance from ‘well-adjusted’ people who like to see everybody fit a particular mold and who don’t tolerate anyone with different values. They’ll tell you that you are unrealistic and irresponsible, and maybe speak of duty: ‘If you don’t work, you’re lazy. If you don’t spend, you’re unpatriotic.’ This makes me think of the social experiment about line length. A group is asked to say which of the three lines is the same length as a line already given. Only one member (the subject) has not been told to conspire and say the wrong line. In a majority of the cases the subject will go along with the rest of the group and pick the wrong line! It’s easy to say ‘I would not do that’ but pressure from a crowd makes ‘easy’ decisions very difficult. Crowds love pulling people down.

“The mass never comes up to the standard of its best member, but on the contrary degrades itself to a level with the lowest.”  -Henry David Thoreau

The author makes the concept of retirement seem absolutely silly. “Retirement is a relatively new phenomenon. It comes from people having decided that rather than using the time saving technology and inventions that appeared around the first half of the 20th century to live a life of leisure, they would live a life of shopping and work until they could no longer function as useful–that is, income earning–units in the production chain and had to be set aside (ERE).”

How Did He Retire Early?:

He became a Renaissance man: jack of all trades and master at a few. He does almost all projects that people would outsource to have done by himself or with friends. He lived way below his means. His savings rate was around 70%. He was able to eventually only work 4 hours of week in a type of coding for science papers that allowed him to have enough to cover the rest of his costs. He doesn’t waste a lot. The author is married, lives in a mobile home, and has an annual cost of living of about $11,000. That’s pretty crazy…maybe even a little extreme!

It will always be impossible until you think it’s possible and start taking the necessary steps to progress in the direction of your goal. Early retirement is no different. Many people will immediately say things like:

  • “I can’t save 70% of my income.”
  • “I have to have a car.”
  • “I can’t learn to do more things on my own.”
  • “I need an extra 2 bedrooms for guests.”
  • “I can’t stop eating out.”
  • “Everyone has to have a job.”
  • “That’s nice but not everyone can do it like he did.”
  • “I don’t want a roommate(s).”
  • “I have to have a house.”

That’s a lot of have to’s, needs, and negativity that until challenged will prevent someone from achieving early retirement. Early Retirement Extreme: A Philosophical and Practical Guide to Financial Independence will challenge the way you think and give a mental model to pursue this goal. It is not a step by step book.  It offers many different strategies where one can then go research the details from another source. There are enough ideas where someone can cherry pick the ones that will fit with his or her lifestyle. However, it is possible that some reading this book might realize that they will have to change their lifestyle to have a chance at this goal. Saying it (Early Retirement Extreme) is a piece of cake would be a lie. Saying it is impossible would also be a lie.

What do you think about Early Retirement Extreme? Has anyone else read this book or read other works from his site?