Playing With FIRE

This post is partly about the eponymous movie, featuring outgoing FIRE exponents like MMM. It will be shown in Birmingham on the 5th of July, well done Cashflow Cop for getting this shown outside the Great Wen. But I couldn’t help thinking about the other meaning, too…

The Ermine is an introvert¹, so I fought the FI battle as a loner. For sure, I learned from other people – Monevator for how and sort of why², Early Retirement Extreme for why though not so much how, I was too old and too wedded to some creature comforts to live the ERE life.

At that time the FIRE blogosphere was ruled by introverts too, unlike now, where I’d say extroverts rule the roost. I’m glad I started when I did, because I could relate to people’s narrative. We were crawling from the twisted wreckage of the credit crunch. The credit crunch had squeezed The Firm I worked for, and what had been a decent job for 20 years started to go bad, fast.

I read this post shortly after what I interpreted as a manager trying to run me out of the company. I was more than a decade away from retirement and needed a fast track out. I had been living the usual life of hedonism, though I didn’t carry consumer debt.

The world looked very different then – as Monevator described people’s emotional state was in the pits, the financial world was ending. I read that, and yes, I was one of the people that thought he was barking mad. Rather that yell abuse, however, I asked myself “what if this nutter is right, there is some logical coherence in what he says”. If he were right, this was a remote chance to stick a rocket on my exit plans. So I bought. That committed money to a remote chance, but that money wasn’t anywhere near enough to buy me out of 10 years of working. Looked at in that way, it was a rational choice, though a long shot.

I chose individual shares and a HYP approach, because I thought I was smarter than perhaps I was. I still have most of those HYP shares. It didn’t matter what you bought then, everything was down the toilet. It mattered that you bought.

Swimming in troubled waters – if I will fall, may I fall slowly, all is lost

I recall coming across the song Désenchantée from a colleague, and even with schoolboy French I got the feeling and it matched my mood playing on my work PC as I put half or the 2008/9 allowance into a Cash ISA and half into an III S&S ISA.

I had been slaughtered in the dot-com bust a decade before. Intellectually I saw the logic of Monevator’s words, but I did not feel that there was any hope, after all, it hadn’t worked out that well last time. I invested that money because I saw I was going to fall, though not when the end would come³. I did not have 10 years of working life left ahead of me. Your late 40s is often a troubled time of life,  you cannot live the afternoon of life by the principles of the morning.

The next month I did the same again, in the new tax year, but I also signed up to the company salary sacrifice AVCs and pushed my pay down to virtually the minimum wage, investing in a 50:50 UK:Global index fund. The other options were cash or 100% UK. I did not do this because I was an optimist, I was of the view that this was most likely a lost cause, but that there was a worthwhile chance.

The modern FIRE landscape is a very different place from that lonely and desperate world

We stand on the ramp of a long bull run from those troubled times. Extroverts are optimistic guys, they need to feel things can only get better. Let’s hear it from MMM on the practical benefits of outrageous optimism. Pete isn’t the sort of fellow to play Désenchantée on loop as he throws overboard the trappings of a comfortable middle class lifestyle into the bottomless stock-market pit for a low chance of a big win. He knows he is going to clean up and face-punch the bad guys. Every last one of them. Self-doubt is for pussies.

His story is better, and it’s been turned into a movie. Well, there’s more to it than that. Apparently it was shown in London earlier this month. I totally agree with Cashflow Cop that it shouldn’t just be the Londoners that should get the benefit. CfC has been instrumental in getting this sorted so it will be shown in Birmingham on the 5th of July. Take a look at Cashflow Cop’s site more generally – he is a UK FIRE aspirant who doesn’t live in London or work in finance. As for the movie,

It’s all rather American, but the principles of financial independence are the same. Go and see it for inspiration, particularly if you are an extrovert.

But leaven the feelgood story with the knowledge that…

Winter is coming

The cynical Ermine raises a wizened claw to all this feelgood feeling. If you are at the start of your FI journey, then you need to take special care, because winter is coming to the world of finance. You do not know when, it could be next year, it could be five years’ time, I would be surprised if it is as long as ten. Stock market valuations are high compared to historical levels, and geopolitical risk is ever-present. Strangely enough that is not necessarily a recommendation to do anything different. Invest, by all means. Steadily, and in a globally diversified way. But be prepared for your mettle to be tested.

I am the Ancient Mariner, and you millennial FI sorts are the Wedding-guest

You cannot reliably derive investing plans from valuations⁴. It would seem wise, however, to adjust your FI risk profile. At high valuations like now, it is reasonable to allocate your spare cash to safety first – eliminate unsecured debt⁵, get your emergency fund in order (three to six month’s running costs, in cash, in liquid funds, or if you have balls of steel and can properly understand this post,⁶ as a credit card line of credit). That is sensible at any time before investing, but particularly so now.

So you are saying markets are high, don’t invest?

No. Why is that? The reason is that for most people getting to FI from starting work is a journey of a couple of decades⁷. You will see more than one market cycle, and by regularly investing you integrate over these market cycles.

But be prepared. You will see a market suckout, and these are emotionally tough. When you see drawdowns of 50% in a year, you will feel the irresistible urge to sell. How do I know?

I was that guy. In the late 1990s we were all going to get rich. Dividends were trash, the dotcom companies were going up and up and up. Until Wile E Coyote looked down, and saw there was very little profitability in this biz.

FTSE100. Don’t start in the late 1990s, and it’s even worse if you work in tech and think tech is all there is. The early 2000s drawdown was brutal, particularly in tech stocks. Guess when I got out of the market? I know the graphic’s a little out of date, at the time of writing it’s still up there

I lost about £7k then. I was investing from earnings, and I could afford to lose £7k (about 11k now). These days I look on that fondly as the cost of tuition on how to use the stock market. You can easily spend more than 11k on people telling you how to be a shit-hot trader and get rich quick by day-trading.

The result of the training in the Stock Market University of Life is basically:

Know why you are buying this stock at this time, and what you expect from it. Ask is that expectation reasonable?

Do Not Sell ⁸ (in my particular case, because I learned that I perhaps was OK on when and what to buy, but was bad and jumpy on selling.) I have since read that professional investors have the same problem. I have an advantage over them. I can simply shut down selling, because I am not paid to do stuff in the markets to justify my pay packet.

Celebrate market lows. By buying into the suckers, not selling into them, you doofus

It’s easier to apply that training if you start to buy into the market at low valuations. Let’s face it, even if you manage to put in the £20k a year ISA allowance, the typical yields now available of ~3% aren’t enough to butter the parsnips after five years. It was a time for vague celebration when my ISA was paying more a year than JSA⁹, which meant I would never have to go to a jobcentre to go through the mental torture that is qualifying for contributions-based unemployment benefit.  This came after fewer years of my investing career than if I started now because I bought into higher yields at low valuations.

If the stock market falls 50% tomorrow I still have a reasonable lump of wedge, because I bought a lot of my holdings at less that their current valuation. Someone buying now and seeing a 50% suckout in a few years time is looking at a gut-wrenching real-terms loss. The rationalists are going to say well it’s all a loss, I should be as pig-sick as the new guy. Maybe I should, but having been there the other way round I am not so sure.

The ancient mariner in Coleridge’s The Rime of the Ancient Mariner had seen some things the Wedding Guest hadn’t experienced. I have been through two gut-wrenching stock-market suckouts. In the first I did the wrong thing. In the second I did the right thing. Putative FIRE aspirant, you will pass through the same sort of trials. I can’t guarantee that I will get this right next time, but I will do my level best, and I have greater understanding.

Be warned. The time of the introvert FIRE aspirants will come once again. Perhaps there will be another burned-out Ermine in a large FTSE100 company  lost in the tempest seeing his career flame out as all around screams don’t touch the stock market. And in the storm there will be a very weak signal, the unsteady light of a distant lighthouse showing the path to a distant haven. Perhaps Monevator will still be on station and sound the trumpet into the low-water mark.

For the FIRE aspirant fortunate enough to be poised at the start of their journey, heed that faint call in amidst the noise of the storm. That will be the time to buy. For all the rest of us, that will be the time to hold on and DO NOT SELL. If we can accelerate buying, well, all to the good, but don’t be greedy¹⁰ out there if you can’t stand watching the rout. Above all else, DO NOT SELL.

So, optimists, go watch the movie, and do the right things. Get the basics right, they are independent of the stock market. But once you get to investing, do not let your optimism fail you in your hour of need. That hour will come soon enough. Do not capitulate. If you need to hold some cash or gold to reduce the potential drawdown, well, do just that. You could do worse than read about the Harry Browne portfolio, I considered this in 2012 and the principles informed some of my investing, it is why I have a significant amount of gold. Don’t screw up like I did, however, and stick gold in your ISA. ¹¹.

Do not invest above your risk tolerance. The younger Ermine split the difference in that first couple of ISAs, though I was equities all in in the pension and after the first couple of years. In hindsight the Cash ISA was a total waste and a real-terms loss until I finally shifted it into my main S&S ISA. But perhaps it performed an intangible role. It stiffened the spine, and limited my forecast worst-case losses to 50% as my investing career got out of the gate.

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1. Less so as a retiree, it so happens, but still well on that side of the spectrum ↩
2. Sort of why because I quite fundamentally disagree with Monevator that work is of inherent value. Our axioms are different. Even before the crisis if I had had enough money not to work I think I would have gotten straight out of Dodge. I am at variance and probably in the minority of FIRE folk with this renegade attitude. ↩
3. I applied to internal transfers to get out of that division and fortunately found a niche using a legacy skill that took me to 2012, another three years. They were tough, but I was at the peak of my earning capacity, so those three years counted for much more than say three years at the start of my career ↩
4. I say this because it’s the officially sanctioned story, and as a responsible writer I should give you the generally accepted wisdom. I don’t personally believe it. The signal isn’t strong, the emotional storms around it make it tough to use. It’s not something that you can use right now. In theory some talented people might be able to use it on the sell side, and they are probably getting out now. But I have been able to use valuations on the buy side, arguably Monevator’s who isn’t buying now post was an example of a valuation-led call. There hasn’t been much opportunity to use valuations to buy of late. Valuation’s time is coming, every dog has its day. But the official story is that the market is efficient and this cannot be done. Yeah, right. If the market is so goddamned efficient how come it has market swoons and irrational exuberances. I’ve kept this heresy in a footnote because most people CBA to read footnotes. ↩
5. with the specific and particular exception of student debt. Leave that be. If you ain’t earning, you ain’t paying it. ↩
6. Properly understand means you can mount a convincing counterargument as to why this is a bad idea, particularly if you have equity in a mortgage IMO, and have a good counterargument to your counterargument ;) ↩
7. If you were like me, and needed an out in 10 years from a standing start, then perhaps no, don’t start 100% equities now ;) ↩
8. More accurately, Do Not Sell for stock market reasons. I have sold to be able to borrow from my ISA to bridge a house purchase. That was in times when valuations were high so the downside risk of being out of the market is not high, and the money was returned to the ISA. Do Not Sell is more OMG this stock has gone down it’ll never come up Sell Sell Sell. I made one exception, and that is TSCO. I bought on the principle if Warren Buffet says this is good, it probably is. When WB came to the conclusion he had cocked up, I figured  he’s a better investor than me. ↩
9. Jobseeker’s allowance, the UK’s unemployment assistance program.  It is £71 a week, so when my ISA paid > £3700 p.a. in dividends I was safe from that ↩
10. Warren Buffett, memorably, tells us to be greedy when others are fearful. Monevator can do that. I have done that. It is tough as hell, I wouldn’t bet my life on being able to do it again. For most of us exposed to the market, just staying in there when we are fearful is good enough. If you can be greedy, well, knock yourself out. Paradoxically – safety first. DO NOT SELL. That really doesn’t feel safe… ↩
11. Seriously, when was the last time you saw gold pay a dividend? Balance that against the hazard of CGT, sure, but if you think you are going to have to liquidate a profit of > 10k p.a. in gold then you are either a lot richer than me or you are foreseeing scenarios when you would be better off investing in guns, ammo, and MREs. Most ISAs have a a parallel unwrapped trading account, and there are other ways to hold gold. ↩

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