Should I listen to financial independence gurus?

A cottage industry has developed around spruiking how to achieve financial independence (sometimes called “early retirement”). Financial independence Gurus have websites offering blow-by-blow accounts of how they achieved their goals (including personal financial information), and the awesome life they live outside the rat race. They are written in an engaging often amusing way, covering topics such as: lifestyle design, personal finance, investing, loyalty schemes and travel. High profile websites include Mr Money Moustache, Go Curry Cracker, The Mad Fientist, J Money, Millennial Revolution, Root of Good and The Escape Artist.

Despite the apparent transparency of many of the Gurus, significant scepticism is evident every time an article like “How this couple saved enough to retire early” goes viral. The Business Insider or Forbes article usually links to a well designed website with affiliate links. The blogging “hobby” is (or may soon be), a business generating tens, if not hundreds of thousands of dollars of income a year. The comments section at the bottom of the article get abusive quickly.

I don’t pretend to know the true nature of the individual Gurus personal financial circumstances. This article covers their common traits, what you can learn from them, and if you should stop working when you achieve financial independence.

Who are the Gurus

The Gurus I have come across typically have five common traits.

Above average intelligence

The intelligence of the Gurus is above (if not far above) the average person. Why do I think this? Before embracing their new lifestyles, they typically worked in jobs such as engineering, investment banking or law. They also write well.

Commercially savvy

The Gurus are undoubtedly commercially savvy. This is evident both by their history of high incomes, and ability to design, execute and monetise their websites.

Time and willingness to proactively manage spending

The proactive management of spending has several elements: (1) tracking how money is spent; (2) identifying and pursuing opportunities to save money (e.g. product switching such as Apple to Huawei smartphones, home downsizing); and (3) taking full advantage of credit card and other loyalty schemes. Ultimately, they focus on decreasing spending and maximising benefits from spending decisions.

Willingness to break from social circles and norms

You cannot lead the lifestyle that the Gurus lead without a willingness to break from social circles and norms. For example, moving to a lower cost destination will affect your interactions with your existing social circles. Similarly, dramatically decreasing entertainment expenses will change the nature of your social life.

Benefitted from investing in the stock market

The gurus typically invest a high proportion of their savings in US index funds or ETFs. The massive post-GFC bull market has accelerated the time frame taken to achieve financial independence.

What can I learn from the Gurus?

Scepticism to the individual success stories you read on the internet is warranted, but ignoring everything is foolish. There is undoubtedly lessons to be learned from the experiences and writing of the Gurus. In my view there are three key lessons that apply to people of all income and wealth levels:

  1. Financial independence is liberating. I define financial independence as the freedom to decide what work you undertake and how often you do so. Achieving financial independence alone will not make you happy, it’s just a number. But it does provide the opportunity to live your life as you wish.
  2. Managing spending is far more important than smart investing. No matter how good you are at investing, if you earn $100k and spend $98k per annum, financial independence is absolutely unachievable.
  3. Invest sensibly. The Gurus usually spruik the benefits of investing money in low cost index funds or ETFs. Index funds and ETFs minimise concentration risk and wealth management costs. This is backed by academic, regulator reports and financial services industry research.

Should I stop working when I achieve financial independence?

In a word – No. I believe people should continue to work, even if they have achieved financial independence. Work can provide purpose, fulfilment and social connections. Financial independence enables you to pursue work which makes you happy. Continuing to generate income also reduces the risk of you losing your hard-won financial independence.

Let’s say you achieve financial independence and quit your job. You live off your investment income, occasionally drawing down your capital. You travel the world for 10 years, and pursue your non-income generating hobbies of landscape painting and amateur theatre. There is a savage financial crises in 2027, with a 70% fall in the stock market, which then remains flat until 2037?  If this was to occur, you would no longer be financially independent, and be searching for work in an era of high unemployment with no recent employment history. Hello poverty line. An extreme hypothetical maybe, but not outside the realm of possibility.

Finally, I’d note that this is consistent with many of the Gurus, who have continued to generate income post “retirement”, whether it be blogging, writing books, carpentry or letting rooms through Airbnb.

Remember stock analysts are nearly always too bullish!

As the new year approaches, the financial press will be full of stories such as:

  • “Top 10 stock picks for 2017”
  • “Investment experts say 2017 will…”

Which brings to mind the McKinsey article from 2010 “Equity analysts: Still too bullish”. In essence they found that equity analysts nearly always over-estimate profit growth. However capital markets are more constrained in how they value companies. Actual P/E ratios are typically substantially lower than those implied by analysts forecasts. Here is an excerpt:

Moreover, analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12 percent a year. Our analysis of the distribution of five-year earnings growth (as of March 2005) suggests that analysts forecast growth of more than 10 percent for 70 percent of S&P 500 companies. compared with actual earnings growth of 6 percent. Except 1998–2001, when the growth outlook became excessively optimistic. Over this time frame, actual earnings growth surpassed forecasts in only two instances, both during the earnings recovery following a recession. On average, analysts’ forecasts have been almost 100 percent too high….Capital markets, on the other hand, are notably less giddy in their predictions. Except during the market bubble of 1999–2001, actual price-to-earnings ratios have been 25 percent lower than implied P/E ratios based on analyst forecasts

The brief article and charts are available here



Do you know the sector composition of your index ETFs?

Good article highlighting the difference in performance between similar index ETFs by The Irrelevant Investor:

Small value stocks are up 25.5% YTD. Small value stocks are up 32.5% YTD. Nope, that’s not a typo. The first one represents Vanguard’s ETF, VBR. The second and better performing small-cap value ETF is IWN, from iShares.

As you can see from the chart below, they were neck and neck until the election, and then IWN kicked into high gear. The reason for this divergence is 29% of IWN is in financials, VBR is just 18%. Does this mean that iShares is the “better” option? Of course not, at least not due to twelve months performance. Over the last five years, IWN has returned 107%, while Vanguard’s offering is up 121% over the same time (also, does not mean Vanguard’s is superior).

Read the full article here

High exposure to financial services could increase the volatility of broad index funds during financial crises. It’s something to consider when choosing which index funds/ETFs to invest in.



Time to reassess the risk of investing in family businesses?


Family businesses are viewed as being less “corporate” than their listed peers. They are associated with poor governance, family disputes (especially over succession) and bad treatment of minority investors. However, Credit Suisse research indicates family businesses outperform:

Read the full article here (Nikkei Asian Review) and a more detailed breakdown of the analyses here, including performance by generation (Credit Suisse).

Similarly, a BCG study showed that family businesses in emerging markets grow faster than their peers, but achieve lower returns:

A Bain study indicates that returns to shareholders in companies where the founder is involved are 3x higher:

Time to rethink the bias against family businesses?


Who will profit from the decriminalisation of marijuana?

Social attitudes to marijuana have shifted quickly. The global movement towards decriminalisation will dramatically change the nature of the legal marijuana market. Who is best positioned to “win” in this market?

The legal marijuana market opportunity

The decriminalisation of marijuana provides a massive opportunity for entrepreneurs and investors. Tens of billions of dollars will transfer from the black market to private enterprises as decriminalisation plays out. In the US alone, the legal marijuana market is forecast to increase by c. US$15bn to US$23bn by 2020, according to Arc View Market Research. Around half of this is expected to be “adult use” (i.e. non-medical). Note: You can download a 51 page executive summary of Arc View’s report if you follow the link (free).

There are many challenges for those in the legal marijuana industry. Vague and conflicting regulations between states and countries are a major hurdle. Significant market growth appears inevitable, the speed of growth is dependent on the political process.

Unfortunately from an investor’s point of view, the legal marijuana market is currently highly fragmented, and the sector’s performance on public markets has been volatile:

North American Marijuana Index performance 2015 and 2016


The index is available here.

Away from the public markets private equity firms such as Privateer Holdings are launching to take advantage of the decriminalisation opportunity. Privateer has an agreement with Bob Marley’s family to sell Marley Natural products, as well as Tilray (“Exceptional Medial Marijuana”) and Leafly (“The World’s Cannabis Information Source”).

Who is best placed to take advantage of the opportunity?

Eventually, I foresee both artisanal and industrial producers, similar to markets such as wine and beer.  Ultimately, I think very large multi-national marijuana companies will emerge (this could take decades). These will likely be well-funded businesses who excel at marketing, distribution and M&A. 3G Capital’s growth and consolidation of the beer industry comes to mind, as does the current trend of brewers acquiring promising artisanal/craft brands. These early entrants are likely to have the option of selling to industrial marijuana companies which seek to consolidate the industry.

From an investors perspective, my guess is that the big winners from marijuana decriminalisation will be venture capital / private equity firms and their investors for the following reasons:

  1. Large corporates are risk adverse and are unlikely to enter the market until the regulatory “grey areas” have been clarified. VC and PE firms have a much greater appetite for risk, and will enter the market earlier.
  2. VC and PE firms have plenty of “dry powder” to put to work, and banks are likely to remain wary of financing the marijuana industry (or unable to).
  3. PE firms often have experience in executing the “buy and build” strategies required to quickly scale in a fast growing market.

Firms like Privateer Holdings have a head start, but more established firms are sure to follow in the near future.

Investors appetite for risk remains below dotcom and pre-GFC peaks

Interesting piece from BlackRock on investors risk appetite versus historic levels:

So, will risk appetite rise? Our BlackRock Macro GPS suggests that economists remain too pessimistic on the growth outlook for major economies in the months ahead. It highlights that economic conditions may not be as downbeat as the consensus suggests. At some point, stronger confidence in the economic outlook may prompt money to shift into risk assets, providing some upside potential. We believe upgrades to growth forecasts and greater clarity on the policy agenda of U.S. President-elect Donald Trump could help stir more investor hunger for risk. We don’t expect renewed bouts of euphoria, but we see scope for investor optimism to lift equities and other risk assets, and see a mild rise in bond yields.

So, still more upside to the S&P 500’s P/E ratio of c. 25x?