The speed and the destination

When we want to go somewhere, is the speed we can arrive at the destination the only factor to consider?

Let's say that we are to go and visit some friends in a remote area in northern Sweden. 

The winter roads through the forests are full of moose, reindeer, bears, polar bears, and what-not.

What kind of driver (and car) would we prefer for the journey?

Let's make a thought experiment with obvious hints to a financial journey.

One driver promises to keep a good, high average speed, with the performance one can expect of a good, new car, let's say around 120 km/h (80 mph).

Another driver wants to arrive as quickly as possible. This driver proposes a new kind of car (untested on arctic winter roads) that he thinks could go really fast, let's say 160 km/h  (100 mph). We will reach the destination in no time, or so he promises us. All other alternatives seem unnecessarily slow to this driver.

The third driver seems, in comparison, dull and boring, but quite stable from a temperamental perspective, and proposes to drive in 80 km/h. Just in case.

There might also be this guy from the local bank who tells us to walk the whole way.

Quick? Or safer but slightly slower?

Speed might not be the only factor to consider when aiming for a given destination (that doesn't include a dead moose in one's lap).

To arrive at all, in an acceptable time, is for many much more important than being the first to arrive.  

Let's end with the analogy there. 

Many seem to focus on optimizing for just one parameter when considering one's financial journey.

• Insane returns. Including untested assets, which could be anything that is new. New is the definition of tech stocks. Or exotic assets that didn't exist 20 or 50 or 100 years ago. Might be quick, yes. Will it always work? Who knows? And what happens at an unexpected turn?
  
  
• Average speed, known car. Buy the index, or pick value stocks and reinvest the dividends. This is less insane and it's far from impossible to reach our destination. Yet, if one is not that familiar with the conditions of winter roads in northern Sweden, then do we really understand what risks we are exposing ourselves to? And what makes the assumption true, that high average speed is the only factor that is interesting for our journey? Is the assumption that average speed automatically also has a decent reward for the risk? Or that the risk matches our journey and appetite to arrive also if conditions or events are less than optimal?

• Slow yet steady. Even a sharp turn becomes much less challenging with slower speed and higher safety. The big swings, so to speak, of the road  becomes less dangerous, and we can both handle sudden ice and even the odd moose on the road. We might get to our goal in a slightly longer time. But in most scenarios we will get there, alive. 

We have given the question which vehicle will bring us to our destination some thought, and for us, slow and steady might not be so bad, as we prefer to arrive in most scenarios rather than being quick in the average scenario. 

You can read our thoughts on portfolios here, and our thoughts on volatility here.

How about you? Are you mostly considering your speed in your portfolio? Or is arriving at the destination even if the unexpected moose shows up behind a curve also in your equations?

Farewell,

antinous&lucilius

Why the Samurai shouldn't study too much Buddhism

There's so much mindfulness in today's world. And to enjoy freedom, the stoics, and quite a lot of thinkers like them, advice a kind of detachment from the material world - at least when it comes to deriving anger from material failures.

Yet - when we are NOT yet free; isn't it better to think of how to be good followers of our clan and company? Is then too much dwelling on the mental virtues for freedom really with what we should consider ourselves?

A Samurai is not overly concerned with a peaceful mind.

(Kusunoki Masashige, 14th century)

In the Hagakure, Tsunemoto writes that the Samurai should not study too much Buddhism. 

Instead, one finds other virtues, quite detrimental to preserving one's peace of mind, in the thinking of the way of the samurai - bushido. 

Act quickly

The philosophers in Their Elevated Elysium like to think and not make haste. 

Yet, the Samurai prefers to to act and act quickly. Only the feeble refrain from acting. 

Use the anger

The stoics stay clear of anger, and comfortably turn their fat necks away.

Yet, for a Samurai, rage can be turned into a force that can be directed at one's enemies or what needs to be done.

Don't be afraid of death

In one translation, Tsunemoto writing goes:

"This is the substance of the Way of the Samurai: if by setting one's heart right every morning and evening, one is able to live as though his body were already dead, he gains freedom in the Way; his whole life will be without blame, and he will succeed in his calling."

Perhaps we don't always have death over us, yet at some point, being attached to personal safety is obviously counter to Tsunemoto's samurai. If we accept that everything will vanish to the point that it has already vanished, we can do the right thing, free of fear. 

If we are afraid of death, we might refrain ourselves from doing the necessary.

Often, the hard way is the right way and can be enjoyed precisely because of its hardships. 

Live by honor

Honor, and the lesser byproduct of reputation, is everything in a clan-based society. 

Hint: much of business life, and beyond that, behaves like a clan based society.

In all action, show respect, stick to your word and never loose face.

Serve your master

Precisely because of honor and reputation, the Samurai cannot have anything but complete loyalty to his master.

A good follower

Most of us spend some time in a clan, nowadays called an "organization" or a "corporation". This existence can be enjoyed for its medieval, clan- and samurai-like attributes.

And being valuable to the clan is a sure way to achieve freedom.

So let's think how we become a good follower for our master, and put the horse before the cart, and consider this and enjoy this before we start to consider freedom.

A samurai shouldn't study too much Buddhism. 

Be a good samurai first, and then, be the monk who dwells on transcendental freedom in his state of higher and higher enlightenment. 

If we set our will to it, our goals will be in our grasp.

Tsunemoto again:

"Nothing is impossible in this world. Firm determination, it is said, can move heaven and earth. Things appear far beyond one's power, because one cannot set his heart on any arduous project due to want of strong will."

Farewell.

//antinous&lucilius

When lightning struck the cow

There was this farmer's tale, of a good ranch. The harvests were plenty, the meadows bountiful. 

Each and every year, everything at the farm got a little better, the barns were filled, the live stock was fat, the children happy.

Then, one summer night, the farmer looked to the skies and saw dark clouds gathering. A storm was building up.

Well, he was probably not sitting on the cow.

His favorite cow grazed on the hill, and the farmer had a tingling sensation. Too late he understood what was about to happen.

Lightning struck his cow.

From that day on, what was slightly better every year became slightly downhill as the years passed by. And just five years later, the farm fell into disarray.

It was a story that ran in the village for generations. 

To have a little bit too much is not a problem. To discover that one has a little bit too little is a big problem. 

Diversification and safety margins are there for the things we do not see coming.  

As when lightning strikes the cow.

Farewell,

//lucilius&antinous.

Only the wise are rich

Cicero was a funny guy. He used an old-school trick to maintain his financial freedom, which was the Roman version of house hacking - to have a lot of property out for rent. 

He was obsessed with how he should furnish his villa and which statues to buy. 

This was a fellow who did not live as he learned. His writings are confusing. Once when war called for duty, he escaped it by calling home sick.

He wrote about the stoics, and about stoic paradoxes, and sometimes he hit close to home. Perhaps because he could draw on personal experience of how paradoxical human behavior can be.

One of his paradoxes are: All Fools Are Mad. Only The Wise Are Rich.

Only The Wise Are Rich

We think that there's something creepy with the Rich Dad, Poor Dad kind'a'guys. Of course, a Poor Dad is doing something wrong with neglecting money all together, and we've been there. 

But someone who just want to amass as much money as possible, to the detriment of one's tranquility of mind or, worse, one's core moral values? 

A man, like Cicero, obsessing about buying the right statues to his villa. Is that person really wise? And if he's not, can one say that he's rich?

This question is tangible for us. 

We start to seriously leave the basic level of lean financial independence. But what after that is enough? 

Well, we add some safety margin. For instance, like Cicero's mad man, only a fool would assume that the highest mountain he has seen is the highest mountain (or financial crash) there is.

But after that safety margin? At a certain point, perhaps for us around USD 2-3 millions, there's a new level, the point where someone that are used with our level of expenses just can't spend the money on a monthly basis (unless we buy something very expensive or give the money away). 

For us, at that point of a few million dollars, we could always do whatever we could imagine; renting whatever car we wanted, travel from Sydney to Bali to a chalet in the Swiss Alps, hang out with the jetsetters, go to our conferences, meet the people we like all over the world - indefinitely, month after month - as long as we are at least reasonably conscious about the price and not paying over-prices. 

All experiences that we could imagine would be financially feasible without end.

This is of course what we want to do anyways, but with moderation. The key difference is the 'without-end'.

By just adding a little extra we could achieve all experiences we've imagined, forever, for as long as we want. 

Is it worth to work 3 more years to get to that point? Or should we use the last years of our relative youth to concentrate on for instance more health? Or can we do both?

Heli-skiing with the jet set bunch
Picture by Zach Dischner

And what comes after that? Are we becoming the Rich Dad, the mad fools? Appetites are insatiable. The financial independence community would agree with Cicero here; all fools are mad.

We are always at risk to become slaves to our appetites, be it the inferiority complex of the buyer of yachts and castles, the fear of having a too small safety margin of the too neurotic, the lack of imagination of the one that is forever stuck at the desk with the paycheck.

There's a point, where it is much more important to work on one's wisdom, rather than one's riches. 

Farewell,

//antinous&lucilius

How we dared to start investing

Our investment journey started with that we both went through crisis at work; where we realized that our financial future shouldn't rely on the paycheck alone.

Yet we had too much fear of the total stock market, and of stocks, to go all in on stocks.

Looking back we had some investments, mostly in mutual funds with corporate bonds that had a return of 4%. So very weak returns for the accumulation phase. And we really didn't pay attention to it. 

At some point, Antinous said that if we put our brains to it, we should be able to get at least a 7% return, still with reasonable risk. 

Sunrise for Antinous & Lucilius Financial Freedom Journey

Enter Asset Allocation

That's when we came across the permanent portfolio. We soaked up and read everything about it, we got the books of which we would especially recommend Craig Rowland's The Permanent Portfolio from 2012 that goes into more depth and answers some of the questions otherwise left unanswered. 

Compared to the advice one would get from one's bank, this is a wildly different approach.

It allocates 25% in four completely different asset classes (cash, long term government bonds, gold and the domestic stock market via a broad index fund).

Why? If we don't know anything about the future, then we bet equally on what's going to happen. And then the asset balance each other out, providing a radically different risk approach than anything one has heard from the old bank's investment advisors.

Why we dared going all-in

We already had a bunch of money when we started to be interested in investing. But it didn't feel good to go all in in the stock market, as many seemed to recommend in the financial independence-sphere.

Basically, it was the table below that made us dare to put our hard-earned money in a portfolio. The data below sums all periods from 1970 to now, with yearly re-balancing. We added US and France below just as a reference, with the US stock market as a benchmark. 

	PP SE	PP US	PP FR	Stocks (US)
Deepest Drawdown	-12%	-14%	-13%	−49%
Longest Drawdown	5y	5y	5y	13y
Average Return*	5.9%	5.2%	4.9%	8.2%
Short Term 3y Bad Case*	1.1%	1.6%	1.6%	-2.3%
Long Term 10y Bad Case*	3.2%	3.9%	3.6%	1.4%
Min Time to FI**	4y	7y	6y	3y
Max Time to FI**	10y	10y	10y	14

* Returns here are per year without inflation. So one needs to add one's expectation on inflation to see the same returns one would see in a brokerage account. The bad case is at the 15% percentile. 

** We assumed a 50% savings rate and 8 years expenses already saved. But this is 

When we started, we didn't really find online numbers for Sweden, so we crunched the numbers ourselves. It would show that the permanent portfolio is even better in Sweden than we first thought. Now there's portfoliocharts that is excellent for getting better ideas about different asset allocation strategies. 

So the higher average return in the stock market has also a very high price of 4 red boxes in our table, where each and one of the red box represent a very unnerving result for us. 

In short: the idea of asset allocation and perhaps the permanent portfolio might be worth checking out. 

So we did go slightly slower, but preferred to avoid the red trapdoors. Can you go more aggressive? Yes. Did we dare go more aggressive? No. So better to have something to start with rather then bring scared into doing nothing at all, or to pretend to be an ideal stoic sage that will be unaffected whatever happens just to discover that it might not be true. 

Farewell,

//antinous&lucilius

Amor fati

Mark Spitznagel of Universa, the guy that did a 2000% return on the start of the pandemic, has an interesting thought experiment, that he attributes to Fredrich Nietzsche. 

It's about a curse (and a lion).

The curse is that we will freeze in a time-loop, being 5 years long (yes, there are a Hollywood clichés on this theme).

And the loop is there forever and contrary to the Hollywood clichés, there's no hope of escape. And we wouldn't know what would happen during those 5 years that would repeat forever.

What would be a wise strategy going into the time-loop, before we know the results?

In Nietsche's writing the answer to that question is represented by a lion, what else. And the lion turns "thou shalt" spend an eternity into "thus I willed it and thus I willed it for eternity".

Because, well, a lion doesn't much care what happens. 

Would we be able to say, whatever fate has in store for us; "thus I willed it"?

Medici lion, reasonably calm about the future.

sammydavisdog CC BY 2.0 

We do plan to live longer than 5 years. But we are also interested in what will happen during the next 5 years. It's a liberating thought-experiment to try to look oneself in the mirror and think about one's own strategy for the next half-decade. 

Is it a strategy that gives the confidence of a lion?

Are we so calm and confident with our strategy so we are able to, like Nietzsche's lion, say "Thus I willed it and this I willed it for eternity", whatever happens?

Or is something meeker looking back at us from the mirror?

Farewell,

//antinous&lucilius

Where to go now?

Try: Ergodicity: Anything that can hit us will, eventually, hit us

What's meant with 'all seasons' in investing?

There is more to what happens in the markets, than what happens in the stock market alone.

And that can be very useful. 

When looking broader than thinking if the stock market will go up and down, one can start try to understand the financial markets in scenarios of what might happen, and how one can profit with different asset classes in these scenarios.

Scenario thinking

Let's move outside of the stock market, and for a few minutes think about what can happen with an economy at large. 

First, let's face it. Some of the things that might very well happen during one's life time, due to ergodicity, will be quite severe. 

The country we're in might cease to exist. Property might be confiscated, which happens in most parts of the world at least a few times per century; remember gold in the US, not to mention Europe after the second world war. New regulation might be introduced that creates havoc with private enterprise, and so on. 

This is why hardcore financial planners recommend having part of one's investments entirely abroad. And the bags packed.

Financial Seasons

But before we start to save up on the tin cans and buy a gun, let's think about what can happen before the tanks come rolling in. 

The proponents (Brown, Dalio and others) that recommend asset allocations often have a model to understand what might happen in the economy, short of war on the streets. 

Such a model can, for instance, break down the investment climate into fundamental dimensions. 

What are those dimensions that can reasonably encompass a whole economy, we hear you ask?

One is what happens to the values produced by the economy. Does the economy fundamentally produce more goods or services that society value? Or is the economy shrinking? So the (local) economy itself is one such dimension that can either grow or shrink.

So what's left when we've considered everything in the economy? What could possibly be left? The other dimension is that which we use to trade these values that the economy produces. 

When I give you something, I trust that you will pay me back, and that token of trust is often expressed as the currency used in the local economy where I have an expectation that the token will work in my next transaction with someone else. So this consists of all kind of short promises, that is, short debt that can be turned into exchangeable tokens in the economy. In broad terms, let's call this dimension the credit available in the local economy.

So now we have two dimensions:

• The Economy consisting of everything we value and we can potentially access, 
• Available Credit, that can trade those values.

With the above said, let's not fool ourselves that the mental model is everything that can happen. It's a model, not the rules of the game. In the real world there are few games that really bend to rules, as the ludic fallacy reminds us.

Economy: increase or decrease

So the economy can both increase or decrease. For instance, if trade increases, or we invent new sweet things that we enjoy, or we proposer and just value new or subtle things more, then the economy increases. 

If we instead screw up trade, we destroy what we value or we get depressed and don't value anything anymore, the economy decreases.  

Credit: increase or decrease

All that we value in the economy, for a monetary civilization, is traded using some kind of credit. 

Credit is multiplied via different mechanisms by the level of trust that currently prevails, through one kind or another of fractional banking; as money itself, or through credit cards, interbank lending, consumer credits and so on, and the basis of that multiplication is that short term promises will be honored. 

When trust is high, a lot of credit can be created, far exceeding what the central banks actually puts out in the shape of money. 

And on the other hand, if trust disappears or the central bank decides to remove money from circulation, the credit in the economy can evaporate rapidly, leaving only true, liquid, accessible hard cash in it's wake, and nothing much else.

Beware of theories

Now, this of course opens up tons of questions. But we are not academics. And we're wary of overly much theory, especially for theory's sake, not to mention what theory is currently in fashion. We try to stay away from that. 

We know that this is a model, and not the rules of the game. And we're not going to use it to predict (don't predict!), or speculate about cause-and-effect. 

It's much more like four different boxes that the economy is likely to end up in, because there are few other scenarios to go to (except war and confiscation, as said above). 

The economy shrinking or growing, credit increasing or decreasing create four "seasons" and the economy will be in one or another of these seasons. 

Winter is coming,

Caspar David Friedrich 1811

Now the important question. If we have these four fundamental seasons in an economy; how can we profit from them?

Well, different assets have different characteristics depending on the season. Let's flesh out a little more what might be going on.

1. Increasing economy, increasing credit. 

This is the way "everybody" wants things to be; what we normally call growth. The stock market chums along, sometimes very impressively, and credit that can trade the values that are being created chums along with the economy. 

Stocks can perform extremely well during the growth season, and long term bonds (25y+) are expected to perform very good as well. 

Cash and gold are both probably at bargain prices. 

A side note on cash in this season, which is a little difficult to observe because we're not used to think about cash in that way, as an investment asset: What does it mean that cash is at a bargain price? Well, price goes both ways. Something is almost always available at a bargain if one knows how to look for it. 

In this season, it's precisely cash that is at a bargain price. And what should we do with an asset that we can obtain at a bargain price? Well, get it, for the bargain price of course. 

2. Increasing economy, decreasing credit. 

Increasing economy and decreasing credit is a season that happens when the economy grows, but a lunatic in the central bank might constrict monetary policy, or a politician might interrupt interbank-trade, or any hick-up in trust might happen, which means that credit evaporates like dry tinder in a wildfire. 

This triggers the onset of a crisis. Flash sales occur. 

We might be in for a quick devaluation of stock and bond values. Anyone with real cash or long term bonds in the local currency might expect to benefit, and gold sometimes also perform.

But often, if the trust evaporates quick enough, it's only cash that will work, and one can suck up tons of stocks, and also gold and bonds with the cash that one got cheaply earlier. Anyone with liquid, real, accessible cash at hand in the immediate has the opportunity to go on a shopping spree and build the fortunes of their lives in 6 or 12 months, when the other asset classes start to bounce back.

Now, the crisis can either bounce back or turn into a full-blown, protracted depression.

3. Decreasing economy, increasing credit. 

Another alternative might be that the economy decreases, but someone in the government might get the good idea to solve the issue of a decreasing economy by printing more money, by calling it modern monetary theory, quantitative easing and what not. It might work if the economy is actually increasing beneath the credit. But if the economy is truly decreasing, we're in for another ride that will trigger inflation and an even worse crisis.

It might also be a a high point in the economy, and the growth has started to flatten out, but this is obscured by the trust that is still there and keeps credit expanding.

Now inflation looms, and when it strikes, then very hard assets will perform well. And the hardest asset of all is what nation states put in their vaults for bad times, the most trusted asset since Seneca's time and well before that.

Gold. 

And when inflation strikes, everyone suddenly rushes after the hardest of assets, and gold prices turn explosive.

Decreasing economy, decreasing credit.

And the last season, the winter, is a protracted depression. Both credits and the economy are decreasing. The sudden fall in trust and credit has now spread and infected the whole economy. 

Anyone that needs cash will be forced to sell inventory and assets at low prices, which will be reflected in the daily prices in the stock market that will spiral downwards. 

The newspapers will call this a crisis and disaster with black headlines, and some bank directors (central or otherwise) will jump from skyscrapers. The newspapers will continue to call it an ongoing crisis, and as usual the news will be blind for the opportunities that now open up for those with the right assets on their books.

Cash will be useful. And perhaps even better, when there's no real trust not even in cash, gold will allow us to do the shopping.

Conclusion

By having different assets in a portfolio, one can always have at hand what the market wants. 

Oh, so you're ready to sell your stocks really cheap to get cash? Lucky you, I've got cash, so just hand over some of those stocks for a really low price. 

Or you value stocks at crazy levels? Sweet, I bought some a few years ago when they were at a bargain. So here you go, I can by some gold or keep some cash instead. 

Oh, so you don't trust anything anymore? Lucky you, I've got some gold saved for a rainy day.

This is the beauty of having an asset allocation and rebalance from time to time, as the gentlemen Mr Dalio and Mr Brown discovered.

And if one mixes the assets in good proportions, one can build a quite powerful portfolio that will sail one's portfolio safely through any storm.

Farewell,

//lucilius&antinous

More: Can this thinking really perform and create reasonable returns? we hear you ask. And how can one mix the assets? Keep on reading about Our Crawling Road: A portfolio for accumulation part 2 or our current portfolio.