In pursuit of FI

My motivations for FI are standard - the way I'm getting there and the final destination are a movable feast at the moment.

Having read fairly widely across various different blogs and sites it is great to come across one I hadn't seen before. So it was a pleasure to discover Mr Everyday Dollar and in particular, one found via this link.

It was a great piece on how different people, with different motivations, decided to follow a non-standard path through life. Good motivation and reaffirmation of the reasons for starting my own first baby steps down this route to FI.

My net worth?

I don’t track my net worth. I know, I know, this seems to be a bit of a faux pas in the FI community – how else do you track your progress to the summit of FI, get your little hits of oxytocin for a job well done and a teensy bit of smugness thinking I’m a step closer to being to have that conversation with my employer… actually even if I was able to walk away tomorrow, I probably wouldn’t, but more on that later.

Back to reality; I can’t walk away, I’m hacking through the foothills of FI. Short term reasons for not paying close attention to my net worth are quite selfish, I don’t really have the time and I’m a pretty poor accountant, so the idea of taking time I don’t really have to draw up my own balance sheet sounds annoying.

As covered previously I’m doing okay in my plans, I know I’m saving hard and I know I’m keeping control of my spending, so the net worth will take care of itself.

Also, net worth, in relation to FI, is only useful for what you get from your investments. If you think about two different people – one is Jim, who has $1m of gold sitting in his vault. Next is Jack who, for the price of a cow bought some magic beans, grew a stalk and acquired a brand new goose that’s providing some top end 24 carat output following a hostile acquisition. Your gold-bug has a much higher net worth, but no income, whereas Jack has invested c.£1,500 on some beans, but if he feeds that goose right, he’s sorted for life.

Yes, your gold bug could sell the gold for some income producing assets, and his net worth would still be higher, but both will achieve the same financial freedom with very different amounts of capital.

Back to me, as I'm building assets, if there was a stock market crash tomorrow my net worth will follow a similar path, but this is where you buy your magic beans. Lower prices mean higher yields and more bang for your buck. Reinvestment of more dividends earned from buying cheaper shares adds further impetus to grow your potential income and capital more quickly. Too much focus on net worth in this situation could cause you to panic and lose focus on the prize.

So I would like that FTSE fall please. About 15ish% would be about right, and a recovery to prices that takes a couple of years. Any more than this and something has gone quite seriously wrong in the economy, and any less wouldn’t provide the supercharger effect. Importantly with this sort of fall the impact would be mostly felt by the short run value of companies as set by the stock market, rather than any sort of company killing impact of a big economic shock. This also explains my focus taking advantage of lower share prices, rather than the ability for companies to earn cash and pay dividends.

I think net worth matters most when you’re close to, or have surpassed, your Escape Number and you are thinking about supporting your lifestyle, post work, from that pot. I’m not close, so until then I’ll focus on the FI mantras of earning, saving and investing. I'll keep an eye on net worth, but without getting too hung up on monitoring it’s every move as it might even be counter productive.

If anyone thinks I'm completely off the mark or have missed something, please let me know!

Portfolio buy #1

That sounds posh doesn’t it? Here we go then, warts and all decision making process for share buying – firstly, let’s get it out of the way, as you will soon see I am not a financial advisor, stock broker or anyone who has any qualifications to provide investment advice. My investment decisions are mine, as are my mistakes. This is not an endorsement to act and it’s most likely to provide entertainment value for people who actually know what they’re doing.

This time it’s BAE Systems where I’ve increased an existing relatively small holding.

My method of buying shares is to try and buy market dips and therefore a jacked up yield. Hopefully the dips represent general, mild panic sell-offs rather than company specific issues – I don’t pretend that I’m going to be able to tell whether a company is a turnaround or not. I aim to invest where the yield is better than the FTSE100.

BAE Systems –

• Weapons maker (ethically dubious perhaps but I’m okay with that),
• Main customers are large Government contracts to provide air, sea, land and cyber systems.
• They operate across the globe
• They provide military and civilian platforms

Financial performance –

• I do a quick initial analysis to show yield, EPS, divi cover and a Gordon’s Growth Model to see roughly how it’s priced. I also have Benjamin Graham’s tweaked equation to value shares for a cross reference. If more than about one or two of these aren’t looking good then I’ll stop there, or get quickly dissuaded from doing much more analysis such as cash flow, returns on capital, profit margins etc.
• Revenues and profits have dipped as austerity took hold, but have not dropped away to a large degree.
• Dividend has been increased consistently, though slowly.
• PE is low-ish at about 12 and below a longer running measure at 13.5.
• EPS seems relatively stable over recent years given the issues facing them

Future prospects –

• Positive on the whole, coming from internal factor’s (UK has just promised to maintain defence spending at 2% of GPD and increase the MoD budget by 0.5% in real terms each year), Russia’s machinations in the east might see a more spending in this area from the UK and overseas.
• Moving more into cyber which will be an increasing source of revenue, and linked to work better with existing platforms, so hopefully better eco-system.
• Existing orders remain consistent with previous years with new orders rolling through on what appears to be a nice trend.
• General stuff in the accounts saying how they’re looking to manage in a cost effective way etc.

So it’s pretty solid. The dividend is covered and the company seems to be managed well. The company is one of the biggest in its field with few major competitors. The model is simple, the products are complicated – ie decent moat.

The main risks would be another financial crisis, which would see Governments pull back or “pause” projects, but big ticket items like Trident are stimulus in their own right and are likely to still get built backing up the defensive quality. 

Another crisis would risk the dividend and accelerate the degradation of shareholder equity. Hopefully the repair of Government balance sheets will allow BAE’s to improve too. If borrowing starts kicking up and revenues remain depressed then I would review.

So in conclusion:         

• Purchase price of £4.71 per share, post commissions and stamp etc.
• Equating to a 4.4% yield
• A share price 15% off the 52 week high with no material company specific news
• Decent future income streams
• Well positioned company in it’s market.