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Note to self: follow up on more of this: http://richhabits.net/the-worlds-most-prestigious-self-help-university/

Found, with thanks, via Rockstar finance.

Change of tack?

I saw this article not long after I’d posted my thoughts on how I like dividend investing – I like to think I’m not so proud to think I know it all, it was chastening to think that my approach was wrong. However, rather have a knee jerk reaction, I just let it sit at the back of my mind, then I lost the link to the article… but now having found the article and had a bit of time to consider, I will be sticking to my approach.

The way Financial Samurai is advocating makes perfect sense, however, it is also the way a lot of people underperform. I dare say that everyone would be following a strategy which identified future Amazon, Google and Apple type returns, but such continued foresight is surely all but impossible in reality?

Even if you were able to latch onto a massive winner how long would you hold on to it? 300-500%... 1000%? Would you get worried in a correction and sell your winner to lock in the great gain? Not unreasonable to do so, but then you’ve got to find another and another and finding those multi-bagger winners has to happen quite frequently and kissing lots of frogs will just cost you money and time. Even dialing it back in and saying you’re trying to beat the market is a massive undertaking which most individuals fail at.

But say you do chase growth and build up the pot more quickly when you hit your escape number, or are approaching it, you then need to transition to income producing shares which leads to a potentially very substantial capital gains hit once you’re at that level of wealth (though potentially a large one off capital gains tax charge may be less than the cumulative tax paid on dividends received over the same period and ISA’s would help), but aside from that you also may feel that you are changing at the wrong time in the cycle and buying dividend paying shares when they’re expensive and locking in downside risk as well as potential loss of income, perhaps you think you can manage your early retirement by selling units of your growth stocks and relying on the price rising sufficiently all round to maintain your strategy. The risks of this are clear, but it also means your income is far from passive and if you’re able to do this successfully, you could get paid a lot of money to do it full time! Who doesn’t love that bit of irony!

This isn’t to say that only stolid unimaginative companies should be bought where the only attraction is a dividend, any company must have growth potential otherwise that dividend can’t / won’t be increased and will probably end up being cut.

I like seeing the value of my shares rise, who doesn’t, however, I love dividends hitting my account each month and seeing progressive growth year on year! It allows me to fly off to the time when different sources of income translate into something firm on which to take the plunge and quit work. I also know I don’t have the skill to consistently pick successful growth stocks and then pivot from one strategy to another. This self-awareness, hopefully, protects me from making really wild punts on The Next Big Thing in a bid to boost my overall net-worth.

To my relatively conservative mind a good strategy gets you from A to B; where B is realistic, achievable and one you would be happy with and the process of getting there is the same. Yes you want to get there quickly and aim high, but in seeking shortcuts by targeting high growth sectors, shares or funds in an overly aggressive or concentrated way can land you back at square one, or worse, in short order – better to focus on spending less and investing more than chasing future unicorns. 

Update: 10/12/2015 - as if by magic someone far more qualified than me pipes up with a similar sentiment.

Retirement income

I read this article on Bloomberg today. All good stuff about increasing retirement savings, but the most interesting thing for me was the subject's target of replacing 100% of earnings because of expected older age retirement care costs, rather than an expectation of spending like a demon in her golden years.

Thankfully in the UK the NHS provides an excellent safety net for health requirements, but is clearly undergoing change. Whatever your political persuasion, baby-boomers are starting to retire in big numbers and even for the so called 'gilded generation' with their massive pensions and mansions (!) they will lean on the state's infrastructure like never before. This means either higher taxes, higher borrowing, both, or a zero sum game where other departments lose out... oh and that generation are those who are most likely to vote, so they may plump for higher borrowing since, you know, in that respect, time or the lack thereof, is on their side.

But it makes you think - with the above pressures how will you pay for your old age, not just your early retirement?

Perhaps the answer lies within the FIRE community? If you are following this path you're more likely to be fitter. It's notable how many FI bloggers are active people generally, not just cycling to work to save cash. You're more likely to eat better - more home made meals, fewer pre-fab sandwiches chocked with salt and processed meat. When you've hit your escape number any work you do will be because you want to and because it makes you happy, so throw in greater levels of satisfaction and lower stress.

Finally, when you achieve FIRE you're spending will probably drop - see The Escape Artist for proof of that - so as a FIRE devotee you continue to add to your savings pile as you spend less than your passive income streams provide. Combine that with a few more decades of compounding on top of those already accrued and the ability to generate income rises in the period between early retirement and older age.

So, maybe in pursuing FIRE you are more likely to delay incurring those costs because of a longer more positive work life balance and self-sufficient attitude, and then be more likely to meet those costs when they do need to be incurred because you will have been adding to and compounding your wealth for longer.

Seeing red

So the stock markets are busy at the moment, maybe the traders need to top up their children's school fee accounts? Those lifestyles don't maintain themselves you know!

Up and down, up and down - according to Reformed Broker in the US they are seeing a significant increase in the number of days when the market is up or down over 1% - I haven't totted up how the FTSE is doing, but if feels like it can't be far behind.

So what now after the c.15%  fall I was looking for - well, seeing red is never great when you log into your trading account, but there it is, about half of my investments are under water. Some by a few pounds, others by reasonably significant percentages. This makes me feel uncomfortable, obviously, I don't like it at all, but it's worth sticking with because it's caused by and will be helped by reinvesting the dividends.

I generally stick to ticking the box that reinvests the dividends, which means all through the time when the FTSE was going from 6,200 - 7,050 roughly two years from 2013 to early 2015, before tumbling down to where it is now, I was buying shares. These are the ones that are now underwater by a few pounds as more expensive versions of the same shares were bought, taking the average price per share up. The larger losses arise from purchases where I felt I needed to act, bought too quickly and without enough thought - hopefully they will come back and I'll be able to get out of those holes and learn some lessons!

Pre-correction I was earning a yield of just over 5% in good blue-chip, main-stay companies which I bought and add to during dips. I feel this compensates me for my lack of knowledge and skill and increases my chances of avoiding capital losses whilst receiving an above market income return - nice and simple! That yield will now be boosted by the falls through new purchases and top ups along the way.

A slow recovery / this current bouncing about gives me time to think and hopefully act more rationally - my musings on buying shares in the oil industry show just how long I can take to think about things! I'm happy with that as my personal share dealing account is not my main investment pot, across them all I'll be buying more shares and units all the time at, hopefully, discounted prices supercharging future returns - from that point of view, it's all good, but that doesn't make seeing the losses any easier to bear.

I do also genuinely see these as paper losses, crystallised only if I hit the sell button. Since the money invested is surplus to everything else I spend on, I don't need to sell, which generally puts me in a decent position mentally.

So I'm okay seeing red at the moment. Deals are hopefully on offer, rather than "correct" valuations. I've bought Vodafone and the Vanguard worldwide high yield ETF during the slumps, so we'll see what else is out there in the next few weeks...

House price bubble?

Okay, this may seem obvious, housing in the UK is way too expensive, but is it entering bubble territory with the potential to deflate in an uncontrolled way.

I don't know if we're about to hit 2007/08 again. As a home owner I hope prices don't collapse and you can draw your conclusions of my ability to forecast on a macro level from the below - I'm an ordinary bloke talking about what I see. In any case the Government has shown a deft hand at re-inflating asset prices - particularly house prices - when it looks like negative equity might hit voters.

As things stand interest rates are rock bottom with no official pressure for them to go up - inflation is low, there are economic concerns abroad / at home, the Government has a massive debt pile to deal with and a little inflation would actually help them quite a lot (but I'm sure that's only a small consideration for the MPC!)

So debt is cheap and the house price Ponzi scheme has been boosted by the Government with help to buy and other bribes. Another factor to consider is lending standards. I personally thought the Bank of England did a good thing 18months or so ago - they tightened the criteria lenders had to follow to approve lending - I've been through it, it's hellish, long and tedious. You get asked how much you spend on clothes and shopping and gas and water, presumably you can stop your water intake to pay the mortgage...

Anyway, instead of using the sledgehammer of interest rates to knock down house price growth, and everything else in the economy, they just focused on telling banks not to lend lots of money to people who can't afford to pay it back. Well done.

Are those standards slipping? Something which would indicate an unseemly bubble. Have the rigorous controls become a tick box exercise more than actual review? This could provide a third leg to the bubble theory.

To conclude my summary of thinking on this I bring in my Kev "Grand Designs" McCloud Housing Index*. Have you seen any of the present series? The houses are monumental which suggests a fair amount of Hubris, but the amount and ease with which people are taking on debt is the issue. The one with tax accountant was great - this poor chap had a brain hemorrhage and having survived it decided to build a massive house without a proper budget. It ended up costing several million, that's million, with an m, pounds. It was "paid" for with over ten different loans including bridging finance at one point.

Ignoring personal decisions about how the house was supposed to make life better for the family involved, though how mountains of debt makes life better I don't know, it's interesting to see the houses built over time against the backdrop of the health of the economy.

A couple of series ago, the projects built between 2009-2012 ish, it was all highly energy efficient, smaller more innovative designs. Now that's all out the window - so far big is back and only the best concrete will do (paraphrased, but the sentiment was used in this show, it's insane.) A few series before that, projects being completed c2006, were mostly very large and paid for with easy loans from the banks...

Clearly this is not scientific and I don't want to be a perma "we're doomed" bear about the housing market, but its interesting to draw the comparisons. Maybe Nemesis is waiting round the corner to bite?


*not a real index

Further reading:
http://alephblog.com/2011/11/05/bubbles-are-easy-to-spot-well-almost/

I wish I'd written it....

I really like this post, it sums up the majority of my motivation for seeking FI.

There are a lot of posts written about reasons why people seek FI - sticking it to the man, quitting the rat race, giving the finger to a boss, company or industry you don't like. I'm in a lucky-ish position in that I have nothing to complain about, I am pursuing FI in the most part for reasons neatly laid out in this post:
http://www.beardeddragonfinance.com/borrowed-time/

Oil revisited

Since the last post on this things have been "interesting" in the markets and I'm getting tempted by the oil majors.

In the blue corner:
- http://www.reuters.com/article/2015/08/29/us-berkshirehathaway-phillips-idUSKCN0QY0L120150829
- http://theconservativeincomeinvestor.com/2015/09/01/royal-dutch-shell-from-one-correction-to-the-next/
- http://alephblog.com/2015/08/30/we-still-have-a-buck-in-the-till-were-solvent/

In the red corner:
- Me.

I get tempted to go for it and then think about how the market has changed now from 2008/09. OPEC seem to be washed up and the ability of US frackers to gear up when the market picks up should keep prices lower for longer.

Recognising my lack of knowledge is why I keep reading, generally and specifically. In this case, there is a fair amount of information pointing to the plunge and a 7% yield would be rather nice to complement the portfolio.

The current correction seems like it's not as V shaped as in the US, so I can deliberate a little longer...

As always DYOR.

FTSE correcting rapidly

So the market is crashing down to the 15% reduction I said I was hoping for... I would like to take this opportunity to confirm that I am not part of the Bilderberg Group, Bullingdon Club or an Illuminati puppet master setting global stock market prices!

Given the sell offs I am looking to Vanguard high yield ETF as a default buy when there are falls like this. The FTSE100 is so commodity / energy heavy that all the highest yields are related to those sectors, so I'm looking about for companies hit simply because they are listed - Vodafone looks interesting with some heat taken out of their share price given the amount of investment and their general business model.

The opportunity to bag some bargains is quite exciting!

As always, good luck and DYOR...

To BP or not to BP?

BP currently yield just under 7% and a market cap of c£70bn, it’s a global, vertically integrated company who generated $32.8bn in operating cash flow in 2014. Share prices across the industry have fallen significantly recently providing a potential chance to buy slices of companies at multi-year lows – what’s not to love?! The world needs oil and they’re providing it!

There are two issues at the moment – the first is the oil price, crashing through the floor as Saudi / OPEC do battle with the US shale producers, the glut builds, supply and demand do their dance and we, the consumers at the pump see little change in the price being paid… but this puts pressure on those dividends. As a contrarian you might take it as a bargain and the best time to get in. The oil industry is used to shocks and upheaval and this is no different, buy on the cheap, wait for the rebound and off you go, capital gains and a strong, high dividend.

Hopefully a period of low prices will help stimulate general economic activity and prices will drift upwards, all your shares follow and all is well. Except it’s not because the second issue and elephant in the room is the fact that oil will become economically unviable.

There are two ways this could play out; Mad Max style, or like the gradual replacement of steam locomotives, with change coming quietly and without revolution, no one will really feel any difference because you’re still getting a train, it’s just running on different juice.

So, should I invest in an oil company? I’ve no doubt that the larger companies will survive, and may be a profitable bet in the short term and they are used to dealing with the fluctuations of a volatile market. The question is whether I could fire and forget for 20+ years.

In considering this and keeping an eye out in the press I wonder if it is with deep irony, crystal clear foresight or a sense of moral imperative that the likes of the Rockerfeller investment arm and Norway’s sovereign wealth fund are divesting from fossil fuels? Is there a still a business for the likes of BP and Shell in 15yrs? The pace of change and the ability for individuals to create products that change the world combined with the fact that climate change risks seem to be more mainstream means there may be a snowball gathering pace, coming to wipe out our dependence on fossil fuels.

We may already be witnessing the first revolutions – it is not inconceivable that in 10yrs you will have a solar array on the roof and a battery pack in the garage allowing you to draw only a small amount of electricity from the grid. This would mean the current lot of power stations don’t need to be replaced with such urgency. Electric cars may become the norm, congestion falls, oil consumption drops and car ownership in general becomes the equivalent of owning a horse, a pleasant pass-time for those who can afford it, but not actually practical or cost effective as a means of transport for the majority. Perhaps 3D printers become standard kit in everyone’s home and the waste associated with current production and distribution methods falls away, further limiting demand for oil products.

The above is science fact, not fiction, these and many more will disrupt different industries, the question is how much. Oil companies are also threatened from more conventional areas such as state backed companies of nations who may not have governments or judiciaries that are beyond reproach.

How is big oil responding? A number of European oil majors including BP backed plans to introduce a “substantial” deal for energy efficiency recently, and websites include references to renewable energy generation. However, these are not anywhere close to replacing, or even hitting parity with oil revenues, so you could say it’s just lip-service to keep the active investors happy and keep the CSR / PR team in business. The Shell deal with BG gives them “cleaner” reserves, but that’s prolonging the status quo, not leading the industry into the solar powered uplands. Maybe they are secretly developing the renewable sources of energy, seeking to corner the market and nimbly outflanking the still fledgling renewables sector ensuring their ongoing cash and profits for generations… I hope so, they have the clout to at least go some or most of the way to doing so.

I fear it may be death by a thousand cuts, of Porter’s classic five forces model, they could be said to be facing all five. Which brings me back to the main question – take 7% income now, but risk the industry declining into dwindling profits, or look to invest in companies that will have a viable model in 15yrs time (potentially when I’ll be hitting FI if things go well!) I suppose the answer is both. I can’t see BP ceasing to be, but will it go nowhere over the next ten years and will the dividend be cut reflecting a lesser company? The thinking continues!

Just a thought

I’m not great at critical thinking and my boss is.

This is not to say he nit-picks and in what seems to be a departure from most FI’ers he’s a good boss, good at his job and I respect him. It’s recognising this trying to get better on my part. At its extreme it’s like I wait for the answer to pop into my head rather than follow any considered process, whereas he seems has the ability to focus and zero in on what needs to be found and question things appropriately even when the task in question is boring or repetitive. If I read something work related questions or errors will be flagged automatically, other times they won’t and I move serenely on oblivious! I don’t always look for ulterior motives or sub-text, my mind isn’t skipping from place to place drawing parallels or recalling information that could be influential from abstract locations. Well, sometimes, but not always, and not as a rule.

So trying to get better at this I set out seeking some instruction. The problem was where to start. In randomly looking around I went to a book I’d heard of called Thinking, Fast and Slow and with a bit of luck this book provides some great explanations. The main thrust is that we have two thinking and response systems, referred to as 1 and 2. System 1 is the fast and immediate one, it calls on learned experiences and skills to react quickly. It simplifies situations and ignores that which is too hard to deal with – great for knowing to jump out of the way of a bus hurtling towards us, bad for more considered responses to more complex situations. System number 2 is more logical and will consider things more carefully, but is unfortunately easily tired out by excessive analytical processing.

Various examples are included to show how we regularly use system 1 and stop there because using system 2 takes a lot more effort. We humans, like most organisms, seek the easiest route, and coming up with a nice quick answer allows the brain to release a little shot of dopamine (the pleasure hormone) for a job well done.

So for me when it comes to work related tasks I need to realise that I’m using system 1 too much and need to engage system 2 more frequently and be able to identify when I’m slipping back into system 1 and stop it.

At a similar time I learned a little of mindfulness. I’d steadfastly ignored mindfulness because of its popularity and because it is said to be a Western interpretation of Bhuddist teaching involving meditation… I took it to be twisted and tortured beyond the intended purpose having been taken out of context in the first place.

That said, as something that keeps on cropping up with people I respect, I became more curious, so when the opportunity to hear a brief introduction to it came up, I took the plunge. The speaker outlined the main elements of mindfulness as being; in the present, on purpose, paying attention, non-judgmentally and in a particular way (a little woolly, but never mind). In pursuing mindfulness you seek to train to make better use of your Human brain, which has only developed recently (c100,000yrs ago) as opposed to our reptilian or mammalian brains which are much older and deal more with surviving on the savanna and avoiding being someone else’s lunch. The Human brain, being more advanced and social, deals with higher functions such as meaning and emotions, rather than basic fight or flight responses. One example was to apply mindfulness when a work-shy colleague slacks off for the umpteenth time. You may wish to lay hands on him and eject him from the nearest exit, maybe the 4^th floor window, but this would be a mammalian response. Mindfulness teaches that such quick, instinctive responses are a bit basic and require more thought and recognition of facts or emotions which may not immediately be obvious – the point is you consider more clearly, without judgement, keeping your cool and responding via the human brain and importantly recognise what thoughts come and go, how and why they form and then react accordingly.

The connection between Thinking Fast and Slow and mindfulness was clear as well as being mutually beneficial, which was nice. The mindfulness added the element of seeking calm and adding context to your reactions and therefore how to train yourself to react in a more Human way!

The other benefit of mindfulness is being in the present. Pursuing FI involves a lot of forward planning. You try and spend less next month than you did this month, you consider XYZ PLC’s ability to perform next year and the year after. These are good things to consider in their place, but when in the early stages of the journey as I am it can also be depressing. You can find yourself wishing months away, looking forward too much to receiving the next payday and making the next investment or paying down a bit more debt, being in the present becomes frustrating – you’re trapped, if only the next 10yrs could slip by I would be so much closer to being free…

You can start to resent the now and yearn for the future. The risk is you become miserable and miss all the good stuff around you now. Mindfulness, or rather my recently and briefly initiated interpretation, isn’t a glossy sales pitch with attractive young things living in the moment in fashionable clothes, drinking fashionable drinks and generally being better than you (unless you buy this reasonably priced product), it’s the opposite. It engages the Human brain, thinks more slowly and deliberately, of knowing yourself better and understanding your thoughts and motivations, of recognising that negative thoughts of jealousy or anger are just thoughts and not to be acted on.

So this brings us to FI; recognising the immediate responses to advertising or seeing your neighbour with a new car, identifying them for what they are and letting them go. This allows you to enjoy today and then, when you hit FI, there’s no real change apart from how you spend your time. You don’t need FI to be able to self-reflect and by seeking FI you’ve probably already done a fair amount of it anyway, it’s then about implementing it in a positive way. In the mean-time it might help me train my brain to use those higher functions, or at least realise why I’m not succeeding!

I am a latecomer to this Mindfulness lark, but Raptitude has done a fair amount in the topic and Thinking, Fast and Slow by Daniel Kahneman is well worth a read too.

Bedding in good habits

Does anyone else tend to focus on the income coming into their accounts rather than looking to see how much the overall value is going up and down?

I logged onto my trading account and got excited by the fact that another dividend payment had come through! This was a welcome surprise as June and July had been bumper months for my little portfolio, I was expecting a gap before the next payment, so another deposit was exciting to see!

This is what's all about, the steady stream of payments that has is not linked to my employment (aside from earning it in the first place, but lets ignore that for now). The direct link between money being saved month on month, and money being invested to pay me for doing nothing.

The random movement of the underlying market was irrelevant to me.

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.

The Greek drama

Will they or won't they crash out of the Eurozone? The FTSE 100 is down nearly 5% with the worry in recent days / weeks - is that signalling they think the Greeks aren't worth that much, or that they believe the IMF and Eurogroup preserve the status quo?

Certainly the latter if you subscribe to this theory:  The predictability of wealthy white people

Or maybe not if those hard liners have their way.

The next question is whether now is a good time to chuck some of my accumulated cash into the market?

Assuming the recent falls have been entirely due to Greece alone, and an eleventh hour deal solves the issue once and for all, an assumed 5% spring back in market indices isn't really that brilliant a return to put my cash at risk now with so much uncertainty.

When I buy shares directly, I buy one at a time for hopefully the right reasons. Given this situation, with shares being hit across the board, I would be more tempted to buy an index tracker to benefit from a cheaper valuation across a more diversified base, but it's not quite enticing enough at the moment, so I'll leave it for now*.

But what about the #FOMO? Well, if there is a big rebound following a deal then all my other investments will spring back too and I'll feel richer anyway and would be happy in that!

*As always, the decision to invest or not lies with you and you should always do your own homework and come to your own conclusions. I am not a financial advisor and the above should not be taken as advice or in any way other than my own opinion and musings on the state of the world!

Savings rates, compounding and cash

I’m not great at maths. A lot of FIRE bloggers seem to be in engineering or finance so presumably it comes easy to them. Unfortunately that doesn’t apply to me, I just don’t see it naturally and have to learn the hard way, so when I saw a post the other day it stuck with me and I wanted to re-iterate the point for if/when someone might actually ready this blog other than me!

Sadly I now can’t find it again to credit the author* as it’s a nice simple piece which, for me, hits on two main FIRE issues.

Firstly, savings rate. Size matters here and I'm doing okay, but the issue I had was the transition from saver to investor. Most of my savings are set to leave my account each month automatically, well done me. I'm then left with my discretionary cash until the next pay day. Following the FIRE mantra, the plan is to spend as little as possible (without being rude) and invest the rest, thus bumping my savings rate to heroic levels and earning the laurels month on month.

This moves us on to the second issue - investing it. When you read the likes of TEA, MMM or Monevator they are coolly confident when investing, with a clear route to market lying open for them. I know that time in the market is better than timing the market, but still, no one likes to see the capital value fall.

So this building bank balance leaves me feeling shameful! I might have well just spent it! My little Sterling platoon ready and waiting to earn more recruits to the cause and speed me along to my goal, locked and loaded and ready for a mission... but actually just lying idle in the barracks.

Then I saw this post. What is comes down to is this, simply by increasing your savings rate you’re giving yourself out-performance. Ta-dah!

The post assumed two people, Bob, who saves £5k pa into an account that guarantees 10% pa – pretty sweet returns there Bob, and Bill, who is terribly risk averse and only saves the cash into an account that earns no interest. Just going on the simple maths and ignoring inflation and the like, but compounding £5k per annum at 10% takes fourteen years to reach parity with Bill’s savings total, which I thought was pretty astonishing, fourteen years.

This made me feel a whole lot better. The main focus remains increasing the savings rate as a whole, cutting the unnecessary purchases but importantly not worrying so much where the savings are. Those boys will get deployed at some point, maybe just not yet, but that's not the end of the world!

*I'll carry on looking for it and edit it in later.

The Plan

Okay, the last post was a bit wordy and theoretical… this one should be a bit shorter.

So, like all good plans the financial one should be simple enough that you could explain it to a child , so, metaphorical crayon in hand, here goes:

• Emergency fund

1. The first line of offence. Offence because if things at work got really bad I could tell the boss to do one and head off into the sunset like a hero. The knees would be knocking a little, but with 6 months of savings for mortgage and everyday expenses in cash the immediate F-you pot is in good shape. 

• Pensions

1. Personal: I pay in a little each month into a personal pension. I’ve been doing this for a fair few years and that lovely law of compounding is starting to kick in a little.
2. Company: My company is good enough to double what I put into the external stakeholder pension. I put in 5% they put in 10%, pre income tax, tax efficient, building up at quite a rate.

• ISA’s

1. I pay into a stocks and shares ISA and try to make the most of it, I don’t always rarely succeed but it’s chugging along nicely and managed by an advisor. He keeps an eye on the costs, and I keep an eye on him and try to apply my limited knowledge, but at the end of the day he’s a professional and is better at it than me so I think the trade-off is worth it at the moment.

• Active share investing

1. The money I save per month, once all other expenses and savings are taken care of is swept into a separate account for me to prove just how clever / stupid I am. That said I try and buy solid dividend paying companies at c5% yields to compensate for my lack of knowledge and ability in this area rather than think I can spot the next Facebook or Amazon.

The end, that’s it. Pensions and ISA contributions are automatically taken from my account a few days after payday, active share investing is fun on the side, but is getting up to a level which requires proper thought and could provide a small regular income per month to support the F-you pot if needed. 

P.S. To cover it off alternatives such as wine, art, gold, buy to lets – nil. I heard a good pod-cast about financial planning a while ago where the main thrust was do the easy, most tax efficient stuff first and then get stuck into more tricky / risky things like buy-to-lets later, which makes sense to me.

I do like the idea of buy-to-lets and the ability to juice your returns by adding leverage, but all the inherent issues remain – management fees, letting fees, repairs and replacements and the odd recession and, at the moment, I like seeing my dividend paying shares dropping cash into my account on a regular basis, nice and clean, minimum of fuss.

What if everyone became frugal?

Hello and a thank you.

So why have I started writing a blog. A few main reasons, namely;

The opportunity to openly thank those other blogs from whom I’ve taken inspiration, knowledge and clarity and hopefully add my own little entry into the F.I.R.E. canon and spread the word a little further.

Also, to try and improve my own investment process as I try and move down the path to financial independence and put out there my thinking and rationale behind the decisions I make*.

Finally, to hopefully help others looking for answers to the same questions I was through posting myself and re-posting stuff I like from around the internet generally. There is a lot of good will out there and I feel the UK FIRE community is growing, and if I can help it grow in some small way, then great because the message is simple and powerful and is about taking control of your life.

Most of the above can wait for now, the most important thing is to say thankyou. The first one goes to the God-Father himself – Mr Money Mustache. I had been searching for “how much I need to retire” or “how much should I have saved by now” and found no satisfactory answers. The various calculators on line varied so much it was pointless, from saying I was saving enough (which didn't quite feel right) to saying I would need about a thousand pounds more per month (completely unrealistic) to have anything like a reasonable retirement. This meant any attempt to answer the second question was equally frustrated.

Then came MMM and clarity followed. To explain a little about myself I have some self-taught financial knowledge and I am generally interested in the stock market. I’d done a little investing, had a pension and was investing into ISA’s – ie I was on top of doing all the “right” things. I even tracked how much I spent per month, to a greater or lesser extent, but it wasn’t until I sped read my way through MMM that it all came together.

As I read and absorbed it, all the little bits that I’d learned fell into place, my head span, work productivity fell dramatically as I sprinted through the articles taking as much as possible in. It got me thinking about how to achieve what appear to me to be the different steps of FIRE; initially increased financial security leading to financial independence and then further down the track, retirement.

Subsequently I’ve focused, read and learned more and developed the saving framework that I had in place before. It still requires work and ongoing vigilance, but is hopefully simple and robust enough to only require tweaks and improvements rather than wholesale change. At the heart of it comes the principals of F.I.R.E. – earn as well as you can, don't be a consumerist sucker and invest the rest.

So if you’ve got here looking for detailed insights, please come back, hopefully there will be some coming... but in the interim, get stuck into these, which make up my roll of thanks – MMM, The Escape Artist, Monevator, UK Value Investor, The Reformed Broker, Under the Money Tree, Aleph blog.

*NB, as will become a bit of a strap line, I'm not a financial advisor, any thoughts, analysis or decisions are my own and do not constitute advice and any mistakes, omissions or losses are my own.