Author Topic: Question re FIRE future returns  (Read 5583 times)

Bevan

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Question re FIRE future returns
« on: December 01, 2019, 09:04:14 am »
Hi Patrick,

I'd like to get your opinion on this.... Martin Luther King once said that, "Communism forgets that life is individual. Capitalism forgets that life is social, and the kingdom of brotherhood is found... in a higher synthesis that combines the truths of both."

Unbridled capitalism has enabled market returns on average over the last several decades of around 10-15%. However, the world is realising that this is not only inequitable but also unsustainable. We are seeing the emergence of active investors and ESG and impact investors who are advocating for a fairer world, perhaps leading towards the synthesis mentioned in the quote above. Investors now realise that correcting wage and social inequality, helping protect the environment etc. all involve higher costs that were never previously considered by the rampant, greed driven capitalism.

The world is also struggling with the limits to growth, with negative rates abounding, even as central banks try to stimulate inflation and growth by conjuring up new cash. The problem is that there is not enough real-world growth to "absorb" this new cash and it has found its way into markets, dangerously overheating them, at least from a value-investors perspective.

Thus, I believe that low stock market returns are here to stay for the foreseeable future, of around 3-7% per year if we're lucky. There is also the ever-present risk of a serious market correction if prices trend too high above value. ESG and impact investors seem happy with this sort of return, as the world starts to consider measuring returns in more than just monetary terms.

The question is, what does this type of return do to the FIRE movement? What is the minimum annual return required to keep withdrawing (4%) of your capital and not run out of money?

In a way this whole trend change is making intuitive sense to me.... It's only possible to be a passive investor, adding no productive value to the world (e.g. indulging in travel), when we do not properly value the real factors (i.e. the workers and environment) that help that investment to make outsized returns. The days of rocking up with capital, facilitating an investment in a factory, paying slave wages, not accounting for environmental resources properly (cost of water or cleaning up pollution), and then taking the bulk of profits out, are nearing an end....
« Last Edit: December 01, 2019, 09:09:40 am by Bevan »
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Patrick

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Re: Question re FIRE future returns
« Reply #1 on: December 02, 2019, 08:17:46 am »
Hey Bevan,

I'm not terribly concerned. I think the world is making a lot of progress in addressing poverty, and still managing lots of growth. My bigger concern is that the growth has been higher than the fundamentals would indicate it should be.

Just FYI, the world as a whole has been making amazing progress on ending poverty over the last few years, and I expect it'll continue to improve over time:
https://ourworldindata.org/grapher/world-population-in-extreme-poverty-absolute

As to the main question, what sort of growth do we need to maintain a withdrawal of 4%? A quick excel should show that the simple answer would be inflation + 4% growth: https://docs.google.com/spreadsheets/d/1XBK7V7VKA_V5iL7ZIVJvdOBcMlEP1YzuhD6dByIQMEA/edit?usp=sharing

The more complex answer would be inflation + 4% + enough to take care of taxes, fees, costs and more taxes! It's hard to figure out how much that would be, but I imagine adding another 1% would be enough, so my guess is inflation + 5%!

The other problem is that growth isn't linear and predictable. I wish it was, it would make life so much simpler to predict, so on top of the growth number I also fee you've got to build in some flexibility, kind of in the way I spoke about in my 5% drawdown without fail blog post: https://investorchallenge.co.za/the-5-rule-that-has-never-failed/

bw

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Re: Question re FIRE future returns
« Reply #2 on: January 10, 2020, 02:10:18 pm »
Hi Patrick,

I'd like to get your opinion on this.... Martin Luther King once said that, "Communism forgets that life is individual. Capitalism forgets that life is social, and the kingdom of brotherhood is found... in a higher synthesis that combines the truths of both."

Unbridled capitalism has enabled market returns on average over the last several decades of around 10-15%. However, the world is realising that this is not only inequitable but also unsustainable. We are seeing the emergence of active investors and ESG and impact investors who are advocating for a fairer world, perhaps leading towards the synthesis mentioned in the quote above. Investors now realise that correcting wage and social inequality, helping protect the environment etc. all involve higher costs that were never previously considered by the rampant, greed driven capitalism.

The world is also struggling with the limits to growth, with negative rates abounding, even as central banks try to stimulate inflation and growth by conjuring up new cash. The problem is that there is not enough real-world growth to "absorb" this new cash and it has found its way into markets, dangerously overheating them, at least from a value-investors perspective.

Thus, I believe that low stock market returns are here to stay for the foreseeable future, of around 3-7% per year if we're lucky. There is also the ever-present risk of a serious market correction if prices trend too high above value. ESG and impact investors seem happy with this sort of return, as the world starts to consider measuring returns in more than just monetary terms.

The question is, what does this type of return do to the FIRE movement? What is the minimum annual return required to keep withdrawing (4%) of your capital and not run out of money?

In a way this whole trend change is making intuitive sense to me.... It's only possible to be a passive investor, adding no productive value to the world (e.g. indulging in travel), when we do not properly value the real factors (i.e. the workers and environment) that help that investment to make outsized returns. The days of rocking up with capital, facilitating an investment in a factory, paying slave wages, not accounting for environmental resources properly (cost of water or cleaning up pollution), and then taking the bulk of profits out, are nearing an end....

Interesting questions Bevan.


An example of a puzzling phenomenon is Japan flat lining for 20 years. I know that their bubble burst in the early 90's, but wow- 20 years without growth in the stock market WITH a very diligent and productive workforce. It boggles my mind.

..i guess the bottom line might be as Buffet says... when everyone is excited be very cautious and when everyone is scared be bold

Bevan

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Re: Question re FIRE future returns
« Reply #3 on: April 21, 2020, 03:17:38 pm »
Interesting questions Bevan.

An example of a puzzling phenomenon is Japan flat lining for 20 years. I know that their bubble burst in the early 90's, but wow- 20 years without growth in the stock market WITH a very diligent and productive workforce. It boggles my mind.

..i guess the bottom line might be as Buffet says... when everyone is excited be very cautious and when everyone is scared be bold

Japan has been suffering from a deflationary spiral. Simplistically inflation is too much money chasing too few goods. Deflation is too many goods looking to be spent with too little money around to buy them. The money obviously has to be freely floating and be spent in the population, not locked up in investments etc. Japan is a notorious nation of savers who all withdrew their money from the system, whilst supply of goods remained strong. Tough to inflate the economy that way...

The wider world going forward is really interesting now... We are printing more money than ever before and people are expecting massive inflation to kick in. But, unless this money actually finds its way into the population that's not going to happen. Depending on how this helicopter cash is distributed now, will impact markets quite differently.

Assuming they follow the 2008 model of rescuing the banks then the way they did it was to lower rates and issue bonds, notes etc. via the banks. The banks used all of this QE to invest and distribute into the market and all that cash ultimately found its way to the stock market. So we've had the largest bull run ever over the last 10 years, completely unwarranted according to value investors, and giving most stock market investors a dose of sleepy confidence. We haven't seen any indication of inflation because all that QE hasn't flowed into the real economy.

This time I suspect is going to be very different. It's not the banks that need saving now, it's the lower to middle classes. It's the real economy. The money printers going brrr now should result in at least some of that money trickling down to the lower levels. Of course the monetary system is still completely broken, because money should be created when workers create products and services, and not arbitrarily printed when the Fed panics, or when a computer solves a math problem, or when some rich IT geek "stakes" their digital wallet.

Whilst much of the helicopter money will still be sucked up now by the banks, wealthy investors, corrupt politicians and sheer bureaucracy, there should still be enough left when it reaches the real economy. This is going to result in the mother of all inflationary bubbles, especially in the US.

It helps to think of the global monetary system as wanting to always try and balance itself. However, the balancing mechanism is a lagging effect. So, all of the productivity and wealth creation over the last 100 years has been building up slowly amongst the wealthy, escalating the growing divide between rich and poor i.e. the poor produce the wealth and investors keep the wealth. So that's been the primary flow of productivity based wealth creation.  There have been interesting secondary flows e.g. in 2008 the middle-classes started accumulating significant wealth in property, a trend fed by the banking sector, allowing house owners to use their properties as ATM's.

That subsequent collapse in housing wealth was quickly re-inflated by the Fed with most of the QE going to the 1%. The gap between the very rich and very poor widened exponentially. That bulk of cash was now the target for the balancing mechanism, with everyone sensing a stock-market collapse being imminent. That has happened and many pension funds and investors have been hurt. But the Fed and US govt. are re-inflating again.

In the meantime where has all the clever, safe money run to? To the USD of course, the one place it can't get hurt as the US can print money with abandon as the whole world's goods are its playground, not just its own country's goods. We've also seen a decent dead cat bounce in the market over the last few weeks but that is a minor blip. The great balancer is still coming... I suspect it's coming in the form of synchronised, massive global inflation over the next few years. Unfortunately the real economy is going to get pretty rough. Stagnant growth and high inflation = stagflation. A fate far worse than Japanese deflation. The USD should still perform its safe haven status, until such time as the world finally loses faith in the US' ability to repay its debts. The US has kicked the bankruptcy can a long way down the road now, but inflation is going to bring it forward quite quickly now.

Inflation is the one thing that will see the wealth of the 1% eroded. But it will also mean that the poor cannot afford to eat. The entire global system is fundamentally broken and I cannot see how it can be (peacefully) fixed. I expect generally self-sufficient countries such as South Africa and China will fare much better than the generally importing countries of Europe and America. Yes, the ZAR may get to 100 to the USD before the implosion but that will be our pressure release valve. Our gold miners and food exporters will make a fortune.  One thing is for sure. Change is coming.

(Apologies for the long and opinionated piece but I hope it gives some food for thought...)
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Bevan

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Re: Question re FIRE future returns
« Reply #4 on: April 21, 2020, 03:35:22 pm »
If I'm right about the above stagflationary scenario, then you really want to own REAL things:

- Property, especially property with decent water that can feed your family (OK, I'm biased as a homesteader already)

- Commodities such as gold. Hey, it's boring but it has generally held its value with inflation since the time of the Egyptians. You especially want to own commodities priced in USD, until such time as the USD collapse of course - still a few years away at least...

- Stocks that will increase in value as the real economy increases in value. Stocks will be a mixed bag though because generally higher inflation results in higher rates, meaning that investors generally bail out of stocks and into safer money market returns.

If at all possible, you also want to load up on FIXED rate debt. If you can secure a fixed rate then inflation will erode the quantum of your debt very quickly, allowing you to pay it off easily. However, this ONLY applies to fixed rate debt. Floating rate debt will KILL you in an inflationary environment. Floating rate debt has of course been exceptionally kind to wealthy investors over the last 10 years. But that leveraged debt trade is not going to be possible any longer.

« Last Edit: April 21, 2020, 03:39:05 pm by Bevan »
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bw

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Re: Question re FIRE future returns
« Reply #5 on: July 13, 2020, 12:35:07 pm »
Thank you for these food for thought replies Bevan. Its interesting how things are developing.

Check out a spot for me in Hogsback so, i too can become a homesteader  ;)

Bevan

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Re: Question re FIRE future returns
« Reply #6 on: July 14, 2020, 10:32:36 am »
Thank you for these food for thought replies Bevan. Its interesting how things are developing.
Check out a spot for me in Hogsback so, i too can become a homesteader  ;)

It's quite amazing how things are developing. Stock markets have become the new casinos. Everyone in the US has received well over $1,000 of stimulus with many businesses receiving much more than that. Combined with the new Robin Hood investors, where they front run you as a client, we can see that much of this easy money has gone into the popular FANG and Tesla stocks. This is the dumb money personified, that always fuels the final blow-off top before a collapse. Not to say a collapse is coming tomorrow, or even this year. The US has showed its ability to kick the bankruptcy can down the road many times before. But I reckon within 2-3 years the stresses in the system will be overwhelming.

Now is a great time to look out for decent homesteader properties. Many people relying on tourism in popular tourist spots such as Hogsback are having to sell up. If you can earn an income sans tourism, which is going to be decimated for a few years to come still, then there are some decent properties to snap up.

One could sell their Sandton pile for circa R2-3m and buy 10 acres of awesome land, with fruit trees, great water etc., and have around R1.5m left over. It's a tougher life, but so much more rewarding as well. We have satellite internet, awesome coffee spots and restaurants, never mind the forest walks, waterfalls and mountain biking. Almost got the skiis out too as we narrowly missed some more snow this week. And the beach is just over an hour away.

If anyone is interested in sustainability tips and homesteading, plus trading advice from time to time, you can subscribe to our free weekly newsletter at www.thrivecentre.co.za
« Last Edit: July 14, 2020, 10:38:36 am by Bevan »
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RichardPayne

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Re: Question re FIRE future returns
« Reply #7 on: September 08, 2020, 08:51:05 am »
Hello guys, everything in this world revolves around money and it is kind of sad that we live in this kind of world. Money is something we invented and now it is controlling us. I have tried to live a life where money does not play that big of a part, but it is not possible. The newest thing is introduction of cryptocurrency and I see how people are going mad about it. I wanted to try it out, but after reading some articles on investotrend.com I came to the solution that it is not worth it. The market is on a down now and it does not make sense.

Bevan

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Re: Question re FIRE future returns
« Reply #8 on: September 10, 2020, 04:58:13 pm »
Hello guys, everything in this world revolves around money and it is kind of sad that we live in this kind of world. Money is something we invented and now it is controlling us. I have tried to live a life where money does not play that big of a part, but it is not possible. The newest thing is introduction of cryptocurrency and I see how people are going mad about it. I wanted to try it out, but after reading some articles on investotrend.com I came to the solution that it is not worth it. The market is on a down now and it does not make sense.

Cryptocurrency will have a role to play in any future financial system, but the "killer app" has not yet been launched. Creating money because a computer solves an algorithm or a wealthy investor "stakes" his existing wealth, has no utility value and besides, transaction fees and times are insane and getting worse. Cryptocurrency is similar to where we were in the late 90's with the initial dot-com boom, with things like pets.com and askjeeves.com . But of course Amazon was also emerging around that time too.....
Audi, vide, tace, si vis vivere in pace. Pax vobiscum.
Happiness belongs to the self-sufficient - https://www.thrivecentre.co.za