Friday, October 28, 2016

The best decision I ever made

In January 2009, I found myself without a job. But I wasn’t worried.

I had graduated school in 2007 with $2,000 in cash, which I promptly spent on a used car that drained all my money away. I then found a job, and saved up approximately 70% of my paychecks. I put enough money to get the company match on the 401 (k), and put the remainder in Certificates of Deposit. Yields on those CD’s back then were over 5%/year. I had no idea where to invest the money, so I was researching it furiously. Inflation was running high, and the first cracks of the housing bubble had started to appear.

I knew stocks went up 10%/year. The problem was that they didn’t go up every year. Sometimes, stock prices went nowhere for extended periods of time, as they did between 2000 – 2012, or 1966 – 1982. I also knew I didn’t want to spend my whole life working at a job if I didn’t want to.

So I needed a source of cash that was passive in nature, and is relatively stable in the amount and timing. Interest income seemed fine, except for it was heavily taxed as ordinary income and seemed to be losing purchasing power over time. I knew that if I didn’t want to work at some point in time, it would be helpful to have income producing assets, which will generate income to live off. I was very lucky that I sometimes had downtime at my work, so I could research things. This is when I read a lot of studies on long-term performance of US stocks. I also found a lot of blogs, many of which I still read today.

This is when I discovered the beauty of dividend investing. One of the sites called Dividends4Life I still read today. The rest are gone now. As I kept learning about dividend investing, something clicked – this was the strategy I was looking for. This strategy could provide me with a growing amount of cash income every year, which would protect its purchasing power from inflation. This strategy also involved purchasing diversified portfolio of solid blue chip stocks, with solid competitive advantages, solid records of earnings and dividend growth, and attractive valuations. I would only spend the income, and not touch principle in order to avoid dipping into my nest egg and running out of money. I didn’t want to run out of money in case something bad happened. Having a margin of safety is something that was introduced by Benjamin Graham. I try to incorporate the concept of Margin of Safety in dividend sustainability, living off a portfolio, financial independence, savings and investing.

And bad things were happening all over the world. The economy was tanking, the market was tanking, CEOs had no idea what was going on. Luckily the next Great Depression was averted. I meticulously saved money in my CD’s, and my 401 (k). I sensed I was going to be out of a job soon, so I figured out an exit plan. I was also lucky that my company offered a stock purchase plan, where I could buy shares at a discount a few times per year, and then immediately sell them for a guaranteed gain. Every little bit counts.

As I learned more about dividend investing, I decided that it would be easier to start a site and document my progress. In reality, this was a journal that would make me do the hard work, write down my strategy, and write down an objective analysis of each company I was thinking of investing in. This was going to make me honest with myself. Too often I would find out about a company everyone loved, and I would convince myself it was a great company. However, after looking at the numbers, I could not make myself buy that company. Examples include Bank of America (BAC) and US Bank (USB). Unfortunately, I did buy American Capital Strategies (ACAS).

As my CD’s started maturing, I started putting the money in dividend paying stocks. I was lucky that I had a disciplined approach that relied on objective data analysis and was somewhat devoid of biases. It is important to form an opinion only after you have done the work to form it. I was also lucky that I had an above average allocation to certificates of deposit between early 2008 to late 2009, so I could take advantage of the low prices as the majority of those CD's were maturing in 2008 and 2009. I realize that having an above average allocation to fixed income before the crash was luck - such "timing" will be unlikely to be repeated during the next stock market crash. Lucky for me, I have not fallen for the trap of trying to call the top for the past 8 years.

Somehow, in the process, Seeking Alpha started republishing some of my articles, and I gained a large readership. My site also started generating a little bit of cash too. That was pretty cool.

So in January 2009, I was not worried when I was out of a job. Everyone was telling me that I should get a job right away, in order to avoid becoming a failure. However, while I went on a few interviews, I was taking my time. I could afford to do that because my side business income and my dividend and interest income were covering my expenses. Using the low standards of today, I could have called myself financially independent at the age of 24. My side business income kept increasing, and it was covering my expenses. While you may think that my expenses are low today, they were actually even lower back then.

Unfortunately, if you have a net worth of $200,000 and annual expenses of $25,000 - $30,000/year you are not really financially independent. The reality is that at this stage, you need to beef up your portfolio. In order to generate enough investment income to pay for your expenses however, you would need something like $800,000 invested in dividend paying stocks yielding 3% - 4%.

Initially, I was having a blast being in charge of my own time, and doing what I liked doing – researching stocks, writing about investing and investing my money in dividend stocks as my CD’s matured.

My net worth was covering something like 4 – 5 years worth of my low expenses at the time however. And I was saving some money, and reinvesting those dividends.

However, I had a very low margin of safety in case something went wrong. Any time I wrote an article that flopped, I felt uneasy. I wrote a few articles where I said something correctly, but many readers were not happy. They told me they were not going to listen to me anymore. That is pretty brutal. I read those comments any time someone tells me they are going to stop reading me, and any time they tell me I am stupid. The sad part was that in order for me to succeed at this side business thing, I had to provide content that people expected to hear. If I told them something that is right, but they disagreed, they would stop reading me. I have also learned that people prefer to read something that is cheerful and upbeat, and would make them feel good. As an investor, it is a dangerous to feel good about yourself when analyzing a stock, because those "feelings" could cloud your judgment. If you are not objective when analyzing a dividend paying stock, you may end up making a costly mistake. Common mistakes by overmotivated investors could include chasing unsustainable high yielding stocks, not diversifying well, not being patient enough, not paying attention to fundamentals etc.

At the same time, my CD’s were maturing and I was putting most of it in dividend stocks. I kept some large amounts in cash however, because I was applying at different graduate schools and wanted to show them that I have the money to pay for my education. It was nice to show them that I had the means for financial support. Around March – April, things were pretty scary for me. However, I had applied at graduate schools and a few accepted me. One offered me a pretty sweet research assistantship and almost a full ride. I was to be helping a finance professor in their research.

My side business income was exploding, I was having fun at school and really learning things. It was nice to put things from my short career in perspective and apply the real-world knowledge in the classroom environment. I had by then put almost all of my money in dividend paying stocks, as most of my CD’s had matured. I also briefly owned some Treasury Bonds in 2010, but sold them at a profit, after I was convinced that yields cannot go lower than 3%. ( boy, was I wrong about that)

My knowledge of MLPs, companies, and business was helpful to me in landing a job after school. I hesitated whether to accept it however or pursue working on my own. By that time, my side business income and dividend income briefly exceeded the income I was earning at my first job. However, I could see that things moved pretty quickly in the online world. At some point, I felt like I wasn’t’ really growing much, when I had to explain the same concept over and over to new people. It seemed that if I wanted to become a more experienced investor, I would lose the new readers. So I decided to start the new job. I ended up learning a lot about different businesses. And I was pushed to think critically and being more skeptical of things.

The nicest thing was that I generated income from three independent income streams - job income, side business income and investment income ( read dividends and interest income).

Between my losing the job, and getting the new job, I was spending a large portion of my side business income. Nevertheless I managed to save a little each month over that period. As a result, I could not put money to dividend stocks on a regular basis. My dividend income was growing, but it was not enough to retire. After getting the job however, I managed to save up a lot more money than before. This allowed me to build up my dividend portfolio really quickly. If I had relied on the side business income, my networth would have likely been 3- 4 times lower than today. It is much easier to save money when you have multiple streams of income, than when you only have two streams of income.

For example, I was lucky that you the readers found my writing helpful. This has allowed me to generate advertising dollars from this site, and to cover my low expenses. All of this has helped me to essentially save large chunks of my after-tax salary, and reinvest all dividends into more dividend paying stocks at attractive valuations. It is even more inspiring that my journey has inspired hundreds of people to start their own journey towards financial independence.

While the job was brutal at times, I learned a lot. I changed jobs in the process, and kept seeing different businesses from the grounds up. The funny thing is that I learned to be more skeptical about companies, and people that make claims. For example, when I was in college, I was really motivated by Robert Kiyosaki and his "Rich Dad, Poor Dad". Unfortunately, his teachings are full of hype and lack specifics. Later on I learned he was good on motivating people, but it is unclear whether he really was ever successful at investing. Motivation is fine, but it needs factual substantiation. I wanted to avoid becoming a “motivational” blogger. This is why I try to present facts as possible, though at times I do ramble a lot ( if you read this post you would agree).

I believe that too much motivation could be dangerous to investors, particularly to inexperienced ones. For example, inexperienced investors who are full of motivation might end up chasing yield in cyclical stocks, and not develop the skillset to purchase conservative investments which have more dependable distributions. I have also found that investment bloggers who claim to be motivational, really end up making most of their money on blog income, rather than dividends and capital gains. My end goal has always been to hit the dividend crossover point, rather than build a business around it.

The interesting thing was that once side business income peaked, it has decreased since the hey-days of the early 2010s. At some point there were companies willing to pay hundreds of dollars to put a link to their site. Some bloggers were making thousands of dollars. Then Google changed the rules of the game. As side business income decreased, my dividend income was really going up. It is still going up, and it is on par to exceed expenses on a forward basis sometime around 2018.

Looking back at it, I am lucky to have gone back to work, and generated income off three/four income streams. There is a higher margin of safety when your income is generated from several sources, rather than from a single one. I do not want to become a person who merely writes a site for a living - this would be either very boring or very stressful. Perhaps I can say all this, because I am really leaning towards retiring from this blogging thing within a year or so.

If you think about it, if someone earns $50,000/year online, they are viewed as a success. Based on my observations, the reality is that probably a fraction of people who start blogs end up making $50,000/year consistently. We all hear about those earning more than $50,000/year, but those are outliers, not the most common denominator.

In contrast, the median salary in the US is roughly $43,000/year. Source: Bureau of Labor Statistics

I would venture that it is easier to earn $50,000/year with many other professions, than blogging/online ventures. In other words, a successful blogger is an outlier and in the minority, but can potentially earn a very high amount of money. The popular blogger from Mr Money Mustache reportedly earns $400,000/year, and he is extremely famous. Unfortunately, the median blogger probably earns less than minimum wage for their time and effort. I would venture that there are not that many individuals online in the world, who are clearing $400,000/year online. Instead, the time of the average person should be better spent working at a job this person loves, that has better economics and distribution of incomes. In the companies I have worked for before, the number of employees has ranged from 40,000 to 140,000 worldwide. I would venture to state that the number of people earning $400,000/year was in the hundreds in each company. So the chances of earning $400,000/year with a regular job are probably higher than with a website.

And yes, it is true that to succeed at a job, you need to play politics. However, I have found that it is easier to please the one or two ( or three) bosses that you have, than to please hundreds or thousands of bosses. For example, I regularly see bloggers kissing up to others who have more traffic, and hoping that they get something in return. Ironically, these individuals cite not wanting to kiss up to their bosses and play office politics as part of the reason why they want to quit their jobs and do blogging for a living. Stealing best ideas of others is routine with blogging as well. It is not fun getting your ideas stolen by others, and others getting credit for your ideas. At work, I have not had ideas stolen from others. The other fun part is that I have never been called an idiot at work, yet unfortunately anonymous readers sometimes like to use this term from their toolbox of persuasion.

So in reality, the best decision I ever made was to get a job back after that low point in January 2009, despite the fact that the combination of investment income and side income  has been covering my expenses for the past 7 - 8 years. That way, I was able to generate income from several different income streams - salary, side hustle income and dividends.  Having a job income, side income and dividend income really speeded things up in my quest for financial independence.

For example, let's assume that you are the median person mentioned above earning $50,000/year, living on $25,000/year and saving $25,000/year.  If you save 50% of your income, you could be able to retire within 17 - 18 years. If you manage to grow income by 50% by starting a side business, your income is now $75,000/year. If you maintain spending constant at $25,000/year, you would have essentially doubled the amount you save to $50,000/year. This represents 2/3rds of income. At this savings rate, you will be able to retire within 11 - 12 years.

In reality, by 2018 I would have spent approximately 11 years saving and investing, before reaching the dividend crossover point. Investing most of my savings in dividend growth stocks really did help me grow my passive income and getting closer and closer to the coveted dividend crossover point. I view my dividend portfolio as the most diversified stream of income out there, since it is dependent on approximately 100 companies. My portfolio is the silent worker who works 24/7 for me, doesn't need much in terms of supervision, but shares all of their dividend income with me.

I wanted to reach the dividend crossover point as fast as possible, so that I could do my own thing and not worry about others. Having three different streams of income has definitely helped me to build my investable net worth much faster.

My asset base was light at the beginning (2007 & 2008), and relying only on fickle online income would not have enabled me to be where I am today in terms of passive dividend income. I might have been fine calling myself “financially independent” for those years, but I would have never accumulated as much net worth with a single source of fickle side-hustle income. When you are in the accumulation phase, it helps to get your hands on as much cash as possible to invest, and to reinvest those dividends. A further boost to my income and net worth were also helped by increasing my tax savvy.

At that point, I might actually decide to keep the job. I learn about different industries by having a job. This expands my circle of competence, and makes me a better investor. I have hands on experience in technology, telecom, energy, education, real estate, and internet to name a few industries. Plus, by having several streams of income, independent of each other, I am truly financially independent than by relying on a single source of income.

Thank you for reading!

Relevant Articles:

The importance of multiple income streams
How much money do you really need to achieve financial independence?
How to retire in 10 years with dividend stocks
From zero to $15,000 in dividend income in 8 years
How Much Money Do You Need to Retire

Popular Posts