Early FI – 2017 Thoughts

by FI Fighter on February 16, 2017

in Progress, Thoughts

2017 is getting off to a blistering start! Well, look no further than to the Dow Jones, S&P 500, and Nasdaq (which are setting record highs on the daily) to see what the trend has been like so far this year…

When it comes to the markets and investing, not much has changed in 2 years for myself, and today, I still remain as allergic, petrified, and weary of the broader markets and real estate as ever before…

When I first checked out of The Momentum Game back in summer 2015, I basically said, “Screw this shit… If these irrational markets want to keep heading higher and skyrocket to the moon… so be it… From a risk vs. reward perspective, I see absolutely ZERO appeal in continuing to play this game…

So, I took my ball and I headed home…

Of course, it’s never easy (nor popular) to go against the grain… I lost many readers when I first deviated from the “natural way” of doing things… You know, sticking to the time tested, tried and true approach of employing the Buy and Hold Forever investment strategy…

So many people thought that I was totally nuts and had lost all my marbles when I altered course midstream…

Sure, “slow and steady” can indeed win the race, but as someone who saw firsthand what leverage and alpha can do for a person’s net worth, portfolio, and early FI progress, I became 1,000% convinced that there had to be a better way than trying to just grind it out every painful step of the way…

No doubt, I NEVER would have been able to achieve a net worth of $1 million at the age of 30 had I not taken advantage of market opportunities and distortions made possible due to the Global Financial Crisis (GFC) of 2008…

In other words, I made heavy use of “buy low and sell high” without even realizing it… Call it “dumb luck” if you will… Over the years, I’ve learned that “luck” is indeed when opportunity meets preparation…

And what can I say? Honestly, I’m a really lazy guy and I like to take shortcuts in life… Looking back with the benefit of hindsight, I now realize without a shadow of a doubt that nothing that I’ve accomplished to date in the quest for early FI has been anything special…

I was fortunately in the right place at the right time…

I first started buying up real estate in the summer of 2012, and within a few years, I was sitting on top of 300%+ leveraged gains on my Bay Area properties…. In 2015, I completed two separate cash out refis to pull out a ton of money…. All of my initial capital investment (and a whole lot more) was returned back to me… and my rental properties were still very much cash flow positive.

You win on the buy side of the trade!

During that time, even if only for a second, I must have had the stupid thought that all of this was “pretty easy to do”, and something that I could keep replicating over and over, time after time, again and again… After all, if it ain’t broke, why try and fix it?

All day long, my life revolved around: real estate, real estate, real estate…

However, one day, I attended a real estate meet up in the Bay Area, and it left a real sour taste in my mouth… All around me, I was observing smug investors who thought that they were the greatest thing since sliced bread… Every conversation was about “this deal”, “that deal”, and the “next insanely lucrative deal” that had just presented itself…

Man, it was a completely surreal scene…

So many of my peers were walking around with their chests held high, chins pointed to the sky, and with just so much swagger, confidence, and bravado, if you didn’t know any better, you would have been convinced that their plans (and real estate in general) were fail proof…

This cannot end well,” I kept thinking to myself…

When I got home later that evening, I seriously had no choice but to take a time out and reassess everything that I was doing with my own investing…

Did it make sense to keep on keeping on with real estate?

How can I possibly win at a game where everyone and their grandmother is playing with such intense enthusiasm? There are too many buyers and not enough sellers… Where’s my edge?

I have no freekin’ edge…

Call it instincts, reflection, or whatever you want, but when I rewinded the tape, I had the epiphany that, “Holy moly, leverage is this most insanely powerful tool that one can use to amass wealth… The gains that can be made with leverage in an upmarket are out of this world… But leverage only has efficacy if you can attach alpha to it…

Where can I find alpha?

Even though I’ve never been no rocket scientist, I at least least had enough common sense then to realize that “what goes up must come down again”…

I was convinced that “lather, rinse, repeat” can only be churned for so long before the Law of Diminishing Returns starts to set in…

Back in my mind, I was ALWAYS fearful of experiencing another GFC type of moment… which I guess explains why I never went crazy overboard with leverage like so many of my real estate peers did…

Leverage is a potent tool, but it cuts sharply in both directions — It can be your greatest ally, or your worst nightmare…

Well, something along those lines…

So, in the summer of 2015, when I asked myself to objectively assess the local real estate market, my conclusion was ALWAYS one and the same — In my eyes, because of the MASSIVE run up we’ve already experienced (from 2009-2015), the risks now look like they far outweigh any kind of potential reward…

It was time for me to stop playing the game…

Stop chasing the markets…

Instead, let the markets and opportunities come to me, like they did post-2008…

And just like that, I quit cold turkey… I got out of all my stocks and I stopped buying up real estate hand over fist… I was perfectly content to simply hold cash and wait for the next great opportunity…

Luckily for me, I didn’t have to wait long at all…

With a tiny bit of research, the concept of macro investing unveiled itself to me…

From Macro Trends.

Eureka!

In the summer of 2015, I first discovered the world of mining stocks, and after spending a month or so analyzing the space, I remember having a lightbulb moment, where I basically shouted out, “Eureka! I have found the PERFECT next investment! In fact, this sector is so much in deep liquidation, I actually think that I might make more money playing this space over the next few years than I did with real estate!

Gold and silver mining stocks… the most hated and despised asset class that I have EVER come across in my entire life!

It’s the perfect investment that I’ve been searching for!

I assure you, I am not bullshitting you the least bit… Those were my actual thoughts…

From September 20, 2015.

Fast forward ~2 years later, and I have no regrets at all… Sure, the general stock market and real estate have continued to boom, but so what? Like I told myself way back then, I already had so much skin the game, that I really had nothing to lose if the markets kept ascending higher and higher…

My thoughts from the summer of 2015.

If the real estate market keeps going up? I win…

If the real estate market comes crashing down? Well, shit, I can only win if I have a ton of cash readily available to take advantage of “buy low and sell high” again!

Same thoughts now as I had back then…

Holding cash gets a lot of flak from the Buy and Hold Forever crowd, but missing out on the “deals of a lifetime” is something that I think is far more devastating to an investor’s overall progress towards early FI…

Opportunity cost!

I’ve learned that if I have no good ideas, it’s perfectly reasonable (and probably even prudent) to just stop investing entirely…

Don’t try and force fit a square peg into a round hole…

As far as my thoughts as it pertains to early FI?

Cash flow has been and ALWAYS will be the name of the End Game

But that’s just that… The End Game…

If we aren’t quite there yet and within striking distance of the End Game, I believe wholeheartedly that the journey towards early FI needs to be focused on targeting after leveraged investments that can generate MASSIVE alpha to the upside…

It’s a little more nuanced than just “buy low and sell high“…

I would phrase it, “Back up the fucking truck and leverage to the hilt when the best merchandise is selling off for pennies on the dollar so that you can later sell it back to the momentum chasing crowds as they enter the game just before the music is about to stop.

What’s the biggest mistake I see new investors on the path to early FI making on a daily basis?

They settle for mediocre investments that were a hit many decades ago but will NEVER provide the investors of today with the same kind of upside potential…

  • Risking 20-30% of your principal to chase after overpriced assets that could realistically and conceivably return no more than 5-10% gains in the future is a losing proposition!

On the flipside:

  • Risking 50% of your principal to chase after undervalued assets that could realistically and conceivably return 500% gains in the future is a winning proposition!

The first scenario applies to many Buy and Hold Forever investments that are being offered today. Please realize, EVERYONE and their dog is starved for yield these days, so unless you are extremely skilled at finding “needles in a haystack” type of deals, the odds are sky high that you won’t be coming across many “deals of a lifetime” at this late stage of the artificially low interest rates game.

Buy and Hold Forever works WONDERFULLY for someone who is ALREADY IN EARLY FI

But right now (when the markets are priced for perfection), quite frankly, I believe that Buy and Hold Forever is a terrible strategy for anyone ATTEMPTING TO GET TO EARLY FI!

When cash flow and passive income become your SOLE AND ONLY focus, you can’t see the forest for the trees… You become so blinded with tracking silly monthly progress reports that you delude yourself into believing that you’re actually making substantial progress, when in reality, you’re probably not really doing much at all to move the needle towards early FI…

Cash flow and passive income don’t matter until you are in early FI and actually need it to sustain your lifestyle on a daily basis! But to get to early FI, total returns are far, far, far, more important… and you can ALWAYS convert net worth into cash flow later… but good luck attempting to take “slow dripping” cash flow investments and trying to make them appreciate in value (capital gains) significantly!

 

Exponential growth trumps linear growth…

 

That’s just my own personal take…

 

If you want to get to early FI, you need to exploit BOTH leverage and alpha at the bottom of the market cycle…

Here are some of my biggest winners to date (1 year chart shown below) in mining stocks, made entirely possible due to leverage and alpha.

Yes, I hear you… leverage can be risky! That’s why it should ONLY be used aggressively (responsibly) at the Depths of Despair when risks are at their nadir (e.g. 2015 for mining stocks)!

 

In short, “buy low and sell high.

 

That’s the bottom line…

 

In 2017, leverage and alpha are precisely the reasons why I still favor mining stocks so much!

 

I’m still very much bullish on real estate… I LOVE real estate… It’s in my blood… I just so happen to be focusing on a different type of “property” at the moment… The world’s finest: gold, silver, copper, lithium, cobalt, etc., mines… Sectors that have far more upside potential (and lower risks) than Class A rental properties provide right now…

 

But when the appropriate time comes, I would like nothing more than to get out of these mining stocks (which are ticking time bombs) completely so that I can move those proceeds back over into cash flowing real estate… Buy and Hold Forever

 

Back where we started from…

 

After all, cash flow and passive income are indeed the End Game when it comes to early FI…

 

There’s a method to the madness…

 

Fight On!

{ 19 comments… read them below or add one }

1 PonNo Gravatar February 16, 2017 at 4:52 pm

“If you want to get to early FI, you need to exploit BOTH leverage and alpha at the bottom of the market cycle…”

-damn right.

And in 2016, because I’ve re-allocated some of my investments to commodities, suddenly 2017, BAM my net worth grew 10%. I’m keeping a close eye on all those unloved commodities out there and seeing if there are good deals to snatch.

With my blue chip stock at all time high, I’m getting really scared. People are pumping these stocks! *rsus please vest before it crashes!

As for passive income, I have to say, my passive income portfolio is ‘funding’ my investments in the commodities market. It’s kind of nice to have that extra boost.

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2 FI FighterNo Gravatar February 16, 2017 at 10:55 pm

Pon,

I hear you loud and clear buddy! LOL, waiting for RSUs to vest before they crash used to be one of the greatest causes of anxiety for me while I was working 😉

Fortunately, a certain fruit company is performing spectacularly as of late! :)))

Congrats on the big gains in net worth so far this year! That is fantastic to hear!

Will be back in the Bay Area in about a month or so, let’s catch up!

Take care!

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3 PonNo Gravatar February 17, 2017 at 12:07 am

definitely let me know! I’ll be around the bay area for a while… hopefully for not that long.

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4 FI FighterNo Gravatar February 17, 2017 at 3:02 am

Pon,

I’ll hit you up when I’m back in town! Round 2 at Philz Coffee?

haha, yeah, hopefully uranium keeps running and it won’t be for that long… 🙂

Cheers!

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5 JanNo Gravatar February 16, 2017 at 8:19 pm

Thanks Fi Fighter. Love your posts!!
p.s. do you have any idea why Pilbara Minerals went down so much today?

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6 FI FighterNo Gravatar February 16, 2017 at 10:56 pm

Jan,

Thanks for the support!

All the best!

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7 JanNo Gravatar February 16, 2017 at 8:29 pm

Ok I’m not understanding this – Pilbara ‘ASX.PLS’ is up over a percent. However Pilbara ‘PILBF’ is down more than 11 percent.
This does not make sense at all (?). How can this be?

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8 FI FighterNo Gravatar February 16, 2017 at 8:44 pm

Jan,

PLS.AX is the live (real) quote and the only one that matters in regards to price. PILBF is the OTC listing and there is hardly any volume (liquidity) trading on the US market… So, there is inherent lag and spikes in regards to price discovery…

The following article might be helpful:

http://fifighter.com/precious-metals/2016/06/mining-stocks-why-you-should-not-fixate-on-the-otc-markets/

Cheers!

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9 FI FighterNo Gravatar February 16, 2017 at 8:47 pm

In other words, if push came to shove and you had to liquidate out of your Pilbara shares at any time, you can call your broker and have them sell your PILBF shares directly on the ASX (in Australia) where it will trade with PLS.AX shares… the native and most liquid exchange.

PILBF = PLS.AX

It’s one and the same thing… I almost always buy/sell directly on the native exchanges (to get the best bid/ask spreads and most liquidity to get the volume of size I want)… I look at OTC listings as nothing more than placeholders for the real thing.

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10 JanNo Gravatar February 17, 2017 at 4:17 am

Thanks! I knew that PILBF=PLS.AX which is why I didn’t understand how one was plus 1% today and one was minus 11%! So thank you for the explanation!! I will have a look at your link to previous article.
Schwab only offered PILBF.
Thanks for sharing your knowledge.

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11 JCNo Gravatar February 16, 2017 at 11:59 pm

Being nimble and able to take advantage of opportunities definitely has its advantages. I think the big problem is switching your focus to learn the financial aspects of an entirely new sector. I’ve been reading up on a lot of you post regarding the PM/mining space and I still can’t make heads or tails of some of them because it seems like in a lot of cases you’re betting on the come that the new discoveries will indeed turn out as they forecast. Although I think many of the ones you invest in already have economic production to support the expansion to new areas. Any tips/pointers to learn more about investing in these miners?

I’ve become much more aware of how you can turbocharge your path by making a few select investments that have ridiculous performance. There’s nothing wrong with B&H but I think realistically it’s a 7-10 year plan at best unless you have a ridiculously high savings rate and even then 7-10 years still requires around a 50% savings rate.

Based on the macro chart do you still see lots of value in the gold/silver space given the recent run up? Or is oil starting to look interesting since it’s the only one of the 4 that is actually negative?

Thanks for these posts because it always helps to reinforce the only thing that’s true with investing: value is everything.

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12 FI FighterNo Gravatar February 17, 2017 at 2:52 am

JC,

Thanks for stopping by! Absolutely, it takes a little bit of time and effort to learn a new sector, but after immersing yourself awhile with the material, it’s like most anything else… Things start to make a whole lot more sense…

In regards to miners, yeah, it can be tough picking out the best companies out of such a vast universe… As it pertains to my own selection, I’ve got a mix of different companies:

-Producers (generate revenue and cash flow; more important to analyze the production numbers and balance sheets, like you would a typical dividend growth stock.. The best producers are able to consistently meet/exceed guidance numbers for production, cash costs, and have strong/growing reserves base).

-Developers (the project and people are far more important than anything else… Only invest in miners who have a LEGIT shot of actually putting an economical mine into production… Focus should be on Preliminary Economic Assessments, Scoping Studies, Pre-Feasibility Studies, and Definitive Feasibility Studies more than anything else… The geology and metallurgy definitely have to work here, CAPEX needs to be reasonable enough to secure financing… Those are usually the main pitfalls to watch out for).

-Explorers/Prospect Generators (it’s all about the drill results and growing the resource size… No need to waste anytime looking at balance sheets… Any decent explorer will be able to do a capital raise to pay for any land titles/permits/drilling/G&A/etc… Expenses and burn rates for these companies should be extremely low, or that raises a HUGE red flag… No good explorer will be straddled with any significant debt either, another red flag if they are… With explorers, the land package, geological setting — don’t be looking for gold in places where there are no historic evidence of gold mineralization ever being found there… and exploration team are most critical). For prospect generators, you want to make sure they are partnered up with the best producers/names in the business… Cordoba Minerals is an excellent example… You’ve got a micro cap junior that is partnered with Robert Friedland… Nuff said! If that doesn’t tell you their land package is prospective, nothing will… Reservoir Minerals was an example of a most successful prospector generator… They were partnered with Freeport and made a world class copper discovery in Serbia before being acquired by Nevsun.

-Royalty and Streaming (lowest risk of them all b/c you are investing in companies that don’t own and operate mines and have a well diversified portfolio of cash flowing assets… They just earn income on royalties and stream deals, typically negotiated with many developers to help them advance their projects… The R&S company writes a sniff check for a discounted stream on future production… Companies like Franco-Nevada are the best in the business and investing in this type of company is as safe and steady as say going with a DGI stock like Procter and Gamble… The caveat is the upside potential is significantly less than the miners… Yes, you still get leverage to the spot price of the metals, but not to the same degree as the mining companies… but R&S is much lower risk for those who don’t have an iron stomach for volatility… Franco-Nevada even pays out a dividend which has been growing every single year since inception).

Hope that helps segregate out the many different groups a bit… From risk vs. reward, the explorers will offer the “lottery ticket” gains, but are the biggest risk, particularly if we are talking about grassroots exploration where the odds of success are heavily against you… Producers are typically lower risk since they are in production and able to generate cash flow, but even then, too many disasters to name… Just check out New Gold as the most recent example… Developers are tricky as well, no matter how amazing their project is… Building a mine is no trivial task, and cost overruns, delays, all happen more frequently than we’d like… That’s just the reality of mining… So, to hedge, I like to assemble a mix of all those different types of companies…

Anyway, I’ll try to cover this stuff in more details in a future article. Feel free to hit me up anytime if you want to discuss more.

From a macro chart, gold still looks cheap to me, and especially silver… With clean energy, I feel like the paradigm shift hasn’t even started yet so I’m extremely bullish on cobalt, lithium, and copper…

All the best!

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13 Roadmap2RetireNo Gravatar February 17, 2017 at 6:10 am

Great summary, Jay. You should sticky post this on your blog as a separate post. Im sure the newbies will love this explanation when they are getting started. This kind of an explanation sure helped me when I was getting started a year ago 🙂

R2R

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14 NickNo Gravatar February 17, 2017 at 3:20 am

Alot, of us 9 to 5ers, are stuck with 401k plans at work with minimal options. If I don’t max out my 401k, ira, etc my taxes kill me. On my 100k income those investments take me down almost 23.5k. I do fear all the time that this market is over valued but then I would be buying bonds or placing it a money market acct waiting for the next dip. Decisions , decisions. I wish I had more time kkney, and options. Love what your doing and it makes great sense.

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15 FI FighterNo Gravatar February 17, 2017 at 3:27 am

Nick,

For sure, you have to do what is best for your own unique situation. By no means do I mean to imply that mining stocks are the answer to everything… In many cases, taking the employer matching and using 401k plans is the smart, prudent thing to do…

The point of the article (in case it wasn’t clear for anyone) is simply that when it comes to early FI there is a shortcut there… And it’s quite simply — Take advantage of market weaknesses and bear markets by leveraging into assets that historically provide strong alpha on the recovery…

That’s it…

It can be stocks, bonds, real estate, mining stocks, whatever… In the here and now, since the depths of 2015, mining stocks have absolutely been the best asset class to be positioned in…

But there’s always another train arriving at the station… Who knows what it will be the next time around?

Luck is when opportunity meets preparation.

All the best!

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16 alNo Gravatar February 19, 2017 at 10:58 am

” The point of the article (in case it wasn’t clear for anyone) is simply that when it comes to early FI there is a shortcut there… And it’s quite simply — Take advantage of market weaknesses and bear markets by leveraging into assets that historically provide strong alpha on the recovery… ”

Take a peak at following risky ticker’s and the dividend they also provide when turning upwards (own two of them now, SEA and RBL, checking on TROX since TiO is also a shortage market) :

SEA
NGE
EGPT
TROX
RBL

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17 Income SurferNo Gravatar February 17, 2017 at 3:49 am

Agreed Jay. Price matters, and profit is made on the buy side. Happy (Bargain) Hunting!

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18 Evan @ My Journey to MillionsNo Gravatar February 21, 2017 at 10:28 am

What kind of research did you do to get into that sector – The mining stocks and small/mid cap pharmas scare the shit out of me. The volatility is crazy

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19 JesseNo Gravatar February 22, 2017 at 12:01 pm

Nice Article FI. You show 6 fantastic winners in your piece, however did you have any losers that would offset some of those gains?

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