As of November 26, our net worth had appreciated the prior month by 2.86% in USD and 5.4% in EUR to $117,153 and €103,492 respectively.
Our performance in November was aided by strong performance from some of our stocks. We also received several large refunds due to the lowered income in my wife's business resulting from the coronavirus disruptions.
New Date of Record in December
This is the first month where I felt like I should wait until the final day of the month to record the totals. I chose November 26 years ago because it was around when the Deutsche Rentenversicherung made its withdrawal from our German checking account, and it was guaranteed to be before my job paid me. My concept with this timing was wanting to record whatever remains after making all the monthly expenses. Wealth is, after all, that which remains.
The day I recorded our net worth, the market started moving a lot. October 26 through November 25 was a very strong stock market month. From 26 onwards, things started moving downwards, and they moved down a lot. It feels weird to say that we were "up" in November, when the final days of the month were so consequential.
So I'll likely change to recording our net worth on the final day of the month, with my salary subtracted.
Liquid Net Worth
In my spreadsheet, I've also added a "Liquid Net Worth" section. This is basically what I could access if I were to need a bunch of cash. Now, we don't own a home, and I've never included our physical assets in our net worth calculation, so this number isn't drastically different.
I would like to be able to glance at a number that gives me an idea of the number of years we could live off our assets. That means, that retirement accounts and rewards programs don't get counted. Were I to add physical assets and my pensions into the full calculation, they would also be omitted.
At the end of November, this number was $97,131/€85,805. Since we spend about €25,000 a year, it means we could quit our jobs and live about 3.5 years. Were we to cut expenses, we could lengthen that out.
December Outlook
My December Christmas bonus and extra money will be offset by some expenses having to do with some trips, one of which we've already made and another we might make if Omicron doesn't ruin it for us. Obviously, not doing the trip is better for our finances, but, man, we have to live our lives.
In October our net worth (measured on October 26) rose 1.74% in USD and 2.8% in EUR to $113,899 and €98,189 respectively. Year over year, that's about a 52% rise in USD and 55% rise in EUR.
This small monthly gain was entirely due to the stock market gains. Our savings rate was negative because we had to pay our German tax preparer, which means withdrawing from an account set aside for infrequent but recurring purchases. We also paid off our piano, which had been on a rent to own plan. I characterized the balance remaining on the plan as liability when we agreed to it, although it didn't carry an interest rate, and payments to it counted as saving in my scheme.
But since we were also saving up a large cash balance to make the final payment, it's a wash for our monthly savings rate. You can see that in the chart because both assets (the ~€5000 in cash) and liabilities (the balance) decreased simultaneously.
Stock Market Volatility
On the whole, our portfolio did fine in October, however, it was not without its drama. Of the companies that we own that reported earnings, the market's reaction to the majority of them was swift and terrible. Apple, Amazon, Facebook (now Meta), Intel, Ally, and Charter all fell sharply after earnings were released. Sometimes earnings bled into other names, such as when Snap (not owned) announced their earnings, which caused sell offs in Facebook, Alphabet, and Amazon.
While there was some justification to these downward moves, the intensity of the sell off was surprising. It is no secret that Intel is trying to right its ship after years of product delays and encroaching competition. It is no secret that Amazon is investing heavily in its workforce and logistics operations and that it will likely face some bad year over year comparisons. It is no secret that Facebook is pivoting hard towards the "metaverse" and VR/AR and that this will cost a lot.
Nevertheless, the stocks were punished, and that's one of the aspects of single stock investing that anyone who wants to do this just has to become accustomed to. There's no escaping it.
Some companies did well, to be sure. Alphabet, AbbVie, Bank of America, and Sony had strong post earnings reactions. Absent earnings releases, Greenbrick Partners did very well in October. My two small hyper-growth names Dutch Bros and Cloudflare both grew wildly in October, though their earnings aren't until November. I honestly don't know what to make of their relentless price appreciation.
Regarding Cloudflare, at least for now, I have to conclude that my subconscious was right: selling Cloudflare back in May was a colossal blunder. Had I sat tight, I'd be sitting on my first "ten bagger". Whether that price appreciation continues indefinitely is unknowable, but my current cost basis is a more vulnerable price than my original $19.27/share cost basis.
Somehow, I am reacting to all these gyrations with a decent amount of equanimity. Occasionally I will feel some stab of stress, but I know that:
Selling too early has been my biggest mistake.
Companies that I've sold often continue to do well, which means that I'm generally fishing in the right pond1.
Despite that, drawdowns are part of reality, and there’s no prudent way to avoid them entirely within my set of priorities.
A healthy reminder has been that, were I to stop adding new money entirely and only reinvest dividends, this portfolio will likely do very well over time. This is in line with Warren Buffett's admonition that "Wall Street makes its money on activity. You make your money on inactivity." That doesn't mean that it will "beat the market" or that every name will be a long term winner, but left alone, I likely end up with decent price appreciation over the long haul.
November Outlook
We expect several large expenses:
We're planning a few trips. I have some time off around Christmas for once, and we want to take advantage. We also plan to visit a friend in a far corner of Germany, which will demand train tickets and a hotel.
We still have one tax preparer to pay. Fun times.
October has a two week school vacation, which many adults choose to also take for themselves. That means that my wife's income this month will be lower due to reduced working hours. She would have gladly worked, but her clients chose otherwise in many cases. Ah, Europe.
We also expect several refunds:
My wife will receive a refund of part of her health insurance premiums from 2019.
The estimated taxes we paid in September will be refunded due to a new estimated tax appraisal.
We expect a tax refund from 2020, but the Finanzamt might take its time delivering that.
And naturally, the market might behave wildly, which is outside of my control. Until next time, stay healthy and happy.
Reminder: I, like all Americans living in Europe, find myself forced into individual securities. The dual taxation/regulations placed on US citizens in Europe via FATCA, the FBAR, PFIC taxes, and MiFID II rules mean that we are excluded from buying financial products such as mutual funds and ETFs unless we misrepresent our actual residence. In many cases, US citizens in Europe are denied simple bank accounts. We are a group that is actively being discriminated against by multiple countries for the crime of being US citizens abroad.
As I recently mentioned, I just took out a loan to buy stocks. Right now, interest rates are temptingly low, and while the U.S. market overall is expensive, there are still undervalued companies there and elsewhere that can overcome the loan's interest rate cost.
My impression is that few people do this. Stocks are risky, and those who lever up can flame out hard. Stocks, in addition to being volatile, are nearly always available to be traded. I could get drunk, get scared at falling prices on my iPhone, and close every position in my portfolio at a giant loss with six or seven taps. Applying leverage to that is risky, no doubt, and buying stocks on leverage attracts a certain amount of skepticism and disdain.
Real estate leverage attracts much less scrutiny.
Stating the obvious, the high price of a single real estate unit usually requires a buyer to finance the purchase through a mortgage or other lending structure. That's naturally as true in Germany as in the US. And that leverage means, theoretically, that you can turn your down payment into a much more potent force, where you can reap the levered gains from rent and from the price appreciation.
For those who do this, it's possible that rental income more than covers the monthly cost of the mortgage. Indeed, one of the oft-repeated strikes against renting is, "You're paying someone else's mortgage." For a landlord who accomplishes this repeatedly, they can create an empire of rental units paying off his or her debts all while accumulating value through appreciation.
It sounds like a dream.
Expensive
In Germany however, it looks much less dream-like. To be fair, there are serious real estate investors here. I know two of them personally, and their wealth is absolutely real. But recently, both have said the same thing: everything's too expensive.
For all the complaints about costs in the US, German real estate feels increasingly out of reach. Yes, if you live in the hot American cities, purchasing real estate can be nigh impossible. But even in the not-so-hot German cities, buying an apartment can be a ludicrous amount of money for what you get.
Prices in many cases have outstripped the possible rental income you can get from the property. I sometimes see properties listed with a renter in place. That means the rental income starts immediately without having to go through the hassle of finding a tenant and doing all the necessary background checks.
But if you do the math it stops seeming so nice. I've gone through the listings and priced out mortgages for given down payments to see what kind of cash flow can come from these properties, and it doesn't work. In general, the down payment would have to be enormous for the property to have positive cash flow from the rental income. But having an enormous down payment cancels out the benefits from the low interest rates in the first place.
Tenant Protections
For an American, you might ask, "Why not just raise rents?" But we're not in Kansas anymore, and there are legal and cultural realities you have to adapt to. In general, German renter protections are much higher. And, as a renter, they're great.
Leases are continuous, and the renter can leave at any point if they notify the landlord 90 days in advance. So there's no new lease signing event to hike rents. Instead, there are prescribed rules about when and by how much a landlord can raise rent on an existing tenant, and it's biased in favor of the tenant. For the ambitious landlord, there are ways to force it, such as by doing a large Modernisierung of the unit where it's materially nicer and more energy efficient and therefore deserving of higher rents. But that's yet another cost, and do you really want to spend your time doing that?
Dealing with tenants, by all accounts, is hard in Germany. One of my landlord friends says that you basically can't raise rents once a tenant is in place. Kicking tenants out who don't pay rent is, by all accounts, difficult and lengthy. In addition, tenants are allowed to lower their rent payments for cause, such as loud construction nearby. German renters have non-profit organizations that can go to fight for them for nominal membership fees.
High Taxes and Fees
If you're versed in basic investing wisdom, you know that keeping fees low is a primary requirement of the wise investment. But for the German real estate investor, taxes and fees are deadly. When you buy an Immobilien in Germany, you pay a series of up-front fees that are an immediate loss.
If you visit a site like ImmobilienScout24, they list fee estimates for a given property. For example, the estimated fees for an apartment in Stuttgart is around 10-11%. That includes the following:
Maklerprovision (3.57%, broker fee, and the one fee that can be avoided)
Grunderwerbsteuer (5%, property transfer tax)
Notarkosten (1.5%, lawyer fees)
Grundbucheintrag (.5%, registration fee)
So in my Stuttgart example, according to Sparkasse's calculator, we get an estimate of €50,350 in Nebenkosten.
Here's an actual example in Stuttgart from a 56m2 (about 603 sq. ft) Maisonette apartment with slanted walls with a property price of €298,000 where the Nebenkosten add up to €27,952, which equals a total cost of €325,952. And that's with a slightly lower Maklerprovision.
To be sure, the fees vary depending on location. The Maklerprovision and the relevant taxes depend on the local government rules. But they're all high, and the fees are purchase price dependent. The Maklerprovision gets a lot of hate despite it being the one fee that is sometimes avoidable, but the Grunderwerbsteuer by itself will bite you hard. With property values at high levels, you're getting hit twice: you're at higher risk of a fall in property values, and you're hit by the upfront fees attached to that price1.
You're also guaranteeing yourself high opportunity cost. You'll have to save up those fees since banks generally won't finance them for you. To save up, you'll likely stick the money in a savings account earning nothing, and it might take years. You have to ask yourself if the lost potential gains in the stock market are worth it. If it takes you two years, those are two years of compounding you never get back. And when you eventually buy, your down payment might go entirely to the fees and not towards the property, leaving you financing 100% of the property value.
Those fees mean that there's never a guarantee that you earn any money from the purchase. It's an immediate hit of ~6-12% up front of the levered cost, and if you're compelled to sell for any reason before compounding has overcome that hurdle, then it's a shocking loss of potentially more than your entire down payment. That's the two-edged sword of leverage.
At the very least, it means that you'd better be damned sure that this is the best use of your money or that you have some special insight or strategy that makes those costs worth it. And you'd better be able to hold on.
Property Tax
There is property tax (Grundsteuer) here in Germany, but trying to estimate it in advance is hard. Just know this: you will have ongoing property taxes. They are not particularly onerous, which is one advantage compared to the US.
What I've divined from the online literature is this: the tax varies based on the type of dwelling and depends on an official value assessment (Einheitswert) by the state (Bundesland) you're in. This number is much lower than the purchase price and gets adjusted every six years. That number is multiplied by a small percentage (Steuermesszahl). This value is then multiplied by several hundred percent (Hebesatz) - depending on the state - to equal your yearly tax. Clear?
Expat Issues
I haven't even talked about the potential challenges of being a U.S. expat doing this. For one example, Robert Kiyosaki likes to extol the virtues of not owning anything yourself to protect yourself from liability issues and lawsuits. That would likely mean putting your properties into a corporation or other such entity. But you, the American expat, have to consider the implications back in the States and what the IRS will make of your German arrangements. Controlled foreign corporations require extra compliance and paperwork.
Lastly, there are the normal challenges of being a real estate investor that exist everywhere. All the stuff listed above is layered on top of that already substantial levered risk burden.
High Prices, Lots of Rules, High Fees, the IRS... What's Not to Like?
If you're excited by real estate, and other options won't do, then more power to you. There are likely unexplored riches because the hurdles are so high, and there are likely strategies that can work for those geniuses who recognize and execute on them. If you're actually receiving cash from your purchase in excess of your outflows, it dulls - but doesn't eliminate - the impact of the up front fees, especially compared to owning a home as a residence.
But at this moment, I can type some numbers into my computer, get an appropriately-sized loan relative to my income, buy a diversified basket of stocks, and go on with my life. If that sounds irresponsible to you, you have to ask if losing potentially tens or hundreds of thousands of euros up front guaranteed for a likely overpriced asset to service tenants whom you can't kick out sounds responsible.
Maybe neither sounds responsible, and that, at least, would be consistent. But I want to use low interest rates to my advantage, and although I'm attracted to real estate, I look at the reality of it and am turned off in comparison to other options.
Does that mean never for this oft confused expat? Of course not. I've moderated my opinions often, even after writing negative articles. Buying stuff is fun, and property captures my imagination. I know all this because I regularly stare at property listings, after all. But there's a lot of friction in buying real estate, and I assume that I'd bail before putting my name on the dotted line.
In comparison to the US, Bank of America estimates the closing costs for a $500,000 property in Charlotte, NC with a 5% down payment at $12,921. In New York City, it'd be $21,547.↩︎
In September1 our household net worth inched up .74% in USD and 1% in EUR to $111,947 and €95,518 respectively. For the third quarter 2021 (July-September), it rose 9.46%. Year over year was a net worth 42.15% rise.
Portfolio Performance
If the Portfolio Analyst feature of Interactive Brokers is to be believed, my taxable brokerages and IRA portfolios returned -.65% for the quarter. I was keeping pace with the S&P 500, but my portfolio fell harder during the September drawdown.
There's some uncertainty around that number because of the loan - more on that later - and because I added external accounts to the Portfolio Analyst system, which is kind of wonky. Let's just say the way PA works is kind of opaque. Long story short2, I slightly underperformed the S&P500, but by the exact amount is a bit unclear.
I'm not pushing stocks on anyone, so I don't know how much people care about that sort of number. As I've matured as an investor, I've looked at how things will perform given longer future time horizons. I don't know if I'm good at that yet, but I've learned that three month stretches don't really give me much information to work with.
Additionally, I rarely look at any individual position as "full" or "complete". I like adding to positions, and lower prices are helpful for that.
I'm happy, on the one hand, that I didn't crash and burn during these last three months, but given how I close I was to the index, I'm probably more or less closet indexing with a handful of small wildcard positions that have small effects on the portfolio. I'm trying to get away from that by making more educated and larger bets that I can hold for the long term but that will likely perform much differently than the major indexes.
My Worst Timed Trade Yet
I did have my single worst timed stock purchase though. On September first, I bought my first 50 shares of AbbVie. In 15 minutes the stock fell by 10% because of some FDA news. It was pure bad luck because if I'd bought 15 minutes later, I'd likely be sitting on a small gain rather than the loss I currently have. It's not a disaster, and I don't regret the purchase, but there's a real, "You pays your money and you takes your choice," feeling here. Stocks are risky after all.
Speaking of risk...
I Took Out a Loan to Buy Stocks
In September, naturally with my wife's input and consent, I took out a €30,000 loan with an effective interest rate of 2.39% and a repayment over 7 years. You can see the effect in the stacked column chart by looking at both the asset and liabilities side.
It's taken me years to act on this idea. I discovered the loan shopping sites several years ago, but I didn't act on it, and even in the last several months, it was an idea that I bounced around but left in the drawer. While deliberating, I priced out loans and had bankers calling and emailing me. I had to psyche myself up for it by listening to Rich Dad, Poor Dad a few times3 and listening to a terrific episode of The Investors Podcast about using debt proactively to buy assets.
In my case, I've borrowed to buy stocks rather than borrowing to buy real estate, for example. In fact, the terms of the loan explicitly state that I may not use it to buy real estate. A mortgage would likely have meant a lower interest rate, but RE in Germany is a much different animal than in the US.
I had a few guidelines going in:
The interest rate needs to be an achievable return. As in, I need to be more or less assured that over the life of the loan, I don't lose any money to interest.
The monthly payment needs to be lower than the amount I normally save towards my stock purchases. I'm still going to be adding money monthly in addition to the loan amount, and I never want us to feel pinched by the monthly repayment plan.
The stocks purchased should help diversify away from large cap tech stocks (which are the largest single positions in my portfolio). Doesn't mean I can't buy any tech if a great opportunity arises though.
The combined dividend yield of the companies I purchase should pay a growing dividend in excess of the loan's interest rate.
Since I don't want to lose the principal either, the companies purchased should have reasonable-to-great valuations while also not being value traps, melting ice cubes, junk.
Diversification away from the U.S. would be nice, but is not required.
The stocks I've purchased thus far satisfy those requirements and have been in healthcare, real estate, homebuilding, and banking. I've added here and there to smaller growth positions. I've achieved the dividend/interest rate goal already and still have about $10,000 left. I've probably done more stock research in the past week than I've ever done before in order to decide what to do with this $10,000. It's exhausting, but I've learned a ton, so maybe I'll delay indefinitely and just keep learning until I find more 1 foot hurdles.
October Forecast
We'll have to pay our tax preparers, which will eat some money, but otherwise October should be a pretty standard month for us.
Reminder: I, like all Americans living in Europe, find myself forced into individual securities. The dual taxation/regulations placed on US citizens in Europe via FATCA, the FBAR, PFIC taxes, and MiFID II rules mean that we are excluded from buying financial products such as mutual funds and ETFs unless we misrepresent our actual residence. In many cases, US citizens in Europe are denied simple bank accounts. We are a group that is actively being discriminated against by multiple countries for the crime of being US citizens abroad.
Basically, after adding the loan to the PA feature, it made the portfolio look like it had fallen by 25% or so. They don't treat their own margin debt that way, so I'm not sure why it was different for an external loan. Additionally, adding historical data for external accounts is very counterintuitive. ↩︎
Here's our monthly update along with my revised thinking on some controversial and previously derided subjects.
In August, our net worth rose by 3.67% in USD and 4.11% in EUR to $111,121 and €94,571 respectively.
Two easy wins this last month were the third stimulus check from the US government as well as our 2019 German tax refund hitting our bank accounts. My investments mostly bounced around in August and ended up back where they were at the start.
I've changed the chart design to better break out the various types of wealth we're accumulating. Obviously, the largest source is USD-denominated investment securities. Even if I buy a stock from a different country, if it's purchased with USD and listed in USD, then it gets added to this pile. Two examples of that are Sony and Alibaba, neither of which are American but which helpfully trade on US exchanges. Were I to buy shares on the Nikkei or the Hong Kong exchanges, I'd need to add more layers to express those holdings. That's how I show my euro-denominated investments (which are visible, if small).
Changing Your Mind: Loyalty, Crypto, and Leverage
The chart lists loyalty programs, crypto currencies and some margin debt, all of which I've written negatively about. One of the challenges of writing your thoughts down and hitting send is that it makes it hard to change your opinion out of fear that someone will notice the change and call you out on it. That can breed inertia.
In all three cases, my concerns expressed in those articles remain, however, I've tried to integrate them where it's appropriate.
Churning and Loyalty Programs
In the case of loyalty programs, I wait until we have guaranteed spending to do and then order a card that can meet that spending. This has gotten us a lot of points that are genuinely useful for our air travel to the US. However, I've also declined signing up for some good cards (for example the current Chase Sapphire Preferred's 100k point bonus) because there's no smart way for us to reach the spending goal. I don't want to fall into the trap of spending purely to reach a bonus spend.
In the net worth chart, I value all points at 1 cent a point even though some are worth more or less than that amount. And many of them will just vanish valueless.
Crypto
Regarding crypto, I'm balancing out my fears that it's ultimately worthless with my growing perception that there's a giant industry being built around it. Additionally, actual useful stuff is starting to be done with it. NFTs might look like a joke, but I see them more as a proof of concept that could evolve over the next few decades.
Additionally, if I'm being totally honest, there's a lottery ticket aspect to holding crypto. And I could use a winning lottery ticket or at least the possibility of one, even if it's a small bet.
However, I know that:
There are no guarantees that, even if there's ever a thriving crypto industry, my particular tokens will work. Pets.com folded, but the internet lived on.
It might ultimately all be worthless, despite my change of heart.
There are still a bunch of incentivized coin pushers who give a lot of the field a scammy feel.
Bitcoin especially has been the preferred currency of the major infrastructure hacking attacks that have plagued the world. It's a major black eye and makes it a ripe target for regulation. And that's before the stupid electricity costs.
FOMO drives dumb behavior.
Therefore I buy crypto with my own personal BLOW money and not our general savings money. That way there's a kind of automatic cap if I actually want to do anything in my personal life outside of buying crypto, and it limits how much I can buy in case I get a serious case of FOMO.
At the very least, it incentivizes me to remain current on the area, and if I lose some of this money, I'll chalk it up to educational costs.
Margin/Debt
I am increasingly convinced that using debt can be helpful. Interest rates are very low, and it would be trivial to buy securities that result in little risk of a margin call while also covering their resultant interest payments. I've looked at taking out personal loans for this, but I could also just use margin. Each have their plusses and minuses, and I wouldn't blame anyone if they thought any kind of debt was too risky for them personally.
My thinking has evolved primarily because of my thoughts around real estate. I keep looking at real estate and the absurdly low mortgage rates, and I know that buying levered assets makes sense. Leverage used wisely can help build an asset base that allows wealth growth that exceeds that which can be built by cash alone. After all, almost no one would pay 100% of the cost for a house with cash, especially since prices are higher at least partially because rates are low.
But buying houses doesn't make sense. Or, at least, they don't really make sense in Germany. To make a long story short, the transaction costs and risks of political backlash against land lords - not to mention the actual work involved and the extreme renter protections - means buying real estate in Germany too risky for mere mortals like me. It's one reason I bought LEG Immobilien: it gives me exposure to German real estate income while also letting honest-to-God professionals deal with it.
Buying real estate also comes with risks of sudden major expenses and major location concentration (aka a house or even multiple houses would heavily weight my wealth towards this particular part of Germany). And it ties me down to this place in particular, which I'm not ready to do. My wife is also not eager to be tied to this area via a house purchase.
Therefore buying stocks with debt makes the most sense in my case. But it has to be done intelligently and carefully since leverage can lead to losses greater than the initial cash outlay. The challenge is this: when you buy stocks with decent dividend yields, you can easily overcome the interest rate hurdle, however you won't get enough cash flow to pay off the principle if you take out a loan. You might after 5-7 years, but more likely you'll be paying off the principle out of cash flow from your day job.
Therefore, you can't lever up the same way as with a real estate purchase, or, at least, it would be irresponsible, putting it mildly, to do so. Buying a $450,000 house with a mortgage covering 90% of the cost is totally normal. Levering up a stock portfolio to that degree would be disastrous. The whole, "My renter paid my mortgage" idea is out with stock leverage, and that introduces practical limits on how much leverage a person can apply towards their stock portfolio.
To sum up on all this, I've moderated my mind on a few subjects, and I'm neither a maximalist nor a complete pessimist on them. I remain skeptical in the sense that it prevents me from going "all in" on any of these ideas, but I'm looking for ways that certain previously derided concepts can help. This feels healthier and more productive and less dogmatic.
Forecast
September is likely to be a totally normal month. We will likely have some tax prep costs, but I'm not expecting any extra income this month on my end.
My wife's working hours have picked up a lot, so that means her income will likely rise. I've been really impressed with everything she's doing, but one reason I look for investments and savings vehicles is that I don't want either of us to have to do so much hustling forever.
Ultimately, flexibility is the goal. Until next time.
Reminder: I, like all Americans living in Europe, find myself forced into individual securities and forced to make riskier investments than I would prefer. The dual taxation/regulations placed on US citizens in Europe via FATCA, the FBAR, PFIC taxes, and MiFID II rules mean that we are excluded from buying financial products such as mutual funds and ETFs. In many cases, US citizens in Europe are denied simple bank accounts. I would like nothing more than to purchase a diversified stock fund, but that is currently only possible by misrepresenting my actual residence. We are a group that is actively being discriminated against by multiple countries for the crime of being US citizens abroad.
Our net worth increased in July to $107,189 and €90,838, which is a month over month rise of 4.81% and 6.05% respectively.
This is a surprising result for me, because I'm in the USA, and I'm spending money. The trip has been more expensive than I originally expected (though there was always an inner voice telling me to expect it), and the stock market sort of bailed me out. If you owned US stocks in July, you were likely rewarded. At least up until that last week.
Stocks Reporting Earnings
Some of my largest holdings reported earnings in July: Ally Financial, Apple, Alphabet, Charter, Amazon, Facebook, Paypal, and T-Mobile all reported earnings, and the news was generally good. These companies are continuing to grow, and their future prospects are strong.
That doesn't mean that the corresponding stocks were rewarded immediately for that growth. While Ally, Alphabet, and Charter rose following their announcements, Apple, Facebook, Paypal and, especially, Amazon fell in price. Those falls happened in the days after I recorded our net worth change, so they're not reflected in the above totals, but suffice it to say, they were meaningful. Amazon fell a little over 7% in one day, and since that's my largest taxable holding, it was a meaningful drop.
These drops and rises though are just noise though. They are meaningless for long-term success. And getting mad at the market for punishing strong companies' stocks is like shouting at the wind (which I've done at my more pathetic moments). We all see the comments on Twitter and Seeking Alpha that go something like, "Company x just announced a huge beat, and the stock is down 5%? How does that make any sense?"
Maybe it makes sense, and maybe it doesn't. Maybe the company is overvalued, or maybe large holders are taking profits. It's all a guessing game, and it's pointless to try and justify or deride every market move.
I write this, and I have to admit that only in the past year and a half have I been able to actually remain calm during these kinds of drops. My first stupid sale from a drop was Booking Holdings back in the fall of 2017. That kind of sudden reversal was terrifying for me, especially after the easy rise up the market had in 2017. From there to now, I've experienced a real maturation of my response to these movements.
The United States After a 2 Year Absence
I'm currently in the US after being absent from it for two years due to the pandemic. It's been eye opening. The country feels alive and dynamic in a way that I miss from Germany. Germany is solid, and it's treated me very well, but I've never regarded it as an exciting place. The US is exciting. It feels like stuff is happening, like deals are being done, like boundaries are being pushed, like money is bounding forth from all the dynamism.
I like this feeling. It's seductive.
At the same time, there's the dark side. I turn on the TV, and there are the drug ads. CBS Morning has a segment called "Bill of the Month", which highlighted a man with two separate insurance plans who still owed $150,000 after an accident that left him in an out-of-network hospital. I see that a pill that I take daily costs many multiples more than what I pay in Germany, even for a generic! Lots of peers my age are living with crippling student loans and few job prospects if they didn't choose the hot career of the moment.
And during my time here, I kept having to sequester myself from my family to continue working on the Streamlined Filing Procedure. I believe that once it's all done, I won't owe any money, and the IRS won't come after me. But I won't be entirely sure until the statute of limitations is up.
I've lost so much time and energy to this process in a period when I wanted to focus on my family. Since the IRS has to decide - somewhat arbitrarily - whether my actions were willful or not, I had to just hustle to get this done. I wanted to finish it before I left Germany, but I couldn't do it, and the whole thing kept underlining how absurd it is.
For example, I make some self-employment income on the side in Germany. In Germany, there's some threshold you have to cross before they start taxing you on that income, which means I've never been taxed on it even though I always declare it in my German tax return. In the US, that threshold is MUCH lower, and so during this process I essentially had to create a set of P&L books just for my US tax return. I also did the same for my wife's small business.
It's all crazy. Now I have to worry that the IRS is going to bother me about some write off for this tiny small business that I have in a foreign country where the foreign country itself doesn't even consider me worth taxing! These write-offs are to avoid social security, but they know I live in Germany, which has a Totalization Agreement with the US about Social Security, but to actually get out of paying SS in the US, I have to fulfill some additional paperwork that for some reason the German Rentenversicherung doesn't want to provide me (naturally, they just don't respond to my requests for it).
I just don't get why my home country is this way.
Suffice it to say, I have mixed feelings about America right now. It feels like a vibrant place full of opportunity, but it's also loaded with traps and harassment for its citizens.
Let's also not forget that the US is being hit by another wave of the coronavirus primarily because of vaccine hesitancy. To say I'm disappointed in many of my countrymen and women is an understatement. I have several family members who are ill with it, and I hope they pull through.
August Forecast
On the day that I left Germany, the third of the three stimulus payments arrived in our Postfach. However, I was out the door already, and so my wife has been sitting tight on that check. We also received our long-awaited German tax refund at the end of July. Both of those will contribute meaningfully to month over month changes in my August update.
My wife's work is also picking up. We'll see how long that lasts (since Germans are hardly free from this vaccine hesitancy madness), but for now some extra income is very welcome.
As for expenses, I expect to pay for our American and German tax preparers. I do not resent either of them personally since they've both been very good for us, but I do resent this system I've found myself in.
Until next time, stay healthy and look out for your loved ones.
On June 26, when I took the monthly measurement, our net worth had risen in the prior month by 1.74% in USD and 3.87% in EUR to $102,269 and €85,653 respectively. Year over year, that's a 50.4% and 41.33% rise in USD and EUR respectively.
We've essentially returned to where we were in May with slight changes to the overall relationships between various accounts. As I wrote in earlier updates, we haven't been able to actually save much in the past few months, so the gyrations of our stock portfolios have been entirely of their own volition.
Stock Shenanigans
Now, I enabled this volatility a bit by selling and buying some things, but there wasn't really much of a period where any of the proceeds of those sales sat in cash.
May provided one of those confounding periods that I wish I were better at predicting. After I sold some stocks, I purchased different shares. When the first stocks fell, I felt vindicated. When the newly purchased shares also fell, I felt like a fool. My instinct to sell had been right, but my rush to buy was not, and much of the frustration I felt in the past two months could have been reduced had I sat on my hands a bit longer and allowed volatility to help me out and make me feel like a genius trader.
That said, in the long run, it won't matter. I can barely remember the various agonies I've experienced since buying my first shares. Eventually this small irritation in May and June will fade like those others I've forgotten in the past. It's all the more reason to avoid making large blunders that make these periods unforgettable.
The one thing that might have been such a blunder was my sale of Cloudflare. This is not a stock tip. Following the sale, I experienced serious regret and a nagging sense that I had made a long-term blunder. I even dreamed about it. After analyzing the company to a greater extent than I did when I first bought the shares in 2019 on a whim, I've decided to average back into it. Make of that what you will. My other sales haven't distressed me, so this will be a good gauge of my instincts as the years play out.
Taxes
We had to move some money out of savings and into the hands of the German federal government by paying our estimated taxes. If we're overpaying, we probably won't see that money again until the end of 2021 with the lag times between receiving the necessary paperwork, the tax preparer's time, and the pace of the German Finanzamt.
In America, I found doing taxes to be kind of fun and easy. I studiously learned the rules as best I could and filed on time every year. When I moved abroad, I knew I needed to file a US return as well, which I've always done.
But taxes have become a drag and a source of dread. Almost none of that feeling has come from paying taxes, but instead it's the vast quantities of paperwork and organization we're required to maintain along with the conflicting rules of two countries that drive me to anxiety and occasional despair.
It appears I've missed something in all my US filings, and now we're going through the IRS' Streamlined Procedure because the risks posed by the outlandish penalties are too high to ignore. Namely, I misunderstood the FBAR (IRS Report of Foreign Bank and Financial Accounts) and how some of my arrangements in Germany might, repeat, might have been reportable. No one can say with certainty whether they are or not, but because the potential penalties are so extreme, and because I'm already in the IRS system, I can't ignore them.
So now we're paying a firm to help us, and in the days before I fly to America to re-establish my relationships with my blood relatives, I'm reassembling three years of data to prove to the IRS country that we don't owe taxes and that we weren't trying to hide money from them. Along the way, I'm learning the other small ways in which U.S. expats are screwed by the US' tax system and it's hard not to feel like our country hates us. Charlie Munger exhorts people to never feel sorry for themselves ("I know self-pity is stupid"), and I try to keep that in mind to keep plunging forward in this task, but that sense of injustice and unfairness grates like sand in my shoes.
June Outlook
We will have to pay the aforementioned tax preparer in June, and I will likely have elevated spending while in the US. Otherwise, I'm hoping for not too many surprises. Because I received my summer bonus, I had some extra money to save, which I've done. Should we receive any of the various stimulus checks from the US or the mythical refund for our overpaid 2019 German taxes, we'll have a boost.
Happy Independence Day to any American readers, and I wish you health and happiness. Until next time.
It hit me a few days ago that I didn't do a Sankey diagram for our 2020 income and spending. I really like these diagrams for visualizing that which is hard to visualize: namely, how income gets chopped up into various buckets.
Here's the 2020 flow diagram (click to enlarge):
Some notes:
This year I've added income-dependent outflows such as income taxes, social security (Rentenversicherung), my pension, and so on. That presents a more accurate picture of how much we're actually left with to budget.
In my wife's case (Job2), those expenses are estimated in advance and adjusted every year. So 2020's expenses are based on 2018's earnings, which is why they're such a large percent of her income. I expect that there will be a sharp revision downward once we file our 2020 taxes, but that will be months before those are finalized and accepted by the Finanzamt.
"Rent" includes various utilities costs such as water, heating, garbage disposal, etc. In Germany, this is known as "Warmmiete".
The "BLOW" categories house a bunch of personal things. That's where most restaurant, clothing, and miscellaneous stuff goes.
"Household" contains expenses that are agreed upon by us both and are general meant as home improvements or large mutually beneficial expenses.
"Rundfunk" is a cost for anyone with a dwelling in Germany. It's a controversial law that forces the public to pay for a set of media companies in order to maintain viable quality media within Germany. It costs more than Netflix for channels that my wife and I rarely pay any attention to. Nothing to be done about it though.
"Side Stuff" includes my small time freelancing on the side. This has never reached a level to be taxed by Germany.
"Refunds" include the various subsidies I received for my dental procedures as well as the first CARES Act stimulus payment from the IRS.
"German Debt" includes installment plans that don't charge interest.
"Digital Subs" includes media and cloud subscriptions.
Any USD-based income (such as "GiftMoney") is converted to euros for this.
I'm not including investment income or losses in this diagram.
Our net worth dropped 1.36% in USD and 2.23% in EUR to $100,509 and €82,452 respectively. The major factors leading to this monthly drop were reduced income, higher one-time spending events, and volatility in the stock market. Year over year, our net worth increased just under 60% in USD.
The biggest factor affecting 2021 so far are our reduced incomes. My salary has steadily gone up over time, but because of reduced opportunities for doing extra work, I've not had those big one-off boosts to my income. Due to Covid-19, my wife's profession has been severely affected. I've written about this paradigm since the pandemic began, so I feel like I'm repeating myself, but conditions for us have remained very stabile. No one lost their job, but we are nevertheless reduced.
This has meant that we've been unable to take advantage of the market volatility because we're just having trouble saving anything. It's a tricky moment for us on the savings front.
Closed Lots of Stock Positions
During this last month, I closed a lot of positions. I liquidated my small cryptocurrency holdings, and I sold off a lot of stocks while putting that money back into other companies.
I wrote about my feelings on crypto recently, but the stock sales arose from a sense that I couldn't go to war with these names: I knew that I would have difficulty holding them through a serious drawdown, so I bailed on them now. That, and I wanted more Amazon, Facebook, and Berkshire Hathaway shares. I moved out of low conviction names into higher conviction names.
Selling some of those positions will likely have been a mistake when I have the benefit of hindsight. But increasingly, I'm admitting to myself that I am a stock picker, and that means that I need to believe in the position if I'm going to hold it long term. A bunch of small positions that don't mean much to me are just anxiety fuel, and that was especially true because so many of them looked severely overvalued. Some of the positions I sold will likely outperform the positions I bought, but I believe that my behavior will be better in the positions I bought because I have more faith in them.
My desire is to hold a few high conviction names for the long term. That means that I have to understand what's going on and be comfortable holding them through thick and thin. It also means that I will miss out on some other stocks' meteoric rises, but that will have to be ok. I don't have to take part in absolutely everything to have a good result, and, as I saw during the big March 2020 crash, I can hold on to high conviction positions even during trying times.
But to avoid similar culling in the future, I need to be more careful with the stocks that I buy. The sin here wasn't selling, but instead it was that I purchased some names using a half-brained theory, believing that I was a computer who could dispassionately buy and sell companies that I don't have any emotional investment with based on certain factors. This has been a recurring problem for me, and it's time to forego systems that treat me like a computer.
That said, don't be surprised if some of these stocks re-enter the portfolio. I'm not dead-set against them under all circumstances.
As has been the case for the past few months, you can see those positions under the Portfolio tab.
How's June Lookin'?
June will look a lot like May. Our incomes will basically be the same, and we have to pay our estimated taxes, which will hit our savings. Unfortunately, we won't be able to save much, which is a drag.
We're still waiting on our tax refund as well as the U.S. stimulus payments, but those will arrive whenever they arrive.
I visited a palace recently (Germany is full of palaces and castles and such), and the main residence was surrounded by a moat. The waters were richly stocked with fish, and sitting atop the bridge over the moat were fishing poles.
As I absorbed the scene, my day-dreaming mind wandered to the basic premise behind fishing; the fish perceives an offer that's too good to be true and decides that they will be the one to take up that offer. Worms generally don't float at or near the top of the water line, visible to all passers-by, but the fish disregards the blatant non-reality of the situation and bites anyway.
Sitting on that bridge, my mind jumped to cryptocurrency.
Seemingly every day, we're hit with stories of the normal people whose lives have been transformed by crypto wealth. I also get excited by reading this stuff, but my rational quiet brain reminds me, "That's bait." Because it is. Just look at the incentives.
One of Charlie Munger's admonitions is to consider the incentives behind any investment. As described in Richer, Wiser, Happier:
Munger starts with a tendency of such importance that almost all of us underestimate its significance: the role that incentives play in "changing cognition and behavior." He quotes his hero, Benjamin Franklin, who said, "If you would persuade, appeal to interest and not to reason." Munger writes, "This maxim is a wise guide to a great and simple precaution in life: Never, ever, think about something else when you should be thinking about the power of incentives."
Let's work through the incentives.
Crypto is created by programmers. The coin's advent is often accompanied by a white paper.
Early adopters begin with the largest number of "coins", either gained through the creation of the coin itself or by buying very early.
The early adopters are often the biggest proponents of the coins.
These coins are traded for money, which has led to the creation of large exchanges where people could easily use their fiat money to buy these coins.
The early adopters' wealth rises quickly as demand spreads. This - often very public - wealth creation spurs new demand, which pushes up the price, which makes the early adopters even richer.
Crypto miners invest huge sums to facilitate transfers and earn new coins. Those coins are sold to pay for the costs of mining, which are very real and priced in fiat money.
As new entrants see the wealth, they buy in, but their cost basis is much higher, which incentivizes them to also promote crypto.
Recently, institutions have been tying themselves to the fate of cryptocurrency1 by buying it, transacting in it, or being an exchange for it.
Can you see the problem here?
Think about what happens when you buy crypto. First, you want to buy it because you heard good things about it. It can make you rich! Who told you that? Or maybe you believe the claims that it can solve this or that problem. Who told you that?
The early adopters are arguing publicly for the supremacy of crypto.
The institutions who've adopted it are saying good things about crypto.
There are lots of people out there saying good things about crypto. Journalists writing about the sudden riches are saying good things. Jack Dorsey and Elon Musk are saying good things. Thomas Lee and Preston Pysh are saying good things. Bill Miller is saying good things. Jason Debolt is dreaming of trips to the moon funded by today's Dogecoin purchases.
The crypto founders themselves are saying good things. Just read this copy from the Cardano homepage:
Making The World Work Better For All. Cardano is a blockchain platform for changemakers, innovators, and visionaries, with the tools and technologies required to create possibility for the many, as well as the few, and bring about positive global change.
Notice also that their website isn't even finished although Cardano's ICO was in 2017:
Even your family members might be saying good things about it. But that's also the case when your brother is trying to sell you Cutco knives or your mother wants to give a Tupperware party.
Next, who is selling it to you? This stuff isn't coming out of thin air (you missed out on that part of the story). Someone is on the other side of that trade, and why would you assume that you know more about that person regarding the relative merits of your purchase? You likely don't, especially if you're sending your dollars or euros to one of the early adopters. And naturally, the exchanges are happy to facilitate the transaction for a hefty fee.
All this adds up to bad incentives. All of those people are incentivized to say good things about crypto because they're all in on it. That may sound a little close to a conspiracy, but they needn't be colluding to all have similar incentives. For most people, they're just getting in, and they want their purchase to work out.
Crypto Solves That?
Crypto has several major flaws, but one flaw is the sand under its house: its price bears no relationship to any of the perceived benefits. You can argue that blockchain technology is cool tech. Yes. You can say that it can facilitate certain payments. Sure. You can say that it will disrupt certain industries that rely on outdated contract models. Yes.
But. What. Does. That. Have. To. Do. With. Its. Price?
Imagine if Apple let the Swift programming language trade on Binance. You could argue all day about the benefits of Swift and how its a game changer compared to Objective C. Those arguments would be irrelevant, however, to the purely speculative price it would be trading at. Meanwhile, crypto only has a price attached because it's been programmed to have a price attached. But just because it can have a price attached doesn't mean that it's justified.
And all the reasons for the price sound like post hoc rationalizations: it's a store of value, it's a hedge against inflation, it's digital gold, it's becoming scarcer, it's halving, it's based on network fees.
Thus far, that doesn't exist for crypto. That might eventually emerge, but right now, the best argument proponents have is that it's a new asset that's gone up a lot, which means it might continue to go up a lot, so you should hop on or else you can "have fun staying poor".
Intelligently Taking the Bait?
I've wondered, and maybe you're wondering, if we can take the bait intelligently. As in, we know it's all a hustle just like Elon said on SNL, but we figure we can get in and get out without getting the hook.
First, I think we have to be honest with ourselves that we likely aren't incredible traders. I know I'm not. And since the stories about 2000 and 2008 tend to focus on the many who were ruined rather than the few who got out in time, we should assume the base case is that we're likely part of the many rather than the few.
Second, we have to be aware that sitting on a winning trade will change the way we think about it. How well will you remember that it's all a big hustle when it's tripled in a few weeks? When you've applied the glowing eyes to your profile pics, will you secretly remember? After all, as William Bernstein points out in The Delusion of Crowds, the biggest charlatans are also often the biggest believers.
Even for the few months I was holding Bitcoin and Ethereum, I could watch my opinion changing. Motivated reasoning is a hell of a drug.
Third, unlike credit card rewards where you're skimming the points from faceless corporations, and unlike the smart fish carefully plucking the worm from the hook of a predator, if you did successfully sell your holdings to someone, you'd be leaving someone else with the bag. You might secretly believe that you're selling a database entry that's worthless for a profit, but someone is buying it from you. Selling your position is not getting a refund.
There's a scene in Margin Call, where the CEO played by Jeremy Irons decides to sell their worthless holdings to the same people they'd been selling it to for years. But the difference in that scene is that they knew it's worthless. Kevin Spacey's character points out, "But that's it. They'll never buy from us again," because what they're doing is obviously wrong. Now, when you sell on Coinbase, they don't show you who's buying it. But someone out there has bought into the dream, even as you've decided to wake up.
Yes, that's what makes a market, but if you're convinced that it's worthless, you don't have to get involved in the first place.
I sold my tiny holdings a few weeks ago, and I'm disappointed that I ever took part in this thing. It all feels incredibly dirty, and our charitable giving will more than wipe out the small profit I made. I couldn't ever shake the feeling that I was gambling, and the profit I made is a small consolation for the stress. It wasn't investing (long term expected positive return) or even speculation (uncertain future return based on little evidence). It's gambling (long term expected negative return) because the odds are so clearly against me. As I was deciding to sell, I could hear the voice saying, "Maybe it'll keep going up," but I had nothing to base that on other than the hope that I'd gamble and win even bigger.
Reading the aforementioned Richer, Wiser, Happier, I was struck by another bit of Munger wisdom. Quoting from the book (paperback pages 214-15, italics mine):
Munger often remarks on how critical it is to partner with honorable and unselfish people, while avoiding those with "perverse incentives." He was appalled by the greed that precipitated the 2008-09 financial crisis, with Wall Street's best and brightest engaged in exploits such as repackaging subprime mortgages to create pestilent bonds with pristine credit ratings. It's easy to rationalize tawdry behavior, especially when it's legal and others are feeding from the same trough. But Munger recommends a higher moral standard, which involves saying, "This is beneath me."
The incentives are perverse. The adherents have glowing red eyes and speak about non-believers as if we're all a bunch of idiots, unable to see the obvious technological miracle before us. They pump and pump, and somewhere, someone is dumping. The base case throughout human history is that thesemaniasendbadly.
Maybe this time is different, but more likely it's not.
PS: Things I'm Not Saying
That blockchain is going nowhere. Like paper money, the internet, radio, railroads, cars, airplanes, and globalized trade, I can imagine that blockchain is here to stay and will have measurable benefits to society. But like paper money, the internet, radio, railroads, cars, airplanes, and globalized trade, it seems impossible to bet which platform will actually deliver long term profits to investors early in its advent.
That I can't be proven wrong. I can acknowledge some scenarios in which I'm wrong. I won't go into that list now, but it's possible a future me might acknowledge that buying these coins could have been a great idea.
That the aforementioned people who are pro-crypto are bad people. Although I don't like the incentives, I don't necessarily think those guys are bad guys. But I do find their motivations around this subject suspect.
That I'm the first guy to say this. The Twitter handle known as Jesse Livermore had a similarly scathing take the other day. Stephen Diehl as well. And the fishing metaphor... emails looking for suckers are literally called "Phishing" attempts, but I'm telling the truth that crypto came unbidden to me on that bridge.
Disclosure: I'm currently long PayPal, which has recently begun offering crypto trading on its platforms. ↩︎
Our net worth increased 10.75% in USD and 8.07% in EUR to $101,894 and €84,336 respectively. That's a year over year change of 78.77% in dollars and 60.24% in euros.
And what a year it's been. We're still masking up to go to grocery stores. My wife still isn't allowed to meet with people face to face and works from our home office entirely. Our incomes are still depressed. Our restaurant budget is still nothing. I still can't go to the gym.
But if you were long risk assets this past year, you've probably had a very good year financially. In fact, it's been such a good year, that I think a lot of assets have become overvalued and therefore risky.
April Contributors: Stocks and Stimulus
The factors that affected our numbers this month were primarily the strong performance of the stock market and a stimulus payment my wife got from the Germans because of the impact this whole mess has had on her business. That money went straight into an account for earmarked funds.
Germany has had various stimulus programs, but they've been pretty complex to use. Unlike the US, they haven't just shuttled money out to the citizens in waves of checks. The programs have been highly targeted, dependent on the state (Bundesland) to implement them, and you need to meet very specific criteria. For example, my wife missed out on one early stimulus payment because the timing of a vacation she took in 2019, which made the year over year comparison look better than it really was. But that meant zero help despite her income dropping to very low levels.
Additionally, because of these criteria, it requires the use of a tax preparer, whose fee reduces the impact of the stimulus. We love our Steuerberaterin, but we're sending her a lot of money in a very short time.
That's all to say, it's all a bit convoluted and over-engineered, which is kind of the German way.
Selling Stocks
I sold out of my positions in two companies yesterday:
Square (SQ)
And Cloudflare (NET)
Both had run up so much that I couldn't make sense of the valuation anymore. It's entirely possible that I'll regret this at some point in the future if/when they pop upwards, but such a pop would only further divorce them from their fundamentals, and their fundamentals suggest upwards of a decade before their valuations align.
Naturally, if they crash, I'll happily buy them again. And some other companies might also be on the chopping block once I figure out the tax implications.
However, selling is hard, and I often get it wrong. I sold Equinor (EQNR) and Ternium (TX) in the last few months, and both quickly climbed above my sale price. Much to my chagrin, I sold Foot Locker (FL) and Simon Property Group (SPG) a year ago at low prices and ate a huge loss, and both have recovered very well indeed.
My buying instincts appear solid, but my selling instincts need refinement.
Speculative Excess
Nevertheless, I can't help but feel like we're living in a moment of speculative excess, and that makes me more cautious. Speculative excess doesn't just affect the prices of assets, but it affects the way people talk about those assets and the way the press reports on them. It's self reinforcing and full of confirmation bias.
It's one reason I sold: I saw the confirmation bias in myself. I was looking for the angle that could justify my continuing to hold both of those companies, and seeing that in myself made me realize how flawed my own judgment was. The valuations don't make sense, and I was trying to make myself see that the valuations actually did make sense.
Beyond pure speculativeinsanity, we've seen several major blowups this year already from traders using too much leverage:
Likewise, despite John Templeton's admonition that, "The four most dangerous words in investing are 'This time is different'", I've seen lots of arguing that this time really is different! It's hilarious. I've heard it in podcasts, seen it online, and heard it from friends who believe we've entered a new era in some way. They might be right, but it sure sounds like the same sort of rationalization that accompanied previous bubbles.
So what else is there we don't know about? How about fraud? It's likely lurking somewhere, since crypto doesn't solve people behaving like people.
Anyway, I'm feeling cautious.
Over $100,000
As mentioned in my last post, we crossed the $100,000 mark for the first time. I figured it would happen this year, but I didn't expect it to happen quite so fast. And I didn't expect the sudden difference in my mindset. It's not as if I'm going to quit my job to become a full time speculator, but I have a greater sense of autonomy and more emotional detachment from my job.
The Virus Rages On
But financials obviously aren't the only thing, and this past year has been very hard on just about everybody. Thankfully the vaccine rollout is happening faster in Germany, and there's some light at the end of the tunnel here. In fact, we have our appointment for our first shots in a week and a half.
Nothing special will happen with our incomes this month. We won't be able to save much because of some fees around my wife renewing her work permit. Because she's self-employed, they require a special document prepared by our tax preparer for yet another fee to that preparer, plus the fee for doing the renewal.
Meanwhile, we're still waiting on our 2019 tax refund. Hopefully that will land soon. And one day we'll get those last two stimulus payments from the US government, but I won't hold my breath.
In March our liquid net worth dropped 3.38% in USD and .26% in EUR to $91,767 and €77,834 respectively.
There were three major influences on these numbers:
The stock market had increased volatility, and it impacted a lot of the names in my portfolio. Growth stocks fell out of favor this month, and I have a bunch of those. The few "value" names that are in there, or names associated with value like Berkshire Hathaway, did pretty well.
The dollar strengthened against the euro. A month ago, it took 1.217 dollars to buy a euro, and now it only takes 1.179. That's a pretty quick drop, and you'll notice that despite the lower prices of my US stocks hurting our $ number, our € was basically flat.
We had a number of large expenses. In March we pay our estimated taxes, and it was also the month we had to pay for our tax preparation. We're expected two large payments from the German government (tax refund and help for businesses affected by the pandemic), but those haven't landed yet, so I'm not counting them.
Our net worth dropped since this time in February by 12.16% in USD and 12.48% in EUR to $52,448 and €47,985 respectively.
The reason is obvious. Our stock portfolios fell precipitously as Europe and the United States responded aggressively to the COVID-19 pandemic.
Since then however, our year over year change is up 75% in USD. We certainly didn't save enough over the last year to explain that number; instead the stocks we own just did really well, and we plugged in money whenever we could.
If I can give myself credit for anything it's that I didn't lose my cool and sell everything. I did sell some right as the panic started, to be sure, but it was mostly tinkering around the edges. And that money stayed in the market (except for sales to close out our margin balance). So we got to enjoy the weird ride up over the last year.
There's always some hindsight bias. If I'd known how the market would react, I wouldn't have sold anything, including the margined positions. I would have reduced our emergency fund and would have thrown it and the stimmy payment from the US government into the market as soon as I could.
But I was scared, and it was hard enough to just hold and add a little. Even Warren Buffett sold the airlines, and at the time it seemed like a reasonable decision. I sold my retailers (Simon Property and Foot Locker), and that was - with hindsight bias - a terrible decision, but it looked like we were entering a new paradigm, and assumptions I used in buying those positions weren't strong enough to keep me holding them, so I sold and ate my largest losses ever.
April Forecast
As mentioned earlier, we expect a couple large infusions from the Germans, and someday we'll get those last two American stimulus checks, though I have no expectations for when. As always, the market could have a convulsion in either direction. No matter what though, I'm going to be making my monthly stock purchases today.
Our net worth rose in February 3.36% to $94,974/€78,039.
The main positive factors were a relatively high savings rate, decent but not great stock market performance, and a large refund from a January purchase. Negative factors were negatvie stock performance at the end of the month and reduced income due to the pandemic.
Our incomes remain depressed due to the pandemic. Due to lockdown measures in Germany, my wife's ability to work has been severely limited. While many of her customers are happy to work via Zoom or Skype, many aren't and are happy to delay their purchases until the day they can meet in person. Meanwhile, I earn a salary, but the extra work that often served to goose our incomes has completely dried up.
Simultaneously though, we are essentially forced to save money. The restaurants are closed. The shops are closed. I need to buy new clothes, but nowhere is open to facilitate the purchase. When I last tried, back in October, I wasn't allowed to use the changing rooms, so I bought a pair of pants, hoping they'd fit. Unfortunately, they didn't, so upon the return, I decided I'd wait until the dressing rooms re-opened. Joke's on me!
Naturally, there's always the internet for purchases, but eventually, you do run out of things to buy, unless you're willing to also buy clothes over the internet. My wife has become very adept at buying clothes online, while I lack the patience. It requires a willingness to try on and send back repeatedly. But ultimately, I might have to bend on this.
Stock Jitters
It's pretty easy to get spooked about the stock market. Valuations are high. The CAPE is high. When I look at the charts in FASTGraphs, I see just how extended some of my own positions are. Meanwhile, you have people like Michael Burry calling for Weimar-style inflation and Jeremy Grantham saying we're in an enormous bubble.
It's easy to write these folks off since doom and gloom predictions have been so wrong for so long. But at the same time, there's clear bubble behavior. I'll refrain from naming specific areas, but I'll leave you this passage from William Bernstein's latest book The Delusions of Crowds:
Financial manias can be thought of as a tragedy, like Hamlet or Macbeth, with sharply defined characters, a familiar narrative arc, and well-rehearsed lines. Four dramatis personae control the narrative: the talented yet unscrupulous promoters of schemes, the gullible public who buys into them, the press that breathlessly fans the excitement, and, last, the politicians who simultaneously thrust their hands into the till and avert their eyes from the flaming pyre of corruption.
The promoters follow a classical Shakespearean tragic path and are consequently the most fascinating of the actors. Most begin as brilliant hard-working visionaries, who intuit before others the riches that a new technology will bestow upon society. In the process of bringing their visions to fruition, they grow rich and powerful and in a capitalist society that judges men by their wealth, become their nation's lions. When the speculation runs its course and bursts, they wind up disgraced and bankrupt and usually but not always narrowly escape the jailor.
The public proves easy pickings for the blandishments of the heroic charismatic promoters. Competent investing requires a rare combination of mathematical ability, technological expertise, and, most critically, a working knowledge of economic history. Alas, people greatly prefer stories to data and facts. When faced with such a daunting task, humans default into narrative mode and perhaps the most pleasing story of all is one that involves the effortless wealth to be had from buying into a new technology.
The press falls prey to the promoters in the same way as the public. Few things corrode journalistic excellence as the ease of writing about the revolutionary ventures of brilliant businessmen, who with alarming frequency grace magazine covers first as heroes then as accused felons.
Finally, financial manias sweep into their ambit politicians whose reputations and popularity are enhanced by the economic prosperity that temporarily results from speculative excess and who not infrequently get caught raiding the cookie jar.
Our net worth climbed to $91,890 and €75,505, an increase of 5.34% and 5.77% respectively. For the first time, our assets grew above $100,000.
Stocks did well, and we had an inflow of cash that obviously more than made up for our spending. I bought another musical instrument, and actually, these numbers include a double charge for which I haven't yet been refunded, so it was a surprisingly good month. We sold something to some friends for a few hundred euros, and at the end of January, I received a bonus as a kind of stimulus due to the pandemic.
Regarding the pandemic, we can't do anything besides order stuff online. We considered buying some plane tickets, but it seems pre-mature at this moment. We can't go to bars, and we can't even have friends over, which often prompts us to spend a lot on groceries. There was none of that this month. Our money went to things, generally, that we can resell later.
We also hit the bonus for an American credit card, which gave us a bunch of very useful points, which we'll eventually use to save money flying back to Germany one day. I value those at 1¢ per point, though the tickets I plan using them on will cost much more than that were I to buy them with cash.
GameStop Thoughts
Since that's the big market news at the moment, I'll say that I'm not participating in this trade. It just isn't my kind of thing. And I generally try to resist this kind of stuff, even if I might end up winning big. My belief is this: the behavior that might make you outrageously rich suddenly is the same kind of behavior that might make you broke suddenly. So I'll stick to my plan, which is doing fine.
I've also watched r/wallstreetbets for a while as a lurker, and while their trade ideas are often really good, there's a time element to them that requires you to be early or not take part at all. However, with the reinforcing peer pressure on the subreddit -- all that talk about "diamond hands" -- it can incentivize the willing latecomers to participate much later than is wise. Just remember, every time you buy, it means someone else is selling.
