Update: August 2021 | Loyalty, Crypto, and Leverage Thoughts

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.