Saturday, October 1, 2016

What financial decisions would you change?

I was reflecting back on my financial life thus far. While its been a great ride, there are a couple of things I would go back and change if given the opportunity.
I’m generally happy with living a no regrets approach. That extends not only to just general decisions but also aspects of managing my financial decisions as well.
There are however a few things that I wish I could’ve done differently if given the chance once again.

Not investing large amounts on margin

I’ve written here before about the pitfalls of investing on margin. While I think there’s nothing wrong with having a limited, manageable amount of money invested via margin too much margin can be a recipe for disaster. Going into 2008 I was riding a fairly strong bull market and strong growth in assets through doubling down on the market with relatively large margin exposure.

Well this is great during the boom times. I had an acceleration of my net wealth and dividend income. However it was downright dangerous in 2008/ 2009 as asset prices started to unwind. At the precise moment when asset values were imploding not only was I not in a position to fully take advantage of cheap stocks but I also found myself needing to liquidate certain positions in order to be in good stead in my margin account.
I know exactly what Peter Lynch means when he bemoans receiving redemption orders in periods of market declines which forced him to sell at precisely the time he wants to buy. In my case that pain was self-inflicted. While I did do some buying into 2008/2009 it was nowhere near the amount of buying that I would’ve otherwise done had I the flexibility to do more.

Buying too conservatively during the recovery

The other major thing that I would change if given the chance would be to buy more growth oriented assets post the 2008/ 2009 recovery rather than sticking with more conservative income investments.
The reason I say that is while the dividend related purchases that I made in 2009 have stood me in good stead and have significantly appreciated in the recovery, the stocks that have really outperformed were those that were growth oriented, given that they also were the most impacted from a share price perspective during the stock market collapse.
I think like many others I was fairly shell shocked by the magnitude of the fall in stock prices during the 2008/ 2009 crash. So I decided to play it a little more conservatively and vowed to stick with tried and tested names as markets begin to rebound. However that conservatism probably undid me from investing in several companies that have gone on to increase by many multiples of what they were trading at in 2009 versus my dividend investments that have returned very respectable if not spectacular returns since the time of the crisis. Names like Celgene, MasterCard and Chipotle have made investors minor fortunes since 2009.

Not viewing retirement accounts as taxation vehicles instead of investment vehicles

One of the biggest misconceptions that I had about tax advantaged retirement vehicles like the 401(k) plan was that they were more investment vehicles as opposed to taxation vehicles.
The distinction is important. When viewed as an investment vehicle it was a no-brainer for me to invest up to my company match and nothing more. The reason I was doing this was I looked at index funds as a diversified marketplace of options on which I thought I could do better (flawed thinking perhaps).
Thus it was a no-brainer for me to take the free money on offer that my company was giving and try to get steady returns as opposed to spectacular returns by investing in a low-cost index fund.
I had cleverly thought to myself that I could improve upon that baseline performance of a index fund by being more selective in terms of the stocks that I picked and thus would only invest to the amount of the match and nothing more.
In retrospect I don’t believe that that was the most optimal decision.
The reason for this is that it’s hard to beat the tax deduction that you get from investing the maximum allowable amount into a 401(k) year on year. When combined with the power of steady index type returns at close to 9 to 10% year the tax deduction that you received on the amount that’s invested in the 401(k) suddenly turbo charges that 8 to 9% into something much higher, compared with investing on an after tax basis.
To illustrate, getting an 8% return on $10,000 in a tax sheltered vehicle is the equivalent of needing to get something like 20%+ on a $7,500 capital amount on a post tax basis. I don’t care how good an investor you are, that’s a really tough benchmark to meet. I never bothered to really think things through in this framework.
To me that makes investing all your money to the maximum extent into a low-cost index fund within a tax-deferred vehicle a no brainer. You just aren’t going to be able to get the returns necessary on your own to overcome the tax disadvantage or loss of principal that you would start with after tax.
While I invest the maximum allowable into my 401(k) today there were a few years in the interim where I had missed the opportunity to do so and possibly left some money on the table.

Not investing in the right type of growth assets 

While I’m well into my investment in growth assets, I missed an opportunity in my very early days as an investor to pick the right type of growth stocks.
My first few investments were very speculative in nature and while I thought that these investments were growth oriented at the time, they were really nothing more than a pipe dream with not much else to back that up.
Now though, I have discovered the right type of growth assets that fit what I’m looking for from an investment perspective. Those types of companies provide strong revenue growth, good cash flow generation and higher returns on invested capital as well as a measure of defensibility or protection from competitive forces.
Having that type of focus on growth earlier in my investment journey would have probably delivered me immense value creation in the intervening years.
While I think it’s ultimately the process of self-discovery to get to where I am now, having had some of that wisdom and guidance early on would probably have made a material difference to my net worth and financial independence status.
Looking on the bright side though, I think it’s a good thing that I still managed to land where I am now at less than 40 years of age as opposed to making this discovery at a point much closer to retirement where I couldn’t really act on it in a impactful way

Selling too soon

I have bemoaned this one much too often here, so I will keep this brief. But selling very strong performers to take profits is a major no no, and something I’m at pains to avoid again. The MasterCard IPO was a lesson in point, and there were a few other winners that were sold too early such as CSL. The key lesson here is don’t sell strong performers to prop up losers in your portfolio. If you don’t have to, don’t take profits at all. Again, better too learn this in your 30’s than on the verge of retirement!

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  1. The decision I regret most doesn't have to do with investing but buying a car at the wrong moment. We were just moved and our old house wasn't sold yet. And our house was worth less than the mortgage whe had on it.
    Then, just after we bought the care we finally sold the house and had to take a loan to pay for the difference between the mortgage value and the amount we sold it for.
    And that difference was exactly the price of our new car.
    In the Netherland you can't just hand in the keys and walk away from your home.

    Dividend Dolphin

  2. I was furiosuly nodding my head in agreement :-). The only other comment I'd add was something Dividend Dolphin also said above. Leasing a car well above my means. I am just glad that I leased it, so when the lease was up, I could switch down to something that I really can afford.


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