The Investor Mindset

In contrary to common belief, investing money is not rocket science. It can become one, but so can everything else if one would decide to dig deep enough into details. So today I would like to debunk this general perception and give advise on a more healthy and valid approach on how to perceive and apply to investments in the stock or bond market.

It’s a common purchase and it’s easy

Let me start by saying this: Anybody can buy shares of a publicly listed company. If you know how to buy a book on eBay or Amazon, then you already have all the qualifications required to perform an investment purchase.

You do it online, from your mobile or laptop and all you need is an app from your bank or the website address.

In fact, the process is so easy that banks are obliged to check your experience levels and limit the available investment products based on your experience only to ensure that you actually not buy something that you wouldn’t want to have bought by pure accident. The procedure is usually a 4-step process:

  1. Login to your trading account
  2. Select the company you like to purchase shares of
  3. Type in the number of shares and click buy
  4. Re-confirm the purchase via a security code

Done. Your order will be submitted to the bank and unless you are the only one active on the computer in the world in a very specific non-liquid market, your order will be usually processed and confirmed before you can even click back to check your account status. Yes, there are some exceptions for certain very specific stocks, but that will be most certainly not a company that the average investor will have on his/her radar.

Risk of losing money

One of the most common arguments I hear about people not wanting to invest is due to the risk of losing money. Let me be clear: Yes, it can happen. But for myself, I have a simple analogy in place that re-assures me that I am in fact doing the right thing by investing.

Every purchase involves a loss of money and most of our regular purchases are actually a total loss.

When you buy a house or a car, it depreciates the moment you step a foot in. When you buy a book it loses value the moment you take it out of the shop and turn the first page. Clothes keep some value for a while but once they are out of trend, condition or worse, out of size, their value is basically down to zero. The worst are food and beverages. They generate a total loss within usually a few minutes. If you are a gourmet, less then an hour. I know, foodies might see it in a different way and if they Instagram it then there might be some value added, but for most cases, the value will disappear rather quickly. A very short time pleasure for a permanent loss of funds.

For someone with an investor mindset, investing is similar to shopping

Yes, investments may lose value even up to 100%. But so does every coffee and every pizza that you would swallow. However, many investments generate profits and in many cases, they do so for many years. Some even may do so for your entire lifetime and beyond. Without giving here a recommendation let me give a specific example:

One stock of Starbucks will pay you a little over 1 EUR a year in 2018 in the form of dividends. One share costs you almost 47 EUR today (27.3.2018). So by buying one share of Starbucks, you will start receiving payments until after 47 years you get the paid amount back. Provided the company still exists (not much of a doubt) and that the company keeps generating profits to pay the dividend (also not much of a doubt).

Now that sounds rather boring, but consider this: Starbucks is increasing its dividend by 10-20% year on year. So considering this, you might rightfully expect to get your 47 EUR back much earlier, maybe just 20-25 years. It takes some time, yes, but if you have another 60 or 70 years to live, then consider how much additional value it starts to create in every single year after that! If you still have 60 years to go and can get a return of your investment after 20 years, already, the remaining 40 years may offer you triple or quadruple your returns – while you still remain the owner of the shares with its individual value.

And Starbucks has in comparison a very low dividend. What if the company pays not 2.1% but 3, 4 or even 5% or more? What if the company doesn’t grow the dividend by 10-20% but by 30-40%? You might find yourself in the situation that the invested 47 EUR will come back to you within only 6 or 7 years and suddenly it starts paying for every cup of coffee that you enjoy daily.

No other purchase offers you this kind of opportunity. The best coffee and the best burger or pizza or avocado salad will be forgotten after a day or two and the money spent will be gone for good. But companies on the stock exchange are built to last and their sole and only purpose is to generate profits for its shareholders.

The “evil” shareholder

We all know the mantra: Big companies are a cohort of evil. They only chase for profits, don’t care about people and have no soul. The only thing that counts is black or dark green numbers. This is not entirely correct. These companies do care about people, but mostly about those who own them. The shareholders. And even more importantly, they hire a bunch of very well paid and smart other people whose sole purpose is to ensure that the company keeps generating more profits for years to come.

The true meaning here is: As a shareholder, those people work for you. You don’t need to start a business or buy a house, hire people, work on business plans, etc. to start generating income. You like a company and would like to benefit from its success, or have a say in the companies direction? Become a shareholder and buy the stock. You would like to start receiving rental income but lack the funds to buy a house and/or don’t want to take large loans? Buy a REIT (Real Estate Investment Trust).

Long-term plan versus short-term gratification

The other main takeaway here is, that investing is (and should be) a long-term plan that doesn’t involve material, instant gratification. When you drink a hot cup of coffee on a cold day, you feel the warmth, the caffeine brings your brain back to function and you get instantly the feeling of having done something good for yourself. When you buy a stock – well you most likely feel nothing. Even worse, your bank account drops and you got to wait long in comparison before you realize the significance and benefit of your purchase. But once recognized, it will serve you well for many years to come and you will start to enjoy and appreciate it in the long run.

Patience is the key.

Sacrifices – for a better future

There are certainly many ways to reach financial freedom, but unless one got very lucky on a bitcoin deal or in the lottery, the 2 main contributing factors to reach the target are to:

  1. Increase income
  2. Reduce expenses

I will write separately on how to create your personal plan and budget to monitor and work on your plan to reach your goal, but today I would like to make a suggestion: You can probably save plenty of hours, days, months and even years – if you are willing to sacrifice something.

Re-define comfort and embrace a minimalistic lifestyle

This is probably one of the single most important decisions which in my humble opinion is absolutely necessary not only to reach financial freedom but in general to de-clutter your life and to appreciate the world we live in.

If you look around your house or condo, your fridge, your garage. I dare to say that 80% of the things that you see around are nothing that you actually truly need. They might make your life easier sometimes or more convenient, but you could most probably manage without them. If you open your wardrobe, there are probably some shirts and pants that you didn’t wear in a long time and don’t plan to wear again any soon. And when you look into your refrigerator, you might notice that most of the things stored in it can be found cheaper and/or in better quality on the daily fresh market. You just bought it in larger quantities and stored it to not to have to go to the market.

What I am trying to say is: There is a high chance that you have succumbed to our world-order and keep buying stuff just as a matter of convenience and/or the subconscious belief that you need all of it. Truth is: You don’t. You truly don’t and realizing this will change your point of view on everything.

Sacrifice and Gain

Let me assure you that once you sacrifice these daily small conveniences, you will re-discover yourself and it may lead you to re-evaluate many other areas of your life. This may go much further than talking about clothes, coffee choices or modern toys (like phones or tablets).

You might realize that you don’t need a new phone every year, a new laptop every 2 years and a new car every 5 years. You probably can use your old stuff much longer without having to compromise in any truly significant manner. Your children don’t need tons of toys, your wardrobe doesn’t need to be quilling over and your fridge really doesn’t need to be that large – or that full – or both.

You may discover that after getting rid of most things, you don’t need a huge house or apartment anymore and if you shift your activities from in-doors (watching TV or YouTube and playing around with your iPad) to out-doors (exercising, meeting friends or even just taking walks) you will discover a new way of life.

Living costs and daily expenses are all about our surrounding, our location. Location is a choice. You may re-consider and change it. It’s not only about the rent, but also about the neighbors, the local culture, the community, well, the taxes. They all influence not only rental and housing prices, but also our living and ultimately our spending habits in general.

One could go even much further as to question whether the country you live in and the nationality you hold is what truly makes your life what you want it to be. Sounds crazy? Maybe, but keeping an open mind and putting EVERYTHING into question is not a crime. It’s just true evaluation of what you have, what you want and what you need to do to get there. As my old Karate Sensei used to tell me: Who you are, who you want to be, who you can be now and who you will develop into later are all different things. You need to recognize that.

At the end of the day, every change has it’s fair share of risks and opportunities. Every time we give up something, we also gain something back. It’s just a matter of realizing and appreciating it.

Reading News

Let me say it clearly right from the beginning: Writing about politics is almost always a mistake.

I try it anyway. It doesn’t matter whether you are right or wrong, but people tend to have different opinions and very different points of view. Therefore, no matter what you write, you will always have a divided audience. Facts don’t matter much these days. For many everything is a matter of perspective.

No other modern country in the world shows this in a more obvious manner than the United States of America. Watching news on Fox, CNN or NBC is like hearing the same headline from 3 different countries. Same goes for reading newspapers. The interpretation differs as does the storyline and the projected results from and about whatever has happened. By now, I prefer to watch comedy shows that comment on the news as they at least put some humor in it. There is no secret that comedy shows tend to be pro-democratic but I guess liberals offer them more stuff to work with these days. Either way, with my European heritage and mostly German background, it feels almost unreal to see what is happening across the Atlantic.

Having said all that, it is still pretty interesting and I would like to share an observation: If Democrats don’t get their act together, then it seems to me that there is a very realistic chance for President Trump to be re-elected. 

It’s been a while since elections and there is still no possible candidate on the horizon who could actually challenge Trump. I don’t want to take any side but I really just don’t see anyone who would be a match at this point.

It’s actually comparable to the situation in Germany. Here also, we don’t see any possible alternative to Mrs. Merkel and I am afraid she will be able to just “hand-over” the position after her 4th term (that’s 16 years of service) to whoever she will deem the most suitable.

Having a candidate is not the only issue. Trump is, like it or not, really pushing to make good on what he promised. You might want to argue whether something is good or bad, whether it makes sense or not and how it makes the country look in the eyes of the world – but he does it anyway. And that is what he actually got elected for.

Therefore, while I may reveal at this point that I am not a Trump supporter and consider his behavior shocking and embarrassing at times, but he is actually doing many things right to ensure a re-election. Time will tell but beware: Time is running.

What is passive income?

Today I would like to clarify a few points regarding the term “passive income”.

There is probably no financially successful person in the world who would not preach the mantra of protecting your financial future by having multiple streams of regular income. Relying on your job alone is a risky endeavor. You are dependent on your boss, on your companies success, your colleagues, your health, and so many other factors that could trigger a chance of losing your job and your income.

Not being prepared and without other sources of income, you might struggle to pay your rent, medical bills or even sending your children to school. Even if you are prepared and have some savings left, being unemployed may eat up these savings before finding a new job and destroy possibly years of diligent saving within just a few months.

Therefore, having several sources of income is very important. Since our daily time capacity is rather limited, these income streams should be set up as passive income streams. Meaning: One should not have to put too much (or even for the better: any) work into it.

Here is where the misconception may already start and where one should never forget the basic rule of any investment: If you don’t put anything into something, chances are you don’t get anything out of it either.

We all dream about it: Receiving money and doing nothing for it. Well, it does sound wishful but not easy. And it is not easy indeed. The thing about passive income is the time and effort you have to invest to start creating it in the first place. There is no magic bullet or “trick” how to get around it: In order to create passive income, you need to invest time, effort or money – or all of it. This is especially true for the type of passive income that I am promoting: Dividends.

Let me be clear about it: Passive income is not a side-gig. I think it’s great if you have a hobby and use it to generate some extra cash which you can use either for investing, to build up more savings or your next vacations. But passive income needs to be an automized source of income that requires no more than an occasional adjustment. That’s it. You should not have to sit in your cubicle for 9 hours daily just to move to the next cubicle after that for another 3-4 hours to ensure you have an extra income. That’s not how it’s supposed to be.

Before I talk about dividends, let me give you some examples of passive income which do not include financial instruments:

  • Referral payments from your online blog
  • Royalties from your e-book
  • Income from registered patents or issued licenses
  • Paybacks from your participation in a lending club

All these examples have the characteristic that you don’t need to actively do anything all the time to receive payments. They may be not all reliable, but they are automated and generate income in as small or as big amounts as they turn out to be successful.

The more money you would like to receive from your e-book, the better you have to write and promote it. Once. You want your patented reading lamp to be a success? Make it awesome and find some distributors. Once – or – a few times but not daily. The lending club shall pay you back monthly with interest: Borrow them your money. Once. Unless you want to get more. I think you get the point.

So the key element is, that you have to put some time, effort or money into your future source of income first before it starts generating anything. And there is no guarantee it will work. This makes it so tricky and is ultimately the reason why it scares off so many people: It requires a lot of time to start, you need to invest (time, effort, money) and it does not offer any immediate gratification. All the things that our brain responses positively to are not given.

This is even more true for dividends. Because to receive dividends, you have to invest it all: Time, effort and money. Money that you earned in your daily job and money that you understand to be your immediate reward for the work you put in during the whole last week or month – depending on where in the world you live. So why should you put your hard earned Euros or Dollars or whatever currency you use into something that seems so complicated, far off and that feels much less rewarding?

I admit, the psychological gap is hard to surpass. Investing in Stocks, REITs or whatever financial instrument you go for is an abstract model. The stock market doesn’t feel real to us, it’s nothing that we associate with our true needs. Having some stocks of a company doesn’t make us feel of being a company owner. Even though this becomes our entitlement to a tiny fraction. It is nothing we can eat, or dress or even put into the garage if we don’t want to use it anymore. And yet, it is possibly one of the strongest and most rewarding instruments to create wealth that almost anybody in the world has access to.

The dividend season in Germany is starting now, and in 2018, the biggest German companies alone, which are grouped in an index under the name DAX, will pay out approx. 34,3 Billion Euros to its shareholders. Let me write this number down in its full beauty:

34,300,000,000,000

That’s quite some zeros. And not only this, but you should know that this number grew by approx. 13% compared with the year 2017. This is cash money that is being transferred in tiny fractions to all shareholders who are invested in the DAX. Money that you can withdraw, without touching your stocks, and spend on whatever you want or need. Why would anyone not want to be a part of it and to get some piece of that cake?

Buying stocks/shares is not a highly sophisticated financial process. It is as easy as buying a piece of cake. Literally. Or figuratively. However, sincerely speaking, the piece you buy in the beginning will probably be very tiny and it will most probably not fill your stomach at all. It takes time for it to grow to a level, that it will be truly fulfilling your needs. But the good news is: Once it’s there, chances are that it will last a lifetime and if constructed in a clever way, it may even support your family for generations to come. The sooner you understand this concept, the sooner you will be able to profit from it.

This is why in a previous post I explained The Time Replacement Model (TTRM). Every stock you purchase that generates dividends replaces a tiny fraction of the time that you spend at work. The more dividends you receive, the more time gets replaced until you reach the point that you don’t need to work at all. Unless you truly want to. And it is truly passive because putting your money in the right stocks will still let you sleep well at night. No matter what happens in the world. I will get back on the SWAN stocks (Sleep Well At Night) at a later point.

Is the crash coming?

The last week was probably not very good for most investors. President Trump started tweeting and everybody went gaga. Now, nobody knows what will happen and nobody really knows how markets will develop from here on.

The year 2018 was not supposed to be the year when everything comes down. It was supposed to be the super-nova of markets before everything comes down in 2019 and for most parts, it made sense to have this assumption. Stock market valuation in the US are hight but in Europe not that much and as long as politicians keep pumping money into markets, there is no reason for the rally to end too soon. I was expecting things to get blown up even more and then to watch this bubble burst after the next year-end rally.

But of course, this was before the President of the United States (POTUS) would start tweeting suggestions about a trade war and imposing tariffs on certain products, specifically steel and aluminum. Markets and politicians around the globe reacted with shock and within just a few hours announced “countermeasures” and “retaliation”.

It is mind-blowing. A real “wow” effect. When countries start a war or aggression in the middle east, Asia, Africa or wherever people die, usually all you get from our “developed” nations is a political statement that actions get “condemned” without any significant action. But when it comes down to money, markets, and trade, you get countermeasures even before anything happened!

But well, that’s the world we live in and for those who plan on retiring early, there might be some great opportunities ahead.

As you may have learned in school, the original idea of markets was based on the assumption of rational decision making. As you may have seen in the real world, markets are more than often anything but rational. Knowing this, every crash and every dip in the stock market offers great opportunities for quality focused investors. Why is that?

Well, even the best stocks like Google or Apple will go down when the whole market goes down. It doesn’t mean that the business of these companies suffers, but it means that they are not detached from market trends. Therefore investors with patience, time and a long term-horizon don’t worry about things getting ugly. They look out for opportunities and prepare to act on them.

How can we prepare for this scenario? First of all, there is no need to sell your stocks and there is no need to panic. The crash could come but it doesn’t have to. It could be that we will simply experience some higher ups and higher downs and after that, things might just get back to normal. Timing the market is almost impossible to even the best professional trader and if you plan on living from your investments later on, I truly wouldn’t sell anything that already offers a decent yield and has a history of surviving more than one market crash. What might make sense though is to stack up some cash.

Even if a market correction should set in next week, chances are that it will be a process the starts and holds on for 2-3 months before things start to turn around. Having some cash available may offer great opportunities during this time to either buy some stocks that you always wanted to have but which seemed too expensive OR to add stocks to your existing positions which would lower your average price of purchase and ignite the famous cost-leverage-effect. Reducing your average price of purchase will also result in increasing yield on your dividends.

As Warren Buffet, the greatest investor alive used to say: Be greedy when others are fearful. Market downturns are the time to be greedy.

Also, you need to remember that when a stock falls 50% in a market downturn, it will need to rise by 100% just to get back on track. Therefore lowering your entry price by adding stocks of the company that suffered during the downturn may significantly reduce the time it will take to recover the losses – and offer even greater profit opportunities later on.

Also, if you have some stocks that have already reached a specific target, you might want to sell them off in order to re-balance your portfolio and consider adjusting your investment strategy. For example, it may make sense to relocate some of your money into a Real Estate Investment Trust (REIT). Industry bonds are probably not recommendable for the moment as governments start to increase interest rates and money already started to shift from industry bonds to government bonds and securities. But REITs receive their cash flow and profits from tenants who pay rents. No matter what happens on the market, for most people, companies, and agencies who possess physical locations, they still need to pay rents. Therefore during market downturns, REITs are usually a pretty safe investment and offer great dividend yields on top.

We had almost a decade of a rising market and a correction must come sooner or later. How strong this correction will come up is to be seen and especially young and inexperienced investors might have a very hard time handling it. Many of them just don’t know and never experienced the feeling of losing a quarter or maybe even half or more of their entire savings over the events of a single night. The psychological and emotional effect can be devastating and make people literally jump in front of trains. Yes, this happened in the past and while I am not that old, I do remember the dot.com crisis back in 2007 and 2008. Being just a student, I lost my entire savings during that time which was a nightmare experience (even though the total amount of 2000 EUR would be rather negligible from today’s point of view) and the news was full of reports about people jumping down buildings.

In every event that involves parties with different interests, there are always winners and losers. Being prepared mentally and financially will reward the patient and rational investor in the long run. So, make sure to work on your strategy now, stack up some cash or re-balance your portfolio (or both) and enjoy a cup of tea while watching the spectacle develop. It will be an interesting one.