May 2022 Update: Net Worth, Pension Valuation, Crypto, ETFs

In May, our month over month net worth declined by .73% in USD and 2.31% in EUR to $122,613 and €114,165 respectively. Our liquid net worth was $89,945/€83,747 after closing on the last day of May.

May was a surprisingly busy month. Some major changes:

• I've valued my defined benefit pension and added that to the illiquid part of our net worth.
• I've exited all cryptocurrency positions.
• I've transferred a sizable amount of money away from individual stocks to my so-called Wiseguy Portfolio.

Valuing a Pension

Defined benefit pensions are still a thing in Germany, and since I've been working here, I've been steadily adding value to mine. My employer has never mentioned my pension to me (which is just baffling), but I can see the withdrawals from my paycheck every month, and the pension plan custodian contacted me shortly after moving here. I knew it existed, but it's only been the past few years that I've paid much mind to it.

The pension works like an annuity:

• My employer and I both pay 50/50 into the plan.
• The contributions are payments for promised future income streams.
• The income I can expect from each contribution is the contribution amount multiplied by an annuity rate, which is - I believe - calculated by combining my expected retirement date, current expected returns, and life expectancy. This exact formula is opaque, but they publish their annuity rates regularly.
• If I die before my wife, she's entitled to half the annuity stream until her death.
• The payouts are adjusted by cost of living changes. Theoretically, there's not much risk from inflation.
• I am required to pay into this plan as long as I'm working within this career.

Every year, the pension provider sends me a letter telling me the previous year's contributions and my expected yearly pension. From that I can divine a value of this income stream.

To do that, I first value the income stream as if I were about to enter retirement. That's done by using a present value calculation, which discounts future cashflows to a start date. My assumptions are a 2% discount rate (debatable), and my life expectancy limits the years of payments (also debatable).

That value then gets discounted to today. For that I'm using the years until my legal retirement age as the number of periods, and I'm using the 10-year Treasury bill as the discount rate.

All this adds up to a value that is much less than the value of the contributions that my employer and I have spent on this plan. Since I can't touch that money no matter what, it's only a minor intellectual annoyance. But the value of this annuity only really makes sense if my wife and I live well beyond our life expectancies.

Since I'm using fluctuating Treasury rates as my discount rate, and since that discounting process has an outsized impact on the value of the pension today, our net worth has been negatively impacted by the upward movement of interest rates. Had I been factoring in the pension all along, its value would have cratered these past few months.

This is purely a "time value of money" phenomenon and doesn't mean a loss of current purchasing power. However, I want the net worth calculation to accurately reflect how assets and cash flows sources are accruing over time, and similar to valuing a home - the value of which is at least somewhat fictive - this pension should be included. Otherwise it means that the money spent on it is basically lost, which is not the case.

Leaving Crypto

Image: the collapse of Terra was a scary event for anyone in the vicinity of crypto. I feel bad for all the people who've lost money in that scheme.

Crypto is in a world of pain right now, and since it's so speculative, I didn't want to stick around. It's as simple as that. I took a small loss, and the cash helped me buy a present for my wife.

Using ETFs

As I've written about extensively, I'm going to be adding most of my savings to a basket of ETFs that I'm calling the Wiseguy Portfolio. I sold off some of my stocks to get started on this. Some positions were closed entirely, and some others were merely trimmed since they were outsized positions that were larger than I could actually handle when the going got rough.

It's easy to think you can handle a bunch of risk, but it's harder to actually live with the consequences of taking on too much risk. It's better to underestimate what you can handle. Additionally, is extra risk necessary for your goals? Do you need to hit a home run with a specific investment or are steady gains enough?

Increasingly, I also feel like the time spent analyzing stocks is mostly a waste of time. I've been asking myself a lot recently whether I'm getting much value from it. Does the worry pay for itself? Could my ears be doing something more productive than listening to earnings calls? In my daily/weekly/monthly stress allotment, should I be using so much on this one activity?

I went into stock picking because Germany and the United States both had punitive tax regimes towards "foreign" funds. Germany's system has relaxed a lot, and the worst thing about using ETFs is that I need a U.S. broker to whom I'm lying about my actual residence, and I have to keep track of all tax information myself and translate it back to euros (thanks MiFID ii!). But if that's the worst thing, it sure beats the terror of wondering whether company x will ever regain some high price that I was anchored to.

Spending and EOC

Since it's summer, and since that means a lovely European summer break, we've spent some money on vacations. It hasn't been too much, but it's definitely a cost.

I've been re-listening to the Millionaire Next Door, and it's been hitting me differently this time around. I always learn something from it, and this time it has to do with Economic Outpatient Care. Am I spending more than I otherwise would because I get monetary gifts (usually small ones) from my family? Do I feel wealthier than I am thanks to subsidies from family? It's a question I have to untangle, and if I come to any conclusions, I'll share them here.

Until next time, stay healthy, and give your friends and family big hugs.

2021 Wrap Up: Net Worth and Investments

2021 was another strange year. Both of our incomes were depressed, and there was noticeable inflation is many of the staples we buy. In Germany, many of the activities we would have taken part in were curtailed by pandemic rules. My small side incomes sources shriveled to nothing as projects were cancelled or simply not planned.

Despite these challenges, our net worth rose year over year by 43% in USD and 53% in EUR to $124,045 and €109,697 respectively. In December, that represents a respective monthly rise of 6.65% and 6%. Our liquid net worth stood at $104,269/€91,544.

Investments in 2021

The power of compounding assets that work in the background is amazing and shocking. Yes, we made money this year. Yes, we saved money this year. But this relentless background grind of our assets - primarily in stocks, both taxable and tax-advantaged - overwhelmed whatever other forces were working on our lives.

And this was the case, despite the fact that my portfolio only returned around 20% against the S&P 500's 27%. I underperformed overall when compared to that benchmark, and still I'm surprised by how well it works.

In the period between January 7, 2021 (the date the Brexit transition hit my IB account) and December 31, 2021, our investments made a total of $15,752.53 within the taxable account. That includes $504 of dividends, with the rest being a mixture of realized and unrealized gains.

My primary contribution to this result was having some amount of fortitude to withstand all the fears hurled at us investors in 2021. The biggest gains were in positions that I'd bought in prior years and held. That's not to say that I did nothing.

In general, my decisions to sell were, at least in the short term, correct decisions. My decision to sell Square - now Block - was a good call. I sold Cloudflare, which was early but basically correct, and bought back in, which was not correct. I briefly owned a number of foreign growth stocks, but I realized their valuations were beyond comprehension, and I bailed on them. That turned out to have been a good call, though I held Alibaba too long and lost some money on that.

In May, I made big bets on Facebook - now Meta - and Amazon, which have been basically flat since then. I figured those were at least five year bets, so I'm holding without thinking about them too much. I did not expect my Apple position to continue to grow so well, but I can't complain. I also added a lot to Berkshire Hathaway and bought another share of Alphabet, both of which have paid off.

Late in the year, I took out a €30,000 loan with which to buy stocks. My largest single purchase was AbbVie, which was a terrible immediate-term pick since it declined 10% within 15 minutes, but since then has nearly returned enough on its own to pay for the entire interest cost of the loan. Other smaller picks like Intel and Enbridge have been flat but volatile. Greenbrick Partners is volatile but has given a good return so far. Likewise, small positions like Bank of America, D.H. Horton, and Pulte have all done well.

I entered the cryptocurrency space early in 2021, exited after becoming disillusioned, and then I re-entered just as a correction was starting. It's been an uncomfortable few months as my new purchases get swallowed up, but I view the space as promising enough to buy a little bit every month. However, I might be wrong, but I'm strictly using my personal allowance money (BLOW) to pay for these purchases.

On the last trading day of the year, my portfolio looked like this:

The Vanguard All World Stock Index Fund was my largest single holding since that's the entirety of my U.S. tax-advantaged accounts. The largest positions after that are Apple, Amazon, and Berkshire Hathaway, each larger than 10% of the entire investment pool. Some of that is due to deliberate position sizing, while in the case of Apple, that position simply became dominant despite a much lower cost basis.

Final Thoughts: Finding Yourself as an Investor

I have a friend who got an inheritance windfall in 2015. He basically knew nothing about investing, but he knew that he wanted to buy cheap stocks that had promising futures. Like me, he's an American in Europe, so he had to buy individual securities, and he bought around 40.

His performance has been quite good, having bought a mix of growth and value. Some choices turned out to be under performers, and they've have been cut. But he's been admirably steady in his positions even when they grow very large.

It's taken me years to "find myself" as an investor. I bounced from all sorts of styles, but what seems to work best is to be more like him: buy reasonably priced companies that have good odds of doing well in the future. Get convinced ahead of time that the purchase is a good one. It's ok to have some speculative stuff, as long as you're aware it's speculative stuff. And then for the most part let it ride.

Letting it ride is hard, but I'm getting better at it. Over the past month, the market has been rough, but my tendency to want to sell has been quiet. Likewise, I'm trying to get past the need to find the perfect investment or investment style. If I achieved greater than 10% returns annually over time, that would be an achievement.

I plan on writing more about 2021, especially about our income sand saving. Until then, stay healthy. May your 2022 be full of happiness and good fortune.

Cryptocurrency: That's Bait

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.

With stocks and bonds, there's an eventual day of reckoning that proves or disproves the thesis. Or at least there are days of reckoning for enough stocks that there's a theoretical framework to hang valuations from.

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 these manias end badly.

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.

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1. Disclosure: I'm currently long PayPal, which has recently begun offering crypto trading on its platforms. ↩︎

Update: April 2021

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 speculative insanity, we've seen several major blowups this year already from traders using too much leverage:

• Archegos Capital
• Greensill Capital
• Forced liquidations on Binance

Regarding crypto, whatever merits there are to cryptocurrencies, the proponents of crypto are behaving in the way you'd expect bubble proponents to behave: they are often dismissive and full of bile towards anyone who questions the basis for their belief (Disclosure: I have a tiny amount of Bitcoin and Ethereum).

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.

However, the virus continues to hurt people around the world, and I continue experience cognitive dissonance about the relative ease of my life.

May Expectations

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.

I'll leave you with this:

Guilty as charged. Until next time.