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Kindle Notes & Highlights
by
J.L. Collins
Read between
October 1 - October 8, 2021
When you can live on 4% of your investments per year, you are financially independent.
financial independence is at least as much about being able to live modestly as it is about cash, as our opening parable describes.
Make a list of all your debts. Eliminate all non-essential spending, and I mean all of it. Those routine $5 coffees, $20 dinners and $12 cocktails add up. This is what will free up the money you need to pour on the debt flames that are burning up your life. The more you pour, the sooner you stop burning.
Houses are an expensive indulgence, not an investment.
Unlike other kinds of debt, as truly awful as they are, you can never walk away from your student loans. They survive bankruptcy. They will follow you to your grave. Your wages, and even Social Security, can be garnished to pay them.
There are many things money can buy, but the most valuable of all is freedom. Freedom to do what you want and to work for whom you respect.
Those who live paycheck to paycheck are slaves. Those who carry debt are slaves with even stouter shackles. Don’t think for a moment that their masters aren’t aware of it.
Being independently wealthy is every bit as much about limiting needs as it is about how much money you have. It has less to do with how much you earn—high-income earners often go broke while low-income earners get there—than what you value. Money can buy many things, none of which is more important than your financial independence.
Spend less than you earn—invest the surplus—avoid debt
Stop thinking about what your money can buy. Start thinking about what your money can earn.
However, distressingly it appears that most people don’t understand that in choosing to lease or borrow money to buy their car they are basically saying, “Geez. I don’t want to pay twenty thousand dollars for this car. I want to pay much, much more.”
They will rise and fall in the short term, but good companies earn real money along the way and in doing so their value rises relentlessly over time.
Don’t believe me? Think you can? Test yourself here: http://qz.com/487013
Everybody makes money when the market is rising. But what determines whether it will make you wealthy or leave you bleeding on the side of the road is what you do during the times it is collapsing.
Mutual fund companies launch new funds all the time. Random chance is enough to predict a few will do well, at least for a while. Those that don’t are quietly closed and the assets folded into something doing better. The bad fund disappears and the company can continue to claim its funds are all stars. Cute.
A little inflation can be a very healthy thing for an economy. It allows for prices and wages to expand. It keeps the economic wheels greased and running smoothly. It is the antidote to looming deflationary depressions.
Remember that nothing money can buy is more important than your fiscal freedom. In this modern world of ours, no tool is more important.
1. It is a challenge for smart people to accept that they can’t outperform an index that simply buys everything. It seems it should be so easy to spot the good companies and avoid the bad. It’s not.
Today’s stars are tomorrow’s wrecks. Today’s fallen are tomorrow’s exciting turnarounds.
Let me take a moment to be absolutely clear. I don’t favor indexing just because it is easier, although it is. Or because it is simpler, although it is that too. I favor it because it is more effective and more powerful in building wealth than the alternatives.
Bonds are in our portfolio to provide a deflation hedge. Deflation is one of the two big macro risks to your money. Inflation is the other and we hedge against that with our stocks.
When interest rates rise, bond prices fall. When interest rates fall, bond prices rise. In either case, if you hold a bond to the end of its term you will, barring default, get exactly what you paid for it.
The great irony of investing is that the more you watch and fiddle with your holdings the less well you are likely to do. Fill your basket, add as much as you can along the way and ignore it the rest of the time. You’ll likely wake up rich.
As an aside, there are studies that indicate holding a 10-25% position in bonds with 75-90% stocks will actually very slightly outperform a position holding 100% stocks. It is also slightly less volatile. If you want to go that route and take on the slightly more complicated process of periodically rebalancing to maintain the allocation, you’ll get no argument from me.
The more rigid your lifestyle requirements, the less risk you can handle.
“Wisdom comes from experience. Experience is often a result of lack of wisdom.” —Terry Pratchett
A little humility goes a long way in saving your ass and your cash.
Everybody can be conned. Certainly stupid people are marks. But so are the exceptionally bright. The moment you start to think that it can’t happen to you, you’ve become a most attractive target. The easiest victims are those that think they are too smart, too knowledgeable to be taken.
If it looks too good to be true, it is. There is no free lunch. Not ever. Your Mama taught you this. She was right. Listen to your Mama.
“Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.” —Groucho Marx
Once 4% of your assets can cover your expenses, consider yourself financially independent.
Put another way, financial independence = 25x your annual expenses.
