Back in the day, I read the Early Retirement Extreme book, which mostly is just a testament of how smart the author thinks he is. I suppose there are some tips in there, too.
Aside: the favorite part of the book was when the guy hinted for about 200 pages on how good his investing acumen was and then he just glossed over it by saying “investing is so easy for me I don’t even have to explain it.” OH BABY THAT’S GOOD BULLSHITTIN’.
Anyhoo, one of the suggestions from that book was to work on limiting yourself the basic necessities we’ve all decided are needed. For instance, you should turn your heat way down and then sleep in a tent in the living room. The tent keeps heat in, see, which frees you from heating the rest of the house you don’t use.
I swear this was an actual suggestion! Made with a straight face and everything!
Another suggestion was the one we’re going to focus on today. Everyone should take cold showers. Not just for the savings, though. But mostly so they can push their bodies and prove they’re no match for the MAN who’s constantly trying to keep us down. And too warm.
Yes, really. We’re going to be talking about cold showers. And not the kind I have to take after a Taylor Swift music video, either.
The FIRE crowd strikes again
Look, I’d love to stop ragging on the FIRE crowd. I really would. And in their defense, most of them are perfectly nice people who would laugh in your face if you ever suggested they start taking cold showers to save money. But there’s a persistent small minority that insist on doing this kind of dumb stuff to retire 14 minutes earlier.
(Italics man is telling me it would be a bad idea to show the exact tweet that motivated this. Jerk.)
One of the big knocks against the FIRE crowd is when they start making huge sacrifices in order to achieve this dream The Early Retirement Extreme guy and his sleeping in a tent is just one example. A certain facial hair blogger rides his bike everywhere all while mocking people who drive. Then he goes and buys an electric car, apparently without irony. Cold showers are another.
Then, one member of the group gets their story picked up on a major media outlet. The commenters on that piece focus on whatever outrageous thing is being done to save money. This is by design, of course, and everyone’s in on it. Then they retreat to their own blogs and complain about how the haters “don’t get it” and are “jealous.”
Let me set the record straight. You don’t have to take cold showers to retire early. Why? Because they don’t matter.
The number one thing you can do to make all of your financial dreams come true is earn more money. Increasing your top line is, in theory anyway, limitless. Most of us don’t want to work 16 hours a day, so we find the highest paying job we can and turn to passive income to make us money while we sleep.
Next, you need to cut expenses. You might move to a small community like we did. Or you can live in a place much smaller than average. Moving close enough to work to walk will usually end up saving you a bunch of money, too. And for a lot of people (myself included), renting likely ends up cheaper than buying. Combine a bunch of these big picture things and you end up saving a lot of money. Potentially a thousand dollars a month. Or even more.
Meanwhile, how much is taking a cold shower going to save you? We’re talking about $10 a month, tops.
I can’t believe I’m saying this, but let’s think about showers for a second here. Is it really the hot water that costs the money? Or is it taking a 10 minute shower because the water feels good? If it’s the latter, good news! I have a solution that doesn’t involve freezing your balls off to save literally a few bucks.
God let’s wrap this thing up
The important lesson here is you only have to sacrifice a certain amount to make your financial dreams a reality. If you’re really considering taking cold showers to save $100 a year, find a way to earn $200 more instead. You’ll be happier in the long run.
You probably already heard about this, but let me clue you in if you aren’t aware of the latest drama in the ol’ PF-o-sphere.
Suze Orman (you might remember her from that time I was on her CNBC show) came out of retirement with a bang by appearing on the Afford Anything Podcast. Suze’s appearance was supposed to be used promote her latest book, but America’s favorite lesbian financial guru went off the rails and bashed the living crap out of the financial independence/retire early movement (FIRE).
Some choice quotes are as follows:
“If you only have a few hundred thousand, or a million, or two million dollars, I’m here to tell you … if a catastrophe happens, if something happens, what are you going to do? You are going to burn up alive.”
“Two million dollars is nothing. It’s nothing. It’s pennies in today’s world, to tell you the truth.”
“You can do it if you want to. I personally think it is the biggest mistake, financially speaking, you will ever, ever make in your lifetime.”
Basically, Orman’s argument boils down to this. Having a mil or two in the bank doesn’t provide nearly enough of a safety net. Early retirees have the 4% rule and whatnot behind them, but they forget about very real risks like having to care for a disabled family member, having an expensive major illness, or needing long-term care themselves. In any of those scenarios, the early retiree quickly runs out of money.
Naturally, the FIRE community defended themselves with all the might of a certain Supreme Court Justice (TOPICAL!).
They pointed out that if anyone is prepared for such outcomes, it’s the folks who found a way to save up seven figures in a short amount of time. Sure, running out of money is always a possibility, but if that ever became a risk they’d simply go back to work. And so on. To be honest, the rebuttals were pretty boring. Suze brought up the same points everyone else has and they were easily rebuked.
Where the FIRE community failed
Long-time readers know I’m not really on the ol’ FIRE bandwagon. I lurve the idea of financial independence, even though I’m living proof it’ll mess you up. Your patience for crap will go down once you hit whatever your magic number is. Trust me.
I just hate the retire early part. Many early retirees keep busy by blogging, which is just swapping one career for another. There’s nothing wrong with that. Hell, I was a professional blogger for years. But let’s not piss in each other’s ears and say it’s raining. Even part-time bloggers aren’t retired. They’re simply free to pursue whatever they want. That’s great, but it’s not retired.
But here’s the deal, at least from my perspective. Suze brought a bunch of great points to the attention of a much larger community. And instead of acknowledging her legitimate points, they attacked her personally.
Go ahead, read the comments on that post I linked to earlier. They’re amazing. Many of them accuse Suze of not understanding the FIRE movement or the math behind it. Those especially made me laugh. The guy who pointed out the math behind all this titled his article “The Shockingly Simple Math Behind Early Retirement.” And Suze Orman, one of America’s best financial minds doesn’t understand it? Really? It’s not that hard of a concept, guys.
We also have a bunch of FIRE bloggers who have seen their index funds do nothing but go up and to the right for the better part of a decade. These people had barely graduated university the last time the market hit the shitter. Many of these guys are going to capitulate during the next 25%+ downturn. Some are even going to go back to work. Mark my words.
Speaking of going back to work, do these people realize how hard it is getting a good job at 45 with a decade-long gap on their resume? Talk to some stay-at-home moms sometime, guys. It’s not as easy as showing up the day the nuclear plant opens.
Let’s wrap this up
Ultimately, Suze’s point about early retirement was “shit will happen. Get a helmet.”
Early retirees say they’ve already planned for this. Some have, but many haven’t. It’s going to be interesting to see what happens to these folks as they try to “retire” for four or five decades. I believe most will end up just fine, but mostly because they operate small businesses that generate additional income (i.e. blogs).
But at the end of the day, here’s the lesson you should take away from this. Everybody is talking about Suze Orman right now. She took something that she’s never covered before and made it all about her. I didn’t care about Suze’s early retirement opinions two weeks ago. Nobody did. And now I’m writing a post about it. Amazing.
She successfully trolled the whole FIRE community. Suze Orman is a g.d. genius. I couldn’t be happier.
Long-term readers might remember my investment in Danier Leather, which, at the time, was a struggling retailer that sold leather coats, purses, handbags, and so on. Whips, probably too. OH I’M BAD.
The company had a tradition of slowly buying back its shares via tender offers, an outcome I viewed at the time as pretty likely. It would struggle along, make a little money, and then offer to buy back my shares at a nice premium. I’d sell and everyone would live happily ever after.
If I remember right, I paid about $9 per share.
We all know what happened next. Danier faced bankruptcy about a year later, thanks to the further deterioration of its market and retail’s struggles in general. I remember at the time thinking the company probably threw in the towel too early. It barely owed anything to creditors. In fact, it had been debt free up until about a month before going to donut land. I chalked it up to an odd case and moved on. It wasn’t until a couple years later until I learned my lesson once and for all — do not invest in trash retailers. I’ve since extended that ground rule to cover retailers in general. It’s serving me well.
Little did I know my initial feelings would be right. Danier had thrown in the towel too early. Here’s the story of the Danier Leather bankruptcy.
On March 21st, 2016, Danier Leather officially entered into bankruptcy proceedings. KSV Kofman Inc. was assigned as the bankruptcy trustee and Koskie Minsky LLP was assigned the task of representing Danier’s employees.
Danier had some decent assets heading into bankruptcy. It sold the lease for its largest store and headquarters to Michael Kors. It also had the option to sell other leases held in malls across Canada, although I’m not sure any were actually transferred. The company also sold intellectual assets to a firm called Rehan Marketing. The company also got some cash when it liquidated all of its inventory.
After paying the bankruptcy trustee for their work, Danier was left with approximately $36 million in cash. Just under half went back to creditors because they always get paid first. The rest — or a little more than $18 million — have been earmarked for shareholders. Thus far, some $11 million has been returned to shareholders.
This means I’ve gotten $4 per share from the Danier Leather bankruptcy proceedings. I remember the stock trading at $2 per share just before it went under, which would have been a nice profit. Still, I was thrilled to be getting anything back, never mind almost 50% of my initial investment. If only my other bankruptcy would have gone so well.
The bottom line
Overall I’m very pleased at what happened here. Sure, I lost money, but the Danier Leather bankruptcy could have been a lot worse for me. I recouped some of my capital and went on to fight another day. And there’s still a tiny bit of money left over, so I could still see a little more cash come my way.
It just goes to show that, at least sometimes, bankruptcy doesn’t mean shareholders lose everything. It’s never a great outcome, but this one worked out about as well as you could hope.
The most important part is the lesson learned. I now stay away from retailers in general and make it a rule to avoid crappy businesses as well. Sometimes that’s easier said than done, but at least I’m not actively wading into these situations enticed by cheap assets.
There are many kinds of investing you’ve heard of, like growth investing, value investing, dividend investing, and perhaps my favorite, buying a bunch of weed to resell to all the stoners on October 18th. I have a feeling the price is going to really skyrocket that day.
AWW GODDAMMIT GUYS.
These are all fairly standard investing styles that can easily be added to your portfolio via a selection of ETFs. There’s also the argument that if you buy ETFs that track large indexes then you’d automatically get exposure to every type of investment anyway. After all, indexes have all sorts of different stocks in them. Some will be value names, others will offer more growth. Many will pay dividends. And so on. This is pretty simple stuff, yet I felt the need to explain it for some reason.
Let’s talk about a method of investing that gets virtually zero attention, special situations investing.
What’s special situations investing, anyway?
Great question, giant header font. Special situations investing is a broad term for putting your money to work in any unique situation that promises the investor a potential profit when the event normalizes.
That’s a pretty broad explanation, so let me list a few examples. Special situations investing might include:
- Merger arbitrage (when there’s a small profit to be made because of the slight chance a corporate takeover doesn’t succeed)
- Spin-offs (when a company breaks into two or more parts, the new part will often outperform over the short-term)
- Odd-lot tenders
- And a few more that we won’t get into
Odd-lot tenders are definitely my favorite type of investing. Here’s what happens. A company will announce a share buyback that gives first dibs to odd lots. An odd lot is defined as anything less than even multiples of 100 shares. So investors buy 99 shares at the current market price, and then tender their shares at the offer price knowing they’re guaranteed to make a small profit.
These happen often enough that investors could make a decent return on small amounts of money (like, say, $10,000) if they paid attention to the space. I’m talking $1,000 a year, easy. Maybe odd-lot tenders could be the new credit card hacking.
Hedge funds tend to dominate the field of special situations investing. Whenever there’s an acquisition announced, a small army of these analysts scrutinize the smallest of details to determine a deal’s chances of succeeding. If these odds are greater than the spread between the deal price and the current market price, their cash gets put to work.
The beauty of these investments
I’m the first to admit there’s a fair amount of research that goes into special situations investing. You have to sift through the whole investing universe looking for these opportunities. Then, when you find them, you have to narrow down the field again, looking for ones with mispriced odds. A good special situations investor will only put his money to work in maybe half a dozen companies a year.
The benefit of doing all this is really important. By putting a portion of your cash in odd-lot tenders and other such situations, you create an investment that isn’t correlated at all to other stocks. If done right, special situations investing should be able to return steady results no matter what the underlying stock market does.
Bonds have traditionally played such a role in one’s portfolio. The problem with bonds is they do tend to do poorly when stocks do well and these days a 3% yield is all you’re getting in the bond world. That’s not enough to excite me. I CRAVE ADRENALINE, BABY.
(Promptly falls asleep on my recliner)
The bottom line
I may feature some of the special situations investments I do at some point here on the blog. I’ve looked at a few in the past, with varying results. Remember, special situations that don’t attract the attention of big investors tend to do best.
Most people reading this won’t dabble, which is quite okay. There needs to be a large level of commitment to the practice. It’s far easier to own a handful of index funds and call it a day.
Those of you who have read me consistently over the years (thanks for nothing, mom) know I’ve had some anti-frugality views. It would seem I hate it as much as the average Instagram model hates pants. Finally! A joke relevant for 2018!
Too bad it’s not funny.
It’s not that I hate frugality, of course. Limiting your spending is an important part of every financial plan. It isn’t much sacrifice, either.
Anyone with a little access to the internet and the patience to wait for decent sales at the grocery store can learn to cook. There are hundreds of enjoyable things you can do that don’t cost much.
Video games can stretch $50 worth of entertainment out over hundreds of hours. I’m still playing MLB The Show 12, a game I acquired for about $10. Each hour I’ve played the game has cost me like 5 cents. And you should see how good my user-created player is. It’s probably my greatest accomplishment.
Many early retirees have taken this to the next level, starting blogs primarily designed to keep them busy, but then turning them into decent side businesses. This ensures they’ll have enough money to survive their withdrawal rate while conveniently explaining the gap in their resume in case they ever have to go back to work. A hobby that generates income is the ultimate frugality hack.
Ultimately, I used to downplay frugality because at the end of the day there’s a limit to how little you can spend. It costs at least $10,000/year to have a paid off house and a car, no matter how cheap you are with the latter. You might be able to get it under that, but not much. By the time we add in food, a little travel, and the rest of the categories that make up the average person’s spending plan, we’re up to at least $20,000 or $25,000 per year.
In short, it costs about that much to function in today’s society. There’s a minimum spend amount.
The challenge in keeping spending down
I firmly believe most people don’t have an earning problem. They have a spending problem.
Think of your friends who are constantly broke. Chances are they’re university educated folks with decent jobs. Many of them probably have a household income of six figures, or close to it. And yet for whatever reason, they can’t seem to get ahead.
The earning power isn’t really the problem here. These folks might think so, but at the end of the day they’re spending every nickel that comes in (and then some in many cases). If their income goes up, so will their spending.
If you’re reading this blog, you likely don’t run into that problem. You’ve got a healthy savings rate and you’re more interested in optimizing your finances. Also your wiener is GIGANTIC. Well done.
Still, we should all strive to constantly improve our financial lives. And the easiest way to start is to come up with a spending plan.
The beauty of a spending plan is it doesn’t have to be very complicated at all. You might set a nice round number of $30,000 annually as a spending goal. That makes the exercise pretty easy. Or you might get into the nitty gritty of each and every budget category, deciding that you’d only like to spend $500 per month on food and $100 per month to keep the lights on.
You can decide to make it as complicated or as simple as you want, with one important caveat. Your spending plan must motivate you to cut your expenditures while maintaining a high happiness level. Because if you don’t have the latter, the former will quickly fall apart.
Making yourself happy should be the goal of every spending plan. If you want the odd splurge here and there, knock yourself out. I’ve been considering taking up golf again, something that would likely cost me $2,000 or so every year if I get a membership. That seems like a lot, especially considering I’d like to keep our spending at approximately $30,000 per year. I’d have two choices — either cut back on the golf or cut back on other spending. I’ll likely play a few rounds next spring and see if I enjoy the game as much as I used to. If the answer is no, I’ll simply find a new hobby. I hear herding cats is fun and enjoyable.
The bottom line
Ultimately, every financial plan is prone to failure if you don’t watch your spending. Frugality is important. Perhaps not as important as increasing your income, but it’s still a major part of everyone’s financial success.
Instead of making it a chore, embrace a spending plan as a way to figure out what brings you happiness. Once you find out something doesn’t do it for you, stop spending on it.
Frugality is something best approached as a challenge. How can you have a happy life while keeping your spending in check? The answer will be unique for everyone.