The End of Slavery – Why I Live Off Dividends

One of the reasons why I don’t like being around people most of the time is because they tend to say things that trigger me. Maybe I am too sensitive. Most of the time people just say whatever is on their mind, and they quick jump from one superficial idea to another. Most of the time human interaction is just an attempt to say something for the sake of saying something, so perhaps I take things too seriously.

I live with my mother, and a few days ago, someone at work commented that I should not live with my mother because she will become a burden on me as she grows older. The reason why this comment triggered me is because there are many assumptions made, and it simply isn’t true. I didn’t get much of a chance to explain myself before the topic of conversation moved on, but days after this colleague made this trivial comment, I am still thinking about it, and my colleague may have forgotten all about it.

If I moved out from my mother’s house, she could still be a burden on me because technology connects us all, so even if I lived far away from my mother, she can still call or message me if she wants something from me.

However, suppose my mother and I lived in different cities. It would be more difficult for me to get to her, so she won’t be as much of a burden on me. Regardless, currently I don’t consider myself to be too close to my mother even though I live with her. I work quite often, and she also works as well, so we often do not see each other. My mother and father divorced a few years ago, so my mother learned from experience how important it is to be independent and to never trust or be dependent on anyone. Even on weekends I may be out somewhere, and she would be as well, so we rarely see each other. The only time we regularly see each other is at night when I get home from work and she cooks me dinner, and this is a tradition that seems to just happen all the time. She has always cooked dinner for me, and I never objected to it, so it keeps happening. In fact, my mother cooked dinner from my whole family, but over time everyone moved out. After the divorce, my father moved out, then my brothers moved out, and now she only cooks for me.

Even though my mother is in the habit of cooking dinner for me, this doesn’t happen all the time. For example, last night I had dinner with a colleague at work, so I came back at around nine at night, had a shower, and went to bed. This tradition of my mother cooking dinner for me seems to be the only habit that keeps us together. My grandmother on my father’s side used to wake up early and cook breakfast for me. I didn’t like it because there were days when I wanted to go to work earlier, so I just wanted to make my own breakfast or skip breakfast and just drink coffee, but my grandmother wanted to make breakfast for me. After the divorce that ripped through the family, my grandmother left the house to live with my father, and now I rarely see her. Most relationships are based on dependence and habit. When you are a child and you’re dependent on your parents, you are forced to interact with them, and they become familiar to you, so you bond to them. The same applies with work. You provide skills to your employers, and employers give you a salary, so you are mutually dependent, and over time there are colleagues at work you see all the time, and familiarity breeds trust and bonding. But as people become more independent, that dependency goes away, and as a result, bonds break.

Going back to the topic of my mother and her habit of cooking dinner for me, there are many in my family who jokingly talk about how I need my mother to cook for me (or I need a woman to cook for me), but I think many people say this because many people are traditional, and they believe in the traditional family. They want to believe that the woman’s role is to cook. This includes many traditional women. However, in my opinion, modern technology has made cooking irrelevant. You can easily eat out at restaurants, but even if you consider that to be expensive, it is not difficult to cook simple meals for yourself using e.g. a blender or microwave. For example, it is not hard to microwave or boil beans or to throw fruits and greens into a blender. To clean up, there is the dishwasher. There are many traditionalists out there (mostly women, based on my observation) who want to go back to the days of old when they stayed at home and engaged in low-skilled cooking and cleaning duties, and I think the allure of this is that woman don’t need to go out into the workplace to make money, and this is what drives anti-feminism among women. These women are simply selfish. I would consider myself to be a feminist man, and I encourage all women to get out into the world, work, invest, and become financially independent. They should resist the temptation to glamorize slavery.

My mother does not always cook dinner for me. There are times when I eat out, e.g. when I had a girlfriend a few years ago I spent a lot of time having dinner with her. If I wanted a cheap dinner, rather than eating out, I can bring meal replacement powders (e.g. Aussielent, Soylent, Huel, or Joylent) to work, and after work I can simply mix the powder with water and drink it as dinner. For added nutrition, I can come home and prepare a green smoothie using the blender. Because these foods are simple to make, I am not dependent on my mother for anything.

In the future, I intend to rent a one-bedroom apartment in or near the city because I am quite tired of commuting to and from work. I love to just be able to walk to work. Once I grow my dividends, my dividend income should cover the cost of renting an apartment in the city. As my dividends grow even more, I may be able to work part-time and use the spare time to work in a coworking space doing projects that I enjoy. With the proliferation of cryptocurrencies and blockchain technology, I suspect that a lot of business in the future will be done online and on the blockchain. It is a new frontier. Basically my plan is to transition gradually from living in the suburbs with my mother to living in the city and being self-reliant. I will also transition away from the traditional 9 to 5 job into more flexible work that gives me more control over what I do and with whom I work, and all this will be funded by dividend income. I recently performed a quick back-of-the-envelope calculation and found that I am investing about $70,000 per year, which is a lot. A considerable amount of this (about one-third of it) is going into my superannuation fund, which means I will not have access to it until I am very old) but about two-thirds of it is going into dividend-paying stocks or ETFs, so I expect my dividend income to gradually increase, which will improve my standard of living. I want to use my dividends to fund a more autonomous life with more freedom. I want to be free from my family and from my employer.

I expect freedom to come gradually. Most people have a date when they simply retire. There is a clear date, a line in time when they are no longer slaves but are free. I will have no such date. I believe that slavery is a continuum. On one end you have total freedom, i.e. no debt, good health, and living off enormous amounts of passive income. Then on the other end you have total slavery, e.g. shackled and in prison. Then there are degrees of slavery, and most people have quite a considerable degree of slavery imposed on them by their jobs, their family, their children, their mortgage and car loans, etc. For me, there is no retirement, just a gradual move from slavery to freedom.

As my dividend income increases, I will eat out more for dinner (or drink Aussielent) rather than go home and get my mother to cook. As my dividend income grows even more, I will sleep at home less. Rather than commute back home, I may hire places to sleep at night using Airbnb or I will rent apartments in the city for longer periods of time. The same applies for work. My intention is to reduce my hours so that I work part-time, or I may be more flexible, e.g. I may work at coworking spaces or at cafes. I may even ask my manager if I can work at overseas coworking spaces. This is good for me because I get away from the office, but it is also good for my employer because my desk is not being used, so there are cost savings. If technology is good enough, working remoting should not make me any less productive. This will be my main digital nomad plan, which is to do what I currently do at work but to gradually do it remotely as my dividend income and skills increase. As dividend income and skills increase, I have more bargaining power, and technology will improve over time, which should make remote work be easier. There is also a broader push by feminists for more flexible working arrangement because women want to spend more time looking after their family, so this could possibly benefit me.

Basically with higher dividends, I have more power so that I can shape my life the way I want my life to be. This has been the intention since the beginning. Living off dividends is my guiding philosophy in life because it gives me the freedom and power to do what I want. The basic idea is that you increase dividend income so that you get paid without needing to work, and at the same time you reduce all obligations, e.g. debt, marriage, and children. You minimize responsibility, obligation, and duty. By not putting any future obligation on yourself, you are free to do what you want. You are free to experiment with what makes you happy, and dividend income will allow you to experiment.

At the end of the day, my belief is that freedom depends on the direction of flow of obligation. When you hold stocks, ETFs, government bonds, etc, then there is an obligation for others to pay you money. There is a legal obligation for companies to pay you dividends. There is a legal obligation for the government to pay you interest because you are a bondholder. The flow of obligation is from others towards you. However, if you have debt, then the flow of obligation is reversed. For example, if you have credit card debt or a mortgage, you owe money to the bank. If you have obligations to family, friends, spouse, or children, that also imposes either a legal or social obligation from you to others.

The flow of obligation from you to others makes you a slave. The flow of obligation from others to you makes others your slave and increases your freedom. Freedom or autonomy is dependent on the flow of obligation. Manage the flow of obligation and you manage your freedom, and freedom is happiness.

You Save 100% of Your Salary? What if You Die Before You Retire?

I probably shouldn’t do this, but I told someone recently that I save 100% of my salary and live off dividends. One of the argument he used against this is that, if you save up a considerable amount of money, you deprive yourself while you save and there is a chance that before you retire, you may die, which means you never had the opportunity to enjoy spending the money that you saved.

This made me think about why I continue to live a minimalist lifestyle and live off dividends.

If you die with lots of money saved up, you could have enjoyed that money. However, for many people, freedom is so important that it’s not the spending of money that makes them happy but the holding of money. This applies to me as well. I love to hoard money not because of what I can buy with it but because of the freedom and autonomy it gives me.

If I had, say, $1 million then according to the 4% rule I can spend $40k per year forever. I never need to work ever again so long as I’m satisfied with a $40k per year lifestyle. There is no need to suck up to some boss, and I can do jobs on my own terms and live according to your own rules. I continue to work, but I do the work that I love. That is freedom, and I care about that more than some shiny Ferrari.

You enjoy your work when you’re not dependent on it

In my opinion, you enjoy working when you don’t care if you’re fired. If something at work bothers you, you simply ask your manager if you can be transferred elsewhere. If for some reason you are fired, just shrug and walk to a job agency or find a new job yourself. Because you live off your investments, it doesn’t matter if you’re unemployed. You don’t work to feed yourself because other people feed you.

However, if you’ve never saved up any money, if rather than living off dividends you have massive debt and spending obligations, you are then dependent on your job, and dependency is slavery.

Slavery has not been abolished. It has evolved.

Property vs Margin Loan vs Internally Geared Funds

I have mentioned in a previous post that I don’t like to buy a house. Instead, from experience, I find that it’s best to invest in ETFs. The reason is because ETFs give you flexibility to invest in what you want. If you buy a house as an investment, you are leveraging into one house, and although the general property market may behave one way it’s very hard to know how your house will perform individually. For example, the house price indexes from the Australian Bureau of Statistics averages out results for a number of different houses. If, say, you have a house in Sydney and Sydney house prices went up 5% this does not mean your house specifically went up 5% but that houses in general in Sydney went up 5%.

Furthermore, if you buy a house to live in, you have nothing but debt (unless you buy a house outright without a mortgage, but this is rare). You have a mortgage that you must pay monthly and any benefit from the investment is in the form of capital gains, which you cannot access until you sell the house. You cannot see capital gains, and you cannot access capital gains. Capital gains are invisible and, if there is suddenly a recession, all your capital gain that may have taken you decades to accumulate may disappear in a matter of weeks or months.

Capital gains do not provide the same sort of comfort that cold hard cash income provides. If you have a house, this problem can easily be fixed if you turn your house into an investment property and rent it out, but even if you had an investment property, the performance of an investment property just doesn’t compare to ETFs, in my opinion. Unless you really know how to pick good property, residential property in general has low yields, and after you pay property management fees, taxes, house repair and maintenance, etc, you don’t end up with much, especially not when compared to ETFs that have been engineered to seek out and pay high dividends.

Property is not a good investment. From my experience with residential property, once you buy a property, suddenly everyone wants money from you and everyone sends in their bills. Once you buy property, you need to pay bank fees, mortgage interest, lawyer fees (for conveyancing), real estate agent commissions, taxes (stamp duty and land tax), and property manager fees. Once something goes wrong in your house (e.g. the shower breaks) you need to get a repairman in to fix it, and he send you a bill as well.

Investing in high-dividend paying ETFs is completely different. You use an online broker (e.g. CommSec) to buy ETFs listed on a stock exchange, and then you sit back and watch money flow into your bank account. That’s it.

What about leverage?

One of the benefits of property is leverage. Because you borrow money from the bank, you have more assets exposed to the market, which means potentially higher gains. However, leverage works both ways. If the asset price does not go up enough to compensate you for the interest expense, you will lose money, and when you are leveraged, you will lose a lot of money.

That being said, leverage is a legitimate strategy if you want to accept higher risk to get higher returns. You are effectively moving up the efficient frontier.

Leverage is easy to achieve using ETFs. There are two options: (1) invest in leveraged ETF (e.g. the Betashares Gear Australian Equity Fund (ASX: GEAR)) or (2) apply for a margin loan to borrow money from the bank to buy stocks or ETFs.

Based on the modelling I have done, all these options (property, margin loan, and leveraged ETFs) have somewhat similar returns, so it doesn’t matter which you do so long as you feel comfortable with the risk you are taking. However, that being said, I think that out of these three choices, property is the worst because once you sign up to borrow money from the bank, you have a monthly mortgage that you must pay. You basically have a noose around your neck. If you don’t pay it, the bank will sell your house, and you will incur substantial transaction costs. When you have a margin loan, many people will try to scare you about the dreaded so-called “margin call” but this I think is overblown. The bank will only step in to induce a margin call when your debt levels are high relative to the value of your assets (they look at your loan-to-value ratio or LVR). They do this because, if you have a high LVR, the risk you are taking is too high, and the bank will get worried that the size of your debt will be too high relative to the size of your assets, which means you may owe the bank money that you may not pay. As part of their risk management, banks will monitor your LVR and intervene to lower your LVR if you raise it too much. This applies not only with stocks but also with property.

Banks will intervene to lower your LVR if you have not been paying your mortgage. If you miss a mortgage payment or two, the bank may allow it because your LVR will not be too high, but if it goes on for too long and your debt levels start to rise too much, the bank will intervene to sell your property. Therefore, regardless of whether you have a property or a margin loan, the bank will still intervene if the LVR is too high. So long as you keep watch of your LVR and make sure it is not too high, you will be fine.

When managing your LVR, the problem with property is that you have zero control over your portfolio. Once you buy your house, there’s littel you can do to affect the volatility of the asset. You have zero control. However, if you own a portfolio of shares or ETFs, you can control how much volatility there is in the portfolio by buying specific listed assets. Managing volatility is important to managing your LVR because volatility affects the value of the portfolio, which of course impacts the denominator in the LVR. If you use a margin loan to leverage, say, into the Chinese stock market (e.g. the iShares China Large-Cap ETF (ASX: IZZ)) then the risk you face (and therefore the probability of a margin call) will be much higher than if, say, you invest in stable assets such as global infrastructure (e.g. via the AMP Capital Global Infrastructure Securities Fund (ASX: GLIN)).

There is a much easier way of leveraging that involves zero risk of a margin call, and this is by investing in internally geared funds. With internally geared funds, you don’t borrow. Rather, you take your money and invest it in the fund. The fund manager collects your money (as well as money from other investors) and uses this to borrow money from the bank in order to invest in stocks. Because debt is handled by the fund manager (rather than you yourself), you don’t owe anyone anything ever. Betashares currently offer two listed internally geared ETFs: GEAR, which leverages into Australian stocks; and GGUS, which leverages into US stocks.

According to the Betashares website, the fund is “‘internally geared’, meaning all gearing obligations are met by the Fund, such that there are no possibilities of margin calls for investors.”

Gearing via an internally geared ETF, in my opinion, is the optimal strategy unless you want to borrow money yourself so you can claim the interest expense as a tax deduction. However, that being said, if you borrow money yourself, because you are only one man (or woman), you will typically pay between 4 to 6 per cent at current rates, but if you invest in a leveraged ETF, the fund manager is responsible for borrowing, and the fund manager has access to low institutional interest rates (supposedly around 3%) thanks to its buying power. You are therefore able to gain even greater leverage with internally leveraged ETFs.

Conclusion 

I used to be very much against gearing because I strongly believe that debt is slavery, but now I accept that gearing can be a legitimate strategy so long as you have robust downside protection. I believe that no matter what you do (when investing and in life in general), it’s good to take risk because more risk provides greater return, but risk must be managed. It is okay to take risk so long as you have a safety net or a fallback plan if everything goes wrong.

My Thoughts on “The Big Short”

Yesterday I was watching a movie called The Big Short and it’s an awesome movie about the GFC. The movie makes me wonder about whether we are in for another financial crash. Stock and property markets went down about 50% in America and most countries around the world, but since then central bank injections of cash seem to have restored everything.

This movie blames the property crash on subprime loans, but at the end of the day subprime lending popped the entire American housing bubble. The bubble was there in the first place, and the bubble was in property, not just subprime property but also prime property, which is why property prices in the US fell across the board.

This movie also really exposed how corrupt and fraudulent the financial system is. The biggest injustice of all, in my opinion, is that investment banks created these toxic assets (CDOs, etc) and then when they were worthless they simply did a deal with the government to unload it onto the government in return for printed money (or bailout money). This pretty much means the banks can do whatever they want knowing that if things go wrong they can simply get the government to bail them out. If you or I started a cafe and the business failed, the government will not bail us out. However, this does not apply to bankers, the holders of capital. Capitalism, therefore, does not apply to capitalists. Bankers can create bubbles, create bad assets, and then sell these assets, and if everything goes wrong they can just tell the government to take it off their hands. There should be no bailout, and those who held CDOs should have been left to learn the errors of their ways. By bailing them out, you only reward bad behavior.

Looking at it this way, the banking industry is simply an arm of the government. Banks are simply government business enterprises.

The original view was that if the government prints money to buy these toxic assets off bankers, this would cause inflation, but these toxic assets are usually highly leveraged, and more debt actually increases the amount of the money in circulation, which is inflationary. As debt prices go down (e.g. there is a debt bubble that pops) then this means the expectation is that loans will not get paid, and the amount of money in circulation goes down, which is deflationary. The government printing money simply restores the money supply back to original levels. 

How to invest

My investing strategy is pretty simple. I’ve been focusing mainly on dividends and looking at funds that provide low volatility. The perfect ETF on the ASX, in my opinion, is Betashares’s HVST, which has a double-digit yield and pays monthly. It also uses derivatives to lower volatility by selling futures when volatility is high. If the market crashes, I’m sure this fund will go down, but it won’t go down that much, and while everything is rosy, this fund will produce great dividends, which is awesome.

If there is a GFC 2, I expect to take a hit. My net worth will go down, but I have been loading my portfolio up with funds that are designed to be low volatility (such as HVST) as well as other defensive investments like gold mining ETFs (ASX: GDX) as well as bond funds, and so if my net worth goes down, it won’t go down much, and when the market bottoms, I will definitely be plowing as much money as possible into leveraged ETFs expecting the government to print money to restore the economy. While the market is likely in bubble territory now, it’s also a good idea to keep debt levels low because a major risk when there is a market crash is that a margin call will be triggered. Keeping debt low reduces the risk of this happening. Furthermore, as the market bottoms, if your debt levels are low, you have more ability to take on more debt to invest when the market bottoms, which means you can leverage into leveraged ETFs and achieve “double leverage” to magnify your returns once central bankers start firing up the printing presses.

Bottom line is that at this stage you should load up your portfolio with defensive assets, e.g. cash, bonds, gold, as well as “smart beta” low-volatility ETFs, but don’t go all into these defensive assets because it’s almost impossible to determine when a bubble will pop. As they say, a market can stay irrational longer than you can stay solvent, so often when a bubble is formed, it’s often best to simply ride the bubble and make money, but always have a plan to protect yourself if the bubble bursts. There must be a plan B.

 

Commitment Phobe by Choice

It makes my blood boil when I read Generation who refuse to grow up: No mortgage. No marriage. No children at the Guardian, mainly because it reminds me of the many people over the years who have suggested to me that now that I have turned thirty (or when I was in my late twenties) that I must be a responsible adult and buy a house, get married, and have children.

There is so much negativity about commitment phobia on men that you’d think there was a concerted advertising campaign being funded by the real estate, wedding planning, and children’s lifestyle industries in order to encourage us to spend more.

Buying a house, getting married, and having children are very personal matters, so I don’t want to criticize others if they decide to walk down these paths, but what I hate is the assumption almost everyone has that by a certain age I must do this or that. People give you all sorts of rules that are clearly just made up: you must date a girl for this long before you are officially in a “relationship,” then you must be in a relationship for x years before you buy her a ring. You must then save up y years worth of salary to buy the ring, and then you must marry her, and then you must buy a house, etc, etc. And if you don’t follow this formula like a slave, many people have the balls to tell you that you are not “man enough.” They tell you to “man up” and start taking responsibility.

Seriously? If I were a conformist beta male who followed what other people say I should do and get married, buy a house, then that makes me a true man? And if I defied society and did what I wanted to do instead, that would make me less of a man?

The term “commitment phobe” is used a lot. There is even an article on Psychology Today titled Understanding and Dealing with Commitment-phobia that talks about reluctance to commit as if it were a mental disease. I absolutely hate it when people talk about reluctance to commit in relationships as if it were scientifically proven to be some mental impairment when if fact it is not a scientific or medical defect.

Take Responsibility: Don’t Blame the Banks

Property investors are borrowing money from the bank and then blaming the bank for lending them that money

I have just read Banks Are Loaning Too Much to People Who Can’t Pay it Back on News.com.au. Here are some snippets:

An explosive 60 Minutes investigation, which airs on Channel 9 on Sunday, has discovered banks are irresponsibly loaning large amounts of money to people who just can’t pay it back due to a collapse in the property market.

The 24-year-old, who was an ordinary income earner, was loaned $6.5 million by a bank and encouraged to invest in a “highly volatile” market in the little mining town of Moranbah in Queensland — she bought 10 properties.

She has now obtained documents from the bank that loaned her the money, which show they knew there was a medium to high risk of the values collapsing and her homes being left abandoned by potential renters….

“The investors bought their properties during a peak in the market, some were $600,000 or $700,000 for ordinary buildings, but now some are worth just $100,000.”

Mr Coulthart said people with an average income who wanted to buy an investment property had to borrow 10 and 20 times their gross income.

“That is a preposterous amount of lending,” he said. “Property values in Australia are out of control and the level of mortgage debt in Australia is something like 3.8 times the gross domestic product.”

He questioned why people are being encouraged to borrow 10 to 20 times their gross income.

“It’s an unsustainable level of borrowing,” he said.

The 24-year-old featured in the 60 Minutes report doesn’t entirely blame the bank for the millions she borrowed, admitting to being greedy.

But she said while she didn’t look closely enough at her capacity to repay the loan, she believes the banks also had a duty of care.

“What this has taught her is banks are throwing money at people in the good times and now in the bad times banks will blame the borrower and say it’s their fault for borrowing all this money,” Mr Coulthart said.

“To some degree that’s true, but they should have a duty of care to make sure people have the capacity to repay.”

One of the main businesses banks have is lending money to people who want to borrow.

However, I shake my head in disbelief when people willingly borrow money from the bank, put it in a high-risk investment, lose their money, and then turn around and blame the bank for lending them the money in the first place.

Banks don’t want to lose money. They are a business. As such, it makes no sense for them to lend to someone who will not pay them back. They will try their hardest to filter out bad borrowers, but this is an inexact science. You can look at income statements and check creditworthiness, but with so many borrowers on their books, banks can only do so much, and borrowers need to take responsibility for their own actions.

It may be true that banks are “throwing money at people in the good times and now in the bad times banks will blame the borrower and say it’s their fault for borrowing all this money.” However, it works the other way as well. Borrowers fall over each other trying to borrowing as much money as possible during the good times and now in the bad times they will blame the lender and say it’s their fault for lending all this money.

Debt can be useful if you use the borrowed money to make more money. If you borrow at 4 percent and make 10 percent, you’ve made a good 6 percentage point difference. However, in business and investing, things don’t always go to plan. There is such thing as risk.

This is why debt is like a knife. It can be used for good, but if used poorly it is a dangerous instrument.

A knife can be used to cut vegetables. Eating vegetables is good for your health. However, a knife can be used to cut yourself or cut others. Debt is similar. Debt can help you, but used irresponsibly debt can hurt you.

Suppose I were to buy a knife from a shop. Suppose I then take this knife and stab myself. I go to hospital due to heavy bleeding. Then suppose I blamed the shop for selling me the knife. That is no different to those who borrow from banks and then blame the banks for lending them money when investments turn bad.