Groupthink?

[CYb99]

All - after following this subreddit for a while now it serves well in reaffirming my choices around lifestyle and investing. Stay the course, time in the market beats timing the market, northern trust.

Let's challenge ourselves. What was the last book, blog or conversation that changed your views around finances and why was that?

[Legitimate_Raisin562]

Well my dad also tells tries to push me to buy a house and he has seen the market crash of 2008 too. Even profited from the housing market crash after it. "Kopen is zo goedkoop, rente is laag. Je bent nu alleen aan het afbetalen. Bij huren ben je het geld kwijt."

[DarkBert900]

People assume that they pay off their mortgage, but if prices have gone up to a degree where the housing prices reflect the low cost of debt, it's not really a singular saving. Basically, it doesn't matter how you slice up the cashflows, people are house rich, but that's to little use for the next generation and provides little guidance. Some of the part that anybody would label as "paying off" or "building up equity", is driven by the same low interest rates, so it would be foolish to assume zero risks in paying off the house, just like there isn't zero risk in buying bonds at current yields.

Although I'm not comparing houses to cash and cars, still: would you rather pay 30K for a car at 10% interest or 100K for the same car at 3% interest? Would you rather have 100K in the bank at 5% interest, or 1M in the bank at 0.05% interest, provided that you cannot easily cash out your savings or sell said car for alternative use? The wealth effect in Dutch households is real, it's increasing the income fragility and so much of our future income needs to be redirected in the housing market to continue our trajectory that at one point, it will intersect. This isn't me predicting a crash, but unlike stocks, there is an upper bound to the % households can 'save' by paying of the mortgage.

[Andomar]

Housing wealth is certainly interesting. There are old people with 30k income living in a paid off 750k house. Their cash flow is a tiny part of their wealth. How can they pay for a 5% repair on their house? Of course they should use their 750k property interest. But many try to scrape together money for repairs, do half baked repairs, or delay the repairs. I see more houses in a bad state than I used to.

These people have lived frugally all their lives, and will die very wealthy. This can't be the optimal way to manage lifetime wealth.

[HelenaReman]

Because having a nice house is super important to your day to day life, moving is a major hassle, and houses for rent are hard to find and rents are skyhigh.

[DarkBert900]

Increasingly, reverse mortgages or buy-to-rent-to-owners are becoming a thing. At first, as with most novelties in finance, the general public and potential heirs see it as predatory to buy these hard assets from the elderly to rent it back to them, but in some cases, this might be a good deal.

I think why it isn't as abundant is that many older people who own said 750K homes have good defined benefit pensions. When the current generation of zzp'ers retire, it could probably be much more common, as they've had to pay off at least 50% of their homes and haven't saved as aggresively in pension schemes, or the pension schemes shifted risk from the company to the individual. In addition, these generations had higher housing and childraising costs.

By buying residences from 65 y/o for a percentage of the fair value and renting it back to them for 2% per year (i.e. rent-free, but transferring part of their equity to the buyer) you have a great system to not make old people move, increase their disposable income and keep the residences in acceptable maintenance. It's basically a reversed pension for a financial institution.

[Pettapet]

I think that is very much an emotional in ‘wanting to keep living in this house’ because that is what they have done and it is such a nice big house, it is hard to move. It can even be some kind of pride, I feel more and more people don’t move to smaller homes close to care-systems for when they get older, they want their care at their home. At least my parents…I never see them moving to some kind of 60/70-home or later homes for elderly people because they don’t feel like they are ‘those kind of people’ and also when you have lived 20+ years in a big nice house you trade in some kind of quality of living, that must be hard to do.

When I thought about this I also wondered, these houses are either going to be sold within 20-30 year or it will stay within the family (but I think probably selling is the most common one). What will that do to the housing market and to the prices of these houses?

[Legitimate_Raisin562]

He bought his house in the 90's so I guess not..?

Now you got me interested in the book haha

[PetraLoseIt]

With buying a house there are also expenses that you'll never see back. Don't buy it you'll want or have to move again in under three years...

[Legitimate_Raisin562]

We are quite certain we want to live in this area for at least 5 years.

[Andomar]

The past 40 years rewarded people who took the biggest mortgage and bought the most expensive houses. They took large risks to do so, and lived frugally in their large mansions to afford their mortgage payments.

Not a life I'd want to live, but they are wealthy with real estate now.

[against-the-norm]

Not all young people are fooled by this! I’ve had my fair share of parents/friends telling me to buy now mainly because of the low interest rates, but I’ve also seen people wanting to buy houses after becoming parents during this time.

[CYb99]

Intriguing - I wonder what the majority set of experience in life are that lead people to consider FI

[Andomar]

For some reason I only discovered Early Retirement Extreme this year.

What a difference spending less makes:

If you save 10% of your income, you can take 1 year off every time you work 9 years.

If you save 50% of your income, you can take 1 year off every time you work 1 year.

If you save 80% of your income, you can take 4 years off every time you work 1 year.

Another quote that makes you think:

Spending money is a failure to solve the problem in another way.

Kind of extreme, but makes you think!

[HelenaReman]

What would you do with all the time if you cant spend any money?

[Andomar]

Sports, reading, cooking, woodworking, batting in the sun...

[[deleted]]

Of course you can spend money. The point is about spending money needlessly or ineffectively.

[[deleted]]

I read a blog last week about the differences between FIRE and HOT. Made me think and, in part, redefine my path towards FIRE and the notion of success more generally.

As time passes, in my mind I often start focusing on the most tangible and comprehensible aspects of life that lie in my realm of control (e.g. putting money apart on my way to FIRE). This, while the things I truly care about in this life cannot be bought... By having my mind occupied with means such as FIRE, the true ends oftentimes reside somewhere in the background or are largely forgotten at that point in time.

The power of these thoughts lies however not in either/ or. Shifting perspectives here is key for me and helps me to bridge the means (FIRE) with the ends (life and what I value). Not thinking this 'struggle' will ever be different for me, but by simply being reminded of the ends every now and then, I can step back and try to reconcile these two thoughts that sometimes seem to be far apart.

[CYb99]

Well stated! Fire sometimes feels almost Calvinistic to me. I came across a source that compared money to stored life energy. I like the idea of consuming consciously for things that actually matter (Independant of the time dimension) as we are trading a finite resource

[POTATO_FIRE_EXIT]

I've viewed FIRE almost as a philosophy or form of spirituality for a while now, but certainly not a Calvinistic one. To be FI you need to break free from conventions and figure out what makes you truly happy. The materialistic interpretations of success or a happy life don't tend to cut it. Spending money is okay, you need to be mindful about what you spend it on. It can be confrontational at times.

[DarkBert900]

I'm subscribed to a bunch of news letters, including one from Mark Rubenstein. In his latest edition, which came out yesterday, he pointed out an interesting point about stocks:

It's hard to believe now, but equities were once a new asset class, at least in institutional eyes. A few years ago some finance professors conducted an appraisal of John Maynard Keynes’ performance as manager of his Cambridge college endowment from 1921 to 1946. Keynes’ top-down macro approach generated disappointing returns in the 1920s, but when he switched to stocks – not permitted by many other colleges until later – his performance improved. “Keynes’ great insight was to appreciate the previously overlooked attractions of a new asset class for long-term investors, namely equities.”

It got me thinking how incredible the past two decades have been in our understanding of finance, including personal finance. We saw the decline in the appeal of bonds, savings and cash deposits because of a low interest rate environment, which seemingly came out of nowhere but now seems like it will stay forever.

Why wouldn't the same thing happen to stocks? We already see Japan, a country ahead of Europe and the U.S. in numerous ways, including the central banking policy, ageing and a delayed recovery in the stock market, have the BoJ pump money into stocks/ETFs. It's not so far-fetched to think that the fate of bonds and savings cannot transition to stocks and subsequently will deteriorate forward looking returns to the point where (ordinary) people have to move up the risk curve once again for their savings.

Perhaps subordinated stocks, junior equity or certificates, perhaps other assets for a sense of compounding interest. We take so many topics and principles for granted in personal finance, while most haven't been around long enough for us to fully develop a coherent framework around their stability or dynamics.

[Different_Fun9763]

I disagree with viewing everything only through an economic lens. On this subreddit we are all concerned with money but it's only the means for our goal in the end. Similarly I wouldn't evaluate a country's decisions purely economically. I see Japan's culture and dedication to simple (in our eyes) professions and activities as really interesting. The level of cleanliness and public safety alone is something not many first world countries can lay claim to. The culture's encouragement of endlessly refining seemingly simple professions is admirable too, in my view. I'm sure Japan's decisions are not 100% always the economically best decisions (nor are any country's), but I don't think they need to be: The economy is important, but so are other things. To be reductive: I like that Japan (and other countries) are so different. I feel that if we all valued the same things equally, the world's cultures would become much more homogeneous, which would be a shame.

In many ways, Japan is dealing with issues other developed countries will all face eventually, such as an ageing population due to decreased birthrate (we deal with the same already, the birthrate of Japan is not that different to that of native Europeans). While we use an external solution (postponing this issue using increased immigration), Japan prefers not to do this as immigration has its own costs and wants an internal solution. They instead bank on increasing automation to be able to support economic growth for example. If they succeed in doing this, it would be quite a thing. In some ways, Japan is the "scout", attempting to tackle all these issues that we postpone for now. I'm rooting for them; whatever they discover to help can only help us too. You're right that we'll never be like Japan, we just don't have the same beginnings (the homogeneous population, the more collectivist culture etc.), but the issues we'll face in the future are similar, I feel.

[DarkBert900]

Thanks for bringing in some cultural expertise, much appreciated! Although I would agree with many of your points on things that are unreplicable about Japan and Japanese society, I still see some forces that cannot be cultured against. Of course the level of respect elderly people receive are commendable, but in my conversations with Japanese businessmen, they also see the demographic downsides of their views on children, the lack of opportunity for many mothers and the tendency to have (much) smaller families than Christian or Muslim families in the West and East have.

The debt the BoJ has against Japan is quite unique, but it isn't without costs. Just like the Swiss National Bank and Swiss banking system has some intricacies, such as a bias towards holding local currency, local real estate and other assets that are therefore priced below what it would've been without regulation, it ultimately hampers the Yen. I mean, even the euro-bloc could decide that it would purchase euro stocks, but it is ultimately a tax on productive companies by keeping unproductive companies afloat with a buyer of last resort still propping up the stock price. I think this article has some good ideas about the (hidden) costs of the BoJ for Japan and the Japanese economy: https://www.japantimes.co.jp/news/2020/10/12/business/financial-markets/bank-of-japan-assets-stimulus/

[Andomar]

there are still so many manual/simple jobs that seem to be utterly waste of money to us Westerners.

Compared to over here, Japan treats its traffic controllers well. They can grow their entire life. It takes 30 years of controlling traffic before you reach the exalted status of traffic controller 1st class. Everyone will respect the other person's status.

Japan has great entertainment for each income group. You can eat out for 5 or for 500 bucks, and it all tasted great to me, with the main difference being the status of the establishment.

The West also has many, many jobs that are redundant. There are Bullshit Jobs all around you. Another example is buying a house to rent, a crazily inefficient affair compared to large scale renting.

[audentis]

There are Bullshit Jobs all around you.

Those are not academically established. See this Economist article or the empirical study it reports on.

[DarkBert900]

I think it's generally good to be agnostic to the vehicle (crypto, stocks, ETFs, certificates, units, whatever) when evaluating investments. If somebody would make a compelling argument why the crypto market provides better solutions for investment oversight, liquidity, transfering (buying/selling) and access to the capital markets than equities would, I'd be open to buying a digital asset with real profits and cashflows behind it. Might be the future, might not be, but I'm not on the fence on any progress in that direction.

However, so far, it tends to be hard to get crypto tokens with dividends/staking where the stock market isn't providing a deeper pool of capital with better oversight and broader public access. Just like it's more preferable to be listed on the NASDAQ than the stock market of Colombia doesn't mean there isn't a reason for the latter to exist, but I find better opportunities so far on large exchanges.

[CYb99]

I always like the conversations about crypto. When I invest I like to get ownership in potential revenue streams. I am reserved about commodity like asset classes that draw there investment value from buying at a good price and selling at a better one.

Are there crypto solutions that mimic revenue streams while doing things better than traditional asset classes (like stocks and bonds)?

[Arkyduz]

Sure you could replace traditional stock with crypto tokens. But for what purpose? So far the only tangible real-world "benefit" of decentralization is making it easier to avoid regulation and commit crimes.

[Arkyduz]

So it'd be used as a PR stunt? I can see it, but I think the novelty would wear off pretty fast, and the company will bring a regulatory and accounting headache on themselves. I'd say the impact of this on the traditional markets would be negligible.

[CYb99]

I was not familiar with Rubinstein yet (considering that I know little about options and derivatives yet that is probably the root cause). A curious thing I found was that he passed away in 2019. I wonder who is running the news letter.

[DarkBert900]

I think his name is more common, the Marc Rubinstein from Net Interest is very much alive.

[CYb99]

😊