Deeper thoughts about FIRE

 

I just wrote a basic article on FIRE on the Dr Wealth website. You can read it here.

This article allows me to share miscellaneous thoughts on the topic that might not be appropriate for a primer on the movement.

a) Why did FIRE splinter into so many variants?

I had the same questions when I first read about Barista and Coast FIRE - both movements do not eschew the working world altogether, so they are short-cuts at best and half-baked ideas at worst. But I'm convinced that very few folks will complete the journey over time. FIRE influencers are overwhelmingly Tech or Finance professionals, and the MBTI personality type that dominates the movement is a rare INTJ type that is less than 5% of the human population.

So, some kind of moderation to create a form of FIRE for ordinary humans is inevitable. Even my challenge to ask my students to set aside $24,000 to generate an average of $100 a month in dividend income is quite challenging to some. 

b) Does FIRE threaten the financial industry?

If FIRE does not threaten the livelihoods of commissioned FAs, we are not doing FIRE correctly because we can save 2-3% in fees when we invest directly using a low-cost broker. I think the financial industry understands this point, and I'm detecting many "dog whistles" to that effect. 

An increasingly common strategy is to ask whether people make personal sacrifices regarding FIRE. Talking about some folks' relationships or appearance is also a low blow. Another approach is to "forgive" and "give permission" to others to start saving later in life. More complicated strategies will pick on a person's inheritance. 

It's all an attempt to convince folks not to start, but it ignores how much freedom a person can achieve with even $100 in passive income a month. 

c) Does FIRE threaten policymakers?

If done correctly, policymakers should actually promote FIRE. A severe practitioner will have to work really hard and maybe hold multiple jobs to get a credible portfolio running before they reach the age of retrenchment. 

There are certainly worse movements that are gaining more traction, such as the idea of lying flat.

d) What can policymakers do to make FIRE less attractive? 

Actually, policymakers threatened by this movement can take welcome steps to make FIRE less attractive in Singapore society. 

I can imagine myself continuing working on a statutory board today if some really toxic managers did not exist because I liked IT work, and I have no issues going to work even with a passive income of $20k+ a month. I'd like to hang out with friends in the office, too. 

If you want to blunt the impact of FIRE, we need to take further steps to make Barista FIRE a reality. More work from home, flexible work arrangements and a four-day workweek are a good start. I don't think you can remove the assholes from the government offices or any corporate HQ overnight, but creating a means to minimise contact with these people and creating outcome-based work objectives will help immensely. For me, the potential for AI is to require less middle managers so assholes will be stuck in individual contributor roles. 

Suppose a double-first from Cambridge prefers a life as debating coach rather than a path to say, the Admin Service, I'm not really interested in his choice of FIRE - I want to know specifically what kind of Ministry culture will drive him to freelance instead of becoming an Elite.  

e) Are there viable alternatives to FIRE?

Every successive generation of folks will reach adulthood and get their shit together at a much older age. They will also become more individualistic. This is a common trend from Boomers all the way to Gen Alpha. 

I'm seeing younger Millenials and Gen Z taking up a gap year after years of work to travel or do whatever they want. This is a viable alternative as they effectively separate their retirements into multiple parts and enjoy small bits of it when they are young. 

My generation will not do this because it can taint our resumes. 

But HR will be unable to do anything if every young Singaporean aspires to this lifestyle. Just like the CCP will note able to do much if every young person in China starts to lie flat. 

I actually love what young people are doing here when it comes to lifestyle design, I welcome credible alternatives to FIRE and love hearing about them. If done collective as a population, the working world can become a much better place even for older folks like me. 

Strengthening the case for dividends investing

 

Interestingly, folks are still publishing books on dividend investing since most of the top-performing stocks in the US are tech stocks that give tiny payouts to investors. Daniel Peris is one of those rare authors who are still trying their best to push dividend investing in the US despite multiple decades of very ho-hum performance.

First, he admits that dividend investors have become underdogs in the US. He has, in fact, placed his bets that with higher interest rates, a new trend will emerge where US companies will eventually clarify their dividend policies and increase payouts to appease investors in the future. This is an incredible leap of faith, but he has great arguments for this.

When arguing for investing based on dividends, the first hurdle is Modigliani and Miller's Dividend Irrelevance Theory, which, over the years, has generated enough influence to get company bosses to dispense with dividend payouts entirely. Furthermore,  tax authorities who apply a different rate to dividends and capital gains taxation make this worse. Peris found academic arguments to counter M&M, citing the stability of dividends as a reason why it remains a good factor and putting M&M within the context of a different economic era where free cash flow is often negative.  

With the big argument out of the way, it's easier to understand why dividends have underperformed. A stock that returns dividends to shareholders retains lower earnings and would appreciate in price less than a stock that keeps its dividends or performs a buyback despite the same business performance. But there's a lot of pressure for growth investors to stay vested, as the lack of dividends means more volatility and a nasty drawdown if the growth thesis fails later. 

At the end of the book, I suspect that Peris is nostalgic. He wants the stock markets to return to an era where investors place their assets on well-run businesses and companies. In this current era, speculators bet on technology trends that push the markets higher and higher, allowing ridiculous PE ratios to take root in the US.

This is the same fantasy in the hot Japanese Anime Frieren. 

Frieren, possibly the best anime of late, invokes the same fantasies, where Fern uses only the basic offensive magics to defeat all the mages of this era. I had to make this reference as I just completed watching this series with my son. 

Strangely, the Singapore market is precisely what Peris desires. In Singapore, you find our local public companies being carefully focused on a good dividend policy and selling stocks at current PEs of less than 10. If you attend AGMs, that's what the boomer uncle investors really want. 

They just want to get paid and eat an excellent buffet simultaneously.

I am currently testing a few screens based on the book. There is some outperformance, but Sharpe ratios are around 0.5 at best. 

Always good to have a lab to test assertions.