Key metrics to track for Personal Investors

It is important to track certain key metrics when working towards Financial Independence. Different types of metrics can be tracked including investment performance, personal goals and even macro-economic ones. Having an eye on key metrics is particularly useful in times such as today with ongoing events of civil unrest over social injustice, Coronavirus, trade wars and an uncertain economic outlook.

In this post I will outline the key metrics I have been tracking over the years. Without these, investing would feel like driving blind.

Stocks proportion rule

Historically stocks have been the best performing asset class for investors with a typical portfolio which also includes cash and bonds. It makes sense to maintain a minimum proportion of stocks in order to capture returns of the market in line with your personal risk level.

I prefer to set this level to 80%; this ensures that as long as I have this amount of stocks I do not have to worry about what is in the remaining 20%.

Stock proportion rule

Stock proportion rule

Other assets/ liabilities such as cars or real estate can also be included in this comparison.

Asset Liquidity Breakdown

Financial liquidity is the ease with which an asset, or security, can be converted into ready cash without affecting its market price. Knowing how much of your portfolio is liquid is critical; a lot of people claim to be wealthy because the house they live in appears to be worth a lot.

However, the house is highly illiquid, requires maintenance, has many fees and taxes attached, has a price of ultimately what the other party is willing to pay, and is just somewhere to live. If the person has very few or no other assets, or has negative equity they are a long way from financial independence.

Liquidity Breakdown

Liquidity Breakdown

Property such as real estate, business assets and pensions which are to be accessed after many years are regarded as illiquid. Liquid assets can be stocks, shares and bonds in an investment portfolio held in an ISA (Individual Savings Account) and cash. Usually, such assets can be converted within a matter of days for use towards Financial Independence purposes.

You can also further breakdown the liquid portion to specific asset classes. This way, you can identify if the liquid assets are geared appropriately for desired long term returns by determining if the portfolio is too aggressive or conservative.

Liquid - asset classes

Liquid – asset classes

Financial Independence Goals

Tracking the overall goal towards Financial Independence is another important metric. The chart below shows how I do this.

Financial Independence - Goal tracker

Financial Independence – Goal tracker

The black line is the ultimate portfolio size to enable Financial Independence at 25 times  annual expenses. The red line shows historic progress. Current portfolio size is shown by the dotted line – once this crosses the black line the goal is achieved.

Achieving 75% (green line) of the goal is also a big milestone as one can easily find other ways to make additional income required or they can become more comfortable to transition to a different type of working such as self-employment.

The dashed grey line shows the current portfolio size plus property. If this crosses the grey line it shows that if the property is converted to the portfolio the goal can be achieved early.

Data and update frequency

To visualise these key metrics and others I regularly enter relevant data into a Google Sheets spreadsheet and have created charts which are updated automatically. This does not have to be an onerous process and only needs a few minutes of updating every month.

So far it has been incredibly helpful in keeping an eye on progress and providing much needed motivation. Definitely something for every series investor to consider.

 

Berkshire Hathaway Shareholders Meeting 2020 – Top tips from Warren Buffett

The latest annual 2020 Berkshire Hathaway Shareholders meeting (AGM) held on 2 May in Omaha was as insightful as ever. Warren Buffett was on top form, dispensing timeless advice to investors, new and pros alike. Charlie Munger, Buffett’s partner was not present at this year’s meeting due to logistics difficulties brought by the ongoing Coronavirus epidemic. Instead, Buffett was flanked by Greg Abel, one of his deputies. Unlike previous years, the thousands of attendees were absent and the virtual meeting as streamed by Yahoo Finance. Here are key takeaways.

Market volatility

Dow Jones Industrial Average Chart

Dow Jones Industrial Average

Stock market prices can be very volatile for a whole range of reasons. This is something that investors should expect and huge price drops are to be expected once in a while. Buffett referred to the Dow Jones Industrial index’s long term performance. The price dropped by more than 50% in the 1930s, following the roaring twenties.

Full recovery only occurred after 1950, although dividends were collected in the meantime. Therefore, it is important for investors to have the psychological temperement in order to go through market drops and were possible buy more stocks at reduced prices.

Buffett gave the example of owning a farm. You would have purchased it at a value based on its projected investment return. However, A neighbour with a similar farm may offer to sell to you at a price which varies wildly from day to day. This is how the stock market behaves and does not mean that you should act on these prices.

Plant seeds now

Responding to a question about why Berkshire Hathaway invests huge capital in its energy businesses, Buffett and Abel outlined that these are long term, planned investments analogous to planting seeds. As investors, we can use this to plan for the future by making the right investments as soon as possible without focusing on an immediate return. Returns may not be epic, but will become substantial over a long time.

Index fund investing

To avoid disaster, investing in index funds offers wide diversification of industries within the economy. This is particularly important now in the time of the Coronavirus. Different sectors’ performance will vary as evidenced by a contrast in fortunes of Technology companies and the airline/ travel industry.

Berkshire has sold all of its holdings in four major airlines at a loss due to bleak prospects in the sector. Buffett alluded that the initial purchases were a mistake and that the world has now changed due t the virus. Such losses can be inflicted on individual investors too if the are into buying single stocks and day trading, rather than diversifying across the whole market.

Be prepared according to goals

Buffett revealed that Berkshire now holds over $130 Billion in cash/ equivelants. This seems like a huge figure but must be taken in the context that Berkshire’s overall market cap is nearly $400 Billion.

A large cash pile enables the company to protect investors and part of it may be used to make a large ‘Elephant’ size business acquisition when valuations permit. This opportunity has not appeared to Buffett during the recent chaos on the markets.

On a personal investor level, one can develop micro portfolios, which ensure that you are better placed to meet your goals if the market crashes. For example, if saving for a real estate property, one can have a dedicated fund with less than 40% stocks, and be 100% stocks if they have a longer term goal such as early retirement.

Appreciate key workers

Buffett and Abel also made known their appreciation of key workers in the current COVID-19 crisis. It is disheartening that people born in the right place at the right time or who can do things such as arbitrage bonds become more successful than those who do truly important work such as teachers, nurses delivery and transport workers. We really on such workers in times of crisis and rarely fully appreciate them in normal times.

It will be interesting how the next few months play out for investors. Diversification will be as important as ever as the World emerges to different ways of doing things.

The full 2020 Berkshire Hathaway Shareholders meeting can be streamed on Yahoo Finance here.

Investing wisely during lockdown

Coronavirus investing

Lockdown will be a new experience for most if not all investors. Based in the UK, I have pretty much been housebound for over a week, apart from the occasional trip to the shop or for a walk. Fortunately, I am able to work from home so my productivity has not been impacted much. As the Coronavirus continues to wreak havoc across the World with increased intensity, here are my top tips for the Intelligent Investor.

Polish up you CV and Skills

It is no secret that, across the board, all types of companies, big and small, have been affected by the Coronavirus and are looking into different ways of mitigation. This may impact employees through reduced hours or pay, forced leave or redundancies.

In such times it is very wise for the employee to be prepared for the worst by getting their CV up to date, improving or learning new skills and have a Plan B. It may not be easy though as hiring may be scaled back or stopped in certain sectors.

Have a Low Information Diet

The worst thing about being stuck at home is that you will probably end up watching/ reading a lot of the news which ends up making you even more depressed. For investors, too much bad financial news may cause one to act irrationally.

Personally, I know a few people who were happy when the bull market was raging recently but are now either rushing to sell or hoping to stop investing when previous valuations are restored. Selling now will crystallize your losses forever. Instead, it is best to not check your portfolio frequently, stay the course and hold firm.

When I did my regular quarterly update my portfolio is down 18.33% so the net worth chart below looks bumpy. It may look like an entire year’s progress has been wiped out but it is a a good time to buy. My progress to Financial Independence has been scaled back but I will keep investing.

Net worth chart snapshot (to Q1 2020)

Net worth chart snapshot (to Q1 2020)

Keep buying stocks consistently

It is undeniable that Coronavirus is unlike anything investors have ever experienced. Even Warren Buffett said he had never seen such an event in his lifetime. The virus has touched every aspect of life from the housing market to visiting family. Unbelievable; even last month who would have ever thought that you would be never be able to move house or go to the local park.

The one thing to do now is to be consistent at buying stocks, preferably low cost index funds. This may be an opportunity of a lifetime for investors with a long term view, particularly if stock prices remain low for a prolonged period. When things recover, those who have been piling into the markets will reap the rewards.

Look out for the silver lining

It is also important to have a positive outlook. Not all bad things have to end up that way. If we get through this situation then there may be other opportunities to be had. You just have to be in the right place at the right time so it is worth thinking about any potential benefits in future.

A number of great businesses were born during scary recessions of the past including General Electric, Microsoft, IBM, Disney and FedEx. Necessity is the Mother of Invention.

You may be finally finding out in shock that your job or business can go at any moment. It is best to have some resilience. A level of Financial Independence can also help mitigate any financial hits.

Relevant posts:

Investing lessons from Warren Buffett’s letter to Berkshire Shareholders 2019 amid Coronavirus market panic 

Why I am Optimistic about future investment returns 

How to react to a Bear Market and invest wisely

Why volatility is an investor’s best friend and top insights from Warren Buffett’s 2017 letter 

Standoff and stocks selloff – Should Investors be worried 

Investing lessons from Warren Buffett’s letter to Berkshire Shareholders 2019 amid Coronavirus market panic

FTSE 100 EventsWarren Buffett’s 2019 Letter* to Berkshire Hathaway Shareholders has been released in a timely manner, amid the panic gripping Global markets due to the Coronavirus (COVID-19) outbreak. As usual, for those seeking Financial Independence, there are likely to be gems of advice in the letter for how to keep a cool head in such times. I enjoyed reading the latest letter, so let us get into it.

“Be fearful when others are greedy. Be greedy when others are fearful.”

This is the most iconic advice by Warren Buffett. This is not a core message in the latest letter but worth taking note of as one of the keys to successful long term investing. Instead of running for the hills; it is best to keep calm rather than sell shares at this point. Instead most dedicated investors will be happy about any buying opportunities. It is interesting how people run to the shops to buy goods on sale but rush to sell when the market becomes less expensive. Whether it is socks or stocks, we like it cheap.

Retained earnings are key to compound growth

When buying stocks, one is buying fractional pieces of businesses rather than short-term gambling on market gyrations. A business’ earnings can be reinvested in the company and or distributed to Shareholders as dividends.

Buffett, with advice from economist Edgar Lawrence Smith, writer of Common Stocks as Long Term Investments and John Maynard Keynes, asserts that companies which retain and reinvest part of their profits will grow with an element of compound interest.

Mind-boggling wealth was amassed by Rockefeller, Ford, Carnegie and others by following this simple principle. Today investors can emulate this by regularly investing in low cost index funds; the “Accumulation” type which automatically reinvest dividends. Berkshire Hathaway has deployed a total of $121 billion on property, plant and equipment against depreciation charges of $65 billion.

It is all about the units you own & having a long term view

Berkshire Investments

A picture is worth a thousand words. This image captured from the letter is worth a long look. These are the partly owned companies within Berkshire Hathaway’s investment portfolio. It shows that you should focus on the number of units or shares of your stock investments rather than the movements in the price. Over time, the price per unit will increase due to earnings resulting in a market value which far surpasses the cost price. Buy and hold is the best strategy.

According to Buffett, due to the power of the economy and wonders of compound interest, stock investments will outperform bonds over the long run, but only for those who can control his or her emotions. Others or those who use borrowed money should beware!

He also notes that occasionally, market drops of perhaps 50% magnitude or even greater will occur.

These Letters to Berkshire Shareholders are interesting and definitely worth reading as they contain timeless investing advice. I have also done a review of the letters for 2017 and 2018.

*The 2019 letter can be accessed here.