2020 Q4 Financial Update Part 2-TER: Investor’s Anxiety and Stocks vs Bonds with Julianek

Hi RIP readers, this is Part 2-TER of my 2020 Q4 Update.

I’ve published 3 posts so far in this infinite 2020 Q4 review:

  • Part 1 is about income, expenses, net worth and a few financial facts.
  • Part 2 is about my 2020 investment analysis, and my 2021 investing plans.
  • Part 2-BIS is a long Q&A about Part 2, since I received a few dozens comments and personal messages.

Part 2-TER (this post) is my public reply to a personal email that my dear friend Julianek (Value Investor, moderator of MP Forum, member of my Zurich Mastermind Group) sent to me again about Part 2, about my market analysis and investment strategy.

It’s so good that I asked him permission to make it public, and he gently agreed 🙂

This is last post about my investing strategy (for now), promised! I appreciate your amazing feedback, and all the homework you assigned to me 🙂 but I want to move on.

As reader MrWHDY said in my last post:

Money should have been a tool for you to reach freedom and it is now taking over your brain. How much energy has it already drained?

[Amazing comment. Another cold shower. I’ll take time to craft a proper reply. Thank you MrWHDY]

On the same subject, I think I’m no more able to keep up with all of your comments on my previous posts. I read them all, but I might not be able to write a proper answer to each one of them. It’s becoming a full time job on its own.

Next post will finally be Part 3, about personal and blog updates, with new projects, ideas, plans and bla bla bla 🙂

Let’s get started!

What follows is Julianek email, verbatim, and then my public response.


Julianek Email

Dear RIP,

I wanted to discuss your latest post [NDR: Julianek is referring to Part 2] and comments. I figured out that this would be way too long for a standard blog comment, so here I go.

Some of it is to provide advice. I know it is unsolicited, but I hope it will be helpful. Some of it is also to use writing to get my thoughts in order. If you use this trick with your readers, you won’t mind that I use it with you…

On Investor’s Anxiety

First of all, your post transpires what must have been a period of high anxiety as an investor. I imagine what it might have been like, because I shared a similar situation in the past. There was a time where I had a significant portion of my holdings invested in ETFs, and I hated it.

I hated it because I was not able to have any idea about what my holdings might be worth. I had to rely on the market so every day it would dictate to me the value of my portfolio. My emotions were directly tied to the various mood swings of Mr. Market.

It felt good when the market was up, very bad when it was down, and horrible when other people were getting rich and I did not.

So here comes my first advice: Don’t check the market prices too often. I am as guilty as you are of this sin, and I am trying to get rid of it (first I looked at the prices every week, then every two weeks, and now i am trying every month). Watching your portfolio go up is a dopamine kick. Watching it go down is the same mental pain as a drug addict experiencing a drug withdrawal.

You are already an anxious person, you don’t need to impose on your brain this rollercoaster of dopamine rushes. This will only be detrimental to your well-being.

I know that you like to think from first principles, so here are some. Let’s assume that in the long term, world businesses will create wealth in the order of around 6% per annum (feel free to replace 6% with any of your estimates). Then the daily wealth creation is roughly equal to (365th root of (1.06) )-1, or 0.016%. This is imperceptible and you know as well as I do that daily market price changes are way bigger than 0.016%.

So consider market daily changes for what it is: in the worst case it is purely noise (and why anchor your well-being on noise?), and in the best case it is just an opportunity (if Mr. Market is willing to sell you his interests at a strong discount, or if on the contrary he wants to buy your interests at a big premium).

I truly think watching daily price moves is an addiction, and I am trying to get rid of it. I think it would be beneficial for you too. You have created an investment plan, stick to it. You only have to watch prices once a month to rebalance your portfolio according to your plan.

This leads me to the second dangerous emotion for any investor that you mentioned in your post: envy. I am as mad as you are to watch the kids make X time their money on TSLA and BTC, but let’s be honest with ourselves and treat this emotion for what it is: pure envy. I’ll put this quote by Charlie Munger, as relevant as ever:

“Here’s one truth that perhaps your typical investment counselor would disagree with: If you’re comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what?! Someone will always be getting richer faster than you. This is not a tragedy. [..] The idea of caring that someone is making money faster than you are is one of the deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?” (to which Buffett answered: “If you combine gluttony and lust you can have a helluva weekend!”)

So the important thing is that YOU reach your financial goals, not that anybody else is getting richer than you. I am trying to remind myself of this when so many people claim how well they did in the stock market in 2020. Watching stock prices less often plays also a big role in that.

I know that I could never sleep well at night holding any significant position in TSLA or BTC, so why should I be angry about those who don’t? The important thing is that I find a framework that works for me, not to copy what others are doing.

I guess you already know it, but I love this quote on the topic: “If you don’t know who you are, the stock market is a very expensive place to figure it out…”

Stocks and Bonds

Now I would like to talk about another topic on which we tend to slightly disagree: how to think about bonds and stocks.

I realized we use a totally different framework when you wrote “You should pay much more for the same yield (guaranteed with bonds, expected with stocks), because bond yield has no fluctuations, while stocks have. You earn a premium for taking risks.” So I wanted to write down my thoughts about stocks and bonds to figure out where this difference comes from.

First, some definitions:

  • I define risk as the chance of a definitive impairment of your capital. This is not the same as market volatility. If a stock goes down without any reason, this is noise. If a stock goes down because the profitability of the business is impaired, this is risk. In the case of bonds and stocks, it follows that risk is strongly coupled to its underlying business: the bondholder wants the business to be able to repay interest and principal, and the stockholder wants the business to have attractive returns over the long term. In each case, the risk you are taking is to pay too much compared to the value of the security you are buying (more on that later). This risk can come either by: a) the investor being too enthusiastic, or b) because of a business aspect that was overlooked (competition coming to eat your lunch, agency problem of management, etc.). Another risk worth mentioning in this context is currency risk, when the payoff of your security is not enough to compensate for currencies variations.
  • Risk is not the same thing as uncertainty. Risk means you lose money, uncertainty means you don’t know what’s going to happen.
  • What is the price of a security? That’s easy: the sum of its future cash flows discounted to its present value. But the devil hides in the details. We have two things to estimate: the numerator (the cash flows), and the denominator (the discounting risk).

As I said in my comment to your post, from a financial point of view, we can consider stocks like very special bonds, with two important differences. First, with bonds you can choose the maturity (short-term, long term) while stocks’ maturity is infinite. As the great Nick Sleep states:

“We own the only permanent capital in a company’s capital structure – everything else in the company, management, assets, board, employees can change but our equity can still be there! Institutional investors have never really reconciled their ability to trade daily with the permanence of equity.

The second difference is that the stock “coupon” is variable over time. Some great businesses will manage to make it grow, others will make it shrink, and others will languish.

But those two differences don’t change a iota of what makes the value of stocks and bonds: you have to estimate their cash flow, and you have to discount it.

So what are those cash flows?

You write that the yield is guaranteed for bonds. It is only guaranteed by the goodwill of the borrower. When the yield is as close as it gets to “guaranteed” (i.e. government bonds in developed countries), coupons are either close to zero or negative. I am sure that we can agree this is not a risk-free return, this is a return-free risk.

For any other situation, bonds yields are also expected, not guaranteed. The bondholder has to make sure that the business will have enough cash flows to pay the interest and principal. This suppose that the investor can estimate within a reasonable range the future cash flows of the business. This is the same work as for stocks! If an investor has no idea what the future cash flows of a business are going to be, he has no business buying its stock. But he will have equally bad surprises buying its bonds! He has to estimate the cash flows, and they are not guaranteed.

True, the task is a bit easier for bonds because you only have to estimate up to the maturity of the bond, while for stocks 75+% of the value resides in what happens after 10 years. But the payoff is still not guaranteed with bonds.

I get your point that one way to bypass this issue is to buy short-term bonds. Here the balance sheet of the company can help the bondholder if in any year the business does not earn enough earnings. But I’d bet short term bond investors are still taking considerably more risk than they realise. For instance, the fact that investors were willing to lend to Tesla at a rate of 5.3% when, in 2018, according to Musk himself, “the company was one month close to being bankrupt”, is as remarkable to me than the recent price action of its stock. This is also the same reason why I think that junk bonds is an accident waiting to happen. Too much business risk, not enough compensation with current yields. The extreme version of this are the unfortunate retail investors in the recent peer-to-peer lending debacle.

Anyway, you get the point: bonds or stocks, you have to estimate. Relying on the word and goodwill of the borrower does not guarantee the yield (or when it does, the yield is usually negative).

So let’s say we have estimated the cash flow of our securities. We are halfway through the journey. Now comes a topic that is an even bigger source for disagreement: how do we discount the cash flows? What discounting rate do you use?

There are basically two schools of thought:

  1. The first one states that you should use your opportunity cost (Buffett, Munger and Co).
  2. The second states that you should use the risk-free return and add a “risk premium” (modern portfolio theory).

I personally think the first one makes more sense.

It is true that there is something to be said for the uncertainty of the cash flows (the origin of the risk premium concept). But I think that risk premium as a concept is half-baked:

  • In most cases, the risk premium refers to the beta of the security, i.e. how volatile it was in the past. This is quite curious when all you care about is future cash flows. Investors using this metric often have bad surprises, the best examples being the LTCM fund, or XIV ETF. You had ultra low volatility, until you hadn’t.
  • Let’s say that you depart from the volatility-as-risk theory, but you still think that you should increase your discounting rate to account for uncertainty. This also leads to funny situations. If an investor has a hard time estimating future cash flows, can he really say “I have no idea what this company is going to do, so I am going to increase my discounting rate from 10% to 12%”. Then he could say “I have a very inaccurate estimation of the cash flows (it could be anything), but at least they are more heavily discounted. My DCF valuation leads to a price with a precision of 3 decimals, which I can feel good about”. I think we can agree this is absurd. Very precise, but totally inaccurate. The only case where this makes sense is when the price is so low that you have almost nothing to lose. “Heads, I win, Tails, I don’t lose much (High uncertainty, Low risk)”.

As said above, I think there is still a place to account for uncertainty. But this should take the form of a “Go/No-go” valve, rather than an adjustable discounting rate. You have a reasonable idea of what the future will bring, you continue the investigation. You don’t and the price is not obviously ultra-cheap, you pass. Anything else is speculation.

Nobody is so smart that he can figure out the future of every company on earth. There should be a lot of “too hard to analyse” conclusions when reviewing stocks. And when it is the case, you simply pass and review the next opportunity. You don’t use a bigger discounting rate.

To me it looks like the risk-premium is a concept created by academics to allow them to have mathematical formulas to analyze portfolios. But this is envy for the hard sciences.

Which brings us back to the other school of thought: you should use your opportunity cost as a discounting rate, which means that you should use your second best opportunity as a yardstick. If you have one investment that returns 10%, and a second one that returns 7% (and you have reasonable expectations about the cash flows), you will never invest in the 7% opportunity. A funny consequence is that the discounting rate is different for everybody.

If your uncle agreed to sell you his business for 1/10th of its value, your hurdle rate is so high that almost nothing in the stock market will be attractive. On the contrary, if your only alternative are negative yielding treasury bills, almost everything makes sense.

Buffett sees a lot of deals coming on his desk, so he is able to choose a high hurdle to discount cash flows.

If you follow this school of thought, then the job of an investor is to try to constantly increase the opportunity cost of your portfolio. I think this is a powerful concept, and it should be applied to life as well: we should be more selective in what we say yes to, and only accept what improves significantly our lives. Everything else should be a No.

In my case, as you know I spent a lot of time in the past investigating Terry Smith. I concluded that 14% per annum during 2000-2010 (a lost decade for many) and then 18% during 2010-2020 was a reasonable clue that he should return at least 10-12% in the future. So when I investigate a company, I simply ask the question: “is this a better opportunity than what I already have in my portfolio? Or should I give my money to Terry?”

That’s a lot of digression. Back to your comment.

“You should pay much more for the same yield (guaranteed with bonds, expected with stocks), because bond yield has no fluctuations, while stocks have. You earn a premium for taking risks.”

Why you want to buy a security is not because its yield is fluctuating or not, but because it increases your opportunity cost. If the yield is the same, you can pay more if there is growth involved (the yield does not account for growth, it only looks at current cash flows. There is no growth in bonds, while there is some in stocks. Growth can be negative, or positive. If history is any guide, we should look at a 3-4% annual growth rate).

This is why I am curious to see how bonds are trading compared to stocks.

Currently, BND’s price implies a Yield-To-Maturity (YTM) of 1.1%. This means that if interest rates do not change and the ETF holds all the bonds until maturity, at current price the investor will get a CAGR of 1.1%. A YTM of 1.1% translates into a multiple of more than 90 times cash flows… This is way higher than stocks, and it does not benefit from any future growth. And this is denominated in USD. I don’t need to tell you that with this kind of returns you are more exposed to currency fluctuations than anything else.

Sorry that it evolved in an almost 3k dissertation. But at least I have my ideas clear now! Happy to hear your thoughts on the matter. If I understand correctly there will soon be a post about bonds, I am eager to read it.

Send regards to your family,


P.S: you mentioned cash as well. Cash is hard to value. At face value it is constantly losing value due to inflation. But there’s a lot of value in the optionality of cash. In March 2020, the happiest investor was the one who had tons of cash, because he could invest in a lot of discounted assets. This has definitely some value. I don’t know how to quantify it, and maybe nobody can. As Einstein said, “Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.” And so with investing.


RIP’s Reply

Thank you for your email Julien, I sincerely appreciate the time you invested to write your feedback.

I also hope you achieved your goal of “getting your thoughts in order” 🙂

Investor’s Anxiety

Let’s talk about investor’s anxiety first.

I will split my reply in a few paragraphs.

Anxiety and Cognitive Dissonance

Yes, you’re right that I’ve been thru a period of high anxiety as an investor.

Not that much for the “missed opportunities”, as you know I’m not here crying that I don’t own BTC or TSLA, those are young person’s games.

I feel the pain of being wrong though, and a huge portion of my brain doesn’t agree with the fact that I’m wrong, but insists that we’re experiencing a worldwide hallucination in terms of asset prices.

So I’d call my current state of mind Cognitive Dissonance.

From Wikipedia:

In the field of psychology, cognitive dissonance occurs when a person holds contradictory beliefs, ideas, or values, and is typically experienced as psychological stress when they participate in an action that goes against one or more of them.

According to this theory, when two actions or ideas are not psychologically consistent with each other, people do all in their power to change them until they become consistent.

The discomfort is triggered by the person’s belief clashing with new information perceived, wherein they try to find a way to resolve the contradiction to reduce their discomfort.

I think I’m in cognitive dissonance in many fields, not just in investing. I hold contradictory ideas and beliefs about work, family, relationships, politics… you name it.

I search for absolute truths, and what I find is valid argumentations about any side of every coin.

The world is more complex than what we crave to simplify it into, and taking a strong position for one side or the other about anything is a lie to our higher intellectual self.

This is not bad in itself. Cultivating doubts is the cornerstone of Skepticism and Critical Thinking.

But I’m not ok with holding too may contradictions. I’m not Buddhist/Zen/Taoist/Confucian enough. I’m a guy who loves rationality, logic, truth. But the more I expand my knowledge, the less I’m sure about what I know. Socrates is my role model.

Like everyone else I aim to find an investment strategy that aligns with my values and beliefs. The problem is that my beliefs about investing in current environment are messy.

I understand your unease with ETFs, and the feeling of “lack of control” you shared in your email. In my opinion even with your current strategy (a mix of businesses you picked plus an actively managed fund with a strong history of good returns) you lack control. With ETFs you were at the mercy of the market, and you hated it. With your current strategy you are… at the mercy of the market anyway, but you feel good about it. Instead of having 0.000001% of control in your hand you might now have 0.00001%, which is a full order of magnitude larger but… yeah… you know…

Checking your Account too often, and Dopamine addiction

I agree that we should check market prices less often though. I agree that constantly checking your portfolio is an addiction. I’d like to add that I feel the pain of my portfolio going down without much joy when it goes up. Which is even more dangerous.

This is a thing I want to commit in 2021: check my balance less often.

Problem is that I get ETFs price and currency pairs automatically in my spreadsheet, almost in real time. I can “skip” checking my IB account but I’d see market impact on my spreadsheet anyway.

I noted that while our pension accounts, mostly our Pillar 3As, are exposed to market risk even more than my brokerage account right now (99% of Pillar 3A invested in stocks), I’m less anxious about them because I only check their value once per week, or even less frequently. Attention drives anxiety in this regard.

So, ideally I’d like to check my accounts once per week or even once per month. And I don’t want to track securities I’m no more invested into – that’s another source of anxiety, regret, FOMO and bad feelings anyway.

How to do that?

  1. I could access my spreadsheet less frequently. A bit hard, because I also track expenses in my spreadsheets, and non-electronic expenses (or expenses that need to be itemized) are better handled more frequently than once a month. Plus I’m kind of addicted.
  2. I could avoid using GOOLEFINANCE APIs to get real time data, and manually copy the end-of-month values at the end of each month. A bit hard.
  3. I should not keep tracking securities I got rid of in my spreadsheet. Easy. Will implement it asap.
  4. I should force myself log into my IB account only once per week, or at least not every single day, multiple times per day. Easy in theory, hard in practice because I’m kind of addicted.

I’ll start with 3, a bit of 1, and a bit of 4 for a while. I don’t want to go full detached-mode today both because I’m in the transition phase of my new strategy (and I want to be reactive in case of a market crash), and because I’m not a robot – can’t go from 100 to 0 overnight.

A Random Walk on a Bubble

I disagree on your daily wealth creation model though.

You assumed a 6% “wealth” created per annum, which boils down to a 0.016% per day. I’m not here to argue about actual numbers, but about the model as a whole.

Your point, if I understood correctly, is that every day, on geometric average, the market is expected to go up by 0.016%. Of course no day in the market looks like that. Daily swings could be even 600 times (+-10%) or more, and on average at least 10-20x the daily wealth creation chip.

Your model is like being the counter in a roulette game. Wins and losses are huge, but on average each day you bring home your 0.016%… which leads to “Time in the market beats timing the market“. Which also means that the less frequently you check the market, the more likely you are to find that it went up in the meanwhile.

An old post by Ben Carlson showed it with numbers:

I don’t fully disagree with that (you can’t disagree with data), it’s also at the root of the Efficient Market Hypothesis, but let’s not confuse the “historical market returns” with “wealth creation”.

We’re creating wealth worldwide in terms of global GDP growth. There’s a “Value” line that’s growing exponentially with human progress and creativity. A slow exponential function though. A ~3% yearly growth, which means a “doubling” of world wealth every 23 years.

Meanwhile, how is the global market priced today relative to its real Value? I’ve expressed this concern in my previous post. If the market is 2x inflated, it might take 23 year at current worldwide growth for stocks to get on par of underline real wealth created.

In the very long term it’s a winning game, of course. In 100 years it doesn’t matter if stocks are 2x overpriced today, and a 50% drop would put them where they belong. But I don’t have 100 years ahead to not care about actual stocks valuations TODAY.

We are both Bayes lovers, we know that priors matter. The above table is unbiased, it’s an average over every market day over a 90 years period. But if we filter by CAPE > 35 we obtain a very different table. Rolf‘s market returns over a day, a quarter, a month… 20 years were all negative. He should have not considered “odds of X happening”, but “odds of X happening given Y“.

I don’t have any “actionable” recommendations for those who are in a situation similar to mine, i.e. mid 40s, with a declining career, and a FI-like amount of money. But if you’re <30 years old and you’re reading this post please listen to this: you shouldn’t care about current market valuation, you have 30+ years ahead and even a bubble-like environment shouldn’t scare you. If your career (and your earnings) is yet to unroll, you should invest today, and hope for a crash.

If you think I’m crazy, please listen to William Bernstein instead.

Well, of course unless the bubble is a superbubble, where assets have tulip-bulbs-like valuations that will never be reached again in at least a century. It’s hard to tell when the market is in a super bubble (maybe the entire stock market will never be in such state), but for example you can try to recognize local superbubbles.

For example, do not invest in Gamestop stocks during a short squeeze with the intention of buying & holding 🙂

Image source: Yahoo!Finance and Barrons

Update: LOL!

I’m diverging a bit from our conversation, as I always do. Please forgive me 🙂

But I do agree with you that “watching daily price moves is an addiction“, and I also want to get rid of it.

Stick with it

Another small contrarian seed, food for thought from Morgan Housel:

Extreme adherence to an investment strategy is dangerous in a world that changes all the time, so an important question to ask when things aren’t working whether you’re being patient or stubborn.

Of course the opposite is even worse, like changing your strategy every season. But maybe it’s wise to not get too attached to your own strategy. Else you end up underperforming the market like Warren Buffett. And last thing I want is to become the new Warren Buffett! ( 😀 )

Yes, I’m the same guy who wrote “The hardest part about your asset allocation strategy is to stick with it” three years ago.


About envy: you’re not the first one who read envy in my recent writings.

I don’t think I envy other investors, but if people are reading envy in my writing maybe there’s something I should investigate more. I do have some investment FOMO, and I hate to feel stupid, but I don’t envy other people just because they didn’t chicken out like I did. Twice.

Maybe I’m unconsciously envious of the unaware kids who are becoming Tesla-millionaires. Maybe. But I know that those young people who made easy money are at risk of losing big time when the inevitable will happen.

Again, like Morgan Housel said:

Investing ability is unproven until it’s survived a disaster. So be careful when identifying skill, whether your own or others’.

Your Charlie Munger quote is amazing – as usual – but I don’t see it a good fit for my situation. I wouldn’t be feeling bad if I were following my passive strategy while someone was getting crypto-tesla-billionaire.

I’m only feeling stupid and left behind because I got stuck with my “temporary” strategy, while the “sliding door” of my previous strategy performed way better.

I’m eventually “envy of myself” in the parallel universe where I didn’t chicken out 🙂

Or maybe I envy the myself in the parallel universe where the worst year on record for human beings since the end of world War II hadn’t ended up with a +20% performance in the stock market…

But as you said, maybe I wouldn’t be sleeping well at night holding 100% VT at current valuations, so why envy even my parallel-self? Maybe I wouldn’t be sleeping well at night with my old portfolio…

“If you don’t know who you are, the stock market is a very expensive place to figure it out…”

I know, I’m already paying the high ticket of self ignorance 🙂

Stocks vs Bonds

I don’t know where to start. maybe I’m also using this conversation to clarify my thoughts. I’ll drop few things I disagree with you, let’s see how it goes.


Ok, I agree, bonds yield are not “guaranteed“, there’s this thing called solvency risk. Else you won’t ask different yields to different borrowers. The yield in a loan agreement should of course be correlated to the likelihood that the receiving part of the loan will be able to pay it back at maturity date. Which implies that both “credit score” and “duration” of the loan play a role in the risk estimation, thus in the coupon/principal repayment.

Sadly this game has been altered by central banks, but this is not the issue we’re discussing here, it’s a gravity problem as we both know.

Let’s agree on the risk definition. I think your “chance of a definitive impairment of your capital” is a bit too restrictive. I like the Wikipedia generic risk definition more:

In simple terms, risk is the possibility of something bad happening.

And Financial risk:

Financial risk arises from uncertainty about financial returns. It includes market riskcredit riskliquidity risk and operational risk.

In finance, risk is the possibility that the actual return on an investment will be different from its expected return.

And I also agree that Volatility and Risk are not the same.

I want to focus on the “possibility that the actual return on an investment will be different from its expected return”, i.e. P(expectations != reality).

Stock Price

You said “If a stock goes down without any reason, this is noise“, and I disagree with it. Because I also disagree on your model of a stock Price. You said “What is the price of a security? That’s easy: the sum of its future cash flows discounted to its present value“.

I think that the stock Price is simply the equilibrium between supply and demand. It can be totally irrational compared to the fundamental analysis (the underlying Value) you’re talking about. Supply and demand are driven by rationality AND emotions. Fama and Shiller are still fighting about it. I don’t think I have to point the finger to the obvious “unexplainable” stocks, I think we both agree that TikTok Traders don’t discount future cashflows, they just buy Tesla “because”.

Given that the price is the equilibrium between people playing different games, a stock can go down without any reason AND without going  down being “just noise”, but a correction from a previous misprice.

Of course misprices below “Fundamental Value” larger than a safety margin are easily captured by Value Investors, which means they’re less common in an optimistic scenario like the one we’re living today. Misprices well above fundamental value are riskier to capture, because shorting or acting bearish toward an asset is way riskier than its opposite, natural bullish behavior (just buy the stock).

This means that in an euphoric market, misprices happen only in one direction, and are not easy to capture. Being greedy when others are fearful is easy to implement, being fearful when others are greedy is much harder, especially when T.I.N.A.

My guess is that we’re in an overly enthusiastic environment, and there are few options for those who want to act bearish. This means there are plenty of stocks trading at crazy prices but nobody has the guts to short, buy put options, sell call options, and so on.

Misprices all the way up!

This means you can buy a stock today that can lose 50% tomorrow without nothing really happening to the company business, it was just mispriced. And you might permanently lose 50+% just because other things happened. Even just a FED interest raise of 1% (bringing US bonds to 2%, probably covering inflation) might ignite a 20-30% corrections (bringing CAPE back to 25-30 to pay respect to market risk factor), that might snowball into pessimism and a 50+% drop. Without your company business being impacted. Just supply-demand rules, once everybody discount factor went up by 1% thanks to “Risk Free” rate bump up by 1%.

Stocks are not Bonds

I don’t agree with “stocks being a special kind of bond”, because bond returns are explicit, with the only risk being solvency risk. Excluding solvency, the cashflow is fixed. Stocks on the other hand have an underlying value which is unknown (and in my opinion unknowable). Discount factors are subjective, and they tend to have not only a personal subjective component, but also a “generational” component.

It’s like the “current meta” in a videogame. “Hey, 2 heavy tanks, a squishy support and two Attack Damage Carry is the current meta! Two months ago you had to have a Mid, a Jungle, a Tank and two tanky Supports” could be a League of Legends truth, based on rules change and buff/debuff game rebalance.

In stocks you have same problem: “hey Warren, in the 10s and 20s you need to have growth tech stocks, please change your strategy! Value and high dividend stocks don’t work anymore in current meta“, or “CAPE 15 was the norm in the 60s, now CAPE 40 is the new norm. Maybe tomorrow CAPE 15 is the new new norm, and you better not own stocks while we switch meta 😉

So it’s not “noise”, even if the fundamentals, and the business opportunities of your stock didn’t change.

Now, I don’t want – and don’t need to – defend bonds. Bonds suck in this scenario. Scenario, not meta: the rules for bonds are always the same.

The lower the credit rating of the entity we lend money to, the closer to a stock the bond becomes. Low rating bonds have higher solvency risk, which are compensated by a more interesting expected cashflow, but you enter a probability game you might not want to play.

Return-free Risk

On the other hand, we can consider some of the bond issuers to always be able to repay their debt, like Lannister developed countries government bonds. That’s why their yield is also called risk-free return.

In current scenario you’re right to call it “return-free risk” because there’s a variable we haven’t mentioned yet: inflation.

In current scenario bonds don’t cover inflation, and this sucks a lot. It doesn’t make sense to me. It’s central banks decision to “save the economy” via punishing bondholders (mainly institutional) via charging negative overnight interest rate (in Europe and Switzerland), or ZERO interest rate in US.

Banks are incentivized to buy short term bonds even at a slightly better rate than what they get for storing money overnight, i.e. 1% in US and zero or slightly negative in EU, which means the bond market is corrupted. It’s not reflecting a sane relationship between a lender and a borrower, where the first should always demand a higher purchasing power for their money at maturity time, as a compensation for having gave up the opportunity to use the purchase power at “contract time”.

And we know the global bonds market cap is 2x stocks market cap, so the damage and distortion of current economy is larger than most investor can anticipate.

Bonds suck today

Again, I’m not defending bonds in current scenario.

They suck today, and one should think ten times about holding individual bonds. They’re not a good long term investment today, but in my opinion they suck for different reasons compared to the ones you exposed: because current rates are lower than inflation.

One thing I fully agree with you is currency risk. Holding bonds in a different currency exposes to uncompensated risk. It’s a zero expected return risk, with some gratuitous volatility. Due to loss aversion, we want to be compensated for volatility.

Over time, currency pairs tend to match (*citation needed) CPI difference among the countries (all else being equal). So a Bond in USD yielding 1% should be the same of a bond in CHF yielding -1% if the difference in inflation between the two countries is 2%, and the USDCHF is tracking that difference over time.

This is true of course only “all else being equal”. The desirability of a country and their own currency manipulation politics might add other volatility on top of the “risk cake”.

But in the short term the USD might lose 10% vs the CHF (hello 2020!), and this hurts. Volatility is welcome if it’s compensated by some expected return. It sucks if it’s uncompensated.

Hedging might not even be the solution, since it protects from short term volatility, not from long term trends. And it’s expensive, given the already small bonds returns.

Bonds ETFs suck today

Lastly, bond ETFs work in a different way compared to individual bonds (more on this in a future post series). A bond ETF is a kind of leveraged tool, a bet on the direction of the yield of future bond emissions, i.e. change in credit rating, interest rate, and supply-demand of future bonds.

For example, if a long term bonds ETF holds bonds with an average maturity of 10 years, yielding 1% (like Vanguard BND), a decrease of 1% in the yield of newly emitted bonds might immediately bump up to 10% the value of the ETF (but then expect a 0% over the following 10 years). Same is true in the other direction: if the FED decides to raise interest rate by 1%, the ETF could lose 10% in a matter of days (but then expect a growth of 2% over the next 10 years). It’s an oversimplification, I know.

Holding long term US bonds is extremely dangerous today. Unless you’re betting that the FED will lower rates in the negative territory, which is very unlikely once the crazy orange man previously in charge of the Whitehouse stopped putting pressure on them.

But RIP, you are holding long term US bonds!

I didn’t plan to hold my bonds for long. As I said many times: it wasn’t a long term strategy.

I know holding US bonds today is not a good deal, but for the reasons I’ve shown above: yield below inflation rate, leverage risk on long term bonds ETF, and currency risk. Not because of solvency risk, or hard to predict cashflow, or CAPE analogy.

FYI I’ve sold all my BND positions and moved most of my money into BSV, which at least reduces leverage risk (at the expense of yield). Meanwhile, I’ll re-deploy my money into stocks according to my strategy.

Why BSV instead of cash? Well, cash in USD yield zero. At least BSV is yielding “something”. Cash in CHF above a certain threshold is hard to hold for free. Alternative solutions I’ve explored are also not very liquid, like saving accounts with a limited withdrawal amount per month/year, and logistics problems.

Plus we know that holding huge amount of cash in your brokerage account is risky in case of broker bankruptcy.

In the end, my short term bonds are there for rebalancing purposes, and as a temporary storage of value while I converge to my long term strategy. I think it makes sense to keep the money in my brokerage account, invested in short term bonds.

Opportunity Cost

What I really liked of your email is the opportunity cost part:

Why you want to buy a security is not because its yield is fluctuating or not, but because it increases your opportunity cost.

And here maybe I envy your 10-12% opportunity cost, or… well, your belief that this active fund will keep performing 10-12% per year in the future.

My opportunity cost at the moment is very low. I’d be ok with 2% in CHF. I see an opportunity here, let’s meet halfway. I’ll give you all my money for a 7% return guaranteed in CHF. Bring some (a lot of) collaterals, and you have 1M CHF from RIP, that you can invest in your desired fund and easily arbitrage a 5% profit. I’m offering you a FI (50k per year) amount of money 😀

I’m trolling provoking, of course, but maybe I have a lot to learn from you 🙂

Thank you so much for your email, Julien!


Not much more to add to Julien’s email. I think I have a lot to learn from him, you clearly have more technical knowledge than I have. I’m only reasoning from First Principle, but maybe I miss some of the “first principles” in this field 🙂

Readers, I’d like to hear your thoughts about this conversation as well. And of course a public or private reply from Julien, if he wants to.

But I also want to move on, this blog is niching itself too much. It’s becoming mostly unreadable for newcomers, and too technical in directions that I’m not really interested in.

I plan to stick with the investment strategy I explained in Part 2, plus I plan to reduce the dopamine addiction of checking my accounts too frequently. I’ve sold all risky bonds (BND), purchased a lot of BSV in the meantime, and I have few days left to buy the first 50k of stocks.

I’ve entered some limit order on VYMI (below my sell price of early January, bad habits die hard) and on VTV… I feel the cognitive dissonance though. If only I had alternatives… I hate to live in a time where saving money is not rewarded.

That’s all for today!



  1. I think both of you are right but incomplete in you r definition of stock price:
    – you : stock price is the result of offer and demand = P
    – Julie: value of a stock is the sum of the future cash flows, adjusted for expected rate of return ie discounted cash flow = V

    Well in practice I think the best definition of stock price is:

    P = V + G where G is the level of speculative greed in the market

    This means that sometimes V goes up yet P goes down because investors greed goes elsewhere

    Similarly now P goes up thanks to quantitative easing that increase G, yet V goes down in most industries because of COVID

    Great post as always !

  2. How about you split your spreadsheets into a savings part (where you track your expenses anytime without being exposed to market fluctuations) and an investment / consolidated part where you have the overview and which you only check in predefined intervals.

    By the way, first post of a long time reader. Your analysis make you my preferred Swiss financial independence blog.

    1. Thank you aarhorn, many told me the same thing and I might actually accept the suggestion about splitting the spreadsheet – or syncing everything on it just once per month.

  3. Hey RIP, ex-Hooli colleague here. I have been reading your blog for a long time and I am in a somewhat similar situation, although a bit further down the road.

    One thought about your emotional struggle. If you allow me: This might be brutally honest, but I think there is also an opportunity in this: I think you simply don’t have enough money to retire. There is just too much money in the markets, and 1.5m isn’t what it once was. It’s just not reasonable to expect the world to sustain so much entitlement from “wealthy but not rich” individuals, pension systems, bad demographies, etc. With so much uncertainty and potential disruptions in the world it’s just not feasible to retire worry-free with 1.5m. You will be plagued by doubts and worries. I think you unconsciously know that and therefore it already stresses you.

    The opportunity: You do have enough as a really good cushion to experiment with alternative earnings. You are smart, you can write, you are good at math. I would design a few experiments around ideas where you could apply those skills for creative new ideas to make money (become a financial advisor, start a fintech, team up with others in the space, offer consulting services, help fintechs from other countries come to CH, etc.). You don’t need a big 6 figure salary, what you need is actually a decent income to cover some costs, and something that actually makes you happy because you have a mission and keep your brain busy.

    One example: I have been in close contact with finpension and they seem like a really good company. Why don’t you turn your financial hobby in an interesting job there, to combine tech and your financial perspective, while making finance in CH a better place?

    I personally would focus on these opportunities instead of ruminating about all the risks and downsides of your current situation. Given that you hopefully have many years to live it will not only make you financially a bit more secure, but also happier.

    1. Hi Raphael, thanks a lot for stopping by! Of course I remember you (and… ahem… I got the chance to take a look at your doc about splitting Pillar 2 into 2 VBAs, and will write something about it in the near future).

      This is a great comment, thank you so much for the time you invested on it. I’m sorry for late reply, but I had more than I had time to handle on my plate.

      You’re definitely right that 1.5M is not enough to retire in Switzerland. Or… are you suggesting that it won’t be enough anywhere in the civilized world? Because I have this fear that an inflation shock wave is coming, cutting a zero from everyone’s “real wealth”.

      “It’s just not reasonable to expect the world to sustain so much entitlement from “wealthy but not rich” individuals, pension systems, bad demographies, etc. With so much uncertainty and potential disruptions in the world it’s just not feasible to retire worry-free with 1.5m. You will be plagued by doubts and worries. I think you unconsciously know that and therefore it already stresses you.”

      You might have nailed it, but I see that I’m slowly being forced into participating in a game that I’ve always refused to play: the lifestyle inflation game. I understand that from your POV 1.5M is not enough, but I’ve been living on less than 1k EUR/Month for almost a decade before 2012. I felt way richer back then! I think the way to send anxieties and fears away is to play with them, and fight them with “fear setting” and “fear rehearsal” stoic exercises, via expenses reduction, via passion work, and eventually moving back to a cheaper place – not by setting another larger number to achieve and grind my way to it. I think we both agree with it 🙂

      Your suggestion to try alternative earnings is the solution I’m exploring right now.

      I didn’t think about contacting Finpension to partner with them, this is an amazing suggestion!

      Thank you so much, a lot of food for thought!

      1. Cool reply. I love your new services idea btw, this is exactly what I had in mind. And I am sure there are many more similar opportunities out there. The future is bright for smart entrepreneurs that have qualified and articulated opinions. Companies will be less and less needed (see the Substack phenomenon as well) and people are willing to pay for differentiated content and advice.

        I am very happy that you are going down that path!

        (on the 1.5m and the lifestyle inflation and cheaper countries — yes, I am generally skeptical of the sustainability of some of the entitlement systems, and CH is in that respect a more healthy country than many others. Even in IT they can find a way to torture you with new taxes and other interesting ideas. Anyways, I think you can not go wrong with exploring some entrepreneurial opportunities that you enjoy, and then best case you can sustain CH, worst case you can live like a king with an online business in IT. Basically you de-risk your future, and put your mind on value generation vs. worries).

        Final thought: I think you underestimate the case for Bitcoin dramatically (I think it’s part of the solution for you in terms of shielding you from bad systems/incentives around you), but since it’s a bit of a controversial topic I just keep it at that. And I might be totally wrong as well, time will tell.

        1. Thank you again Raphael!
          You made a very good point about “sustainability of some entitlement systems” and the risk that even “cheaper” countries could be at risk of tax torturing people who are guilty of not having squandered their already taxed past incomes.
          And of course, there seems to be no downsides in having an online business (even though I don’t hide the fact that maybe a full year far from the “business” side of things would be a dream at my current stress level).

          About Bitcoins and Crypto in general I think they’re huge Ponzi schemes, and they make no sense at all in their current form, with only Ethereum (for smart contracts), and Monero (for full privacy) having some usefulness in my opinion – not at this volatility levels though.
          I’ll probably be wrong, and cryptos will mark that point in time when I can finally call myself old, i.e. unwilling to accept the new normal by calling it a fad. time will tell 🙂

  4. On TINA, what about using structured products that have higher fees but can give you a more guaranteed performance? You can manually create one yourself.

    Example: VT is 100$. Buy VT at 100$. Sell call options at 105$ after a year, and with the money buy put options at 95$.

    The downside, of course, are the fees. Perhaps, due to the fees, the strategy doesn’t work for your range.

    1. Not only the fees, also the Greeks. You constantly lose money by the passing of time.
      Anyway, I’m exploring stock options in the near future, in the direction you suggested (as an insurance, not for leveraged gambling)

  5. ciao Giorgio, I can totally relate to your thoughts and emotions. We are having a huge (and hysterical and nonsense) upward trend in the stock market, which is totally unrelated to actual economy where people are losing jobs and shops are closing due to the global pandemic and country lockdown policies.

    The reasons why the stock market is rising nevertheless the situation are the following imho:
    – central banks (FED, ECB) printed a lot of money to keep the economy floating, but most of this money went into financial institutions. So after March 2020 we did not have a correction that was really needed at the time (and now it is even more needed..) to realign financial and actual economy status.
    – people and institutions cannot invest in safer solutions, because their returns are abysmal. On the other hand, everyone is seeing that the stock market is continuously rising, and everybody is putting their money into it. Also, with lockdown and people at home, more people are saving money and have time to look into the stock market, and start investing in there. In other words, a lot of money is continuously entering the stock market, rising prices up. And nobody is exiting this market, because where would they put their money in?
    – as you said, bearish positions are harder to maintain in such a bullish situation, because bears are throwing away good revenues by not following the bullish market and nobody knows when this will stop (what if central banks will print even more money to prevent another downward correction in 2021/2022?).

    Countries are increasing their debt to fight the pandemic negative economic impact, and central banks are printing money to buy such debt. I believe this his will inevitably lead to inflation in the next years.

    So in summary the situation is dire, and even I don’t know what to do. “Thankfully”, I have a mortgage to cover my home purchase, so for the moment I stick to lower this debt. I know you don’t like real estate investment, but imho in this situation it is something worth considering: I prefer to allocate my money into something that is real, and will retain its usefulness (and therefore value) wherever the market/inflation will bring us. Money perceived by renting the apartment will yield a constant income which will be used to cover the mortgage (if you make a mortgage with fixed interest value and inflation will occur, you will get a house much cheaper than its actual value when you finish to pay the loan). And the rent price will adjust to inflation, if it happens. Of course the risk is not perceiving any rent if the person in the house stops paying, but what investment has zero risk (in this case it would be best to buy and rent few houses to average the risk and avoid having really bad luck with the only one rent contract)?
    Also, it is best to differentiate our investments. I understand you have nothing into real estate, and in this situation if I were you I would consider to put something into this.

    Good luck in your endeavors,

    1. This is a great analysis of crazy prices, and it aligns with mine.
      Problem with RE is that it’s crazy as well. Prices skyrocketed, while our rent didn’t.

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