Lazy Man and Money

Lazy Man’s Market Minute Update #1

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While every other blogger is writing year-end recaps, I’m taking a minute to do something new and different. I’m in the phase of my life where I typically make more from investing than I do from all my side and freelance gigs.

While it’s best to invest over time, there may be specific times when investing in one asset vs. another asset is better. The winning formula is to buy low and sell high.

Stock Market Outlook

Predicting the stock market accurately is impossible. However, it is possible to know when to buy/sell stocks based on when the markets are cheap or expensive. When the stock market is cheap, I buy stocks. When the stock market is expensive, I look for cheaper investments such as bonds or housing. It’s worked out well for me.

I determine if the markets are expensive or cheap by looking at the Shiller P/E. The Shiller P/E is an evaluation that I cover in more detail in the link in the previous paragraph. Since the mid-1990s, the Shiller P/E average has been around 26-28. It was a low of 15 in the crash of 2009 – a fantastic time to buy. The Shiller P/E reached a high of 44 in the dot-com boom – the best time to sell. Before the stock market’s drop this year, the metric was around the 37-38 range – a sign that it would be an excellent time to sell.

I would never sell all my stocks when the market is high. Instead, I adjust my asset allocation to be more conservative. I also focus more on “value” stocks like consumer staples that people need to buy no matter what.

Current Stock Market: Shiller P/E: 28 (Medium)

It’s a great time to stay the course. Nothing seems particularly cheap or expensive.

Housing Market Outlook

Several months ago, I detailed when to buy and sell real estate. The key is to use the NAHB/Wells Fargo Housing Market Index. It’s rated on a scale of 1 to 100. A rating of 1 means that the housing market is low, and a rating of 100 means it is high. When the HMI is low, it’s good to buy. When it is high, it’s a good time to sell.

The year started with an HMI of 83 (a strong indicator to sell).

Current Housing Market: HMI: 31 (Cheap)

This HMI number indicates it is a very good time to buy. However, keep in mind that interest rates are high. You may need to pay a lot now, and hope that you can refinance to a cheaper rate in the future. Also, real estate is particular to the property you are buying. You may be able to find a great value in an expensive market or a poor value in a cheap market.

Final Thoughts

These indicators shouldn’t be signs to make any rash financial decisions. They are important indicators for me, and I share them with the hope that they’ll be helpful to you.

The Case Against Time in Market

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There’s a very popular philosophy that “Time in Market” is one of the most critical factors in investing. Combined with a buy and hold and broad market diversification, it can take $10,000 and make it $40,000 in 12-15 years. Sorry for the long words, but broad market diversification simply means buying a mutual fund or ETF that covers many different companies around the world. One good example is Vanguard Total World Stock ETF (Ticker: VT).

“Time in Market” is important because you want to start the clock and get the investment working for you. Your money can’t grow if it’s sitting under a mattress or making 0.01% interest in a bank account.

If you were to search the internet for articles about “Time in Market,” the front page of every search engine will likely point to the benefits of being in the market as long as possible.

This is great, but since you’ve read the title, you know I’m going to blast a hole in the “Time in Market” philosophy. If you are a beginning investor, this is your cue to review the first paragraph above and continue with your day.

Have all the beginner investors gone? Good.

Here’s my personal case against “Time in Market.” In August we sold a condo. We hit the top of the market, which was perfect. That previous article also details our investment plan. The idea was to invest in real estate investment trusts (REITs) and high-dividend ETFs. It could be argued that REITs aren’t great for taxes, but my goal was to show my wife that we’re getting monthly checks. If we still had a rental property, we’d be getting checks too. The checks might be smaller from Vanguard’s brokerage account, but we don’t have to do any work for them.

I had one minor problem. I can’t remember ever moving more than $10,000 without lawyers and bank wires. I didn’t want to transfer $200,000 at once. I decided that it would be safer to do it in pieces. I started off with $5,000 and then $10,000, up to $20,000. It would take time for all the money to get in this way, but it isn’t bad. It was easy enough to move over the month.

A funny thing happened along the way. I don’t know if you’ve noticed, but the stock market has been going down. In September, the S&P 500 fell 9.3%, and the Nasdaq lost 10.5%. (So much for the sell in May, come back in September plan).

I put together a table to show the prices of the ETFs when I made my first investment in them. This is what I would have paid if I invested all at once with the theory that “Time in Market” is most important:

TickerTypeTime in MarketCurrent PriceDCA Cost BasisAt Once %DCA %
VNQReal Estate$98.73$80.17$91.10-18.8%-12.0%
VTIUS Stock$207.18$179.47$197.92-13.4%-9.3%
BNDBonds$75.95$71.33$74.55-6.1%-4.3%
HDVHigh Dividend$104.00$91.29$100.88-12.2%-9.5%
VYMHigh Dividend$106.22$94.88$104.86-10.7%-9.5%
QQQUS Stock$295.29$267.26$288.91-9.5%-7.5%
VXUSInternational$52.84$45.77$49.42-13.4%-7.4%

Ouch! As you can see, I would have bought VNQ at $98.73, which would only be $80.17 this morning. That’s a loss of almost 19%. Instead, I kept buying using Dollar Cost Averaging as it went on sale. It’s not great that it is still down 12% from what I paid for it, but I certainly saved myself 4-5% of losses.

I suppose you could say I got “lucky” because it was an unusual month. It’s not often the market drops 9% in one month. If the market went up 10% in the month, I would have been better off investing once to get those gains. I’d like to say that I had a crystal ball and knew the month would be down, but if I did, wouldn’t I have just waited until the bottom?

I don’t know when the bottom is coming, but I hope to pick up more shares along the way. I like to track how far the ETFs are from their highs. For my asset allocation, I’m paying about 26% less than when stocks were at their peak. I don’t know when they’ll get back to those highs, but when they do, I’ll be happy that I bought in at these levels.

What do you think? Is DCA the way to go, or is time in market truly the most important way to invest?

The 3 Top Chowder Rule Stocks Now

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Today’s article comes from Jonathan Weber of Sure Dividend. Sure Dividend has been a great partner with us for years. I’m just now starting to get into dividend investing and I’ll be looking to implementing a lot of their insight. I had never heard of the chowder rule before, so I suspect that many of you haven’t either.

Many investors want to invest in stocks that offer income, especially retirees and other that live off the dividends they receive. Others prefer to invest in income stocks for the ability to reinvest cash flow consistently, even during market downturns.

No matter why one invests in income stocks, one way to evaluate potential picks is the so-called “The Chowder Rule“. The framework can be summarized like this:

The Chowder Rule is a rule-based system used to identify dividend growth stocks with strong total return potential by combining dividend yield and dividend growth.

It states that stocks are attractive when they offer a good combination of dividend yield and dividend growth — it does not make sense to look at only one of these. A 5% yield with no or negative growth isn’t particularly attractive, and neither is a company that grows its dividend reliably but that offers a yield of just 0.5%. The right combination makes for an attractive dividend growth investment, however. The Chowder Number is calculated by adding the stock’s current yield and its 5-year dividend growth rate.

The three rules popularized by Chowder that can be used when the Chowder Number has been calculated look like this:

Rule 1: If a stock has a dividend yield greater than 3%, its Chowder Number must be greater than 12%.

Rule 2: If a stock has a dividend yield of less than 3%, its Chowder Number must be greater than 15%.

Rule 3: If a stock is a utility, its 5-year dividend growth rate plus its dividend yield must be greater than 8%.

Some use the 5-year trailing dividend growth rate for the calculation, but we prefer to use the (expected/forecasted) 5-year forward dividend growth rate. After all, a company that has raised the payout considerably by expanding the payout ratio without growing its earnings and cash flows will most likely not continue to grow the dividend at the same pace. We thus believe that looking at expected earnings or cash flow growth paints a more realistic picture about a company’s long-term dividend growth potential.

Using this framework, we have identified three companies that look like attractive dividend growth investments according to the Chowder Rules.

1: Baker Hughes Corporation

Baker Hughes Corporation (BKH) is an oilfield services and equipment company that also is active in some other, less important areas, such as digital solutions for monitoring the health of machinery, etc. Its main businesses are oil and gas exploration, drilling, production, and other energy-related services.

Like oil and gas companies, its business outlook depends on the macro environment. High oil and gas prices mean that energy companies are inclined to expand production, which means that companies such as Baker Hughes get more orders and contracts and have the ability to grow their revenue and profit. On the other hand, Baker Hughes’ services will be in less demand when oil and gas prices are low and energy companies are cutting their exploration budgets.

Luckily, the macro environment is very beneficial for Baker Hughes right now, as energy companies are very profitable, and since the ongoing global energy crisis means that the production of hydrocarbons needs to be expanded. That’s why the growth outlook for Baker Hughes over the coming years is excellent. We believe that the company has the ability to grow its earnings-per-share at a mid-teens rate going forward, which should allow the company to grow its dividend at a similar pace.

Since Baker Hughes is currently trading with a dividend yield of 3.1%, its Chowder Number is somewhere in the 18% range — which is pretty attractive.

2: National Storage Affiliates Trust

National Storage Affiliates Trust (NSA) is a real estate investment trust that primarily owns self-storage properties in metropolitan areas throughout the United States. With around 800 such properties, National Storage Affiliates Trust is one of the largest players in this space.

Demand for self-storage space has been growing for many years, and so far, that trend has not broken. As consumers have been expanding their purchases of all kinds of material goods for many years, it seems likely that this trend will hold, and that consumers will continue to own more and more “stuff”. This stuff needs to be stored, and that’s where NSA and its peers come in.

The real asset nature of its business model also provides solid inflation protection, as property values and rents are increasing meaningfully in a high-inflation world, while debt gets inflated away over time.

Between rent increases for existing properties and acquisitions, NSA has delivered highly compelling growth in the past, roughly doubling its funds from operations-per-share between 2017 and 2021, i.e. in just four years. We believe that growth will slow down somewhat, but FFO-per-share growth should remain north of 10%, we assume. When that is combined with a dividend yield of 5.0%, the Chowder Number is in the 15 range, making for an attractive dividend growth pick.

3: ASML Holding NV

ASML Holding NV (ASML) is an industrial company that manufactures so-called lithography machines that are used to produce chips. It is the absolute market leader in this space, both from a market share perspective as well as when it comes to technological leadership. The Dutch company just has no competitor that is able to produce lithography machines that are as advanced as those from ASML.

The semiconductor industry has experienced rapid growth over the last decade, and growth should also be attractive going forward. Although there will be some ups and downs in the short run, megatrends such as digitalization, autonomous driving, virtual and augmented reality, and many more will lead to increases in both the number and the power of chips going forward. The industry should thus continue to expand, and chip manufacturers will continue to buy the lithography machines they need from ASML.

ASML thus has a compelling long-term growth outlook when it comes to revenues and profits. Its yield isn’t overly high today, at 1.7% (based on the payout over the last twelve months), but that’s at least slightly north of the broad market’s dividend yield. The dividend has grown at a rate of 32% over the last five years.

We believe that dividend growth will slow down going forward, but a mid-to-high-teens dividend growth rate seems very achievable based on the lowish dividend payout ratio of around 30% and when we consider the strong earnings growth outlook. We thus estimate ASML’s Chowder Number at around 18, making it a compelling dividend growth pick.

Stocks vs. Real Estate

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Back in 2007, I covered an article in Money Magazine that was interesting to me – Stocks vs. Real Estate. It’s fifteen years later now, and I thought it was worth revisiting now that we sold an investment property. Now it’s time to invest that money in the stock market.

Before I get to that new stuff, let’s review what Money Magazine and 2007 Lazy Man thoughts were:

May’s Money Magazine tries to answer the Stocks vs. Real Estate question. I had thought that real estate would come out as the big winner. I know that real estate has been trendy of late, but I had it as the favorite due to the value of leverage.

Money Magazine declared stocks the winner, but I think they glossed over the leverage factor. For one, they took a two-year timeline for the real estate and deducted many one-time costs. That didn’t seem fair to me. So to the right, you’ll see my attempt at running the numbers in my spreadsheet.

For this example, I assume the investor has $40K to put to work. I assume a 10% (for better or worse) gain for stock picks. I also took a cue from my early physics classes and ignored friction – in this case; it’s the cost of buying stocks. The “Real Estate” column assumes the investor puts 20% down, allowing them to buy a $200K home and pays 10K in closing costs (closing costs from the article). The “Real Estate AC (after costs)” factors in a 6% sales commission (though I believe this can be less), paying off the mortgage, $3,600 in preparing the house for the sale (sourced from Money Magazine), plus the original 40K investment.

I’m not sure that my chart is accurate. I’ve edited it several times, realizing a couple of errors. However, each of the charts showed the same trend. Real estate seems to outperform in the short term, but at some point in the 25-30 year mark, the 10% return of stocks takes over the leverage of real estate. However, if one were to lock in real estate gains at year 8 (around $125K), the person could use the profits to buy three more $200K homes, getting more and more leverage. Leverage can be dangerous as a loss can spiral just as much in the negative direction. Nonetheless, it still makes me think that there are a lot of general gains in real estate.

If you plan to go this route, remember that it’s not a get-rich-quick scheme. In today’s real estate market, I believe you should be prepared to hold onto a home for a minimum of 6 years (while being prepared to hold for ten years). Trying to fix up and flip a home within a year opens you up to short-term price pressures and fixed costs. You should also be aware of other factors mentioned in the Money Magazine article apply. One important thing to remember is that a home is not a very diverse investment. Another is that real estate investing takes a lot of work while investing in stocks is relatively quick and easy.

That was the whole article. I miss the pithy 2007 style of blogging. For the most part, it seems to stand-up well today. Of course, it might be more challenging to buy a $200,000 home than it was back then.

With fifteen years of wisdom, I’d say I should have put more attention into the last few lines of that article.

  1. Investment property is NOT a diverse investment
    There are ways to make investing in real estate more diversified. You can buy a REIT, which trades like a stock. Or you can do crowdfunded real estate like Crowdstreet and Fundrise. Those weren’t around in 2007.

    We all know what happened in the next 12-24 after I wrote that in 2007. The market crashed, and the property I bought for around $275,000 suddenly became worth $175,000. It took years for it to recover. In 2012, we purchased another property for $95,000 and sold it for $200,000. We used that money and did a 1031 exchange into another property now worth $300,000.

    One condo lost nearly a hundred thousand in a few years. Another gained a couple hundred thousand in a decade. Those are extreme examples, but they are two of the properties we owned.

  2. Owning stocks is a LOT easier than managing a rental property
    About 97% of the time, managing a rental property is easy. It’s the other 3% that’s tough.

    The real estate approach is more difficult, but I feel that you have more control over the results. I’d like my kids to have the life skills to be able to fix up an old dump and flip it for profit. I never learned those skills, making being a landlord more difficult. My friend, Carl at 1500days.com has executed some excellent live-in home flipping profits. It’s amazing to take one of your biggest expenses (your home) and turn it into a profit.

Let’s take the case of the property we just sold. We sold the property for $385,000 – close to the Zillow Zestimate. The Zillow Zestimate said that we should be able to get $2375/mo. in rent. We would need to do some updates, but that’s a reasonable number. That’s an annual income number of $28,500. Let’s assume that there was no mortgage on the property. All we have for expenses are property tax, insurance, condo fee, and maintenance. If it wasn’t a condo the condo fee and maintenance would be combined. All those numbers add up very close to $1,000 – so we’ll keep things simple and say that expenses are $12,000 a year.

The profit on a $385,000 investment is $16,500 or about 4.2%. That’s not a great return. It’s better than I can get with most dividend stocks, but the stock market usually grows more than 4.2%, and I don’t need to be a landlord. While I never ran these numbers specifically when I sold, I knew I wasn’t getting great value. Our situation was a little more complicated because we still had a mortgage, so our monthly gain was building the equity towards owning 100% of that $385,000 property.

There are likely better properties out there that would return more. Perhaps there’s a property that’s $250,000 and rents for $2,000, making the numbers more favorable for investors.

I think it’s hard (maybe impossible) to answer the stocks vs. real estate question because the specific details matter. If you do real estate poorly (pay too much, can’t maintain the property, pick lousy tenants, etc.), you would be better off with some index funds. If you can do real estate right (live-in flip, buy at a low market, have a tremendous price-to-rent ratio, etc.), it will probably beat the stock market. And it should, especially if you are putting in the extra work.

I’m left with the same conclusion that I had before. It seems that real estate is great if you are young and can put in the work. As you get older, maybe it’s best to cash out the equity and let the passive income from the stock market work its magic.

(Original version of this article published on: Apr 19, 2007 at 05:55)

We Sold a Condo. Here’s the Investment Plan.

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Sometimes I think this blog is too often a reflection of my money journey. I should focus on things that other people can relate to more. However, that will have to wait for another day. Remember a couple of months ago when I wrote We’re Selling a Condo!

Well…

WE SOLD A CONDO

Ever had a day where there are a couple hundred thousand dollars changed hands? That’s what we had last week. I have to write about a big financial move like that, right?

We had sold a condo a couple of years ago, but we did a 1031 exchange and bought a new investment property. A 1031 exchange is a tax code sale where we avoid paying taxes because the money is going to a new property. We had decided to get out of landlording in Massachusetts – it’s easier to be a landlord in Rhode Island.

I initially thought of doing a 1031 exchange again, but my wife changed my mind. She usually doesn’t weigh in on the financial decisions, but I’m so happy she did. We had an opportunity to sell at the market highs. It was rare timing that the tenant’s lease had ended in the window where prices were high, and everyone was trying to buy because they wanted to lock in a low mortgage.

If we wanted to do a 1031 exchange, it meant buying at market highs. That’s not something that makes me comfortable. Why not cash out, pay the taxes, and see where life takes us for a bit? Perhaps there will be a crash like in 2010, and we’ll buy in low. If not, that’s okay too.

For years we’ve lived almost paycheck-to-paycheck. We were saving money but in retirement accounts. A small part of our income went into the investment properties because they had 15-year mortgages, and the rents weren’t covering expenses. All of this was great for our net worth, but at the end of the month, I’d look and see that we had 90% of our money in retirement and real estate accounts – not very liquid. In fact, among other investments, only about 3% of our money was liquid. It can be dangerous not to have enough liquid cash, but my wife’s government job is relatively secure, and all my income streams are diverse enough to withstand a lot.

Suddenly we have a couple of years of expenses in cash. Finally, we have a true emergency fund.

Where Do We Go From Here?

Having that cash is great, but my wife and I are afraid of spending it. After we pay off the taxes, we’ll invest the money. I hope that the investments throw off enough cash to supplement what we make from our jobs. Perhaps we reinvest that money. Perhaps we use it for fun. Perhaps it goes into home improvements or something like that.

I wasn’t sure how to invest this, so I went back through my archives and found my income investing article. There are some good ideas in that article, but this is how I am planning to invest the money:

Income$250,000
InvestmentPercentageYieldTotal
VYM (High Dividend)25%3.04%$1,900.00
VNQ (REIT)25%3.00%$1,875.00
BND (Bonds)25%3.32%$2,075.00
VTI (Total Market Index)25%1.56%$975.00
Annual100%2.73%$6,825.00
Monthly$568.75

These are all Vanguard ETFs. We have enough money to get Admiral shares of the mutual funds, but I’m more comfortable with the ETFs. From what I read, it doesn’t seem like it would make a big difference. If you think otherwise, please let me know in the comments.

The dollar amounts are a reasonable sample. I’m not sure if we’ll have $250,000 exactly, but I found it helpful to put in an estimate. We have to pay some taxes, but we also have some existing money to contribute to this.

We’ve got two goals that we’re working on:

  1. Preserve the Money

    The hope is that these asset classes are diverse enough to do well in a recession. Here’s how they did in the 2009 crash:
    VYM dropped about 50%
    VNQ dropped about 66%
    BND dropped about 10%
    VTI dropped about 40%

    In total, they combined to drop 40%. That’s… not great. That recession hit real estate and banks hard. Banks usually pay good dividends, so it’s understandable why VYM was hurt badly. In some down markets, like the 20% drop in the broad indexes this year, VYM has done well. Bonds haven’t done well in this environment, but they are only down about 12% compared to those broad markets.

    Since the markets are already down, hopefully, we won’t see anything like 2009. If we do, we’ll try not to sell anything until it recovers. We’ll also try to reinvest at those lower prices.

  2. Getting a Check
    Most of these pay dividends every three months, so the “monthly” number in the chart above isn’t accurate. However, it’s an average. We’ll get more money in some months and less money in others. After the first few months, we’ll have cash in there that we can start to use.

    It’s disappointing that we wouldn’t even get $7,000 in cash. However, the ETFs prices have also gone up over time. There’s a lot more value than just the dividends.

I was curious to see how this portfolio of investments would perform over an extended period. However, I didn’t know of a good tool to help me model and backtest it. Fortunately, the awesome Mike Piper had an answer – the just-as-awesome PortfolioVisualizer.com.

Here’s what it looks like:

(Click for larger version in a new tab.)

I could only model this portfolio back to 2008, as not all these ETFs were around before that. Looking at the bottom of the image, it seems this portfolio has returned 7.60% since the start of 2008. So with a $250,000 portfolio, I could expect average returns of $19,000 per year. I’d have to sell a few shares, but that’s the kind of return that I’m happy with, especially while I try to reduce risk.

I’m still exploring this Portfolio Performance tool and coming across some great information. For example, they publish the maximum negative periods so that you can get an idea of the worst-case scenario (historically):

As you can see, the worst it did was that 40% I estimated above. After that, there was a brief period when COVID first started spreading, and there are the last six months where inflation has been high. That’s not too many downturns of 10%, and that’s still very safe. To put it another way, if it had an average year of making 7.6%, we would be in the positive almost always after that first year.