FIRE and Time Billionaries

Last week I came across a concept called time billionaire. In the context of FIRE, this has stuck in my mind. I have been a FIRE enthusiast over the last 5 years and this idea helped me put things into perspective. The goal of this article is to show you the tradeoff between time and money. 

The life expectancy of a normal healthy adult is around 80 years.

A billion seconds almost equals to 31 years. So on average every 20 year old has 2 billion seconds of time left. We work hard, spend our time to earn money, save our money to buy capital. The capital appreciates over time and gives us money. That is how we convert our time into money. 

Taking the returns of the US stock market over the last 100 years and assuming it doubles every 10 years, earning the capital early in life pays dividends in terms of that capital will give more money and time back to the owner to enjoy. 

Hence, 1 million USD earned at 30, will be 8 million by 60, if the owner doesn't need to depend on that capital for day to day expenses. As this post calls out, there are different brackets of numbers and where each individual lies in the bracket is a deeply personal question and the answer will vary based on lifestyle and choices. But the point is the faster you get there, the more you time you have from life. 

This point can be really driven home by this following question : 
If you got a chance to exchange your position with Warren Buffet today, would you do it ? You would be both the richest person on earth and also be 90+ and wont have long enough to live from hereon. 

For folks, for whom the answer is No, you already have the most valuable resource on earth which is time. Use it wisely and you can generate both time and money. 

Types of FIRE - Financial Independence and Retire Early

 Types of FIRE

1. Lean FIRE - 1-1.25 million USD
• At 4% withdrawal rate, this leads to 40k to 50k annual income
• At 3% withdrawal rate, this leads to 30k to 37.5k annual income
• At 2% withdrawal rate, this leads to 20k to 25k annual income
2. India FIRE - 1.5 million - 10 crores INR
3. FIRE - 2.5-3 million USD
• At 4% withdrawal rate, this leads to 100k to 120k annual income
• At 3% withdrawal rate, this leads to 75k to 90k annual income
• At 2% withdrawal rate, this leads to 50k to 60k annual income
4. FAT FIRE - 4-5 million USD
• At 4% withdrawal rate, this leads to 160k to 200k annual income
• At 3% withdrawal rate, this leads to 120k to 150k annual income
• At 2% withdrawal rate, this leads to 80k to 100k annual income
5. Silicon Valley FIRE - 8-10 million USD
• 3 million+ is tied up in the primary home
• Rest is same as FAT FIRE

Investing essays during crisis

Musings of an investor during a crisis

Insurance

1. Insurance is cheap before the crisis (Gold prices)
2. Once the crisis is clear, insurance becomes expensive (gold prices shot up)
3. Insurance is not free. Insurance can be a drag on portfolio performance during good times. Hence asset allocation and rebalancing is important.

Range of outcomes

During this covid crisis, the absolute range of outcomes still says vast

Negative outcome

1. The reopening of the economy can cause a huge second wave, leading us to close back again. That could be devastating for the economy. The Fed may have prevented a short term collapse, but the medium term uncertainty remains. Also that could lead to much more long lasting permanent damage in the economy. At this point, markets are probably pricing in a lost quarter. The crisis started in America in March when cities started to shut down. Hence, Q1 results were not really hampered. But the lockdown effect will be visible in Q2. Market is hoping that the economy opens up and by Q3, results start trending back to normal and we have a great Q4 like last year. I think that is what is baked into the prices and we have already seen a swift recovery from 35% lows. 
2. However, if the reopening is hampered by a huge second wave of the virus, the market would start pricing in more than a quarter and up to a year of lost revenue. Things would be interesting when the market starts to price between outcomes like
1. A quarter of lost revenue
2. Multiple quarters of lost revenue
3. Multiple years of continued revenue compression due to more permanent damage caused by a second wave 

Positive outcome

1. There is a possibility of a vaccine by the end of the year and several companies are already pre-scaling production in anticipating. This would definitely be the fastest vaccine ever
2. However, if it were to happen, it would be easy to say "long human ingenuity" or this is what you expect to happen if the whole world gets behind one common goal
3. Don't fight the FED. The Fed has done all that is their in its power to remove tail risks
4. American capitalism may have changed forever. With the Fed buying high yield bonds, we may be entering an era of Government Sponsored Enterprises. 

Both the positive and the negative outcomes are equally likely. At this point, it remains hard to say which one is more likely vs the other and in what timeline. The FED continues to mitigate tail risks in the short term. 

Sectors impacted 

1. Travel
2. Hospitality
3. Airlines
4. Cruises
5. Retail stores
6. Malls real estates
7. Oil

Sectors at the risk of contagion

1. Commercial real estates
2. Hospital industry
3. Mortgage banks
4. Junk Bonds

Commentary on Big Tech

1. The economy continues to migrate from atoms to bits
2. Big Tech stock prices indicate that
3. Silicon valley housing prices still correlated with big basket of tech stocks
4. User behaviors that would pan out in the next 5 years have been expedited within a span on 2 months
5. However, more short term revenue may be hit if the more companies get hit (ads could be more vulnerable than cloud revenue followed by retail)

Coronavirus - The Black Swan of 2020

What is a black swan ?

Here is the investopedia definition : A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the practice of explaining widespread failure to predict them as simple folly in hindsight.

The concept was highly popularized by Nassim Taleb's book. 

On March 1st, I published a blog post predicting the massive outbreak in california and particularly the west coast. Washington has evolved as the epicenter of USA. That article looks very prescient now.

I stated in the article

The disease has a R0 of ~2.5, that means that 10 affected people will spread it to 25 people. R0 is a measure of how infectious a disease is and is heavily used for planning strategies to mitigate the spread(R0 calculation is an ongoing task here and it lies between 2 and 3.5). This is what makes it an exponential rate of increase

Paul Graham, VC investor and the co-founder of startup accelerator firm Y-combinator also tweeted yesterday

This is similar to catch a lightening in a bottle and indeed very hard to explain outside the startup world. Very few people understand the power of compounding.

This is what also explains why the government response has been bungled, our testing kits have lacked in numbers. In-spite of a headstart from china and other countries, our preparation and response has been tepid. This is what makes it a black swan.

Black swan events are characterized by their extreme rarity, their severe impact, and the practice of explaining widespread failure to predict them as simple folly in hindsight.

Before talking further, customary disclaimer and warning. I want to emphasize I dont know how good/bad it will get from here and how sharp/shallow the coming downturn will look like. This is not investment advice. Use your own judgement. The world is uncertain and I am just talking about some possibilities. I might be wrong.

Now that we have a blackswan event, how is the investment community(Venture Capital and Hedge Funds) reacting

Venture Capital

1. Sequoia capital, the legendary silicon valley VC firm published the blog post - coronavirus the black swan of 2020. This is eerily reminiscent of 2008 presentation that sequoia capital did before the depths of the housing and financial crisis, RIP Good times. Does that ring a bell ? Yes, this time it is different. 
2. Some of the key points from Sequoia's black swan presentation
• It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing. Some of you may experience softening demand; some of you may face supply challenges.

• Monetary policy will prove a blunt tool in front of a healthcare crisis
• Squeeze coming in capital spending, marketing, sales, headcount as we are already seeing in some industries like travel


• A distinctive feature of enduring companies is the way their leaders react to moments like these. Your employees are all aware of COVID-19 and are wondering how you will react and what it means for them. False optimism can easily lead you astray and prevent you from making contingency plans or taking bold action.
• Already, there is a thread on the private social network blind titled  - Anybody think differently about their employer after seeing the response to COVID-19

• It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing. Some of you may experience softening demand; some of you may face supply challenges.

• Monetary policy will prove a blunt tool in front of a healthcare crisis
• Squeeze coming in capital spending, marketing, sales, headcount as we are already seeing in some industries like travel


• A distinctive feature of enduring companies is the way their leaders react to moments like these. Your employees are all aware of COVID-19 and are wondering how you will react and what it means for them. False optimism can easily lead you astray and prevent you from making contingency plans or taking bold action.
• Already, there is a thread on the private social network blind titled  - Anybody think differently about their employer after seeing the response to COVID-19

Hedge Funds

Like with any downturn, some firms will be more impacted than others. The legendary hedge fund investor, Ray Dalio published the blog post : My thoughts on coronavirus. Ray Dalio has a net worth of ~$18.7 billion and is the founder and chairman of Bridgewater Associates with approximately $160 billion AUM. Here are his thoughts on the market impact section - 

The world is now leveraged long with a lot of cash still on the sidelines—i.e., most investors are long equities and other risky assets and the amount of leveraging that has taken place to support these positions has been large because low interest rates relative to expected returns on equities and the need to leverage up low returns to make them larger have led to this. The actions taken to curtail business activities will certainly cut revenues until the virus and business activity reverse which will lead to a rebound in revenue. That should (but won’t certainly) lead to V- or U-shaped financials for most companies.  However, during the drop, the market impact on leveraged companies in the most severely affected economies will probably be significant. We will show you what that looks like shortly. My guess is that the markets will probably not distinguish well between those which can and cannot withstand well the temporary shock and will focus more on their temporary hit to revenues than they should and underweight the credit impact—e.g., a company with plenty of cash and a big temporary economic hit will probably be exaggeratedly hit relative to one that is less economically hit but has a lot of short-term debt. 

Additionally, it seems to me that this is one of those once in 100 years catastrophic events that annihilates those who provide insurance against it and those who don’t take insurance to protect themselves against it because they treat it as the exposed bet that they can take because it virtually never happens.  These folks come in all sorts of forms, such as insurance companies who insured against the consequences that we are about to experience, those who sold deep-out-of-the-money options planning to earn the premiums and cover their exposures through dynamic hedging if and when the prices get near in the money, etc. The markets are being, and will continue to be, affected by these sorts of market players getting squeezed and forced to make market moves because of cash-flow issues rather than because of thoughtful fundamental analysis.  We are seeing this in very unusual and fundamentally unwarranted market action. Also, what’s interesting is how attractive some companies with good cash yields have become, especially as many market players have been shaken out. 

Ray Dalio doesnt say that this is a black swan but uses the words

it seems to me that this is one of those once in 100 years catastrophic events

Bill Gates 

Bill Gates is the founder of Microsoft and the second richest person in the world at the time of this writing. Rather than debate whether to allow WFH policies or not, he is spending his time helping the world become a better place. I highly recommend watching his TED talk from 4 years back where he states how the world is ill-prepared to fight the next outbreak.


If it is not clear why all the above is a problem, it is going to create huge pressure on the healthcare system, the health of the population, lost productivity, supply side pressure due to factory shutdowns, lost demand because of cancelled travel, vacations, business trips etc.

Conclusion

The goal of this blog is not to give investment/life advice, but to educate the community in terms of what is going on. Hope you are able to learn from some of the stalwarts of the VC and hedge fund industry and take the best of decisions in terms of health and investments for yourself and your family. 

References

1. Bill Gates ted talk : the next outbreak? We are not ready. shared 4 years ago.
2. Ray Dalio's thoughts on coronavirus shared on March 3
3. Sequoia capitals memo : coronavirus - the black swan of 2020
4. The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: "On Robustness and Fragility" (Incerto)
5. Healthcare crisis : recession 2020

Best books for Investing and Financial Independence - FIRE

The FIRE(Financial Independence and Retire Early) movement has really picked up in the last decade.

Here are the best books to prepare for FIRE

1. The richest man in Babylon
2. The simple path to wealth
3. The Intelligent Investor
4. The Little Book on Common Sense Investing
5. Rich Dad Poor Dad
6. A random walk down wall street
7. One up on wall street
8. Devil take the hindmost - a history of financial speculation