Back to Basics

Jeff’s Random Words

In this week’s episode, Jason and I discussed when it might be appropriate to stop investing and instead use that money for another purpose. While the bulk of the conversation was us kicking around various scenarios of when a pause on investing might make sense, I want to come back to a point we made at the beginning about setting up a strong foundation as a way of (hopefully) avoiding ever needing to be in the position to decide to stop investing.

I was speaking with a younger colleague of mine this week. Someone in her early 20s. She had some questions about very basic financial concepts like her pension, retirement accounts, and a Roth IRA she had opened recently. With several pauses to reiterate that I am not a financial advisor, I helped answer her questions with facts about what these different accounts are and how they work.

It reminded me of how little I understood when I was that age. I set up my 403(b), which is the educator version of the 401(k),  during my second year of teaching. I had no idea what I was doing. The advisor I met with asked me about my risk tolerance and I must have said I was risk averse because he set me up in a very conservative account. I also made the mistake of allocating a dollar amount and not a percentage of my salary. 

I remember this clearly. My salary that year was somewhere around $38,000 (yay teacher pay!) and I decided I could spare $100 a paycheck for my 403(b). Now remember that this is a tax-deferred contribution so it was really like $75 less take-home pay. So right off the bat, I was undercontributing. But then I didn’t change the allocations for many years. Even though my salary increased, my contribution remained the same.

Luckily, a move into administration and some learning later on helped me catch up, and while I am fine now I do wonder where I would be had I been even slightly more knowledgeable when I was 23 years old.

Anyway, back to this week’s podcast. I spent an uncomfortably long part of my adult life without an emergency fund while contributing an embarrassingly small amount to my future. Only by good fortune did I make it through without a catastrophic financial emergency. Had I faced one, I certainly would have been in the position of stopping my retirement contributions just to make ends meet. And what’s frustrating is that it didn’t need to be that way. But starting late makes it harder to catch up.

As I was wrapping up my conversation with my colleague this week, I encouraged her to spend the money on a fee-only financial advisor. The Garrett Planning Network and The National Association of Personal Financial Advisors (NAPFA) are two great resources for finding fee-only advisors. Both of these recommendations come from recent podcast guest Robert Brokamp (check out our two-part series on investing and kids, episodes 77 and 78). 

For anyone who listened this week or is reading this and feels like they might be in a position to have to stop investing to handle a financial emergency, I encourage you to get the opinion of a professional and work to ensure you have a strong financial foundation.

Jeff

Jason’s Random Words

We recently interviewed Andrew Sather and Dave Ahern, the co-hosts of the Investing For Beginners podcast, coming out this Wednesday. We hope you enjoy it, and check out their podcast if you haven't already. 

In talking with them, there was one thing that really stuck with me: How important it is to focus on the basics as an investor. Few things destroy more capital than a great story. For every Tesla (TSLA) that became wildly successful and created enormous wealth for a lot of people, there is a litany of failures, bad investments, and outright frauds that never deliver for anyone except for the people selling said story. 

And let me tell you, I know better than most. I love a good story. A few examples that had very compelling ideas, but that have been horrible investments:

• Clean Energy Fuels (CLNE)

• Plug Power (PLUG) (Most hydrogen companies)

• Most EV companies not named Tesla

• Most 3D printing companies

There are quite a few more recent examples that are still playing out that I could also add to the list (cough, AI, cough) but it's too soon. Quite very possibly the stock heavily discussed by yours truly and some idiot named Jeff in a recent Random Words will prove a great story/bad investment. It's certainly done thusly since IPO so far…

The point? This is where drawing the line between being a fan of an idea/company and being an investor in an idea/company is really important. The proliferation of hydrogen, produced from zero-carbon-emissions energy like wind and solar would absolutely make the world better. Safer. Cleaner. Healthier. I'm pulling for the industry to actually grow up and make something that works and doesn't require them to spend $1 to make something they sell for $0.75. 

A world filled with electric cars would also be a better place. As an asthmatic, heavily affected by air quality, I can relate to every urban kid who struggles to breathe.  But we also have companies like Canoo (GOEV), which recently issued a press release bragging about buying used manufacturing equipment. I'm not kidding. They also (maybe on the same day) filed their proxy statement, with the new executive compensation set to award the CEO with a double-digit portion of the company's stock if they hit all the goals. 

One of the best ways to avoid the grift, and allocate your capital to ideas that actually deliver, versus great storytellers who are mostly lining their own pockets, is to listen to Maya Angelou: “When people show you who they are, believe them the first time." Companies show us who they are with how they spend the money we give them, who they reward, and how much cash they generate from the cash they employ in their operations and making their widgets. 

Does that mean not to take speculative bets? That's a question you have to answer for yourself. For me, it's no. As I wrote last week, I have a speculative bucket in my portfolio; it's really more of a thimble. But that's the point: It's small. So I can't fit all the grifters into it, and if they are indeed grifters, they won't get much out of it. 

And if they're not grifters, and indeed are building a wonderful business, They'll show me. And if I'm really paying attention, I'll see the first time, either way and then act accordingly with my limited capital going forward.

Jason