The Digest #155
Early Retirement, Chris Davis on Berkshire's future, Howard Marks on market cycles, Threads vs. Twitter, Costco takes the high road, James Cameron, GEICO in the 1970s
Dear Readers,
As I wrote last week, I’ve restarted The Digest and plan to publish several times per month rather than on a set weekly schedule. Like most of you, I am flooded with a daily inflow of information and it is a struggle to separate signal from noise. To put it simply, my goal is to not waste your time. I omit much more material than I include and try to avoid mainstream media articles that have probably already hit your radar.
I plan to fine tune the material and presentation over the next few issues, so please feel free to provide any feedback in the comments section.
If you find The Digest interesting, please click on the ❤️️ button and consider sharing this issue with your friends and colleagues or on social media.
Thanks for reading!
Baseline FIRE
The desire to achieve financial independence has existed for most of human history. People have always dreamt of riches that would permit a life of leisure free from the need to trade their time for money. However, until the twentieth century, most people did not expect to be able to give up employment at the age of sixty-five and live for another two decades. Today, that is the baseline expectation for almost everyone.
FIRE stands for “Financially Independent, Retire Early” and represents a twenty-first century movement that advocates gaining enough financial independence to retire far earlier than sixty-five. Proponents usually counsel living an extremely frugal life in order to amass resources that make it possible to retire at fifty or even earlier. I feel qualified to write about it since I made the decision to “retire” at the age of thirty-five.
I’ve written about personal finance for many years hoping to help people make better decisions. I believe that very early retirement is indeed possible for many people, as I wrote in Fifteen Years to Financial Independence. However, much of what is needed to successfully achieve FIRE is in the realm of psychology rather than finance. A vow of poverty is not required, but one must be willing to increase spending at a far lower pace than income in order to achieve financial independence at an early age.
As I explained in the article, holding the line on spending as income increases does two things simultaneously, both of which are critical for FIRE:
Funds are available for saving and investing. By avoiding the ratcheting lifestyle trap, more funds are available to invest over a long period of time with the goal of amassing sufficient funds to achieve financial independence.
It is easier to sustain pre-retirement lifestyle in retirement. The lower one’s spending while employed, the less one needs to accumulate in order to fund the same level of spending once retired, avoiding a decline in standard of living.
The second point is critical. Very few people are willing or able to cut expenses dramatically in retirement, and this is especially true for early retirement. In fact, the added free time could very well cause spending to increase for a younger retiree.
In Understanding Fat FIRE, Nick Maggiulli presents a roadmap for people who not only want to retire early but intend to maintain their standard of living in retirement, a concept that he refers to as “Fat Fire”. The article brings up a number of important points and presents some interesting ideas, so I recommend reading it.
I think of “Fat Fire” as “Baseline Fire” because the goal is that the retiree will not suffer any diminution of their standard of living when transitioning to retirement. In my opinion, any “FIRE” plan that calls for significant cuts in standard of living will almost certainly fail, or at least lead to dissatisfaction. Call it “Depressing FIRE”. Unless you absolutely hate your job, what would be the point of such a retirement?
In Fifteen Years to Financial Independence, what I outlined is, in fact, “Fat Fire” in the sense that the couple only pulls the trigger on retirement at the point where their portfolio can reliably fund their current standard of living. I wrote it with this mindset because it never even occurred to me to give up employment until I had the ability to sustain my (modest) standard of living based on a very conservative withdrawal rate.
As I wrote last year in The Trouble With Fire, there are many reasons to proceed with great caution when it comes to very early retirement. I expanded on this in more detail last month in Navigating Early Retirement. While I still think that Financial Independence is a goal everyone should have, I have grown skeptical that Early Retirement is a good idea for most people.
I am now much more of an advocate for “FI” than for “FIRE”.
Chris Davis on Berkshire’s Future
“I think Berkshire is worth defending. Warren has assembled a collection of long-lived assets that will produce cash flow for decades to come. If we had a Latin motto in my family, it would be the Latin for work before play. Eat your vegetables, then you get dessert. Being on the board of Berkshire is a bit like getting dessert first: the chance to be with Warren and Charlie. The vegetables will come when they aren’t there, when the job of the board will be to protect this precious culture.”
Related articles:
Berkshire Hathaway’s 2023 Proxy Statement, March 18, 2023. At the time of the proxy filing, Chris Davis owned 36 Class A shares and 2,666 Class B shares. If he still owns the same number of shares, that’s a stake worth $19.8 million.
The Case for Splitting Berkshire’s Class A Shares, November 21, 2022. I’m not arguing for a split for the typical reasons but because I think that it would help keep more A shares with full voting rights in the hands of individual shareholders.
Berkshire’s Future Depends on Voting Control, March 3, 2022. I make the case that control of Berkshire in the 2040s will depend on who owns the Class A stock.
Articles
Taking the Temperature by Howard Marks, July 11, 2023. Howard Marks reflects on his prescient market calls over the years: “I’ve written before about the time in 2017 when I was working on my book Mastering the Market Cycle and batting ideas back and forth with my son Andrew. I said, ‘You know, looking back, I think my market calls have been about right.’ His response was dead on target as usual: ‘Yeah, Dad, that’s because you did it five times in 50 years.’ It struck me like an epiphany: He was 100% correct.” (Oaktree Capital)
Review of Mastering the Market Cycle, October 13, 2018 (The Rational Walk)
Berkshire Hathaway Energy Buys of Additional Stake in Cove Point, July 10, 2023. I wrote about the initial investment way back in The Digest #29. It’s nice to see BHE have an opportunity to deploy $3.3 billion. “The transaction is valued at $3.3 billion. It will be funded with cash on hand including cash realized from the liquidation of certain investments. Upon closing, Berkshire Hathaway Energy will own a 75% limited partnership stake in Cove Point LNG, LP. A subsidiary of Brookfield Infrastructure Partners holds the remaining 25% limited partnership interest in Cove Point LNG, LP.” (BHE Press Release)
Threads and the Social/Communications Map by Ben Thompson, July 11, 2023. I’m not sure what to think about Meta’s answer to Twitter. I set up a rationalwalk Threads account, if for no reason other than to prevent an imposter from taking the handle. Ben Thompson has been following the social media field since its inception and his current take on the competitive landscape is worth your time. (Stratechery)
The Next Chipotle, The Next Berkshire… by Brooklyn Investor, July 7, 2023. Investors are always searching for the “next big thing” because the reward for being an early investor can be a grand slam home run. In contrast, investing in a larger established company can be boring. However, the fact is that Berkshire itself has outperformed many of the popular “mini-Berkshires” in recent years. (Brooklyn Investor)
Take the High Road by Sean Iddings, July 10, 2023. When health care costs at Costco came in lower than expected several years ago, management voluntarily distributed the savings to employee 401K plans, a great example of taking the high road. “The easier, more profitable, choice would have been for Costco management to tell no one and pocket the money. Jim Sinegal – Co-founder and former CEO of Costco – did the opposite. He distributed the excess to employees’ 401k based on their contribution. Sinegal said, ‘We felt that our word to our employees was much more important than the money that was involved in this. And it was significant to them relative to their life.’” (Microcap Club)
The Tightrope of Discipline by Lawrence Yeo, July 12, 2023. “Walking the tightrope of discipline is just as intricate as navigating the boundary between the present and the future. Discipline is beautiful when it allows you to make the most of a given moment, but loses its utility when you only think of who you might one day be. Discipline can be used to show up regularly for what matters, but it’s only through acceptance where you can be content with whatever the current moment has to offer.” (More to That)
Podcasts
Founders #311: James Cameron, July 11, 2023. 1 hour, 15 minutes. David Senra shares his highlights from reading The Futurist: The Life and Films of James Cameron. “Cameron's career has been built on questioning accepted wisdom and believing in the power of the individual. His outlook is that we can take fate in our own hands.” (Founders Podcast)
Value Restoration Project, July 12, 2023. 44 minutes. Jim Grant interviews Seth Klarman, CEO of the Baupost Group. Needless to say, required listening! (Grant’s)
The Financial History of GEICO with Jacob McDonough, July 8, 2023. 1 hour, 23 minutes. Geoff Gannon and Andrew Kuhn interview Jacob McDonough, the author of Capital Allocation: The Financials of a New England Textile Mill. The focus of the discussion was GEICO’s troubles during the 1970s. McDonough’s 10-K Podcast premiered with a series on GEICO annual reports. (Focused Compounding)
GEICO - 1974 Annual Report, June 2, 2023. 39 minutes. (10-K Podcast)
GEICO - 1975 Annual Report, June 5, 2023 30 minutes. (10-K Podcast)
GEICO - 1976 Annual Report, June 8, 2023 26 minutes. (10-K Podcast)
Book Review of Capital Allocation, June 27, 2020. (Rational Walk)
Training for The Centenarian Decathlon, July 10, 2023. 1 hour, 5 minutes. “Peter answers questions revolving around his concept of the centenarian decathlon. He starts by defining the ‘marginal decade’ and how that shapes his training for the events and activities that make up his personal centenarian decathlon.” (The Peter Attia Drive)
A case study on the importance of taking charge of one’s own health by Peter Attia, July 8, 2023. “John wouldn’t stand out as one who might be at high cardiovascular risk. He’s in his early forties, keeps a fairly healthy diet, and participates in triathlons. And yet, he also has a 90% blockage in his left anterior descending artery (LAD), a major coronary artery long known as the widow-maker.”
Book Review of Outlive by Peter Attia, April 6, 2023 (The Rational Walk)
A Sunday on La Grande Jatte
“In his best-known and largest painting, Georges Seurat depicted people from different social classes strolling and relaxing in a park just west of Paris on La Grande Jatte, an island in the Seine River. Although he took his subject from modern life, Seurat sought to evoke the sense of timelessness associated with ancient art, especially Egyptian and Greek sculpture. He once wrote, ‘I want to make modern people, in their essential traits, move about as they do on those friezes, and place them on canvases organized by harmonies of color.’”
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I once suffered from spending! In the late ‘70s I developed a simple way to encourage saving. When I got my first real job in ‘74 I would earn way more that I had ever earned before. I had a short buy list—a TV &c.—and gleefully assumed that I would shortly be saving gobs of money. Five years later I was shocked—I’m not sure why it took 5 years—that I hadn’t saved much: my buy list had simply gotten longer and longer.
So one evening—I was now earning twice as much in Washington—I sat down and added up all of my contractually committed expenditures—car insurance, rental expense—, and I subtracted this sum from my expected after-tax income—W2 as a proxy. I then divided this sum by 52 to produce a weekly amount. This was my weekly spendable amount. Each week I wrote this sum on a 3x5 card, and during the week I subtracted every, I mean every, expense. Within a matter of weeks I found myself aiming to see how large a residual number I could end the week with. What I soon realized is that I had found a way to grasp the opportunity cost with every decision. This procedure soon became a habit, and since it became a habit I stopped worrying about saving.
I urge those who find it difficult saving to spend some serious time to figure out how to introduce opportunity cost In a workable manner into your daily behavior. (It might not be how I did it!) Done effectively, moralizing—thou shalt, god damnit!—will be expunged from your conscious behavior and replaced by a simple question, Do I really want to give up having this money to spend tomorrow, or the day after? Or, as Mark Twain nicely put it, Why put off until tomorrow, what you can put off another day?
I hope this will help a few readers to build opportunity cost into their daily life.
Your definition of Fat FIRE is the opposite of everywhere I've seen it used.
Reference: FatFIRE Reddit group FAQ:
"FatFIRE is Financial Independence / Retire Early at an overabundant or luxurious level. Unlike FIRE (and leanFIRE in particular), FatFIRE is typically achieved through high incomes rather than minimalism or extreme frugality."
FatFIRE is not saving up enough to maintain a modest lifestyle without decreasing your standard of living. It is saving enough to maintain a life of wealth and luxury that explicitly surpasses the need for frugality.