Review: 2017

Year ends are always a good moment to take a minute and look back how the past year has been. Not only on a financial basis, but on a happiness level as well. Last year has been characterized by lots of travelling, having some academic headwinds but overcoming them, buying a first apartment and enjoying life in general. I can conclude that despite some difficulties, I have been happy in 2017.

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But now, how have the financial markets behaved towards me and was I able to meet my goals?

1. Invest €26,000 in the stock market. 

–> I’ve been able to pour €31,100 into the stock market. This is higher than foreseen and due to lower expenses.

2. At least €6,000 in an index tracker (i.e. S&P500 or All-World).

–> Not completed. However I would like to own more trackers, I do not feel comfortable paying the expensive valuations for the majority of stocks. I can’t really call this a failure because everything is circumstantial in investing.

3. Receive €2,250 in dividends.

–> I’ve received around €3,150 in dividends. This is a rather big difference due to exceptional capital distributions of Resilux and Symphony International. Adjusted dividends would have been €2,500 so still beating the estimation.

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4. Reach a net worth of €125,000.

–> Crushed this goal. Mainly because of major subsidies and a parental gift. Leaving out the parental gift and checking the amount that I worked for (or found a way), the net worth would come in at €239,000. Excluding everything except money from my job, my net worth would come in at €129,000.

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5. Read at least 5 books about management, economy, finances, stock market…

–> Got stuck at 3. I’ve enjoyed ‘Rich Dad Poor Dad’ most. Currently I’m still reading 2 other books but it’s taking ages. After studying and reading research papers a lot, I just don’t feel the need to read another hundred pages. I’m already glad that I’m giving reading a shot, knowing that it is not one of my favorite hobbies.

In hindsight, I have enjoyed a pretty good 2017 on both a financial and ‘living’ level.

How did your 2017 develop?

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Options: a Gift from God

From an investor’s point of view, there are a couple of things to avoid. 1) taxes and 2) broker costs. This is where options come into play very handy. If you live in Belgium, you’re probably walking like the Hunchback of Notre-Dame due to all the heavy taxes onto our shoulders. Enter: options.

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A normal transaction (<€2500) of stocks (turbo’s as well) would cost me €7,25 broker fees for the Brussels Stock Exchange and slightly more for other exchanges (€10-something) + government tax of 0,27% of the invested amount. So let’s assume we buy 100 stocks at €20 each, this results in €2000 accompanied by €12,65 in costs. Now the price goes up to €25 and we decide to sell our position. This means we have to pay €14 (higher taxes). Eventually we paid €26,65 in broker fees and government taxes, reducing our total profit by more than 5% of the total amount!

Now, if we would have done the same by putting up an option construction, this would cost €2,45/contract. Let’s assume a buy and close so €4,90 in total. This makes a difference of €21,75 or almost a fivefold! Options are free of taxes. And now we are only calculating with relatively small amounts of €2,000 so imagine what €50,000 would be. I’ll skip the calculations, but a difference of around €300! These €300 can get you back and forth to Miami, just to give an idea.

Check the picture below to see how options work:

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This is how it works in a nutshell. Now there are a lot of different option strategies of which quite a few are explained in this link: Investopedia Option Guide

It’d be double work to type this all over again. I will just review the option strategies that I prefer using. Note that an option implies 100 stocks!

  • Covered Call: Are you thinking about selling an expensive stock when it hits a particular price? Sell a covered call option. Let’s say you would want to sell Wal-Mart at $100 with deadline in June. This will give you an extra $4,50 a share so $450 in total. What’s your risk? If Wal-Mart goes higher than $104,5 then you would have less profits, however this is not true because you would already have sold them at $100. So in my opinion you’re only fucked when the price dips under $95,5 but then you can repeat the construction and still collect dividends in the meantime.
  • Naked puts: Here is the advantage that you can work on margin, you don’t actually need the cash. But beware!!! Know what you are doing, things can get bloody working on margin if it goes the bad way. Of course you don’t have to work on margin, but it can boost your results significantly. I do it, but not excessively. Let’s say you want to buy AB Inbev at price €95 but you don’t have the cash to buy 100 stocks. Sept18 puts @ €95 give an option premium of €8 so basically you would buy them at €87 if exercised. This gives some downside protection and you can profit from the movement of a 100 stocks. So as long as the stocks trades above €87, you’re making money. If the stock would dip below that point, you can roll the option (buy it back and sell it again at a lower strike).
  • Sell both a call and put: There’s probably a name for this construction, but I can’t find it. Let’s say you have your eyes on a stock that’s not particularly expensive nor cheap. In my opinion, Walt Disney is a good example. Trading today at around $110, I’ll use this price. Use different strikes, but same deadline. What I would do in these circumstances: sell 1 call @ strike 125, deadline sept18 for $2,70 and sell 1 put @ strike $97,5 deadline sept18 for $2,90. This results in a $560 premium. You make a profit if at deadline the stock is moving in between the $91,9 – $130,6 range. Note that this is quite a good spread for the range. The risk for this construction is that the stock suddenly makes a huge move. Think mergers, very bad results, fraud… So choose wisely about which stock you pick as underlying asset. In normal conditions, the stock price won’t go up or down that fast so the time factor in option price will decrease which means profit even if the stock price stays the same!

These are my most preferred tactics.

Options can be very profitable and have certain cost advantages but beware when working on margin and always know what you are doing.

Do you have certain profitable option strategies?

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Obsessed

I’d like to start this post with a quote from Conor McGregor fitting right in:

conor

I’ll add a quote from Felix Dennis:

Most people don’t want to be rich.”

At first, I didn’t fully grasp the meaning of the phrase. But, after some thinking, it actually is very true. Very few people have the dedication and persuasion to chase what they want. I see it every day in daily life. Things are too hard, people are tired, want to have fun or don’t want to put in the effort. No one will throw everything into your lap. Nothing worth having comes without effort. Sacrifices are unavoidable. Did you ever reach something awesome without hard work?

Research showed that 74% of the 18-34 year olds in Belgium does not invest. This is in my opinion the most interesting target group, as this lays the foundation for wealth and a maximum compounding effect. Of the remaining quarter that does ‘invest’, only 18% decided to go with stocks. The rest does put some money in mutual funds, bonds or low yielding tak 21-23 products. I was astonished by this numbers. This means only 4,68% does invest in money making assets with potential. Taking the whole Belgian population into account, this amounts to 9% which is still really low.

During my study time, there were a lot of people with higher grades than me. Not only because of luck, but mostly because they had a better understanding of the matter. So I would expect them to be good on the stock market as well, or at least have an understanding of it. Truth is: they don’t and it’s a missed opportunity. How is it possible that smart people don’t figure it out for themselves? Lack of interest, knowledge, scared?

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But the actual point of this post is about finding a balance between investing and living your life. The thing is, I love the game of investing. However I do not think one should love investing to actually invest. Going with an all-world or s&p500 ETF might provide very decent returns as well with few to zero activity needed. Sometimes I’m having trouble between deciding to live in the now vs investing. I try to allocate as much cash flow as possible towards my stock portfolio and thus we meet the opportunity cost. I’m not a man who needs lots of stuff to feel good, but I do appreciate quality and soundness in products. When I’m considering to buy something I often compare the price to a stock. Last week I was looking at new shoes and the price was approximately the same as 1 AB InBev share. I preferred the 1 share above a new pair of shoes.

AB-InBev-topmerken (1)
Does this make me an alcoholic?

Normally I don’t have problems to restrain myself from buying items. What does make it a problem for me is if it could have an impact on my social life. Let’s go on Saturday to an adventure park, dine at a restaurant, continue the evening in the movies theater and finish with some cocktails. That’s all fun and games but in the end of the evening you’re €120+ out of the pocket. I do however not like it to refuse an evening out or say no to a social event.

How do you handle this problem? Do you make a weekly/monthly budget for social activities or events? Do you sometimes regret not being able to go out when the budget is zero, even though you do have cash available?

Dividend Income Nov ’17

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Let’s dive into the numbers:

Scandinavian Tobacco Group A/S: €40,68
Pandora A/S: €12,31
AB Inbev: €112

HSBC Holdings: $43,89
Verizon Communications: $14,04
General Mills: $23,33
Hormel Foods: $3,54

= €164,99 + €71,86 (used conversion rate: $1,18/1€) = €236,85

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It’s the first time that I ever received dividends in November, happy me!