The invisible workers

I graduated from college in 1992 and started working as an intern two weeks after I graduated. I was only earning $1700 per month. My rent was $550 per month, car insurance $50 per month (when annualized). When you add up all the other expenses, $1700 per month was not a lot for someone in their early 20s. I enjoyed my job but after about a month I started projecting my financial situation into the future. I realized that I would be working for a very long time. I also realized that if I saved money and invested it well that I would someday be able to earn more from my investments than from my job. At the age of 22 this became my goal. Even if I liked my work, I could work; however, if I made enough of a return on my accumulated money, I would no longer be required to work. I now call this concept hiring the invisible worker(s). You can work for money, but you can also invest your money which is sort of like hiring someone to work for you without you having to work yourself. You don’t need to feed and cloth these workers; they don’t sleep and they can work 24/7 without getting tired. As you get more money, you can hire additional workers. Eventually, you get to the point where your workers earn enough so that you can hire new workers at an increasing rate. So taking my salary when I started working which is roughly equivalent to minimum wage today, every $100,000 growing at 20% is an invisible worker.

So I opened my first brokerage account a few months after starting my job. I decided to save a minimum of 10% of my gross salary no matter what. This became the first priority and I could spend the rest on my non-discretionary expenses and other things like vacations. I also focused on increasing my earning potential. I got 2 advanced degrees but made an effort to continue earning while going back to school. I got my first advanced degree part-time while working full-time. My employer paid for this first degree. It was important to continue to save. My second advanced degree was a full-time program but I worked part-time but at this point I earned nearly as much working part-time as I previously earned full-time. I decided to take out low interest loans to fund the expense of my second advanced degree because I wanted my investments to keep growing and because I knew my pay would at least double when I resumed working full-time.

I ended up working in full-time day jobs for another 10 years always increasing my savings rate as my pay increased (sometimes in excess of 50% of my gross income). For me it was far more important to achieve financial freedom than it was to increase my spending I things that I didn’t really need. I quit my job in 2007 at age 37. It’s now been 8 years. I still consult in my field a bit but I average I don’t work more than 10 hours per month.

I’m posting this more for the younger people who might read this. I think they might find it useful. Most young people that I meet generally don’t plan ahead and most spend more than they need to. There are many paths to financial freedom. I believe that the path that I chose will work almost all of the time. I have found that I am very unusual in a couple of ways. First, delayed gratification seems natural to me. Second, I almost never felt a need to buy a nice car or spend much money on things that I felt were not needed. Third, I would plan ahead (and set reserves for) for all my expenses; this is especially important for large periodic expenses like a new car. I would usually keep my car for 8-10 years and pay cash when I needed a new one. Fourth, I abhor high interest rate debt (low interest rate debt can be a wonderful thing if you invest rather than spend) and avoided spending on things I could not afford. However, I would take advantage of low interest rates if I could invest the borrowed money are higher rates of return than the after tax interest rate. Saving at least 10% of gross should not be violated.

So the next time you want to buy that new car, you might want to consider hiring another invisible worker instead.

Chris

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Great post, Chris.

Thank you for sharing your life with us all.

It took a lot of courage for you to quit your job at age 37. However, the principles you laid out to achieve financial freedom are as timeless as they are true.

My goal was to be completely out of all debt when I turned 40. Simply living beneath our means and saving and “hiring another invisible worker” has been the theme of my career. Now at age 65 my wife and I have the complete freedom to live our lives as we choose. That is true wealth!

It works, young people. Shun the new cars and bigger houses now and in 20 years you will be able buy new cars and new homes WITH CASH. We use credit cards but only for convenience (and ALWAYS completely pay them off every month) and to upgrade for first class airline trips to Bermuda.
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An added bonus is being able to bless others with our abundance.

Thanks Chris for sharing your wisdom. Financial freedom to live freely is priceless, indeed.

Jim

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Hi Chris,

I hear you loud and clear…and appreciate your advice.

I am relatively young I guess (currently 36) and I love reading and hearing words of wisdom from older folks…

You were only one year older than me when you left the workforce…I can’t imagine how you did it.

I am a natural saver as well. My wife and I max out our deferred compensation plan yearly (too bad we are limited to about 20 mutual funds to chose from), contribute to my ROTH, and have a taxable brokerage account…in addition, i will a pension (2.5% for every year I work that will kick in at age 55)

Despite living below my means, I will be lucky to reach my financial goals at 55…that’s the price of living in the Bay Area…

Childcare for my 2 year old son alone is close to $1500 a month…hehe

I can’t complain though…life is good, my family is healthy, and we appear to be financially on track to meet our goals…

But if I could reach Saul’s goal of 30% annualized returns, i may be able to get there by 50…we’ll see… :slight_smile:

When I was young I always had income, I always had a job. At NCR I quit three time and they would not let me go. Saving didn’t seem necessary as I would alway have an income. But that’s not how it turned out. Globalization cut my rates by 75%. Old age crimped my ability to work. I should have raised “invisible workers.”

Denny Schlesinger

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Chris -

Congratulations and thanks for spreading the word. I hope many more follow your path.

sw

This kind of post is why you are one of my favorite fools!

Great post. I’m 29 so I feel like I’m in the target audience of this thread.

What would your (or anyone, feel free to respond) advice be for a portfolio strategy for a guy my age with a modest portfolio under $50000?

I feel like I can’t invest in the standard 20-25 positions with relative percentages, that would be like 50 shares of SWKS, 40 of CELG etc…next to nothing, to where even if SWKS is killing it it’s barely noticeable.

So far I’ve done well going all in on one winning company but I’m not naive enough to know this strategy can last forever; I’m one bad decision away from wiping my profits out and there’s no way I can be right 100% of the time.

Would you recommend investing in say 6 or 8 winning positions? Enough where I have a reasonable accumulation of shares to profit when the companies do well, and enough protection against downside risk if say one tanks I’m not wiped into oblivion.

Gaining 13% a year is fine, but I want to gain 30-50 so I would prefer aggressive strategies and advice to conservative.

$1700 is a lot more than I earn in a month, though investing is always wise. I have two degrees and I work a brutal job in a call center. Congratulations on your good fortune.

Chris what were the stocks that got you to this wonderful space?
Curious minds want to know.

Thanks Chris for sharing your story. I agree, living below your means and investing shrewdly probably is the easiest method for accumulating wealth and gaining financial independence. As a young person (currently 24), I learned this lesson early after having the majority of my savings wiped out in ’08. I set the goal to be financially independent by 30 and put together a spreadsheet to figure out what it would take to get there. It was pretty clear what the major drivers were – high savings rate and an aggressive rate of return. Saving is pretty easy once you start accounting for lost opportunity cost when making purchase decisions on frivolous things (wants). Achieving the return is the tricky part and is why I lurk various Fool forums and study the companies that are going to compound my capital without making me break a sweat (thanks invisible workers)!

It is a shame that our school system does not provide young people with a basic financial education. Most friends and peers both young and old don’t seem to have a clue about purchasing power, inflation or investing in general. They think the Market is rigged or for “pros” as opposed to a place to deploy capital and earn a return for taking on risk. They consider parking their money in a near 0% yield savings account or in CDs/GICs as the way to invest for their eventual retirement (that’s if they save at all).

I am thankful to have found the Fool and for all the contributors here who post and share their ideas, methods and wisdom. This board, in particular, is a real gem.

Thanks again for sharing Chris.

Travis

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sweetadeline,

If I were 29 years old and really wanted to invest aggressively, I would simply divide your $50,000 into quarters and put a quarter into each of the 4 largest positions of Saul: BOFI, SWKS, CELG, and SKX. Saul posts his monthly holdings and you can see his moves and reasoning. Learn from the master while you are young.

Do not invest unless you have at least a 3-5 year investment horizon and do not need the money to live on.

Be prepared for up to a 50% loss on any of them. Don’t lose your nerve and be patient. Successful investing requires a strong stomach more than investing brilliance. I’ll wager you won’t regret it in 3-5 years.

Jim

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Sweetadeline,

I am just a few years older than you (33) and fairly recently was trying to figure out the same thing. I usually bought between $2-4k worth of a given stock at each purchase, often with multiple entry points. When my portfolio was a little smaller, I usually ranged between 5-10 companies, but now I’m up to 10-15 companies, and I continue to be happy with my returns.

What I’ve been doing is having my larger positions of high conviction stocks, then buying small lottery-ticket type positions when I saw an opportunity (EXEL after the big drop, BLUE, CLDX), and those have performed really well so far for me. I also have a high risk tolerance so I’m being as aggressive as possible, and . Selling puts is another strategy I’ve used with outcomes that I’d be happy about either way - either adding shares of a company I like at a lower price point, or adding some cash to my portfolio. Good luck!

What would your (or anyone, feel free to respond) advice be for a portfolio strategy for a guy my age with a modest portfolio under $50000?

Hi Sweetadeline,

At 29 you are already doing very well. $50K in savings is very good for your age…way above the average. You definitely don’t want to lose it!

Jim made a suggestion that you put 25% in each of Saul’s top picks. Here’s what I think of that.

  1. You want to develop and maintain good habits and discipline. You are correct (IMO) for worrying about being one mistake or one wrong decision from getting wiped out and having to start all over again. At 29, this would be a very significant setback but not a complete setback (a complete setback being having to work as a Walmart greeter at age 80!). Now, if you are successful at being highly concentrated then you might be inclined to continue this approach. Be careful no to get overconfident. The older you get, the less room for error you will have.

  2. If you decide to put all your eggs in 4 baskets then you should be very careful. The 4 stocks at at least in different sectors (biotech, finance, consumer goods, and tech/IoT). It is good to be in different sectors. However at 25%, you are still exposed to significant firm specific risk. You can do this allocation and I think you will have a good chance of success but if one of the companies tanks you will take a couple of years to recover.

  3. If I were you I would diversify a little more. I would reduce BOFI and CELG and add at least a couple of more stocks. If it were me I would add 5-10% of XPO and 5% AIOCF and 5% SYNA. This is just my opinion.

  4. I would further diverify as you accumulate more wealth, moving more towards allocations similar to Saul and me as you get older and accumulate more wealth.

Just my opinion.

Chris

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$1700 is a lot more than I earn in a month, though investing is always wise. I have two degrees and I work a brutal job in a call center. Congratulations on your good fortune.

Speedbump,

How much you earn should be viewed in relation to how much you spend. The net savings is important so the location where you live will in part determine your monthly expenses. If you have 2 degrees, you might want to work on trying to find a higher paying job. You might consider moving to a location where your prospects for advancement are good. Good luck to you.

Chris

sweetadeline:

Swinging for the fences is not a good idea. Neither is being too conservative at a young age. One of your most important assets is time, use it wisely, don’t rush into anything but once you figure out what you want to do, execute smartly.

I don’t want to tell you what to do. Come up with a plan and build on it as you gain experience. Read books by and about some of the best investors and speculators: Buffett, Lynch, Fisher, Graham, Jesse Livermore and others. My start was following two stock letters from which I wanted to learn how to do it myself. You could start using Saul’s choices.

I have a bone to pick with the suggestion that you buy Saul’s four top picks. Not that there is anything wrong with them but for the buying opportunity – today might not be the best time to buy them. Fast growing stocks that Saul favors present the risk that you might be buying at a top and face a 50% retreat. I like to buy fast growers after they have had a large correction of 25% or more.

Since you are not (or should not be) in a hurry, instead of buying Saul’s current four top pics, start buying his recent or next new recommendation. Then keep adding positions as he comes up with new recommendations. You can also check to see if any of the top ones is correcting enough to make it a buy. If four is too concentrated, buy five or six.

Denny Schlesinger

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Chris what were the stocks that got you to this wonderful space?

This is an interesting question. The source of my nest egg is diverse. There was some dumb luck involved (sold out of most of my stocks in the Summer of 2000 to buy a house). In addition, I managed to avoid any large financial setbacks. My stock returns did not really contribute that much until after 2002. Prior to quitting my job, I earned from the following sources:

30% savings which included stock options grants in 2 companies for which I worked. I really increased my income from my job significantly from when I first started This was because I specialized in a fast growing field where there was high pay, high demand for skills, and a low supply of skilled people.

40% gains from real estate. I was a home owner starting in 1994 at age 25 and the SF Bay Area had a nice run up since then (somewhere close to a 300% increase…when you only put 10% down your gains can be enormous).

30% gains on stock investments but most of these gains were from 2002-2007.

I would also add that I was fortunate to have gone to college when tuition was only $1200 per year. I worked part-time during college and had financial support from my parents so I graduated from college completely debt free. Like Jim, I have avoided credit card debt and never had to pay any interest on credit card balances.

I haven’t had any children which would have extended the duration of my working career.

So stock gains have a huge impact now. I can tell that if I knew as much about investing in 1992 as I do know, I would probably have 10x more money than I do now.

Another important point: I saved significant sums outside my 401K/IRAs because I knew that these funds would be “locked up” until I was in my late 50s…didn’t want to work until then so I knew I need money available prior to then. Today, >95% of my assets are outside of tax deferred accounts so I have the flexibly to access them at any age.

Chris

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Sweetadeline,

One more thing: the best thing that you can do for yourself is learn how to evaluate investments and how to allocation capital while maximizing returns and minimizing risk. You want to learn for yourself what you should do. People can tell you to buy this or that and to allocate this much here or there, but unless you can determine for yourself what is good advice and not so good advise, you will always be at risk. There really is no substitute for understanding for yourself what is the best course.

Chris

4 Likes

There really is no substitute for understanding for yourself what is the best course.

Chris

Absolutely!

Denny Schlesinger

Great post. I’m 29 so I feel like I’m in the target audience of this thread. What would your (or anyone, feel free to respond) advice be for a portfolio strategy for a guy my age with a modest portfolio under $50000? I feel like I can’t invest in the standard 20-25 positions with relative percentages, that would be like 50 shares of SWKS, 40 of CELG etc…next to nothing, to where even if SWKS is killing it it’s barely noticeable. So far I’ve done well going all in on one winning company but I’m not naive enough to know this strategy can last forever; I’m one bad decision away from wiping my profits out and there’s no way I can be right 100% of the time.

Hi Sweet Adeline, Look, you are young and can take some risks, but you don’t want to blow it all, as you can putting it all in one stock. I would put approximately $10,000 in each position, and figure four or five positions for your $50,000. That allows you to really profit from good positions but not have all your eggs in one basket. With four or five baskets you can really keep an eye on your eggs :wink:

If you can gain 30% per year compounded on $50,000, you’ll have $690,000 in 10 years. And if you can add $5,000 a year (which will compound itself), you’ll probably be somewhere close to a million.

Saul

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It is a shame that our school system does not provide young people with a basic financial education.

Hi Travis!

Isn’t that the truth. They don’t even teach kids what is a stock, what is a bond, and what does compounding mean, much less a PE ratio, gross margin, operating margin, etc. Nothing at all!

Saul