Barbell Investments

 A barbell is an interesting analogy for investing where the investor puts their money in two distinct and different investment types or strategies. Often this is a division of high and low risk investments common for dividing long and short-term investments. For example putting long-term investments in stocks and holding cash for monthly expenses. This division shows up in separating stock investments between taxed and tax-free accounts, in which certain investments make sense in one account or the other.

An interesting question is whether it might make sense to invest some money in more mid-tier investments to both cover expenses and generate more return.

Barbell Life Strategy: http://bitsbusiness.com/life/barbell-for-life/

Financial Independence-Retire Early (FIRE) Math

 Retiring early to leave the corporate world and enjoy personal passions or pursuits is a dream considered by many Generation X and Millennial individuals. Whether one wants to change professions or pursue an independent project, a certain amount of financial cushion is needed to bridge the gap. With a large enough cushion and the right investments, never returning to the corporate world is possible. The math isn't that complicated, but critical to having confidence in choosing early retirement.

The key to a sustainable retirement is earning a return on investments that are greater than your costs plus inflation, such that you aren't spending the equity of your portfolio. So, you will need a sizeable portfolio to begin with, such that the earnings on that portfolio cover all of your expenses and grows faster than inflation.

So starting with a $1 million portfolio, and annual expenses of $50,000 ($4167/month) you would need to earn on average a 7% return to cover a 2% inflation rate. The federal reserve usually targets about a 2% inflation rate. Inflation is a tricky number to estimate, so it is important to understand how you think prices for your most expensive expenses will increase. A 7% return means your portfolio must increase by at least $70,000, so minus your $50K expenses, you'll have $1.02M at the end of year 1. If you can generate extra income that will help cover costs or potentially allow investing in less risky investments.

Probably the two biggest threats to this financial model is unexpected costs or poor investment returns. So, insurance that can cover large bills or negative returns, will go a long way towards financial independence. Unfortunately, that can mean higher monthly costs or lower average investment returns, respectively.

Use of Capital and Growth

 A profitable business generates cash that it can deploy in four possible ways. It can invest the money back in the business to grow the profits of the business, or invest in unprofitable projects that squanders the money. To avoid the second of these two options, companies without profitable investments will return the money to shareholders through dividends and share repurchases. Squandering the companies profits is the worst possible option for shareholders and should probably go without saying that companies that do so should be avoided at all costs. Investing the money back in the business is often the most lucrative, because it is the most tax-efficient option. Corporate profits that require paying corporate taxes are delayed, and money re-invested in the business or other businesses after being distributed to shareholders is taxed as capital gains or dividends. Only the reinvested money can avoid taxes, temporarily, in a tax-free account, like an IRA. The trade-off of these two options is usually based on the current tax rate of capital gains vs dividends.

Investors should seek out businesses with investable opportunities that are aggressively plowing profits back into the business. The difficulty of recognizing these companies is that on the face these companies will seem like money-losing business never able to eek out a positive profit. However, in reality their current operations are quite profitable, but the added expenses of investing in the future look like costs. This is one reason focusing on growing revenues instead of profits can be beneficial for a growth company.

Value investors are anathema to these types of companies who don't have a long history of profits, and this poses the greatest opportunity for growth investors to out-perform them.

Fundamental Index

 The most popular index funds such the S&P500 Index fund and Nasdaq 100 Index fund are market cap weighted. This increases the weighting of stocks as they increase in value and decreases their weighting as their price drops. Instead of rebalancing towards cheaper stocks, this would seem to do the opposite.

Robert Arnott has published and patented the idea of a fundamental index that weights stocks based on efficiency weighting. He believes this type of index will outperform a cap-weighted index by several hundred basis points.

The Fundamental Index: A Better Way To Invest

https://www.amazon.com/dp/047027784X/

In the eyes of a value investor, a cap-weighted index fund over weights the overvalued stocks and under weights the undervalued stocks. This flies in the face of the efficient market hypothesis that all stocks are fairly valued. It’s an intriguing idea with many interesting implications.

Coinbase IPO

 Coinbase stock was priced at $250 before the IPO, but that only seems notional since the stock started trading at $381. The stock quickly gained to over $429, but then pulled back to close at $328. It also hit a low of $310. Quite a wild ride in one day!

It will be interesting to see what happens with this stock after such a bumpy start. BTC ($62,321) and many cryptos that trade on Coinbase are near an all time high, so it seems like interest will be high for Coinbase.

Only a few months later Bitcoin has now dropped by half to around $30k and Coinbase is trading below $250.

Bitcoin and Coinbase

 Coinbase has announced they are going public April 14, 2021 at an expected valuation of $100B. See the Coinbase S-1 Prospectus here. This valuation certainly seems driven by Bitcoin and other cryptocurrencies trading at all time highs. In 2020, Coinbase generated over $1.2B in revenue and over $322M in net income.

I had never been interested in cryptocurrencies since I had never seen it as an investment. The fact that cryptos are not based on any underlying asset made it difficult for me to understand what value they had. However a company like Coinbase that is generating revenue from holding or trading assets I can understand.

I found it interesting that I could get free cryptocurrencies by creating an account on Coinbase. This requires watching a number of videos about how cryptos work. I received $5 in Bitcoin for signing up and then an additional $31 in other cryptos. I then traded the other cryptos I received for Bitcoin. This seems like a cool incentive for signing up for an account similar to how PayPal gave new users $5 back in the 90s.

Cloud Stocks - Applications and Tools

 Cloud software stocks tend to fall into two categories, applications and tools. Application stocks offer a direct customer service like banking, accounting, sales, marketing, programming, etc. Tool stocks offer a backend service that a customer uses to build a cloud service.

Application Stocks:

Bill.com, PayPal, ServiceNow, Atlassian, Salesforce, Coinbase, Workday

Tool Stocks:

MongoDB, Twilio, Okta

It would be interesting to compare the performance between these two categories.