This weeks post again got delayed. This time my excuse, work-travel!

I am attending the annual NeurIPS (NIPS as it was called in the old days) conference in  beautiful Vancouver (see image below). It is hard to fathom how fast and how much this conference has grown.. from a measley 200 people back in the days when I was a grad student to a single session attendance topping 1500 people and total registrations topping 15000 people.  That said, let me get back to the post.. keeping it short this week.

I came across two excellent articles, the first titled: F*** the 4 % rule- My Detailed Plan for How I will Become FI in Only 5 Years by route2fi.com and the second article from onemillionjourney.com,  titled: My One Million Journey Plan Statement- Millionaire in 10 Years. Both these articles presented the authors attempt to analyze their cash flow several years into the future and in the process paving a well-thought out path towards FI.

Motivated by these examples, I thought it would be good for me to go through this exercise explicitly. However, instead of extrapolating into foreseeable future with high uncertainty, I will forecast one year into the future based on the analysis of AVI family income for 2019.

I will revisit this post next year around the same time and if my forecast is reasonably close, I will continue the tradition of forecasting income one year into the future.

Musing

In the past week I began reading the biography on Jim Simons titled The Man Who Solved the Market, How Jim Simons Launched the Quant Revolution. Jim Simons is the founder of Reniassance Technologies, the worlds largest quant trading hedge fund. His flagship Medallion fund produced an eye-popping 71.8 % annually  from 1994 through 2014 and has averaged about 40 % per year since its inception in 1988. Btw, the 40 % return is after a 5 % management fee and a 44 % performance fee, way above the industry standard of 2% and 20 %. According to this marketwatch.com article, these returns dwarf Warren Buffett performance over the same 30 year period by 200X.

Richard Dewey recently penned an article for Bloomberg titled, The unsolved mystery of the medallion fund’s success, where in he talks about how no one can really figure out how Medallion is able to produce these staggering returns.  He argues great investment track records very often end in tears. Since it’s hard to see what Medallion does, it’s difficult to say what might trip it up. 

I am not so sure.. competition may be eventually catching up. Advanced machine learning is now democratized, and no where is it so evident that the NeurIPS conference. I think it is only matter of time when some one will catch up to Jim Simons and Jim Simons secret will be secret no more.

2019 Income Distribution

Note, in the spirit of how I have been tracking our NW progress, all the numbers below are reported in terms of percent of AVI family FI number.

Lets start with the following mental model:

NW (T) = NW(T-1) + Active Income(T) + Passive Income(T) + Home Equity(T) – Liability(T)

Excluding the home equity portion of the  NW, the primary growth contributors to NW are what I refer to as the active income, which is the income generated by trading time for money and passive income, which is the income from sources not tied to trading time.

Lets face it, time is a fixed asset, and we can only trade so much for income. Active income is capped to how much an individual’s skills are priced at the going market rate and the amount of time that individual can spare to trading his/her skills. As such, active income can produce good wealth but cannot be a key contributor to sustainable great wealth. For that we have to look to passive income. Passive income that covers annual living-expense, i.e., liabilities (for a given choice of life-style) corresponds to financial-independence (FI). So where is AVI family in their quest to FI, lets find out.

Lets begin by looking into the income source for the AVI family as of 2019. I am using accurual accounting to calculate AVI family annual income for 2019, i.e., unrealized investment gains are calculated as part of the income.

For 2019, total AVI family income was about 21.9 % of AVI family FI number. The income distribution is shown in the PIE-chart.

Active income resulting from Mr AVI trading time for money produced the majority of AVI family income, which includes the base-salary and the vested-stock-equity. Mrs AVI is gradually ramping on her business and contributed to about 8 % to AVI family income. Net, active income contribution was about 70 % of AVI family net-income.

On the passive income side of the equation, the key sources of income were, paper-investment gains contributing to about 20 %, realized investment gains contributing about 7 % and dividend/interest income of about 2.7 %, for a total of about 30 %.

On the liability side of the equation, the annual expense for AVI family for the year 2019, up until this point was, ~7.8 % of FI number. Net growth in NW for 2019 (thus far) has been about 14 % of FI. Lets extrapolate into 2020 and see how we would fare.

I expect no change in my work situation for the year 2020. It is therefore safe to assume that going into 2020, Mr Avi salary contribution to NW will remain the same at about 7.5 % of FI number. On equity side of things, it would be surprising if we continue to see the gains in stock price for my firm in the same vein as was the case for 2019. Therefore, assuming no gains in the stock price, the equity portion of salary would contribute about 5.2 % to NW. Mrs AVI business is in steady state, however it is quite possible that Mrs Avi will hire a part-time helper to help out in her daily activities. As such, I expect Mrs AVI business will contribute about 1.75 % of FI number. Assuming a nominal market rate-of-return of 7 %, investment paper-gains would contribute about 2.8 % of FI number. Passive income from dividends and interest income will contribute about 0.6 % of FI number. Thus, conservatively speaking, I expect 2020 income to contribute about 18 % of FI number.

For 2019 our liabilities were on the high end with an expensive purchase of AVI family car. I expect liability costs in 2020 to be lower than 2019 to around 6 % of FI number. NW growth for 2020 is then expected to be around 12 % of FI number.

Based on this analysis, I venture to predict that next year at this point in time AVI family NW will be anywhere between 70 to 75 % of FI number.

Video/Book/Article/Audio for the Week

For this week, I want to share youtube video of Mohnish Pabrai’s lecture to the MBA class of Boston College. Its hard not to get inspired by Mohnish after listening him talk about his investing philosophy. It was also refreshing to hear him talk about his rationale for investing in one of his active holdings, Graftech International Ltd (ticker: EAF). I literally stopped what ever I was doing to spend an hour and half listening to Mohnish talk.