Note: I started writing this blog post on labor day weekend

Its time of the month when I usually report on the status of AVI family net worth. However, I am going to do something different for this post. With kids back to school, life for AVI family is back in rhythm and with that I have had some time to take a deep dive in to personal finance picture for AVI family and on this very beautiful late-summer/early-fall labor day weekend, what is better than sipping a cup of coffee and putting pen to paper.

As such, this post will be divided into three parts– In Part I, I will present a comprehensive macro view of AVI family financial independence status and asset allocations. Part II will cover regular updates on relevant network-monthly numbers and finally in Part III, I will cover my investment thesis for a few new equity positions that I have opened in my equity-portfolio in the last few  months.

Financial Independence Status

Since reaching the proverbial Flamingo FI status back in March of this year, the cadence of my blog posts have gone down significantly. I attribute two reasons for this slow down: (a) laziness– with the relentless one way march in US equity markets and the general froth in asset prices, most of my investments have been on auto-pilot and I have been having hard time finding any thing interesting on the topic of investments to talk about. On the topic of personal finance, after crossing the first-threshold in our journey to financial independence (FI), I have been some what lazy in digging into/searching for note-worthy personal FI ideas and besides the monthly update post, there’s been nothing to write about. (b) summer– with kids home all the time, our biggest challenge, which I assume is a common story for all families with young kids, has been to limit the screen time. Any free time therefore gets devoted towards search and execution of non-screen activities with kids.

Finally, the schools have started and I have had some time to take a comprehensive look at AVI family personal finances. Lets dig into the numbers shall we!

Lets start with the table below that summarizes, AVI Family journey to FI.

Phases in Journey to FI	Net worth Metrics	Passive Income	Status
Accumulation	NW< FIN	PI < 0.25 ASR	NA
Flamingo FI	NW>= FIN; ANW < FIN	0.25 ASR <=PI <0.5 ASR	Achieved
Semi-FI	NW> FIN; ANW >= FIN; AANW<FI	PI>=0.5 ASR	Working Towards
FI	NW> FIN; ANW>FIN; AANW>FI	PI > ASR	Some ways to go

The table outlines the four-stages to achieving FI. I have identified two metrics to allow for quantifying my progression through the various stage in our journey to FI– FIN: Financial Independence Number and ASR: Annual Spend in Retirement.

For example, according to some recent articles (see here and here), a FIN of $3 Million may afford families to consider themselves mass affluent. With a 3 % safe withdrawal rate, one could target an ASR of $90,000, or if one assumes a 4 % withdrawal rate, the ASR can be $120,000.

I came up with FI for AVI family way back in July of 2019 and since then all our calculations for progression towards FI have relied on that number. What has changed since then is our threshold for safe-withdrawal rate and therefore our ASR. Using these numbers as a gauge, the table offers a summary of where we are in our journey to FI. Accumulation phase for us by far has been the longest, 18 years to be precise. We finally moved out of the accumulation phase into what I call Flamingo FI (motivated by https://www.moneyflamingo.com) in March of this year. Basically in the Flamingo FI stage of FI, AVI family should have enough savings, which if untouched, should grow to afford adults in the AVI family a comfortable retirement nest egg. What that also means that there is less of a pressure to sustain full-time career to maintain a modest middle-class life-style.

The next stage in our journey towards FI is what I call semi-FI. In this stage, asset allocation and findings ways to boost passive income stream will be front and center of our focus. While W2 income will still remain the source for AVI family annual spend, my goal is to increasingly focus on income generating investment ideas– see here, for example, on how my investment philosophy has evolved since achieving the Flamingo FI status. The final stage is the FI stage, once achieved, I will be ready to hang in the towel on full-time career and be free to pursue AVI family passion activities!

Asset Allocation

The charts below provide a snapshot of how our assets in net worth are distributed

Non-retirement investment portfolio is by far the biggest contributor to AVI Family net-worth.  Significant appreciation in the house prices coupled with aggressive pay-down on home-mortgage is the reason why home-equity has now surpassed retirement investment portfolio, to now represent second highest contributor of net-worth. Hard cash, the most liquid of all assets, now represent upwards of 7.5 % of total net-worth. This not withstanding the uninvested cash in investment portfolio, clearly feels like a bit-much of savings for rainy-day! However, it also is a reason why I have some-what of a high tolerance to stay on course to stomach the sometimes volatile markets and still be able to sleep well every-night! Misc represent the illiquid assets in hard gold, HSA account and equity in AVI family owned-vehicles.

My investments across retirement and non-retirement portfolio are a mix of individual company securities and Exchange Traded Funds (ETFs). Instead of discussing performance of these portfolios as a function of their tax status, I have decided it makes better sense to split my entire equity portfolio based on whether investments are in individual security or an ETF vehicle that tracks an underlying index of securities.

Lets begin by looking at the following PIE-chart of all my investments in individual securities. The chart on the left shows the distribution of all equities based on my cost basis for purchase and the chart on the right shows the same data but based on current market valuation for these equities

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In total I have investments in 31 individual securities, with top 10 of those representing about 65 % of my total security investment portfolio. Facebook (FB), Berkshire (BRK-B) and Alibaba (BABA) are my top 3 highest-conviction positions, with stake in Alibaba appearing in the past one month, following the regulations imposed shake up of Chinese tech stocks. My investments in Merck (MRK), Verizon (VZ), Ichan Enterprise (IEP), and the two sin stocks- Philip Morris (PM) and British Tobacco (BTI) are motivated by my desire for generating passive income stream.

In response to Covid-19 induced market panic the total United States money supply, known as M2, increased by 30 %. Such a drastic increase in money flowing through the economy should lead to an inflationary environment, simply because more money is now available in the market place chasing the same number of goods. While Fed has taken a more sanguine view of transitory-inflation, i.e., the sharp rise in inflation seen in the recent months are the result of pandemic induced distortions in the market place, which should correct themselves in due course, I am of the view that once the inflation genie is out of the box, it will be hard to curb!

Historically, in an inflationary environment, stocks, in particular those of commodities such as gold, silver, oil often rise. Banks can also see earnings growth in an inflationary environment. My view on inflation has certainly colored my view equity selection, which is reflective of my positions in bank stocks, Wells Fargo (WFC), JP Morgan (JPM) and Bank of America (BAC); oil stocks, Magnella Midstream Partners (MMP) and Enterprise Product Partners (EPD) and gold miners– Kirkland Gold (KL) and Barric Gold Corporation (GOLD).

Moving on to ETF investments, the chart below shows the distribution of asset across various ETF vehicles.

While still heavily biased towards stock ETFs in the US markets, I do have decent exposure to international equities, REITs, commodities and bond ETFs. My investment in these assets are motivated by my desire for a broader market exposure to construct a diversified investment portfolio. The upside for ETF portfolio may be limited but so is the downside (atleast I hope so).

Net Worth Status– Mid September

As of this writing, we are in the middle of September. Breaking from the tradition of posting monthly networth status update, I will instead provide an update on change in net worth status over a period of month and a half! If anything, the past two weeks have been troublesome for markets, which has certainly had negative impact on AVI investment portfolio and net worth. Nonetheless, here are the numbers:

• Net Worth (as percentage of FI number): 132.46
• Accessible Net Worth (as percentage of FI number): 80.21
• Liquid Assets/ Debt Ratio: 4.478
• Cash Balance/Two Year Living Expense Ratio: 1.02

Synopsis:

• The increasing in checking account cash is reflective of semi-annual bonus that Mr AVI receives from his employer. The decrease in savings cash is on the other hand reflective of Mr AVI moving some cash into investments, taking advantage of market downturn seen in the last couple of weeks.
• In contradiction to the markets loosing about 1.5 % for the month, my investments in non-retirement portfolio grew a healthy ~9 %. Not because, I hit an investment jackpot, but because of employer equity vesting schedule, which falls on Aug 15th.
• The retirement equity portfolio saw a modest decrease, which is indeed reflective of the negative market returns that we have observed in the last two weeks.
• Residential market is hot as ever in our neighborhood, with houses selling well over 1 Million dollar mark for the most part. Redfin model seems to have been updated to account for the renovations that we made recently to our house. As such, we have seen a rather healthy increase in market valuation for our residential property!
• I am continuing the aggressive pace for paying down outstanding mortgage on our residential property, which is again reflected in the healthy drop seen above in our mortgage liability
• Credit card expenses are getting out of control, again! Home rennovations are partly to blame here. With early fall cool weather in the air, now is the perfect time to pay attention to garden and flowering beds! This year, it seems I have gone overboard on home depot visits! Hopefully the results will not disappoint come Spring 2022!
• Overall, we have are continuing the trend of healthy growth in AVI family networth status, slowly but surely moving towards phase 3 of our FI journey!

Investment Updates

My last investment update was in Feb of this year. And in mid-May I penned an article summarizing my new STEP investment philosophy. Since then I have added a few new stocks to my equity portfolio. Here’s a brief synposis on my thesis for these investments:

1. Alibaba (BABA): Alibaba is the Amazon of China, the largest Chinese eCommerce company by market cap. Since the fiasco of Ant Group IPO cancellation, Alibaba has been tanking. The more recent collapse has been triggered by several regulatory measures that Chinese Communist Party (CPC) has imposed on big-tech, including a 2.8 B fine, a 15.5 B contribution requirement to Chinese common prosperity fund. Amidst these regulatory interventions, the whole business of the variable interest entity (VIE) nature of BABA investments for foreign share holders has taken center stage, further adding to uncertainty in minds of many would be investors. However, if one can get comfortable with these uncertainties, theres lots to like about BABA and especially at current valuation (EV of ~380 B and free cash flow of ~155 B), BABA offers a very compelling investment opportunity for enterprising investors. It is on a very rare occasions that a growing tech-behemoth is offered for sale at such a discount pricing and I would be remise not having some exposure to BABA at current valuations, especially given that several eminent value-oriented investors ,Charlie Munger, Mohnish Pabrai, Guy Spier, Bill Miller and Christopher Davis, to name a few have taken substantial stake in BABA. As of this writing, BABA is my third highest conviction position in my portfolio!
2. Tencent (TCEHY): Tencent is yet another Chinese tech behemoth that has suffered through the recent crackdown from CPC. At enterprise value of ~581 B and TTM free-cash flow of $78 B, while not as attractive as BABA, Tencent still offers compelling valuation for a business that owns WeChat, the primary online communication channel for majority of Chines 1.8 B population. In addition, Tencent has a vast portfolio of listed securities under its balance sheet, including significant stake in JD.com, Meituan Dianping and Sea Limited. CPC has imposed new policies on gaming, to curb gaming addiction among minors, which has been viewed has a threat to Tencents future profitability, resulting in Tencent loosing a third of its market valuation since mid-February. However, it is my view that in the long-term the new-regulations imposed by CPC, in pursuit of “common prosperity”, should infact be beneficial to the bottom line of these tech giants as increasingly larger numbers of Chinese citizenry will have access to disposable income to seek worldly pleasures.
3. Pershing Square Tontine (PSTH): PSTH is one of those investments that in the past I would have never considered belonging to my equity portfolio. PSTH is the largest special purpose acquisition company (SPAC) floated by one of the most savvy modern day investors– Bill Ackman. Explaining the tontine structure of this SPAC vehicle and the reasons behind the fall in PSTH stock price (loosing ~42 % off its peak market valuation), will probably take up an entire blog post in itself, suffice to say, part of the decline is related to the bursting of SPAC mania and part is to be blamed to the failed transaction with Universal Music Group. However at current price ($19.7, as of this writing), PSTH is trading below the $20 value of the cash value per share in the holding company, making an impairment of capital a non-issue. Basically, market is offering a no-cost opportunity to participate in potential upside offered through what ever next deal tha Bill Ackman cooks up for PSTH.
4. Orange S.A. (ORAN): Formerly known as France Telecom, Orange is French domiciled telecom firm, operating in France and several international markets. Its main shareholder is the French state, with an equity stake of 14 %, which makes it one of the strategically important firms for the French state. My investment in ORAN is motivated by my desire to have some exposure to equities offering consistent high-dividend yield. At current valuation ($11.01 per ADR share), the company is offering a very interesting 8.76 % forward dividend yield. The company as an enterprise value of ~63 B with ~43 B in current outstanding debt. However, it has generated ~ 12.8 B in EBITDA with free cash flow of ~3.9 B. With interest coverage ratio of ~4.9X, it seems likely that at current level of earnings, the firm can sustain their dividend payout.

Video/Book/Article/Audio for last several weeks

• Book: I came across the book, The Joys of Compounding, by Gautam Baid, through Guy Spiers recent podcast interview with Gautam Baid. What struck me most about Gautam was his passion for investing and the journey he took to get where he is today. While I have just begun reading this book and enjoying it so far, if Amazon reviews are any guide, I am in for a treat!
• Alternative Investment Ideas: More and more I am looking to diversify my investments out of equity into alternatives and in my quest for looking into available opportunities, I came across yieldtalk.com. I must say, this website has opened up my eye towards so many investment opportunities out there.. I for sure will be spending a lot more time digging through all the offerings on yieldtalk for some time into the future. Some potentially interesting ideas include, vinovest.co for wine investing to BlockFI, which offers a way to invest in loans backed by cryptocurrency.