Are Stocks In A Bubble? And Why Do Engineers Retire Early? — Rich’s Ramblings

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We interrupt our regular programming to bring you the first edition of Rich’s Ramblings!

Wha?

It’s simply this: I might have thoughts, ideas, inklings that I want to share quickly, but I haven’t had the time to completely process them into full on professional blog posts. (Which is funny, because when did blogs become so professional?? They used to be for amateur novelists and family photos.) So, I’ll stick these 8 pound 6 ounce newborn baby ideas into Rich’s Ramblings.

That’s a Ricky Bobby reference.

What about Penny? Maybe she’ll have Penny’s Ponderings or some such. Or Penny For Her Thoughts. Up to her.

Last part of this preamble: I need to be able to write a ramble in one hour or less. Otherwise, it’s a post. Ok, go.

First a random thought and then on to my main topic.

RANDOM THOUGHT: WHY ARE SO MANY ENGINEERS TRYING TO RETIRE EARLY?

It seems like half of all early retirement bloggers are engineers. Why? Is it because engineers are smart and like to design systems (including early retirement systems)? Or is it because engineering jobs are soul-crushing and need to be escaped? I really want to know before my kids get old enough to consider engineering. Thank you for any advice!

I can dislike stocks and still be cuddly.

MAIN RAMBLE: I THINK STOCKS ARE IN A BIG FAT BUBBLE

This first ramble will, I’m sure, draw all sorts of ridicule and hate mail. It’s ok. I’m 41 years old with twin boys. I simply can’t be offended or humiliated. I’ve held a dirty diaper in one hand and a crying boy in the other at 30,000 feet with dozens of onlookers. And that’s a mild story.

Many personal finance bloggers have been asking themselves if stocks are in a bubble. It usually starts with “Stocks are definitely a bit frothy right here, I’m nervous,” and it usually ends with something like, “I’m sticking to my plan, stocks are for the long run, yadda yadda yadda, I’m really tired today.”

George Costanza reference.

But let’s analyze what we’re saying about stocks before we convince ourselves to stick with them. We — and by this I mean me and a bunch of market observers at this point — are saying it’s pretty obvious that stocks are either fully priced or overpriced. At the very least, we can say that stocks, on the whole, are not underpriced (which is the best time to buy them). If you think stocks are underpriced … agree to disagree. San Diego means Saint Diego.

Ron Burgundy reference.

Personally, I think we are in a bubble created by low interest rates, QE, and momentum. I also think many people agree with me but do not want to act on it. I’m not going to wow you with complicated math arguments. You can read those elsewhere (like here — Hussman Funds Weekly Market Comment). I’m just going to show you this chart, and if you think what’s happening right now is totally normal, that’s ok.

Bubble? What bubble? (Image credit: Yahoo Finance)

If you think the first 2 bubbles were obvious but this one is not, that’s ok. Saint Diego.

I’M OUT OF THE STOCK MARKET RIGHT NOW. COMPLETELY.

Yes, I know I can’t time the market. I can’t beat the market. I might miss out on gains. And so on. I agree and I don’t mind. My goals have nothing to do with timing or beating the market. My goals are to support my family and retire comfortably, full stop. I don’t care how I achieve it relative to the stock market.

I’m out of the market right now simply because I can’t turn off my critical thinking machine and buy (or hold) at these prices (see chart above). I will either buy at lower prices or I will buy at higher prices when I’m comfortable with the risk. I’m not going to watch my hard earned money take a nosedive when my brain is telling me these prices are not sustainable.

Investing is not a competition. It’s a process of taking financial risk in order to achieve financial reward. There’s a perception out there, I think, that investors need to be in stocks. But no. No one needs to be in stocks or gold or real estate or anything else. If a person can meet his or her goals with a savings account or a mattress, bully for them. If you need the market to keep going up, you might be taking too much risk. Everyone should only take as much risk as they can tolerate.

Stock market risk is high right now. If prices continue to increase without a proportional increase in earnings, risk will move higher. That’s the basic math of it. I’ll write a more fulsome post when I’ve had time consider how and when to take market risk again. For now, I’m out. And sleeping comfortably every night with my teddy bear. Until the kids wake up.

Reader, I know I could be wrong about this for a long time. I’m not saying stocks will crash tomorrow. If you are heavily invested in stocks and you have a plan to forever stay heavily invested in stocks and you can dollar cost average into all the dips, please stick to that plan. I’m not offering investment advice. I’m just rambling!  

Final thought: I have a friend who was a very successful hedge fund trader. The only author he ever recommended to me was Nassim Taleb, who wrote Fooled By Randomness and The Black Swan. I highly recommend these books to anyone interested in markets and the concept of risk.

With Teddy Bear Cuddles,

Rich

   

18 Replies to “Are Stocks In A Bubble? And Why Do Engineers Retire Early? — Rich’s Ramblings”

  1. The Black Swan and Fooled by Randomness are two of my personal favorites. I recommend them to most people I meet.

    What are your thoughts on buying puts?

    Also, I think engineers could be upset because they make the product but don’t get to reap the benefits of the sales. They are smart and hard-working people for the most part.

    1. Hey Erik — I’ve dabbled in options here and there, but only use them very carefully. It’s a great way to lose money fast! That said, if I had a huge stock portfolio that I didn’t want to sell, I’d consider buying some puts as a hedge.

      As you know, Taleb made his millions in the 1987 crash using puts. I admit the idea has crossed my mind this year but … it would need to be a very compelling risk/reward. I’ll leave it there for now.

      Note to all readers: Only invest in options what you can afford to lose.
      Rich @ pennyandrich.com recently posted…Should I Cash Out an IRA to Pay Student Loans? — A Penny and Rich BlogchatMy Profile

  2. As a degreed engineer, but a non-practicing one since I gravitated more towards the business side of things in my career, my theory is that engineers appreciate efficiency. There is no better expression of efficiency in the retirement space, than early retirement.

    I’m in the same minority you’re in Rich. I pulled out of the stock market a couple of years ago for the same reasons you mentioned. Although I’m mildly irritated by the mirage we’re witnessing, I’m not concerned by it since I have the benefit of an (work) income that can produce plenty of cash flow in the meantime.

    At the very least you can fully enjoy your upcoming trip and not stress about the noise too much! (btw let me know what you think of the recommendations I sent)
    Max Your Freedom recently posted…My Net Worth JourneyMy Profile

    1. Max — great point about efficiency and engineers. I can’t remember if I knew you had an engineering degree, so there’s another personal finance blogger in the camp! Fascinating.

      Being out of the market at this point is a personal choice and you’re right, a lot of it depends on someone’s cash flow and overall investment portfolio. Like you, I don’t need stocks one way or the other so I can afford to be out. In the meantime have you considered other investments or are you stockpiling cash?

      Thanks for the trip recommendations — I’ll connect with you offline 🙂
      Rich @ pennyandrich.com recently posted…Monthly Money Check: How Rich Spends $2,000 On Food — February 2017My Profile

  3. Count me as one who thinks your making a mistake, as obvious by my recent post on the subject. To quote Keynes,’ the market can stay irrational longer then you can stay solvent’. Had you pulled out the last time people stated things were over priced in 2011 you’d have missed almost one hundred percent return. In 1996 green span gave his irrational exuberance speech. The lowest part of the dot com bubble burst was 6 years later, and it wasn’t much below the point where Greenspan called top. After dividends in the ensuing years you were likely ahead staying in the market. That was way more inflated then now by any metric. The point is bubble or not no one knows what happens next.

    As for the engineer Thing, I’ve already achieved a basic level of FI nut don’t want early retirement, but I’m also not strictly an engineer… my wife is one and she’s now a stay at home mom. I’m not sure what those data points mean.
    Fulltimefinance recently posted…How and When to Rebalance your PortfolioMy Profile

    1. True FTF, I may be making a mistake in terms of maximizing gains, I’m ok with that. I’m also minimizing risk. The Keynes quote is exactly right when it comes to irrationality; insolvency is dependent on the investor. I’m in no danger of insolvency because I’m not shorting the market.

      I didn’t mention this but most of the money that would be in stocks is now in “risk-free” Treasuries yielding slightly more than 2%. I could possibly do better with dividends if I wanted to hold the underlying security. Someday I’ll do a post on the rest of my portfolio which includes land.
      Rich @ pennyandrich.com recently posted…The Squirrel Story: How Rich Plans To Increase His Giving (And Not Be An A-Hole)My Profile

  4. I’m an engineer, or well, graduated with an engineering degree, and I think most engineers retire early because we’re trained to think more logically and analyze everything that comes our way.

    We might be in a bubble, but interest rates are slowly rising, which might in turn slow down the market. Of course, I can’t say that this will happen for sure, but by being out of the market, you might be losing some potential gains if a crash never happens.

    Then again, who knows? We’ll see how everything plays out in the upcoming months and years.
    Smart Provisions recently posted…Net Worth Report: February 2017 EditionMy Profile

  5. Thanks SP — it’s true I may miss some gains. That’s ok.

    I, for one, would welcome a rise in interest rates. I think interest rates near zero can lead to misallocation of capital toward risky / high yield assets. Can you believe people used to save in CDs? Traditional retirees who can’t afford short term risk have suffered from a lack of options.

    Another engineer! Thanks for your thoughts.
    Rich @ pennyandrich.com recently posted…Monthly Happiness Report: Rich Eats, Drinks, and Stays Married — February 2017My Profile

  6. As an engineer who is working towards early retirement, I believe its because engineers have two advantages:

    1. We can do the math, see the numbers, do the analysis and realize the opportunity to retire early.
    2. Engineer lifestyle is typically much lower than that of similarly paid workers (sales, management, etc.) We are usually more frugal, and thus able to retire early.

    I like my job, but I have the date planned out (June 2020) when I will be financially free. At that point, I get to decide what I want to do.

    1. Thanks for the comment Kevin — I’m really starting to like this engineering mindset.

      The other piece I really want to know is … do engineers (before they become managers) enjoy the work?? I know this will be different for everyone but in general, is it a satisfying / enjoyable occupation.

      I know plenty of lawyers and in general they are not happy with work, unless they work for the state, in which case they are underpaid. I know doctors who are usually happy. Teachers, eh, 50-50. So what say you, engineers?
      Rich @ pennyandrich.com recently posted…Are Stocks In A Bubble? And Why Do Engineers Retire Early? — Rich’s RamblingsMy Profile

  7. I had a chance to read both of those books by Nassim Taleb. They are excellent and he does a fantastic job of explaining everything.

    I definitely think that the market looks a little frothy but I haven’t taken anything off the table. I’ll continue to dollar cost average as it makes sense for me but I can see where you have some discomfort with the prices.
    Mustard Seed Money recently posted…Pursuing Your Passion: Meredith HannonMy Profile

  8. I am also an engineer. [CAUTION: large over generalization coming] We are generally well paid, practical and not as likely to feel the need to live a flashy lifestyle. Income, frugality and patience are all you need to become wealthy slowly.

    As to why engineers want to escape their jobs, I think each person has their own reasons. For me it is a desire to try my hand at new challenges, spend more quality time with my family and in nature.

    I also fear the market is overvalued. I will not pull money out of the market, but I have shifted a larger portion of my savings to paying down a low interest mortgage and building an even larger cash reserve. To be honest, I wish the inevitable correction would hurry up and happen. I would much rather move into FIRE just after a correction than riding bullish market.

  9. Rich – I like the idea of shorter rambling posts and it is something I am also taking into consideration as a I have a lot of half baked ideas and thoughts that might help bring clarity to them if I write them out.

    I have been parking lots of cash on the sidelines since 2013, and have averaged about a 5% return on my money sitting in brokerage accounts (with only about 50% invested on average). I have a hard time committing money to investments.

    I tend to do a lot of covered calls or short puts when we have significant pull backs and spikes in volatility, but we haven’t had anything great since Brexit.

    This weekend I have it on my list to write out some thoughts on how long this euphoria can last. Even I have been getting a little impatient and sense a bit of FOMO setting in. Coming into 2017 I had this extreme urge to put cash to work, but started to realize that my thesis has not changed.

    We are 8+ years into this bull market and its been fueled by insanity. Realizing that my FOMO is ridiculous, I actually just moved all my 401K investments from an index fund, cashing in a 7% gain for the year, into a money market account.

    Because I am a big believer in reversion to the mean, I think we are either heading for a huge market decline, or we are going to see many years of low to no return. And due to that thesis, in 2015, I devised the 7-year plan to pay off our mortgage at 3.635%. Making a bet that the returns over that 7-year period would not do as well as the guaranteed return I could get for paying off my mortgage.

    I have also become very fond of short term hard money lending through PeerStreet. You can check out my write up here:

    http://www.genyfinanceguy.com/2017/03/05/peerstreet-hard-money-lending-retail-investor/

    This is actually one place I am comfortable putting new money to work. I actually plan to allocate about $60,000 to this asset class in 2017. I like it because it is short term (average duration of 10 months), asset backed (max LTV of 25%; nice downside protection), 1st lien position (so, first in line to get paid back), low minimums of $1,000 per investment, and I am earning about 8% return.

    Unfortunately it is only open to accredited investors, but if you qualify it is very appealing. This has opened up an asset class that was previously only available to a select few and came with huge concentration risk with minimums in the $50,000 to $100,000 range for one deal.

    And to your other point, regardless of all this, I have a very high income and savings rate, that allows me to grow our wealth at robust rates…even without any market gains. The gains from investments are just gravy.

    From 2012 to 2016, we were able to grow our net worth at a compounded rate of 85%. Yes, we missed out on some extra juice from the stock market, but I am not going to lose any sleep over it.

    Thanks for the thought provoking post. And sorry for puking in the comments.

    Cheers,

    Dom

    1. Thanks for those thoughts Dom! I’d love to piggyback off of every point, but that’d be another post. Needless to say I agree with you, and there are plenty of ways to make money without overpaying for equities at this level.

      I’m quite interested in PeerStreet and other real estate lending platforms. I’m not quite accredited but there are some offerings (from RealtyMogul, for example), that might fit the bill. However, I need to consider my overall portfolio first because I already have direct investments in commercial real estate …

      Much to think on but out of time for now! –R
      Rich @ pennyandrich.com recently posted…Book Review: Tribe — Rich Digs The Modern FoxholeMy Profile

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