The Buy/Sell Equation
The Buy/Sell Equation
As you have already read, I have been spending a lot of time thinking about scaling back on my clinical practice. Such thoughts naturally lead me to question how we in the financial independence community make complex decisions. Sometimes I wonder if we could take a lesson from our oft ballyhooed stock picking friends. For most immersed in picking stocks, they formulate some sort of buy/sell equation in their head. When apple stock reaches X, I will buy. When it reaches y, I will sell. The trick is to take emotion out of the process and deal with stone cold facts. The art of the process is to pick the right buy/sell points or limits. These are prespecified points which hold hard and fast to the principles involved in making the decision in the first place.
This idea got me thinking. Should I use the buy/sell equation in all aspects of my financial life?
Early Retirement
My thoughts about whether financially independent doctors should all retire are definitely an extension of such thinking. The buy proposition is obvious. We start a career to build our lives and hopefully also find meaning and purpose. But the buy/sell equation is not just one-sided. When to get out of a successful career is much more complicated. Could it be a trigger event? Or are the cold economic facts of financial independence enough to walk away from a lucrative W2 wage.
Risk management also plays a role. Is there a point when being a physician is just too darn risky?
It turns out that leaving a career is fraught with just as much angst as starting one.
Real Estate
I am a big proponent of buy and hold real estate. Instead of speculation, I enjoy being a landlord and collecting the monthly dividends that come with the business. Yet, it would be foolish to say that there is not some speculative nature to our holdings.
We spend a lot of time on the buy side side of the buy/sell equation looking for severely underpriced properties or units in foreclosure.
There are, however, times when we also think long and hard about selling. We owned a lakefront property in Wisconsin that we bought in foreclosure and sold four years later. Unlike many of our properties, we were aware from the beginning that the property would appreciate quickly and had a rough sell number in our heads from the beginning.
Blogging
Although in less obvious ways, the buy/sell equation continues to play a role in the writing of this blog. The buy proposition is clear. My intentions are to create unique content to engage the community, form connections, and clarify my thoughts.
Certainly, from the onset, there were a number of self-imposed limits. Similar to trigger events for the career, I had thought of a number of reasons the blog would need to be placed by the wayside.
- Unable to create unique content
- Stress of writing is greater than the joy
- Negative feedback in excess
- Keeping me from other important parts of life
Luckily, I haven’t reached any of these sell points yet. We will see what the future brings.
Final Thoughts
When it comes to complex decision making, I think we all use the buy/sell equation. Although we may not rationalize it out loud, we usually create a series of criteria when it comes to both business and personal decisions.
With this blog post I have attempted to codify how the thought process works.
A more interesting question is whether we stick to our prespecified limits.
But that will have to be a discussion for another day.
Selling a rental property has sales costs and tax ramifications. But I can sell my VTSAX in a single click. There are times when it is good to have an easy path to bailing, and other times that the hurdle of selling is actually good because it helps us to stay the course, like when the stock market takes a turn and we get tempted to exit.
I try not to begin anything in life without an “Exit Strategy”, but I often fail on that. It is so much harder to sell than buy, to stop going in the path we are on. Sometimes it’s the feeling of a sunk cost, other times I like to say that I’ve had my million dollars worth of fun and don’t want a dime more.
A good exit strategy is always prudent.
That’s a good way to look at it. In particular, I’ve been thinking about blogging. Recently, I’ve got a couple of emails asking if I’m interested in selling. It hasn’t gone anywhere, but it got me thinking about how much I would sell my blog for. I think the normal price now is about 2x annual earnings. That’s just not enough for me. Maybe I’ll think about it harder if it was 5x earnings. Of course, it depends on emotion a lot too. I still enjoy blogging so I don’t really want to sell. Maybe if I don’t like it anymore, I’d be willing to sell for less.
It would be cool, though, to say you sold your blog.
But then if you sold your blog how ya gonna tell em?
I would just call you and we would have a convo instead.
I used to trade commodities, which is not investing. A commodities trade has one winner paired with one loser. You make money commodities trading by winning (total dollars) more often than you loose. It’s more akin to poker than owning brk.b. Commodities trading is best done mechanically with a system and like fight club it has one rule DON’T VIOLATE THE SYSTEM. If you don’t like the system get another one but do not introduce your chaos into the system you have chosen or it will degenerate into noise. The system is your best defense against risk.
As I’ve watched your struggle I’m struck with the variable nature of risk in financial life. When you’re young you are all potential. When you are old you are burned out potential. Your potential has been spent and hopefully some of that was converted into assets aka property (stocks, real estate, a business whatever). The property may be valued in cash but it is NOT cash. It is property and it’s value fluctuates according to a market. I’m end game. My potential has expired so my risk aversion tends toward maximal. Also my potential savings have been reached. My growth curve is negative compared to my growth curve during accumulation. You are somewhere short of expired potential.
I’ve been studying about the brain structures which actively control this process. (because that’s the kind of geek I am) It turns out there is one that engages risk or at least turns off risk aversion. Another engages risk aversion. They are separate areas and both sub cortical. This means they evolved prior to the cortex and volitional behavior. They are involved more with survival. It turns out the risk aversion area is involved with the area of “knowing and memory” and likely might be called the seat of wisdom where as the other is involved with impetuous behavior and reward (say risk promotion) but again both operate sub cortically. I think as we age and as we amass a nest egg to loose, mr risk aversion lights up strongly, maybe some times too strongly (for example the time to buy stocks is when the market craps but mr risk aversion paralyses the right behavior) And so that is your equation. You are traveling a risk continuum of ever increasing risk actual risk (because your nest egg is at stake) while still being enamored at what a fine money machine you built when the ignore risk part of your brain dominated.
The past is the past. All risk lays in the future and all risk must be evaluated from that perspective. This is exactly why I ignore calculators like FireCALC. They stupidly look at risk through the rear view mirror. Note from this discussion it’s not all or none (until you get old like me) In the middle time you can offset some risk by reducing exposure which I think is perfectly rational and systematic until such a time full risk aversion kicks in.
My risk aversion brain is kicking in faster and faster as of late.