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My favorite investment advice, courtesy of Mr. Money Mustache: "Suppose you’re just starting out as an egg farmer, and your goal is to build up a nice, profita

by _bxg1 7y ago

My favorite investment advice, courtesy of Mr. Money Mustache: "Suppose you’re just starting out as an egg farmer, and your goal is to build up a nice, profitable business. You want to build up a flock of hens so big that they are eventually producing thousands of eggs per month. Enough to live off for life and retire. You buy your first 100 hens, and they get right to work. You allow those eggs to hatch so more hens can be born, and you also continue to buy hens from the farm supply store. Suddenly your phone rings and it’s Farmer Joe down the road. “The price of hens has just dropped by 50%! You’ve just lost five grand on those hundred hens you bought last summer!” Is this a sensible way to think about it? No, of course not. You’re happy that hens are cheaper, because now you can build your egg business even faster. Stocks are just like hens. They lay eggs called “dividends”, which are real money that can either flow automatically into your checking account, or automatically reinvest itself to buy still more stocks...There’s only one time you care if one of your shares is down: on the day you sell it." https://www.mrmoneymustache.com/2016/02/29/what-to-do-about-this-scary-stock-market/ https://www.mrmoneymustache.com/2016/02/29/what-to-do-about-...

draw_down 7y ago
That’s a good argument for not watching your share prices if you just plan on holding. Not sure it’s good for much else.
quotemstr 7y ago
The problem is that stocks can crash for two reasons: 1) business cycle, and 2) secular economic weakness. In the latter case, that value isn't coming back. Imagine, in terms of your example, that the price of hens dropped because the government passed a law mandating veganism. Would you be wise to buy more hens in this situation?
- _bxg1 7y ago
  The advice assumes you're investing in an index fund or something equivalent; the market as a whole, amortized, goes up. Individual companies may be a different story.
  - quotemstr 7y ago
    Index funds strike me as a very bad idea. They reward unprofitable ventures just for being in some index. Buying into an index fund, therefore, is buying into a class of systemically overpriced assets. Yes, backtested, index fund investment does well---but that's because you're backtesting into an era before everyone was bleating "buy index ETFs!". Between weird investment strategies, the length of the current boom, and the very low interest rates at the peak of the boom, this coming bust is going to be a massacre. I'm honestly not even sure whether the system as a whole will survive it.
    - Bjartr 7y ago
      > I'm honestly not even sure whether the system as a whole will survive it. The question then remains the same while changing. Do I invest in the market, or in canned goods?
      - lotsofpulp 7y ago
        Both.
    - human20190310 7y ago
      Index funds basically delegate "price discovery" to the activity of other investors, and just assume that the market price is the right one. This works as long as there are enough non-index investors trying to outsmart the market by actively trading.
      - loeg 7y ago
        And there will always be active traders setting prices, because it is profitable to do so.
    - robocat 7y ago
      I suspect incredible funds are overinvested (as occurred to many popular labelled investment strategies from the past). But although you might get better returns picking the next strategy, you probably would do fine with index funds. And timing the market has always been a loser strategy (except for a few lucky or skilled outliers).
VikingCoder 7y ago
That is an awful way to think about it. At any given instant, you are about to start investing in something. You may have to stop investing in something else to do it. Your goal at any instant is to maximize the profit of your next few moments of investing. An effective strategy for you MAY to go long, as you describe, holding on to an investment for a long time. But that doesn't mean it's the most effective strategy for everyone. The farmer may do better to unload his hens, live off of cattle for a few years, and then move back to hens.
- _bxg1 7y ago
  Or you use a robo-investor which does the above for you, and then your only decision is, "Do I invest more in the market or pull money out of the market?" That's where the question becomes as simple as the chickens metaphor.
  - sachdevap 7y ago
    I don't think robo-investors do that. They rebalance your portfolio (and that too not very often), and buy more of the cheaper stuff, so more in line with your GP than your parent comment.
- gamblor956 7y ago
  Your goal at any instant is to maximize the profit of your next few moments of investing. This is only true for short traders or others who measure profits on a horizon measured in hours or less. For everyone else, the chicken example is pretty good, though the feasibility depends on the timescale over which you will be investing.
- dageshi 7y ago
  No, it really isn't. You're trying to time the market, which is about as reliable as gambling unless you intend to dedicate your entire life to it. The parent post is correct, recessions are opportunities to buy what you were going to buy anyway at a cheaper price and get more for your money, provided of course you don't need the money for other purposes in the near future.
javagram 7y ago
There are plenty of stocks that don’t pay dividends. Moreover living off the dividends and not the principal assumes you have vastly more savings than most people manage to do. For most people, they should anticipate to run down their principal in retirement, not just interest and dividends.
- dharma1 7y ago
  This depends completely on each individual's circumstances (level of income, your resident country's tax regime/pension rules) but I think many HN readers are in a fortunate position to be able to build up sizeable enough pension pot in 15-20 years, which at retirement can provide a modest income based on 4% yield - without touching the principal.
  - throw0101a 7y ago
    > ... which at retirement can provide a modest income based on 4% yield - without touching the principal. You're doing yourself a financial disservice if you focus on dividends. Total returns are more important: * https://www.youtube.com/watch?v=UpXI_Vd51dA https://www.youtube.com/watch?v=UpXI_Vd51dA There is no financial difference between have $1000 in stock and $40 in cash dividends, and having the stock go up to $1040 and you then selling $40 dollars' worth of principal. Treating the $1000+$40 as "better" than $1040 is a form of mental accounting: * https://en.wikipedia.org/wiki/Mental_accounting https://en.wikipedia.org/wiki/Mental_accounting Do a search for "dividend myths".
    - dharma1 7y ago
      true, though from a tax POV they are treated differently in many countries
      - throw0101a 7y ago
        Which would only apply in taxable accounts though. The majority of people probably are using tax-sheltered accounts and are primarily saving for retirement, or their kid's education. If anyone can max out all of those, and pay their cost of living, they're (a) doing quite well for themselves, and (b) probably a small portion of the population. The advice to not focus on dividends but on total returns is geared toward the general public, who probably don't want to get into the minutiae of tax laws. :)
wefarrell 7y ago
That analogy is problematic because it makes no connection between the price of hens and their perceived ability to generate wealth.
- _bxg1 7y ago
  Further down the blog post (now linked), he looks at historical data which suggests that dividends remain relatively constant despite fluctuations in stock price.
turk73 7y ago
Sure, except a whole of stocks don't pay dividends. Mr. Money Mustache, while entertaining, is making a living telling other people how to FIRE. It's a sham, in other words. It's the same thing as those "get rich quick" books that the author wrote to literally do that.
tcbawo 7y ago
If you were planning on buying more chickens tomorrow, you might be inclined to wait instead if the price is falling. Especially if the cost of hens relative to eggs is near an all-time high.
- sachdevap 7y ago
  All time high has nothing to do with what the value will be anytime tomorrow. If you can't predict the value for the next day, what is the point of waiting to time the market. Besides, even the worst timers of the market do pretty well with disciplined investments.
- overcast 7y ago
  It doesn't matter, that's the point. They are laying dividends that you wouldn't otherwise accumulate because you WAITED.
  - tcbawo 7y ago
    What if the (expected profit per chicken)/(cost of chicken) was close to the return on a riskless asset, like a government bond? Wouldn't the farmer be more inclined to park money there than take the risk of buying more chickens?
mikeash 7y ago
This is a bad analogy. Hens are a relatively cheap, rapidly depreciating asset that require constant maintenance and will cease to be productive in a few years. The capital cost of the hen itself is essentially negligible. Of course you don’t mind when they get cheaper. This is completely unlike stocks, which you can hold forever at no cost, and whose output, on average, goes up over time. If we need to make an analogy to something non-investors can relate to... well, it’s pretty tough. Which is probably why there are so many different opinions out there about how you should feel in response to various events.
nostromo 7y ago
This is true if you’re buying stocks (hens) for eggs (dividends) — which is true for me because I’m one of those rare cash-flow investors. But I fear that the vast majority of investors are price speculators, not dividend farmers.
- H8crilA 7y ago
  As always speculators will die. This has been the case for millenia.
  - vowelless 7y ago
    So you’re saying cash flow investors are immortal?
    - H8crilA 7y ago
      :) I meant their speculative portfolios will die (probably). I keep my YOLO options portfolio at 1% of my net worth. Gambling money.
- andy_ppp 7y ago
  Interesting, which stocks should I invest in for dividends?
  - jriot 7y ago
    Last week I literally set-up up all my automatic investing since we sold our previous home and made a profit, allowing us to become financially stable. I did 75% in a SP500 index and 25% in an intermediate bond market index. Every month I will put $500 split accordingly into those funds. This is after maxing out our IRAs. Not saying this is the best strategy but simple split with the mindset of keeping the money in there long-term e.g., over 10 years. Does it suck seeing the money we just put in there drop? Yes. Though I know I am in it for the long haul, not the get quick rich approach or attempting to time the markets.
    - 7y ago
johnvanommen 7y ago
I love this post. Market timing is dumb. I put money in the market if it's going up, I put money in the market when it's going down. Always be saving.
- at-fates-hands 7y ago
  > I put money in the market when it's going down The only problem is when the market is going down, most people are losing money. Therefore, people don't have any excess funds to invest when its technically the best time to invest (when the market is going down).
  - irrational 7y ago
    How is money being lost? I buy 100 shares of company X for $10 ($1000). The market tanks and now I can buy 100 shares of company X for $1 ($100). You could say that I now have 200 shares of the company that are worth $200 (a $900 loss), but the market will recover (it always has in the past) so when those shares are again worth $10 I can sell them for $2000. The only way people could lose money is if they sell when the market is down, but you don't sell when the market is down - that is when you use cash or other investments that are not subject to market fluctuations.
    - andreilys 7y ago
      Take a look at the Nikkei 225, it still hasn't recovered from its high in 1991. Your assumption is we have infinite growth on a finite planet, which unfortunately is not the case. Eventually the party will be over, and you'll be left with the tab.
      - defnmacro 7y ago
        > infinite growth Assuming growth is linearly correlated with resources. It's not, wealth can be created though cognitive effort i.e. software engineering. > finite planet Assuming humans are bounded to Earth for growth. The markets are the collective reflection of humanities productive efforts in the form of currency. Saying that growth will cease to exist in the future is the same as saying humanity will cease to be productive, a bet I am not personally willing to make.
vkou 7y ago
If the hens stopped laying eggs at the same time the price of them dropped by 50%, I'd be asking myself why I didn't keep my money in a mattress.
trias 7y ago
Well in the case of stacks, the expected dividend (price of the eggs) also dropped by half. So yes, you really are poorer when you bought those expensive hens compared to someone who buys them at the reduced price.
- Godel_unicode 7y ago
  That's not how dividends work. Dividends are related to how much profit/cash the company has, and how many shares are outstanding. The price of an individual share doesn't effect that, only issuance of new shares and changes in cash flow.
  - ericd 7y ago
    Shares frequently crash in conjunction with economic pullbacks, which mean lower revenue/earnings for companies, which means less spending by those companies, which means lower revenue/earnings for other companies, and layoffs, which means lower earnings for workers, which means less spending, etc etc.
    - Godel_unicode 7y ago
      Shares of individual companies also frequently crash for reasons totally unrelated to economic pullbacks, and thus none of those things are guaranteed to happen simply because a share now costs less.
      - ericd 7y ago
        Sure, but I assume we're generally talking about index/portfolio investing here when we talk about stocks in general?
martin_bech 7y ago
Yes and No. For single equities this is true. But if this means a markets are going to turn, credits are going to dry up, and demand is going to plummit, then you are going to have massive problems, in your egg company.. customers might default, your creditline might disappear, and your customers might see eggs as an unwanted luxury, when they can just eat dirt..
aqme28 7y ago
This is why recessions can be good for the young and employed. If the price of eggs drops 50% once you're retired, then you might be in a lot of trouble.
- MrMember 7y ago
  If you're still invested in something that can lose 50% of its value when you're retired, you should rethink your investments.
  - throw0101a 7y ago
    You're not wrong, but it's a matter of balancing risk, which is the point of having an allocation towards equities (stocks) and fixed income (bonds). Recoveries have generally take up to 2-3 years, so if you have that much of your portfolio in cash and GICs, you can weather a downturn without having to touch your equities: * https://www.myownadvisor.ca/cash-wedge-opening-investment-taps/ https://www.myownadvisor.ca/cash-wedge-opening-investment-ta... One suggestion, which is not popular, is to take a portion of your retirement savings and buy an annuity: enough to cover your day-to-day expenses. This way, regardless of what your invested portfolio is doing, food and shelter (rent/property taxes) are covered. You would consider the annuity as part of your fixed-income ("bond") portion of your portfolio.
tabtab 7y ago
Dividends alone don't pay out that much on average. The main value of holding onto stocks is in selling them for more later. Dividends alone are probably not a good reason to buy and sit on stocks.
- MandieD 7y ago
  My T and GIS beg to disagree.
- OrangeMango 7y ago
  http://www.crsp.com/files/Big_Picture_2019.pdf http://www.crsp.com/files/Big_Picture_2019.pdf Look at that. US Stocks with dividends reinvested: 6 million dollars. US Stocks without dividends reinvested: 200 thousand dollars.
  - tabtab 7y ago
    Are you saying investors prefer stocks that pay more dividends? That's a different issue. I think there's a misunderstanding here.
tomc1985 7y ago
Chickens' eggs are worth way more in proportion to the chicken than dividends are to a stock. The only way you're capturing appreciable amounts of money in dividends is with a very large portfolio. This kind of advice doesn't help folks trying to build a portfolio from nothing because $25 in monthly dividends doesn't really do or mean much. I mean, of course don't try to time the market, but this story only further propagates the lie that everyone(tm) can make money on the stock market without gambling aggressively
- H8crilA 7y ago
  In the long run it's only dividends that matter. Using Robert Shiller's long term stock market data we find that s&p returns without dividend reinvestment is about 2%, after inflation. With dividend reinvestment it's about 6%. That's a 2x difference in 20 years.
  - tomc1985 7y ago
    But, again, you need to making enough money from dividends to be able to reinvest. What about the guy with a $1,000 portfolio, or all the retail rubes with small portfolios on Robinhood?
    - H8crilA 7y ago
      If your income is lower than spendings then you can't invest as successfully as someone who has the opposite situation. More income = more money, what's weird about that? A $1000 will not get you anywhere. You can maybe turn it into $2000 after inflation within 5-10 years, on average.
  - alasdair_ 7y ago
    >In the long run it's only dividends that matter. Stock buybacks are a thing, and are generally better than dividends for the owners of stock since they can choose whether or not to have a taxable event.
    - 7y ago
gingabriska 7y ago
Well as someone whoes has bank in Tokyo, I find it's difficult to invest in US stocks without paying withholding taxes. Where do other international investors like ones from Singapore, Hong Kong invest? And what vehicles they use for minimizing taxes as an international investors. I've USD cash in bank, so if USD falls in value my wealth is erroded overnight. Can someone suggest what I should be doing?
rb808 7y ago
If you're a proper farmer you probably have a big loan, if the price of hens drops 50% the only one calling will be the bank to foreclose on your farm.
- seanmcdirmid 7y ago
  Only if you are using your hens as collateral for the loan, which isn’t very likely. As the hens are just overhead, the banks are more interested in the value of your farm (eg related to the price of eggs you are selling).
benj111 7y ago
I prefer the Buffett version: "A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying" https://finance.yahoo.com/news/warren-buffett-why-stocks-hamburgers-031629347.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuYmluZy5jb20vc2VhcmNoP3E9YnVmZmV0dCUyMGJ1cmdlciUyMG5ldCUyMGJ1eWVyJnBpdm90PXdlYiZta3Q9ZW4tR0Imc2V0bGFuZz1lbi1HQiZpbnB1dD0x&guce_referrer_sig=AQAAAEli9SrakWBo84O_nD2vAWFAMZdOCBAuCixe-gZEWnJNH2WTsd-VUwKNcaIWceNTDgow7rrCBwcu5jYVjmk31HFhuz3ZqsNyinzzzAK_J_pxlLPVUFagnozZUdua1wJ421kMPbZv-Hncq2SgMfEIMMPNwI8CR-lBXaiYvMyw_giy https://finance.yahoo.com/news/warren-buffett-why-stocks-ham...
seanmcdirmid 7y ago
If you are leveraged, then you may or may not be able to pay back your loans depending on the price and demand for the eggs you are selling. If the price of hens have fallen, it could be because there are too many hens or demand has fallen because the price of eggs has fallen. For us, if stocks get too weak, the boom might be over and our ability to retain and obtain jobs that pay as much as they do now is very much in jeopardy.
throw0101a 7y ago
> Stocks are just like hens. They lay eggs called “dividends”, The general advice of not worrying about market dips/corrections is good. Even if you only invest at market peaks, if you stick with it and don't sell, things will turn out pretty well: > Meet Bob. > Bob is the world’s worst market timer. * https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market... The specific advice of going after dividends is not as prudent, as one should (especially with retirement savings) go after total return: * https://www.youtube.com/watch?v=UpXI_Vd51dA https://www.youtube.com/watch?v=UpXI_Vd51dA There are a whole bunch of myths that have sprung up over dividends: > Dividend Myth #1: Companies that pay dividends are inherently better investments than those that don’t. > Dividend Myth #2: Dividend investors are successful because they select excellent companies and buy them when they are attractively priced. > [Total of six myths.] * https://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/ https://canadiancouchpotato.com/2011/01/18/debunking-dividen...
- david927 7y ago
  > if you stick with it and don't sell, things will turn out pretty well I think that thinking is at fault, at least in part, for the massive loss that's pending in terms of a deep market correction, because it's valuing based on growth and not on fundamentals. If you can sell eggs for 10 cents each, you have a cap on the price of chickens. Now you can adjust this for future growth but you still have a limit in the fundamentals of getting a return on your money. But when you invest ignoring that, you might do well for a very long time. As chickens go from $500 to $1,000 to $10,000, etc. more people see it and join in, pushing the price higher. In the end, it's a Ponzi scheme. You'll only do well if you get out before it comes crashing down.
  - throw0101a 7y ago
    Notwithstanding the Schiller P/E, it's kind of hard to figure out when things are overvalued, and the average person has not time to track things. On 2018-12-24 the S&P 500 tanked, and a lot of people were freaking out: * https://awealthofcommonsense.com/2018/12/buying-when-stocks-are-down-big/ https://awealthofcommonsense.com/2018/12/buying-when-stocks-... * https://awealthofcommonsense.com/2018/12/5-thoughts-on-the-market-downturn/ https://awealthofcommonsense.com/2018/12/5-thoughts-on-the-m... * https://awealthofcommonsense.com/2018/12/the-forgotten-bear-markets/ https://awealthofcommonsense.com/2018/12/the-forgotten-bear-... And then they went up, and then hit an all-time high a little while ago, and there seems to be a bit of a swoon now (2019-08). For most people, the best thing to do is ignore the news, and put away a little each month automatically ("pay yourself first"). Dollar cost averaging is a thing that works well in most situations.
manjana 7y ago
The problem is just that your dividends are halved if the yield percentage don't double after the stock has halved.
linsomniac 7y ago
I was once building a new computer. I got 2x 32MB memory sticks, for something like a grand. When I bought there were a few places listing them for an impossibly low price, like $100. A month or two later, EVERYONE was selling them at $100. The average investor shouldn't try to outsmart the market. But, if there are indications the price of hens is going to dip dramatically, it may be worth delaying that big purchase.
the_watcher 7y ago
I wholeheartedly agree with the principle here, but not all stocks pay dividends, so it's not precisely fair to compare them to hens in that way.
cko 7y ago
A month ago I sold a sizeable amount of real estate. I will quit my job in 6 months (resulting in lower cashflow). Do I buy as many hens as I can right now? I heard of studies that lump sum investing is better than dollar cost averaging two thirds of the time, but I’m quitting my biggest income source soon. What is one to do in this case?
acchow 7y ago
Wall Street Bets follows this philosophy - it's only a loss if you sell.
cylinder 7y ago
This is, by far, one of the stupidest things I've ever read on this site.

by _bxg1 7y ago

draw_down 7y ago

That’s a good argument for not watching your share prices if you just plan on holding. Not sure it’s good for much else.

quotemstr 7y ago

The problem is that stocks can crash for two reasons: 1) business cycle, and 2) secular economic weakness. In the latter case, that value isn't coming back. Imagine, in terms of your example, that the price of hens dropped because the government passed a law mandating veganism. Would you be wise to buy more hens in this situation?

_bxg1 7y ago
The advice assumes you're investing in an index fund or something equivalent; the market as a whole, amortized, goes up. Individual companies may be a different story.
- quotemstr 7y ago
  Index funds strike me as a very bad idea. They reward unprofitable ventures just for being in some index. Buying into an index fund, therefore, is buying into a class of systemically overpriced assets. Yes, backtested, index fund investment does well---but that's because you're backtesting into an era before everyone was bleating "buy index ETFs!". Between weird investment strategies, the length of the current boom, and the very low interest rates at the peak of the boom, this coming bust is going to be a massacre. I'm honestly not even sure whether the system as a whole will survive it.
  - Bjartr 7y ago
    > I'm honestly not even sure whether the system as a whole will survive it. The question then remains the same while changing. Do I invest in the market, or in canned goods?
    - lotsofpulp 7y ago
      Both.
  - human20190310 7y ago
    Index funds basically delegate "price discovery" to the activity of other investors, and just assume that the market price is the right one. This works as long as there are enough non-index investors trying to outsmart the market by actively trading.
    - loeg 7y ago
      And there will always be active traders setting prices, because it is profitable to do so.
  - robocat 7y ago
    I suspect incredible funds are overinvested (as occurred to many popular labelled investment strategies from the past). But although you might get better returns picking the next strategy, you probably would do fine with index funds. And timing the market has always been a loser strategy (except for a few lucky or skilled outliers).

VikingCoder 7y ago

That is an awful way to think about it. At any given instant, you are about to start investing in something. You may have to stop investing in something else to do it. Your goal at any instant is to maximize the profit of your next few moments of investing. An effective strategy for you MAY to go long, as you describe, holding on to an investment for a long time. But that doesn't mean it's the most effective strategy for everyone. The farmer may do better to unload his hens, live off of cattle for a few years, and then move back to hens.

_bxg1 7y ago
Or you use a robo-investor which does the above for you, and then your only decision is, "Do I invest more in the market or pull money out of the market?" That's where the question becomes as simple as the chickens metaphor.
- sachdevap 7y ago
  I don't think robo-investors do that. They rebalance your portfolio (and that too not very often), and buy more of the cheaper stuff, so more in line with your GP than your parent comment.
gamblor956 7y ago
Your goal at any instant is to maximize the profit of your next few moments of investing. This is only true for short traders or others who measure profits on a horizon measured in hours or less. For everyone else, the chicken example is pretty good, though the feasibility depends on the timescale over which you will be investing.
dageshi 7y ago
No, it really isn't. You're trying to time the market, which is about as reliable as gambling unless you intend to dedicate your entire life to it. The parent post is correct, recessions are opportunities to buy what you were going to buy anyway at a cheaper price and get more for your money, provided of course you don't need the money for other purposes in the near future.

javagram 7y ago

There are plenty of stocks that don’t pay dividends. Moreover living off the dividends and not the principal assumes you have vastly more savings than most people manage to do. For most people, they should anticipate to run down their principal in retirement, not just interest and dividends.

dharma1 7y ago
This depends completely on each individual's circumstances (level of income, your resident country's tax regime/pension rules) but I think many HN readers are in a fortunate position to be able to build up sizeable enough pension pot in 15-20 years, which at retirement can provide a modest income based on 4% yield - without touching the principal.
- throw0101a 7y ago
  > ... which at retirement can provide a modest income based on 4% yield - without touching the principal. You're doing yourself a financial disservice if you focus on dividends. Total returns are more important: * https://www.youtube.com/watch?v=UpXI_Vd51dA https://www.youtube.com/watch?v=UpXI_Vd51dA There is no financial difference between have $1000 in stock and $40 in cash dividends, and having the stock go up to $1040 and you then selling $40 dollars' worth of principal. Treating the $1000+$40 as "better" than $1040 is a form of mental accounting: * https://en.wikipedia.org/wiki/Mental_accounting https://en.wikipedia.org/wiki/Mental_accounting Do a search for "dividend myths".
  - dharma1 7y ago
    true, though from a tax POV they are treated differently in many countries
    - throw0101a 7y ago
      Which would only apply in taxable accounts though. The majority of people probably are using tax-sheltered accounts and are primarily saving for retirement, or their kid's education. If anyone can max out all of those, and pay their cost of living, they're (a) doing quite well for themselves, and (b) probably a small portion of the population. The advice to not focus on dividends but on total returns is geared toward the general public, who probably don't want to get into the minutiae of tax laws. :)

wefarrell 7y ago

That analogy is problematic because it makes no connection between the price of hens and their perceived ability to generate wealth.

_bxg1 7y ago
Further down the blog post (now linked), he looks at historical data which suggests that dividends remain relatively constant despite fluctuations in stock price.

turk73 7y ago

Sure, except a whole of stocks don't pay dividends. Mr. Money Mustache, while entertaining, is making a living telling other people how to FIRE. It's a sham, in other words. It's the same thing as those "get rich quick" books that the author wrote to literally do that.

tcbawo 7y ago

If you were planning on buying more chickens tomorrow, you might be inclined to wait instead if the price is falling. Especially if the cost of hens relative to eggs is near an all-time high.

sachdevap 7y ago
All time high has nothing to do with what the value will be anytime tomorrow. If you can't predict the value for the next day, what is the point of waiting to time the market. Besides, even the worst timers of the market do pretty well with disciplined investments.
overcast 7y ago
It doesn't matter, that's the point. They are laying dividends that you wouldn't otherwise accumulate because you WAITED.
- tcbawo 7y ago
  What if the (expected profit per chicken)/(cost of chicken) was close to the return on a riskless asset, like a government bond? Wouldn't the farmer be more inclined to park money there than take the risk of buying more chickens?

mikeash 7y ago

This is a bad analogy. Hens are a relatively cheap, rapidly depreciating asset that require constant maintenance and will cease to be productive in a few years. The capital cost of the hen itself is essentially negligible. Of course you don’t mind when they get cheaper. This is completely unlike stocks, which you can hold forever at no cost, and whose output, on average, goes up over time. If we need to make an analogy to something non-investors can relate to... well, it’s pretty tough. Which is probably why there are so many different opinions out there about how you should feel in response to various events.

nostromo 7y ago

This is true if you’re buying stocks (hens) for eggs (dividends) — which is true for me because I’m one of those rare cash-flow investors. But I fear that the vast majority of investors are price speculators, not dividend farmers.

H8crilA 7y ago
As always speculators will die. This has been the case for millenia.
- vowelless 7y ago
  So you’re saying cash flow investors are immortal?
  - H8crilA 7y ago
    :) I meant their speculative portfolios will die (probably). I keep my YOLO options portfolio at 1% of my net worth. Gambling money.
andy_ppp 7y ago
Interesting, which stocks should I invest in for dividends?
- jriot 7y ago
  Last week I literally set-up up all my automatic investing since we sold our previous home and made a profit, allowing us to become financially stable. I did 75% in a SP500 index and 25% in an intermediate bond market index. Every month I will put $500 split accordingly into those funds. This is after maxing out our IRAs. Not saying this is the best strategy but simple split with the mindset of keeping the money in there long-term e.g., over 10 years. Does it suck seeing the money we just put in there drop? Yes. Though I know I am in it for the long haul, not the get quick rich approach or attempting to time the markets.
  - 7y ago

johnvanommen 7y ago

I love this post. Market timing is dumb. I put money in the market if it's going up, I put money in the market when it's going down. Always be saving.

at-fates-hands 7y ago
> I put money in the market when it's going down The only problem is when the market is going down, most people are losing money. Therefore, people don't have any excess funds to invest when its technically the best time to invest (when the market is going down).
- irrational 7y ago
  How is money being lost? I buy 100 shares of company X for $10 ($1000). The market tanks and now I can buy 100 shares of company X for $1 ($100). You could say that I now have 200 shares of the company that are worth $200 (a $900 loss), but the market will recover (it always has in the past) so when those shares are again worth $10 I can sell them for $2000. The only way people could lose money is if they sell when the market is down, but you don't sell when the market is down - that is when you use cash or other investments that are not subject to market fluctuations.
  - andreilys 7y ago
    Take a look at the Nikkei 225, it still hasn't recovered from its high in 1991. Your assumption is we have infinite growth on a finite planet, which unfortunately is not the case. Eventually the party will be over, and you'll be left with the tab.
    - defnmacro 7y ago
      > infinite growth Assuming growth is linearly correlated with resources. It's not, wealth can be created though cognitive effort i.e. software engineering. > finite planet Assuming humans are bounded to Earth for growth. The markets are the collective reflection of humanities productive efforts in the form of currency. Saying that growth will cease to exist in the future is the same as saying humanity will cease to be productive, a bet I am not personally willing to make.

vkou 7y ago

If the hens stopped laying eggs at the same time the price of them dropped by 50%, I'd be asking myself why I didn't keep my money in a mattress.

trias 7y ago

Well in the case of stacks, the expected dividend (price of the eggs) also dropped by half. So yes, you really are poorer when you bought those expensive hens compared to someone who buys them at the reduced price.

Godel_unicode 7y ago
That's not how dividends work. Dividends are related to how much profit/cash the company has, and how many shares are outstanding. The price of an individual share doesn't effect that, only issuance of new shares and changes in cash flow.
- ericd 7y ago
  Shares frequently crash in conjunction with economic pullbacks, which mean lower revenue/earnings for companies, which means less spending by those companies, which means lower revenue/earnings for other companies, and layoffs, which means lower earnings for workers, which means less spending, etc etc.
  - Godel_unicode 7y ago
    Shares of individual companies also frequently crash for reasons totally unrelated to economic pullbacks, and thus none of those things are guaranteed to happen simply because a share now costs less.
    - ericd 7y ago
      Sure, but I assume we're generally talking about index/portfolio investing here when we talk about stocks in general?

martin_bech 7y ago

Yes and No. For single equities this is true. But if this means a markets are going to turn, credits are going to dry up, and demand is going to plummit, then you are going to have massive problems, in your egg company.. customers might default, your creditline might disappear, and your customers might see eggs as an unwanted luxury, when they can just eat dirt..

aqme28 7y ago

This is why recessions can be good for the young and employed. If the price of eggs drops 50% once you're retired, then you might be in a lot of trouble.

MrMember 7y ago
If you're still invested in something that can lose 50% of its value when you're retired, you should rethink your investments.
- throw0101a 7y ago
  You're not wrong, but it's a matter of balancing risk, which is the point of having an allocation towards equities (stocks) and fixed income (bonds). Recoveries have generally take up to 2-3 years, so if you have that much of your portfolio in cash and GICs, you can weather a downturn without having to touch your equities: * https://www.myownadvisor.ca/cash-wedge-opening-investment-taps/ https://www.myownadvisor.ca/cash-wedge-opening-investment-ta... One suggestion, which is not popular, is to take a portion of your retirement savings and buy an annuity: enough to cover your day-to-day expenses. This way, regardless of what your invested portfolio is doing, food and shelter (rent/property taxes) are covered. You would consider the annuity as part of your fixed-income ("bond") portion of your portfolio.

tabtab 7y ago

Dividends alone don't pay out that much on average. The main value of holding onto stocks is in selling them for more later. Dividends alone are probably not a good reason to buy and sit on stocks.

MandieD 7y ago
My T and GIS beg to disagree.
OrangeMango 7y ago
http://www.crsp.com/files/Big_Picture_2019.pdf http://www.crsp.com/files/Big_Picture_2019.pdf Look at that. US Stocks with dividends reinvested: 6 million dollars. US Stocks without dividends reinvested: 200 thousand dollars.
- tabtab 7y ago
  Are you saying investors prefer stocks that pay more dividends? That's a different issue. I think there's a misunderstanding here.

tomc1985 7y ago

Chickens' eggs are worth way more in proportion to the chicken than dividends are to a stock. The only way you're capturing appreciable amounts of money in dividends is with a very large portfolio. This kind of advice doesn't help folks trying to build a portfolio from nothing because $25 in monthly dividends doesn't really do or mean much. I mean, of course don't try to time the market, but this story only further propagates the lie that everyone(tm) can make money on the stock market without gambling aggressively

H8crilA 7y ago
In the long run it's only dividends that matter. Using Robert Shiller's long term stock market data we find that s&p returns without dividend reinvestment is about 2%, after inflation. With dividend reinvestment it's about 6%. That's a 2x difference in 20 years.
- tomc1985 7y ago
  But, again, you need to making enough money from dividends to be able to reinvest. What about the guy with a $1,000 portfolio, or all the retail rubes with small portfolios on Robinhood?
  - H8crilA 7y ago
    If your income is lower than spendings then you can't invest as successfully as someone who has the opposite situation. More income = more money, what's weird about that? A $1000 will not get you anywhere. You can maybe turn it into $2000 after inflation within 5-10 years, on average.
- alasdair_ 7y ago
  >In the long run it's only dividends that matter. Stock buybacks are a thing, and are generally better than dividends for the owners of stock since they can choose whether or not to have a taxable event.
  - 7y ago

gingabriska 7y ago

Well as someone whoes has bank in Tokyo, I find it's difficult to invest in US stocks without paying withholding taxes. Where do other international investors like ones from Singapore, Hong Kong invest? And what vehicles they use for minimizing taxes as an international investors. I've USD cash in bank, so if USD falls in value my wealth is erroded overnight. Can someone suggest what I should be doing?

rb808 7y ago

If you're a proper farmer you probably have a big loan, if the price of hens drops 50% the only one calling will be the bank to foreclose on your farm.

seanmcdirmid 7y ago
Only if you are using your hens as collateral for the loan, which isn’t very likely. As the hens are just overhead, the banks are more interested in the value of your farm (eg related to the price of eggs you are selling).

benj111 7y ago

I prefer the Buffett version: "A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying" https://finance.yahoo.com/news/warren-buffett-why-stocks-hamburgers-031629347.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuYmluZy5jb20vc2VhcmNoP3E9YnVmZmV0dCUyMGJ1cmdlciUyMG5ldCUyMGJ1eWVyJnBpdm90PXdlYiZta3Q9ZW4tR0Imc2V0bGFuZz1lbi1HQiZpbnB1dD0x&guce_referrer_sig=AQAAAEli9SrakWBo84O_nD2vAWFAMZdOCBAuCixe-gZEWnJNH2WTsd-VUwKNcaIWceNTDgow7rrCBwcu5jYVjmk31HFhuz3ZqsNyinzzzAK_J_pxlLPVUFagnozZUdua1wJ421kMPbZv-Hncq2SgMfEIMMPNwI8CR-lBXaiYvMyw_giy https://finance.yahoo.com/news/warren-buffett-why-stocks-ham...

seanmcdirmid 7y ago

If you are leveraged, then you may or may not be able to pay back your loans depending on the price and demand for the eggs you are selling. If the price of hens have fallen, it could be because there are too many hens or demand has fallen because the price of eggs has fallen. For us, if stocks get too weak, the boom might be over and our ability to retain and obtain jobs that pay as much as they do now is very much in jeopardy.

throw0101a 7y ago

> Stocks are just like hens. They lay eggs called “dividends”, The general advice of not worrying about market dips/corrections is good. Even if you only invest at market peaks, if you stick with it and don't sell, things will turn out pretty well: > Meet Bob. > Bob is the world’s worst market timer. * https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market... The specific advice of going after dividends is not as prudent, as one should (especially with retirement savings) go after total return: * https://www.youtube.com/watch?v=UpXI_Vd51dA https://www.youtube.com/watch?v=UpXI_Vd51dA There are a whole bunch of myths that have sprung up over dividends: > Dividend Myth #1: Companies that pay dividends are inherently better investments than those that don’t. > Dividend Myth #2: Dividend investors are successful because they select excellent companies and buy them when they are attractively priced. > [Total of six myths.] * https://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/ https://canadiancouchpotato.com/2011/01/18/debunking-dividen...

david927 7y ago
> if you stick with it and don't sell, things will turn out pretty well I think that thinking is at fault, at least in part, for the massive loss that's pending in terms of a deep market correction, because it's valuing based on growth and not on fundamentals. If you can sell eggs for 10 cents each, you have a cap on the price of chickens. Now you can adjust this for future growth but you still have a limit in the fundamentals of getting a return on your money. But when you invest ignoring that, you might do well for a very long time. As chickens go from $500 to $1,000 to $10,000, etc. more people see it and join in, pushing the price higher. In the end, it's a Ponzi scheme. You'll only do well if you get out before it comes crashing down.
- throw0101a 7y ago
  Notwithstanding the Schiller P/E, it's kind of hard to figure out when things are overvalued, and the average person has not time to track things. On 2018-12-24 the S&P 500 tanked, and a lot of people were freaking out: * https://awealthofcommonsense.com/2018/12/buying-when-stocks-are-down-big/ https://awealthofcommonsense.com/2018/12/buying-when-stocks-... * https://awealthofcommonsense.com/2018/12/5-thoughts-on-the-market-downturn/ https://awealthofcommonsense.com/2018/12/5-thoughts-on-the-m... * https://awealthofcommonsense.com/2018/12/the-forgotten-bear-markets/ https://awealthofcommonsense.com/2018/12/the-forgotten-bear-... And then they went up, and then hit an all-time high a little while ago, and there seems to be a bit of a swoon now (2019-08). For most people, the best thing to do is ignore the news, and put away a little each month automatically ("pay yourself first"). Dollar cost averaging is a thing that works well in most situations.

manjana 7y ago

The problem is just that your dividends are halved if the yield percentage don't double after the stock has halved.

linsomniac 7y ago

I was once building a new computer. I got 2x 32MB memory sticks, for something like a grand. When I bought there were a few places listing them for an impossibly low price, like $100. A month or two later, EVERYONE was selling them at $100. The average investor shouldn't try to outsmart the market. But, if there are indications the price of hens is going to dip dramatically, it may be worth delaying that big purchase.

the_watcher 7y ago

I wholeheartedly agree with the principle here, but not all stocks pay dividends, so it's not precisely fair to compare them to hens in that way.

cko 7y ago

A month ago I sold a sizeable amount of real estate. I will quit my job in 6 months (resulting in lower cashflow). Do I buy as many hens as I can right now? I heard of studies that lump sum investing is better than dollar cost averaging two thirds of the time, but I’m quitting my biggest income source soon. What is one to do in this case?

acchow 7y ago

Wall Street Bets follows this philosophy - it's only a loss if you sell.

cylinder 7y ago

This is, by far, one of the stupidest things I've ever read on this site.