We awoke this morning to another beautiful Baja sunrise. Violet, pink and orange floods the sky for the first 15 minutes of dawn before the sun breaks the horizon and blue sky is revealed. We get the same beautiful ritual in the evenings and are eagerly anticipating the uninterrupted views of protected anchorages farther south. We hope to ‘splash’ the boat this week and spend a few days testing the systems and doing a couple of test cruises out into the bay here as a precursor to our first passage from Peñasco to Bahia de los Angeles. Our daily work preparing the boat and making any critical changes to her and our systems will (hopefully) soon bear fruit.
Yesterday was an important day in my work, the third Friday of the month is the expiry date for some of the options that I trade to make our income as we travel. Erin has been incredibly diligent and successful at earning and saving throughout her career. I and the girls have benefitted enormously from her hard work, but have also struggled as we watched the toll it took on her. We collectively felt the cost of Erin being away in Vancouver three days each week since we moved to Whistler, which ended up being one factor in our making the decision to give it all up and bet the farm on a different way of life. As the sailing dream started to solidify, I also started to intensify my thinking and efforts around relieving Erin from the burden of having to earn income for our family and taking on the responsibility in that area of our life.
Part of that strategy is really one of simplification; the move to the sea has resulted in a massive reduction in our fixed monthly expenses. No home insurance (although as I wrote this sentence it suddenly occurred to me that I might have forgotten to cancel it. Cue: quick deviation to email our broker), no vehicle insurance or vehicle expenses, no property taxes, no gym memberships (who am I kidding, I hate the gym). We’ve also eliminated all the costs of going to work for Erin – clothing, travel, meals, and even haircuts (yikes!) as well as several costs related to the girls as well. We not only sold our home in Whistler, but also two vehicles, bikes (x5), two motorcycles, all furniture, tools, toys, sports equipment, clothing, kitchen items…we ended up condensing our life into 6-8 large plastic bins. The mental release I felt during this process makes me much more cautious about acquiring stuff going forward.
I remember reading Live on the Margin by Pat Schulte and Nick O’Kelly when it was published. Pat and his wife Ali have been living on boats and in vans since 2003, and Nick and his wife Megan are currently living aboard a catamaran similar to ours, and they fund their respective travels through trading. In a way that book planted some seeds that have grown over the last few years and created a pathway to Skookum V. Pat talks in the book about his own realization of the cost ‘going to work’ and then outlines how he started as a trader and how he used those skills to fund their travels working 100% remotely from their boat, van, RV…wherever.
Another book that had an impact on me at that time was The Four-Hour Work Week by Tim Ferris, which I read just before a previous sailing-sabbatical I took in my late 20s (we do our best not to refer to that adventure as ‘Take One’). Tim put words to an energy inside me that resisted the conventional career path. The book expounds on Tim’s philosophy of working hard to identify and leverage one’s skills and knowledge to get non-linear (as in not 1 hour for $x of payment) returns. I have a strong aversion to having to be ‘at the office’ at set times of day, and also really dislike trading time for money – being paid by the hour. On the outside I may look like a bum – I ‘ve retired 3 (or is it 4?) times already at age 41. That, or that I’m just not that career orientated. I certainly to-date have not found a job or career that really excited me and felt like a good balance of effort, purpose and financial reward. Over time I’ve come to realize that I place a very high value on personal freedom, the phrase that came to resonate with me is the freedom to act. Not the unbridled ability to act selfishly nor acquire unlimited material possessions. Rather it’s something of holding the freedom of myself, my family and my friends to do whatever they would like to on the earth in tension with an also innate sense that the world can be better and that I have a responsibility to act positively in the world for its (and my/their) betterment.
Erin and I spoke many times about retirement planning early on in our relationship. We bought books on managing money as a couple and have even met with a financial advisor to create a plan, but never found a fit that resonated for us. It seemed that no matter where you looked the model was broken. It was essentially we’ll take all of your funds, invest them to generate mediocre returns, and we’ll charge you 2% off the top no matter how we do. Over time we came to the conclusion that for us we felt more comfortable self-managing our money – which, ultimately, I would recommend for everyone. [Side note: Beat the Bank by Larry Bates is a great start for Canadians who are thinking about this.] We ended up walking away from that financial advisor and I kept looking for the tools to help me advance a self-managed investing strategy.
Having decided that we didn’t want to entrust someone else to manage our money and ultimately grow our retirement savings, I needed to find a way to take action, but felt somewhat overwhelmed by the range of options and conflicting opinions. I read several books during this time – often on Audible while renovating our house – but one grabbed my attention in a way that I knew I had to act. It was Invested by Danielle and Phil Town. Danielle, Phil’s daughter, is a lawyer who had zero interest in her Dad’s career or money throughout her life. In her early 30s she realized that despite earning a very good income as a lawyer she was not confident that she was building a stable and secure financial base for retirement. Reluctantly, she asked Phil to teach her about investing, something he had wanted to do her whole life. I think the combination of Danielle being a 30-something female lawyer and the parallel to Erin was meaningful, and the book lays out such a clear strategy to long term predictable results that don’t require expert financial knowledge. I found it very compelling.
I had first heard of Phil through friends that saw him at a conference in Vancouver in 2017. He has written several books on investing, advocating the Warren Buffett/Charlie Munger value-investing school of thought and Phil is a very successful hedge-fund manager. Phil and Danielle have a weekly podcast InvestED that is really accessible and a good entry into the subject matter. Having read both Rule One Investing and Invested, I decided that I wanted to go to Phil’s free weekend investing seminar and was convinced that this method of investing was in our future. On June 6th, 2019, my 40th birthday, I flew down to San Diego to attend the seminar and in July I enrolled in Phil’s 2-year investing course, which I am still completing. Marking my 40th by getting myself a financial education that could change the course of my next 40 years on the planet felt very appropriate and empowering. Ironically, or fatefully, exactly one year to that date later, Erin and I made the decision to make a major change in our lives, but more on that in a future post.
Since June 2019 I’ve been trading with a small amount of funds practicing the skills, but the move to the boat was predicated on my ability to earn us a stable income as we travelled, and that was initiated in December with the sale of our house. Basically, I created a new job and a new career. I can do it from anywhere as long as I can connect to the internet. I can work at any time of day or night, and I can work with kids sitting on my lap or barefoot in a pair of board shorts. It requires me to take calculated risks and manage my emotions – both exuberance and fear – and to read the newspaper daily to keep in touch with the business and financial news. Really, it feels like the perfect career for me.
So what do I do? Essentially, I do two things: sell options to generate income on a monthly or weekly basis, which is our money to live on while we sail; and research and buy shares in companies that we believe in and want to support over the long term. Options training is basically selling insurance. I promise to buy a specific company, say Zoom (ZM) at a specific price, for a specific time period. If you own shares of Zoom and are worried that they may decrease in value over a specific time period you can buy insurance that guarantees the lowest price the shares will decline to before someone else is obligated to buy them from you at a set price, the strike price. Yesterday for example I could have promised to buy Zoom at a price of $325 at any time between now and February 12th and any person could buy that insurance from me for a payment or premium of around $5.60. Options contracts are sold in 100 share blocks, so 1 contract at $325 commands a total premium or net credit of $560 USD.
That might sound a little complicated, but basically, I look at the options pricing on a given stock on a given day and decide whether the premium is worth the risk – the risk in this case being that Zoom’s price drops below $325 before Feb 12th and I am ‘put’ the stock. Zoom was priced at $384.53 yesterday, so my strike price would be about 15% below that. The annualized return on investment in this case would be about 21%, so we’re generating cashflow from our savings by selling these options. The concept is that by restricting our trading activity to great companies that we believe in, and that (we hope) will succeed over the long term the downside risk is very low. In this example, in the event Zoom’s price drops drastically, say a 50% drop to $190, as long as we are in a position to hold the stock for the long term until the price recovers then we are effectively insulated from the loss. The exception being if a company goes through bankruptcy, then of course we would be exposed to a total loss.
The second half of the work is searching for great companies that we love, evaluating their worth or value (distinct from their price on any given day) and watching for them to go ‘on sale’. This is the long-term value investing that Warren Buffett and others have employed successfully to build their wealth over time. It’s not as sexy as options trading in a way but is more lucrative over the long term. The goal is to buy a company at 50% of its intrinsic value, creating a margin of safety. In the last year tech companies have been trading at very high prices and other sectors like energy, banks and consumer staples have not been doing as well. The trick is to find companies that you love, can understand fully and believe in, and that are on sale. In the last year, especially in March and April there were many opportunities like that, and even today there are a few companies on our list that are on sale. Our goal is to balance trading for income against long-term investing.
On a day-to-day basis I’m watching companies that I like either as long-term prospects or as short-term trading candidates. I read the newspaper most days and check in on the stock market every day that I have internet access. A couple of nights each week I spend time after the kids and Erin are in bed generating ideas, and then when the market opens at 7:30am (Peñasco time) I spend between 15 mins and 2 hours placing orders and seeing if they fill. On average it’s probably 30-45 minutes. All in all, I’m probably working on it for 8-10 hours per week, and in December and January we have been able to maintain a higher income level than when Erin was working. It will be less predictable, and there will be losses at times, but with a tolerance for risk, I feel very confident that we can sustain our needs for our sailing adventure. I am quite confident that this is actually a career for me for the long term and one that enables Erin to choose how to spend the post-sailing season of her life doing things she wants to do, rather than things she is obligated to do.
So back to yesterday, and why the third Friday of each month is significant. Options contracts can be sold on a weekly or monthly expiry, and the monthly expiry date is the 3rd Friday of each month. While I am paid the premium at the moment the contract is sold, I don’t know if my ‘bet’ has paid off until the contract expires. I had 17 different trades expiring yesterday, and whilst most had been quite safe, or far out of the money, a couple were closer than I would have liked, and I was watching them carefully. At the close of the market yesterday I was able to change the label in my spreadsheet from Open to Expired, and at that point the premium became income, rather than obligation. This month, like last month, my bets paid off and the premiums were added to the income-earned column.
Since the sale of our house closed at the end of November, we’ve averaged over 40% annualized return, quite a bit over our goal of 25% per year. It’s validating to see the plan working, and I’m extremely grateful to Erin both for her hard work in creating our little pot of gold and also in entrusting me to manage it. I’m also grateful that learning this skill enables us to travel with an indefinite time horizon. I don’t expect us to be perpetual cruisers, although we do know several couples who are, but I like the thought of choosing to end the journey on our own terms when we do decide it is time to pull up to the dock for the last time. Here’s to many, many more months staying afloat!
I even managed to get through this whole article without mentioning bitcoin once. I’ll save that for a future post.