The Yin Yang Investor Mindset post talks about looking for opposite investment opportunities whenever one asset class is roaring. I used the sell-off in bonds as an example of finally beginning to build a meaningful muni bond portfolio to earn double taxation free income.

Now I’d like to highlight more reasons why folks who have a large enough financial nut, are within five years of retirement, or are already in retirement should consider allocating more towards bonds.

For over 20 years, I was heavily invested in equity to try and build my financial nut as quickly and as large as possible. However, after a 10-year bull market in equities that began in 2009, I decided to take down risk. As a family-man now, the last thing I want to do is lose money and have to go back to work. 

One of the reasons why I left institutional equities in 2012 was because I felt it was a dying business. Not only were trading commissions getting squeezed due to algorithmic trading and other technological advancements, assets under management (AUM) for active money managers was also declining due to poor performance.

Working harder and getting paid less was already demoralizing. Watching my clients I cared about work harder and underperform their respective indices made me feel like my job was pointless. When you feel like your job is pointless, it’s time to do something new.

Since the time I left my day job, the business has only gotten worse for actively managed funds. Yes, it is true that passive money managers gained a tremendous amount of assets during this time period. But there is no excitement speaking to an index fund manager or analyst because they don’t do any analysis. All they do is follow the moves of their benchmark indices. For example, if the S&P 500 removes one name from its index, so does the index fund manager.

As of 2020, the market share of passively managed equity funds has risen to 45 percent according to Bank Of America. For passively managed bond funds, the market share is roughly 25 percent. The market share gains will likely continue.

Let’s look at some active versus passive fund management performance in equities and fixed income over the past 10 years and see what we can discover.

Ever since making a goal to accumulate $1,500,000 more capital or generate an additional $60,000 in retirement income by the end of 2022, I’ve been thinking of various ways to make more money. Given neither my wife or I have a job, we are facing an almost impossible financial challenge.

After much consideration, I decided one way we could achieve this stretch goal is by taking more investment risk. When you also have two little kids to take care of, taking more investment risk is not my favorite way. But I was running out of options.

Take a look at this graphic below and tell me what you see.

What you see is a purchase of a measly three shares of Tesla stock at $694.04, $698, and $698.94 for a combined total of $2,090.98. The Tesla stock purchase comes after the account was funded with $243,000 that was safely earning 1.75% in an online savings account. In other words, less than 1% of the capital was deployed to purchase Tesla stock.

The example is a great definition of the phrase: chicken shit.

After Tesla rallied to over $950 a share, I began to feel FOMO that I didn’t build a large enough position in the name at a reasonable price. I had about a $150,000 position at the time and wanted to build a $200,000 position to one day get rich.

For roughly 20 years, I’ve always had a “Punt Portfolio,” equal to 10% – 20% of my public investments, where I buy individual stocks to try and outperform the S&P 500. My decision to take more investment risk to hopefully get rich meant hitting the top end of the 10% – 20% range.

With Tesla, I began to daydream that 15 years from now the company could be a $1.5 trillion market capitalization company (10X from here). If I had a significant size position, I could brag to my kids that their old man had the foresight and the guts to invest in Elon when his company was still in its relative infancy. I could also tell them the reason why I was able to be a stay at home dad all these years was due to this one investment.

Based on my analysis on whether to buy Tesla, I decided to attempt to buy $50,000 more Tesla stock under $700/share, a 35% pullback from its highs. When the share price dipped below $700/share on the morning of February 6, I began to buy one share at a time. I could because buying and selling stock is now free.

I figured I would buy around 75 shares over several hours in the morning. I was simply too scared to buy a significant amount of stock at one go due to the stock’s tremendous volatility. Unfortunately, Tesla shares stayed under $700/share for less than 30 minutes before rebounding higher.

After 10 years, my $60,000 investment in a private gin company finally paid dividends. Initially, given the company was sold for about $49M after expenses and I had invested in the company at a $10M post money valuation, I was thinking I had made a ~3X return ($180,000). Since over time shareholders get diluted with subsequent funding rounds, I thought that was a reasonable assumption.

Well it turns out I didn’t come close. Instead, here’s what I got:

Gross Proceeds: $98,425.88
Federal Withholdings: $0
State Withholdings: $6,523.82
Net Proceeds: $91,902.07

What the hell!? After almost 10 years, with $98,425.88 in gross proceeds, I only made a 64% return on my money (1.64X). Further, I had ZERO liquidity and lost hope for years that I’d ever get my $60,000 back. Doing the math, I only made a 5.1% IRR, barely better than my guaranteed 4.1% 7-year CD that just expired.

So where did all the money go since the company was sold for 5X what I bought in for? Based on an internal document I received, we had to pay a lot of banker, lawyer, escrow, accounting, and general administration fees. We also had to pay severance packages to all the employees (rightfully so) who were made redundant when the parent company took over. But there must be something else I’m missing, which I’ll investigate further.

Despite the missing money, I consider myself LUCKY to get any money back because most startups fail miserably. Before the buyer announced the acquisition, I had already written off the $60,000 because shareholders had never gotten a dividend and the growth target dates kept on getting pushed out.

My concern was the company would turn into one of those zombie companies with just enough growth to maintain EBITDA break even, but never enough growth to become an attractive acquisition target.

When the purchase price was announced, my write-off expectation transformed into greed. And now with the payout, my greed has turned into selfish disappointment.

Something very bad happened to me the other weekend. I lost $800 dollars betting on the 49ers to win the Super Bowl. Earlier, I had won $600 betting on the 49ers to beat the Vikings and the Packers. But lost it all and then some when the 49ers couldn’t hold onto their 10-point lead.

I told my father about my losses because I also bet him a steak dinner that the 49ers would win. Instead of showing empathy for my loss, he immediately questioned whether I have a gambling problem.

I responded with an emphatic, “No I do not!”

But isn’t denial how all gambling addicts respond when they are first questioned? It’s only when gamblers recognize they have a gambling addiction that they can start to heal.