💰 The BEST Way To Define True Financial Freedom

What’s on the Menu 🍴

If the point of growing your dough is more freedom…

Then why are financial goals so elusive and unclear?

In today’s issue, we’re diving into how to create a clear financial target…

And you’re learning about drawdowns through a profitable investment we’ve had over the past year.

Also, we’ve got a busy earnings season on the horizon while stocks are at all time highs.

Let’s get into it!

• The BEST Way To Define True Financial Freedom 💰

• META: A Case Study On Investment Drawdowns 💻

• What To Watch This Week 👀 

Today’s newsletter is a 5 minute read.

The BEST Way To Define True
Financial Freedom 💰

Financial freedom is not just a dream, it’s a calculated destination.

Today, let's break down a concept straight from physics, but with a twist:

"Escape Velocity" for your investment portfolio.

In physics, escape velocity refers to the speed needed to break free from a celestial body’s gravitational pull.

And in investing, escape velocity is the point where your portfolio’s growth outpaces the cost of your dream lifestyle.

Imagine your portfolio compounds annually at 10%, and your dream lifestyle expenses are only 3% of your principal.

This means your wealth continues to expand, even as you live your best life, without additional work or capital injections.

But how do you calculate your personal escape velocity?

1. Start by figuring out your annual dream lifestyle costs.

2. Then, calculate your portfolio’s estimated annual returns.

3. Choose a withdraw rate that’s lower than your average returns.

Let’s look at an example…

Case Study: Dream Lifestyle on a $10M Portfolio

1. Consider a $300K/year dream lifestyle

2. Let’s assume a 10% average annual return

3. If we withdraw 3% a year, we’d need a $10M portfolio to get $300k/yr

A lower lifestyle burn or higher expected returns mean you need less in your portfolio.

Diversifying for Optimal Returns

Here's where it gets interesting. Different assets have different return potentials:

• Stocks: we can estimate a 10% nominal and 7% real return (after inflation)

• Real estate: I use a modest 3% real return, after costs

• Startups are trickier - assume a total loss, and treat any gains as a bonus

• Bitcoin: we need to get a little creative…

Bitcoin’s Role in Your Escape Plan

Bitcoin, with its rollercoaster-like trajectory, demands a bit of creativity to find an estimated future return.

It's had a staggering 124% annualized return over the past decade.

But let’s be conservative: what if Bitcoin compounds at 25% over the next decade?

Here’s a glimpse at where its price could go:

• Year 1: $50,000

• Year 2: $62,500

• Year 3: $78,125

• ...

• Year 10: $372,529.03

Imagine the impact bitcoin could have on a portfolio blended with stocks, real estate, and startups!

If bitcoin’s global adoption continues, adding it to your portfolio could reduce the required size of your portfolio to achieve escape velocity.

Your Escape Velocity Number: A Beacon to Financial Freedom

Knowing your escape velocity number isn’t just a neat calculation - It’s your beacon towards financial freedom!

It's about understanding how your investments can sustainably fund your dream lifestyle, marking the threshold where work becomes a choice, not a necessity.

So, what's your escape velocity number?

META: A Case Study On
Investment Drawdowns 💻

META (previously Facebook) has been on an epic recovery from a loss of investor confidence that sent the stock down a whopping -76% from the highs.

As an investor, drawdowns will happen to us. We may have a thesis on a stock, buy it, and watch it continue lower… and it doesn’t feel good.

But, my personal investment in META, plus many others I have experienced, lead to a great lesson in drawdowns.

They’re not fun, but, they also don’t mean your thesis isn’t in tact and won’t eventually work.

META is a spectacular example of why “information isn’t always priced into a stock”.

Let’s begin with what happened to META on a zoomed out view.

META ran to all-time-highs in 2021.

After worries that Mark Zuckerberg was going to spend META into the ground for the Metaverse product, and earnings we’re weakening, the stock plummeted.

Smart investors knew one very important thing: Zuckerberg had levers to pull, and he wasn’t going to let META fail.

All he had to do was pull back on Metaverse spending to increase company free cash flow.

The stock was trading at a rock bottom valuation.

Fundamental investors with the right skill could snuff this out.

That’s what we did in our Wealth Building Community. I was buying, so was our mentor Travis Devitt.

BUT… I was early.

Hence comes the lesson on drawdowns.

My actual purchase on META is marked up on this chart. You can see, I sat through a -48% drawdown after my purchase. This happens a lot, as timing perfect tops and bottoms is not always easy.

The drawdown didn’t scare me out of the trade because I had confidence in the thesis and valuation (thanks to fundamental analysis!).

I had a financial advisor once tell me “if a stock ever draws down more than -25%, get out”.

While this could work, and you can simply get back into the stock lower… it’s not this easy.

There are many things that can go wrong if you try to do too much trading in and out of a position causing you to be worse off (don’t forget wash sale rule traps for U.S. taxpayers).

In my opinion… it’s better to have a strong fundamental analysis skillset so that you can avoid “noise within a drawdown”. You can know which drawdowns you should be worried about and possibly bail on the trade vs. others.

META would have been a great opportunity for an addition of shares as it went lower and got even less expensive…we call this “averaging down”.

Another very good example of sitting through a drawdown that went right, was my purchase of ANF (Abercrombie & Fitch).

I sat through a -59% drawdown to then watch price move roughly +1200% from the lows! Talk about patience.

So the lesson in all of this, is that a drawdown doesn’t mean your thesis isn’t in tact.

It takes a special skill to know when to hold em’ and when to fold em’.

We teach this in our Wealth Building Community if you want to learn how to manage your trades better and know how to manage the noise for max profitability.

What To Watch This Week 👀 

Last week the S&P 500 and the Nasdaq indices pushed to new all time highs despite a brisk increase in government bond yields.

Can the momentum continue?

Q4 earnings reporting season may hold the key…

Earnings season really kicks into gear this week with a broader set of companies reporting including Tesla, Netflix, Intel, and Visa:

Semiconductors and AI themes remain hot, especially after TSMC gave strong guidance for 2024.

Outside of semis, the post-earnings stock reactions have been underwhelming, but it’s still early.

On the macroeconomic front we’ll get interest rate decisions from three major central banks: the the Bank of Japan, the European Central Bank, and the Bank of Canada.

We’ll also get the following data releases:

• German Manufacturing PMI (Tues)

• US Durable Goods Orders (Thurs)

• US Q4 GDP estimate (Thurs)

• German consumer confidence (Fri)

• US Personal Income & Spending + Core PCE Price Index (Fri)

We’ll need to watch the bond markets closely with so much happening around interest rates and central bank policy.

Crypto cooled off last week, though Bitcoin & Ethereum seem to be holding key levels for now.

Rate sensitive sectors such as utilities, REITs, and alternative energy have also weakened lately.

We’ll keep an eye on those this week as well as the following assets & sectors:

📈 Rising Recently:

• Semis (SOXX / TSM)

• Software & Internet (IGV / FDN / QQQ)

• Cannabis (MSOS)

• Regional Banks (KRE)

• Uranium (SRUUF)

📉 Falling Recently:

• US Government Bonds (TLT / IEF)

• Solar & Cleantech (TAN / PBW)

• Energy (XLE / XOP)

• Crypto Miners (WGMI)

• Chinese stocks (FXI / KWEB)

Delicious Bites 😋

• California Minimum Wage Hike Spurs Massive Layoffs

• Bill Gates thinks the super-wealthy should pay more tax

• Whiskey, Rolexes, and trading cards are in a spiraling crash

• Stocks Are at Record Highs, but Things Will Only Get Harder From Here

• The Reason “Return to Office” Isn’t Working Anymore

Food For Thought 🧠

"Money is only a tool. It will take you wherever you wish,
but it will not replace you as the driver.”
- Ayn Rand

DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.