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Some Brain Farts can Cost you $3.5 million, slowing down your F.I Journey

I never had brain farts that cost me dearly monetary wise for some time (touch wood).

Brain farts, for those that are not acquainted with the term, is some temporary mental lapse in judgement.

I think the closest was in 2009 January. That was in the midst of one of the greatest financial crisis of our time.

I decide to spend $2,107 on a STI put warrant.

The idea was to hedge my downside exposure for the portfolio. Given that is the objective, if I lost money on this, at least it means the rest of my holdings would have recovered. If I made money then it will minimize my unrealized losses.

Turns out, my positioning sizing is a problem, and that holding on a warrant till expiry is a stupid thing to do versus selling off at some point.

This, has been one of the only time I lost 100% on something and I kept asking myself what the f#%k was I thinking of 10 years ago.

Perhaps my greatest brain fart happen during army days.

It was early in the morning, we just finish running six rounds round the 400m tracks. We were supposed to fall in to do our routine pull up. To get to where the bar was, there was a low wall in between.

I am not sure what happen that early morning but strangely I got the idea that I was short enough to squeeze beneath that low wall.

So I did a light jog and went ahead.

I fell and end up with a wound so deep on my forehead that I had blood all over me. I had to get sewn up, I got to go home. But my sergeant got a lot of extra due to my stupidity.

My mates, till this day, refuse to believe that I could squeeze past that low wall.

Well, at least my brain farts haven’t resulted in me losing 3.5 million dollars.

The Brain Fart

This was an interesting sharing that I read over at the /r/FATFire subreddit.

FIRE for those who are not aware, is short for financial independence retire early. FAT FIRE are for those folks who pursue to be financially independent, and retire early with an expense that is likely more than US$40,000, often meaning they desire good comfort in retirement. So this subreddit is for them to exchange ideas.

It is in this thread that one person decide to share his FAT Fire journey including a recent “setback”.

And it all started from the simplest of mental accounting.

So he decided that he wanted to go to the Super Bowl. Tickets for Super Bowl cost US$16,000.

Being brought up with a frugal mindset like his father, the ghost of frugality still haunts how he thinks about things.

And so he has second thoughts about his decision.

However, he felt its better if he “earned” the money that he would be spending.

Coincidentally at the same time, he was feeling uneasy about the equity market and so, despite the possibility of incurring tax on capital gains in the USA, he decided to sell all his equity holdings. This means that he has a giant amount of cash sitting in his brokerage.

So in his mind, the fastest way to earn a lot of money, within a few days, was through leveraged volatility ETF.

Now, he would be the first to admit he knows next to nothing about volatility ETF. So he decide to invest a few hundred thousand dollars into an ETF, which is a bet that volatility would increase, and he would gain from it.

The Friday before Superbowl, his trade worked out, and he closed the trade making about US$18,000. The problem is that short term capital gains in USA is also taxed, so he ended up with only US$9,000.

Mentally accounting wise, he was still short.

So on the mid-day on the Friday before the Super Bowl, he is really not feeling good about still short of $7,000.

You would think that, its ridiculous to pay $16,000 for a football ticket but this is not the ridiculous part of this story. There are many possibly more ridiculous things.

Such as his net worth at this very point, was US$10 million.

So he decide to reverse the trade and buy a Leveraged ETF where he makes money if the volatility drops.

Overcame by the desire to make quick money, he decide to “invest” US$1 million. On that Friday, the market tanked, volatility went up and he is down $200,000. He thought this couldn’t continue, and decide to “invest” another $1 million. After all this, he had US$4 million invested (because his brokerage account is now flushed with cash), and by the end of that Friday he was down by a few hundred thousand.

The market crashed on Monday, then continued on Tuesday.

He ended up losing a total of $3.5 million.

Why it is called a Brain Fart

Is because in most situations this would not happen.

While the guy was the first to admit that he was not familiar with leverage volatility ETF, his training means he has higher competency in finance stuff than most people, since he is in investment banking and even started his own firm.

I think sometimes that frugality prison would work against us if we don’t be reflect about it well.

There were times this year where I experienced some similar mental compartmentalization that, if I stepped back, made little sense.

Earlier this year, I saw this really large travel suitcase that someone in my area picked up. I thought that this would be rather useful to put away some of my stuff in the house. Even better that it has wheels so you can move it rather easily.

So I contacted the Freegan, and decide to go to her place to get it. I made that trip at night via LRT, took some time to find her place, and then get the suitcase and drag it all the way home.

Somewhere near the end as I got off the LRT station, I reflected upon the way I spend my time that day.

The suitcase probably cost $80 brand new. And on that day alone, I lost $3,500 in net worth.

Would my time better spent evaluating the big money decisions, or spending time doing all these Freegan stuff?

I reasoned that, I have to get something out of doing these stuff, other than the money. If not, it looks absolutely ridiculous.

This is also a Great FI Case Study

One of the other reason why I wanted to share this story was because despite this brain fart, this guy executed so well for the past 15 years of his life.

We often comment when we hear stories like this that this guy or this lady must be something wrong in the head.

However, the writer managed to build this up by starting from a lower middle class family in a high cost of living area. While he received financial aid to attend a very expensive liberal arts school, he still graduated with loans.

He worked for 5 years in investment banking out of university.

Then he became a boss and earned a pay exceeding $1 million. Because he has that frugality tilt, and favorable markets, his net worth generally went up by $1 million a year.

Then he got fired from the firm and transitioned to a corporate finance job with a pay between $800k to $1 mil.

Here is his net worth progression from age 26 upwards:

  1. 26: $145,000
  2. 27: $225,000
  3. 28: $420,000
  4. 29: $700,000
  5. 30: $1.5 mil
  6. 31: $2.1 mil
  7. 32: $1.4 mil (GFC)
  8. 33: $2.5 mil
  9. 34: $4.0 mil
  10. 35: $4.9 mil
  11. 36: $5.9 mil
  12. 37: $6.7 mil
  13. 38: $7.2 mil
  14. 39: $8.3 mil
  15. 40: $10.1 mil
  16. 41: $8.1 mil (that error)

$3.4 mil is in fully paid up:

  1. main residence: $2.75 mil
  2. work residence: $0.40 mil
  3. investment property: $0.30 mil

$2 mil in brokerage accounts, $1 mil in retirement accounts, $1 mil (after tax) in unvested employer long term incentive, $0.5 mil in vested employer deferred compensation account.

When he thinks about retiring he sees his annual expenses falling from $130k to $110k after tax ($215k to $180k pre-tax)

So at 4% safe withdrawal rate, he would need a portfolio of $4.6 mil, which is not enough for him. He only has $3.8 mil in assets earning return, or $4.2 mil if he sells one of the work residence.

For a lot of us, that money is enough, but given that kind of frugal spending, living off 4% withdrawal rate is not safe enough, so he will work for the foreseeable future.

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Friday 14th of December 2018

I was feeling rich from large spike in profit last year.... and was about to enter MRT when a lady stopped me whom introduced me on a charting course and proprietary trading method. This get me interested on the inner working of such charting. I never believe in this thing prior to this incident.My wallet lighten by 3k after and feel silly months later. Something I would not do normally.


Tuesday 11th of December 2018

"I reasoned that, I have to get something out of doing these stuff, other than the money. If not, it looks absolutely ridiculous."

It's really interesting how our brains work. We take our behaviour as a given, then find reasons for why we act that way. Maybe there's some way we can use this to shape our actions.


Tuesday 11th of December 2018

Hmm when I did my NSF in the late-1980s, I never saw or heard any superior (officer or WOSE) getting any punishment for stuff that are self-inflicted or really accident.

The problem with that guy is simply after 10+ yrs being in that environment (extremely high pay, ostentatious lifestyle, peer & boss pressure to fit in, expensive city living) he is not able to have a frugal & contented mentality.

I also see this in a close relative, luckily so far not so big financial losses. But he probably needs to continue his million dollar salary job till 65.

Pty taxes are also super high in US --- especially in the expensive cities --- one of the reasons why renting in US cities is much cheaper than paying mortgage + taxes + home association fees.


Tuesday 11th of December 2018

Hi Sinkie, I work in an area where I see enough of it. I think culture plays an important role to some of our spending.

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