My Alternative To FIRE

I thought it might be nice on a long weekend to take a little time to write about part of my financial path, and share part of the story of how I came to be in the position after less than a decade of saving, to be on the precipice of retirement at just 38 (in other words, I’m capable of retiring now, but I’d be poor). More specifically, I want to share the alternative approach to FIRE that I came up with.

What Is FIRE?

You’ve probably heard of FIRE, which stands for Financial Independence, Retire Early. It’s a relatively new movement, the idea behind which is that you live minimally in order to save like crazy and retire early.

I think living minimally and saving like crazy is a great way to get a fast start to your financial goals. In other words: you have to invest; and in order to invest, you need a pile of cash; in order to get a pile of cash, you have to save; in order to save, you probably have to live minimally.

The bigger the pile of cash you have saved, the more significant the compounded interest will be on your investments, and the faster you will be accelerated towards your end goal.

The trouble with FIRE is that people sacrifice their lives to get to their goal, which I believe is counter intuitive if your goal is freedom rather than safety. It’s counter intuitive because when you safe hard, you’re probably not living. This means that you’re sacrificing your time now, to get more time later. Any older person will tell you that time is worth more when you’re young.

Every time you choose something, you miss out on something else.

Lewis Hurst

The trouble is, for every decision you make, you miss out on something else. You choose the chocolate cake, you don’t get the raspberry cake; you choose to lose weight, you don’t get the food; if you choose to save, you don’t get to buy things and experiences; and if you choose to buy things and experiences, you don’t get to save.

My Alternative To FIRE

I believe that there are a few ways to get rich, and if you’re investing, you first need to save. The trick is, once you have saved and are investing, you might not need to save.

Using financial modelling you can find balance between saving and living, in exchange for a slightly extended timeframe of your financial independence. With my alternative to FIRE, you can even live frivolously after a stint of saving, but before retirement.

My approach has been to aggressively save (I didn’t need to do a spending budget, but budgets works for some), then calculate my rate of saving (which I wouldn’t have needed to do if I’d budgeted) per month / year. Then I started investing my saved money, at which point I calculated my Return On Investment (ROI) per annum. I then used financial modelling to work out how long I’d need to save for at my current ROI to get to my retirement goals.

In doing my financial modelling, I ran various models to see what happened if I adjusted the amount I saved each year. I noticed that the more money I had, the less my saving affected my retirement goals, to the point where (in later years) saving had no effect whatsoever.

I realised that I was able to save enough to get the benefits of compound interest from my investing activities, which meant that I could use the salary from my job 100% for my own enjoyment – which leaves a big entertainment budget and still gets my to my retirement goals earlier than I otherwise would.

Modelling at which point in time (age) I started to rely solely on ROI from my investments enabled me to make decisions about how early I could stop saving and start living my life the way I wanted to. Rather than sacrifice all my years saving before retirement, I could decide what was an acceptable amount of my youth to sacrifice in order to have freedom at an older age.


What Are EBO Shares Worth?

After a good FY announcement boasting $168.3m NPAT, up 16.5%, let’s do some quick sums to see what the share price could be worth.

Current MC at the time of writing is $4,267m (share price of $26), less cash equivalents (current assets – current liabilities) of $252m, divided by NPAT of $168.3m gives a ratio of 23.85. That’s a good deal for a company with such a growth history.

If they were to continue to grow at such a rate, they might command a ratio closer to 26.5 (which is conservative based on the fact that the growth isn’t guaranteed, as it could be with a subscription based business with investment in sales). Such a ratio would put the share price closer to $28.

Given the above, without delving too much into the details of the most recent presentation, guidance and outlook, I’d say these are a buy at $26.


What Are ATM Shares Worth Now? (Updated)

After listening to the recent Investor Call, and reading the Updated FY21 Outlook, I still feel unequipped to value ATM shares.

Despite recent COVID19 setbacks ATM is still a growth company and therefore should be valued based on forward earnings. However I don’t feel confident in the numbers provided in the updated outlook for FY21, because I felt that I picked up a little contradition between Geoff and Peter in the investor call, with regard to H2 speculation in the updated figures. This is not a slight against the directors, rather a comment on the fact that it’s all a bit of a guess on something that’s out of ATM’s scope of control.

Therefore any number I place on the value of ATM would be a guess. That said, lets look at the market’s guess on the value and see what assumptions might give rise to such a guess.

The current share price is basically exactly as it was this time last year (albeit slightly higher). Clearly the market pricing is based on statements in guidance that there will be no revenue growth – and assumptions have been made that there is no revenue decline.

Looking further ahead, ATM’s sales infrastructure isn’t damaged (other than the current, temporary Daigou situation). One could expect that growth should be quite significant once COVID19 issues are gone. This probably explains the slight upside on last year’s price.

So, is ATM a buy right now?

Well it’s a bit of a gamble on whether COVID19 will be cleared up (in Australia) by the end of H1 or early H2. Personally I’ve found that when I’ve gambled in the past, it’s always caused me to underperform my average and I’m better off trusting my calculations. Consequently I probably won’t be increasing my holding at this reduced price – but I certainly won’t be selling.

My current strategy is to hold, and wait to see if the existing sales channels that ATM have established ensure a fast recovery in sales once everything finally clears up (this year or next!). However, my position is somewhat hedged by my holding in FPH, which massively benefits from the COVID19 situation. Given that, I may buy more ATM shares if the price falls on news (good or bad), announcements are made that suggest that things are improving and if the price remains static, or if the COVID19 situation in Australia seems to be improving before H2.


After having a bit of time to think about it, given the fervor from ATM’s investors and the fact that they should return to a similar size of sales after COVID19 issues are resolved, I expect that the share price should steadily creep upwards from it’s recent lows. In the event that things become more dire in Australia (in terms of a sustained lockdown), I expect the share price will dwindle and then return towards following the same pattern.


a2 Milk Investor Call Summary

For your convenience, I thought I’d summarise the a2 Milk Investor Call held after, and with regard to the market shocking Updated FY21 Outlook.

Opening Statements

The meeting started off with Geoff Babbage saying that they had hinted at the softening Daigou channel prior to the announcement, and then went on to say that they had not expected such a significant and extended lockdown in Australia.

They expect a soft first half year with no growth, and they expect this to be temporary if COVID19 issues stabilize in Australia.

Geoff then spoke about previously announced performance, saying that other parts of the business are performing strongly. China label up 77% on pcp. Mother and Baby Store (MBS) share increased significantly in August, with the MAT (which is a large market) share increasing from 2% in June to 2.2% [in Q4?].

Plans always assumed a better H2, especially FY21 – more so that previous years.

Inventory peaked in July, as they planned to build inventory for contingency of production issues. They plan to reduce cover over FY21.

Questions And Answers

JP Morgan opened the Q&A by asking how much they expected Daigou business to be down based on H1. Geoff told him that shareholders need to work their own assumptions out themselves, that the Daigou is an important part of ANZ sales, and that they’ve already given guidance on total revenue. He basically refused to answer the question.

JP Morgan then asked how they managed to improve EBITDA margins in their forecasts. Discretionary spending, marketing spend on things like outdoor activities, stock provisions, etc. enabled them to slightly lift margins from 30% to 31%.

Forsyth Barr asked if the change in guidance only had changes to H1 factored in. Geoff said that H2 guidance hasn’t changed very much, but assumes higher China direct sales and [lesser?] Diagou sales.

Forsyth Barr then asked what they’re doing to reroute the supply chain. As I understood, Peter (?) inferred that Daigou inventory wasn’t specified to that channel as it’s just stock that people buy in shops, therefore it can’t be rerouted. He then said that they’re redeploying funds for incentive programmes for Daigou’s.

Wilsons asked if their corporate Daigou was building inventory in H2 FY20, as the half didn’t suffer from Daigou issues when other peers were. Peter commented on pantry destocking.

Wilsons then asked if the lingering effect of COVID19 was factored into H2 FY21. Geoff said that they’re assuming there’s an improvement.

UBS asked about performance in the direct seaback channel. Geoff referenced an inventory issue, which is now being released but there’s a delay. Peter said they were pleased with seaback shares.

UBS asked if they were seeing inventory build for those customers. Peter said that it happens next month.

UBS asked if the pricing strategy will chance. Peter (?) said that pricing wasn’t changing.

Bank of America asked the directors to verify that the directors selldown wasn’t insider trading. Geoff said it was all above board and they only just came to the view of the change in guidance at the weekend, but have been thinking about it for a few weeks.

Bank of America then asked if it was just a problem in the Daigou. Geoff said it’s Daigou and pantry destocking, as previously mentioned.

Morning Star ask if consumer behaviour in China is changing. Peter said that the brand was strong.

Morning Star asked if there will be a rebound in H2 or if it will go down. Peter (?) said it was a hard one to guess if there would be a significant restocking, but said they were factoring in that there will be softness in Daigou in H2.

Jardens asked what the strategy was going forward. They said that they will carefully manage inventory into channels.

Jardens asked about the separation of the sales channels. Peter basically said that all is well.

Macquarie asked about how one channel knocked the whole business. Geoff (?) said that customers of the Daigou channel may switch to another brand.

Macquarie repeated Morning Star’s question about whether there will be a rebound in H2. They said that the updated guidance expected a bit of a restock, but not as much to cover the whole year.

K2 Asset Management asked if a buyback was on the cards due to the reduced share price. A2 said that capital allocation was purely for growing the business, not buying back shares.

Morgans asked how FY21 H1 might look. A2 said that EBITDA (margin?) across H1 and H2 to be steady.

Morgan Stanley asked if there was increased competition from the change to the Daigou and info on MBS. They said they weren’t seeing anything in Daigou. a2 would not give any info on the number of MBS stores stocking product.

Closing Remarks

The closing remarks from Geoff were that they didn’t expect this and that they have been transparent in their announcements. He reiterated that the Daigou channel issues will be temporary and the other aspects of the business are strong.


a2 Milk Presentation & Outlook – Was There Illegal Insider Trading?

As an investor I’m feeling a bit miffed, to say the least – as, it seems, is the ShareTrader community.

Lewis Hurst

On the 19th of August 2020, a2 Milk (ATM) released an investor presentation covering the previous year and the following year’s outlook (guidance). Rather than give my interpretation of that outlook, I’ll paste it directly for you to read here:


• Globally, there continues to be uncertainty resulting from COVID-19, and the potential for moderation of economic activity. This could impact consumer behaviour in our core markets, as well as participants within the supply chain, most notably in China
• Notwithstanding these uncertainties, overall for FY21, we anticipate continued strong revenue growth supported by our continued investment in marketing and organisational capability
• FY21 EBITDA margin is expected to be in the order of 30% to 31% reflecting
‒ Higher raw and packaging material costs partially offset by price increases
‒ Increase of marketing investment
‒ FX benefit of prior year not expected to be replicated
‒ 3Q20 COVID-19 benefit not replicated
• FY21 Capex is currently expected to be $50 million due to our ERP investment and capital projects supporting fresh milk processing in Australia

Medium-term target

• As previously announced, the Board considers it appropriate that the Company target an EBITDA margin in the order of 30% in the medium-term.
This assumes the market performance and mix of our products remains broadly consistent and the competitive environment evolves as anticipated. We will keep the balance between growth and investment under constant review

This outlook comes on the tail end of a very positive presentation, with highlights such as:

• Total revenue of $1.73 billion, an increase of 32.8%
• EBITDA of $549.7 million, an increase of 32.9%
• Net profit after tax of $385.8 million, an increase of 34.1%
• Basic earnings per share (EPS) of 52.39 cents, an increase of 33.5%
• EBITDA to sales margin of 31.7%
• Operating cash flow of $427.4 million and a closing cash balance of $854.2 million
• Marketing investment of $194.3 million targeting opportunities in China and the USA
• Group infant nutrition revenue of $1.42 billion, up 33.8%
• China label infant nutrition sales more than doubling to $337.7 million and distribution expanded to ~19.1k stores
• USA milk revenue growth of 91.2% and distribution expanded to ~20.3k stores

Those figures “are with the 12 months ended 30 June 2019 (FY19)”, which includes 6 months of China enduring the Coronavirus infection.

Given this, I understood the outlook to be positive, as the company seemed performant throughout the year despite Coronavirus, increasing revenue by 32.8%. The outlook said that “…Notwithstanding these uncertainties, overall for FY21, we anticipate continued strong revenue growth…”.

Following this positive presentation on 19/8/2020, there was a director sell off of shares through to 27/8/2020. Nine working days later, on 09/09/2020, there was an investor presentation that parroted much the same information as the last presentation, but with a slightly amended outlook:

Current observations
• Unwind of 3Q20 pantry stocking in the early part of FY21
• Softness in retail daigou continuing due to reduced tourism from China and international student numbers
• Some disruption being seen in the corporate daigou / reseller channel resulting from Stage 4 lockdown in Victoria

It’s difficult to know if the directors were insider trading on this knowledge prior to release or if this was just normal trading. A clue might be in the dates that Victoria went into lockdown vs when the directors sold their shares. According to Wikipedia, Victoria went into lockdown on 06/08/2020, which is before the presentation saying that everything is good, before the directors started and finished their selling, but after the presentation suggesting that there were problems.

So, to answer the titular question of this article: Was there insider trading from the directors? Well I can’t say that there was or was not, but I think there’s probably enough evidence to suggest that an investigation should be done. Perhaps the NZSA might consider kicking off such an investigation? Perhaps their analysis suggests that it’s probably not insider trading? Or perhaps all the larger holders have decided that it is what it is and they’d rather have the directors focusing on the business than defending themselves in a legal battle and risk losing some otherwise good management?

Stay tuned for a summary of the new outlook, summary of the investor call, and a resulting valuation to see if it’s worth buying ATM at these reduced prices…


A Useful Source Of Data For Investors In Retail Related Stocks

Today I stumbled upon a useful data source for people who invest in retail related stocks, such as KMD, HLG or affected REITs.

While it’s not useful to me (as I don’t fit into the above category of investors) the Google Mobility data (which is collected from people’s GPS enabled Android phones) could be useful in predicting the performance of aforementioned stocks.


The Psychology Of Investing – Part I

Today I’ve been thinking about an article I read a few years ago, in which the author talked about how, as the value of his investments grew, the value of his portfolio fluctuated more. It got to the stage where the daily fluctuations in the value of his portfolio would fluctuate by the equivalent of a days salary. Then as he saved more money, his portfolio would fluctuate by a weeks’ salary and then a months’ salary. As he approached retirement, his portfolio might fluctuate by a range equal to a years’ worth of salary.

There’s a few interesting things about this. I think firstly, based on a 5% ROI, if you need a year’s worth of salary as a retirement income (given that it’s normal for stocks to fluctuate by 5-10%) in order to use stocks as a retirment income, one must accept that their portfolio will fluctuate by at least a multiple or two of their annual salary each year.

To use stocks as a retirement income, you have to be OK with watching your portfolio drop in value by the equivalent of a year’s salary or more.

This is quite a mindset to get your head around. Given that other asset types probably fluctuate that much as well (you just don’t see it because you don’t know the exact value of your house or private business on any given day), you have to accept that this is pretty much the same for any retirement portfolio.

I think one take away from this point is that you have to view your retirement portfolio in a way that you don’t lose sleep watching it (this is actually one of the things I like about being a value investor, because regardless of what the current value of a stock is, you feel good that you bought at less than where you see value in the stock).

The other take away is that you need to plan your retirement portfolio in such a way that accommodates these inevitable fluctuations. This might mean having a larger portfolio than you need, in order to cover the risk. This might mean having part of your retirement income guaranteed, or perhaps diversified or hedged.

I think that to achieve the acceptance of these fluctuations, one must change how they see money. Personally I don’t see the money in the same way that I used to (which was a thing that relates to how much I’ve saved or how long it would take me to save that amount of money). I see money as a number that I can manipulate, and as a number that is measured in relation to factors such as ‘inflation’ or ‘how much money I need to fit my financial models’.

This view not only helps me feel nothing when my portfolio drops in value by $10,000, but it also helps me make better decisions that are less influenced by emotion. With that said, I’m still working on this – I don’t feel absolutely nothing if my portfolio drops by thousands of dollars, and I’m not completely emotionless. These things are somewhat linked to how well things are going to plan, but if things are going to plan and my portfolio drops by $10,000, I’m still happy.

How Can Your Portfolio Dropping By $10,000 Be Part Of Your Plan?

I just wanted to pre-empt the titular question, which I’m sure everyone is thinking after reading the last paragraph. In short, I have several plans that are constantly in some sort of flux due to perpetual changing situations (Covid19, etc.).

Basically, I have a Plan A which is to retire with funds from selling my largest private investment. I have a Plan B, which is to retire with funds from selling my second largest private investment and income from my largest investment. I have a Plan C which is to retire on my listed stock portfolio. I also have a Plan D.

There are various versions of Plan A and Plan B that involve a mix of a few things. Which is why it could be perfectly acceptable for my NZX portfolio to drop by $10,000 if Plan A or B is looking good.


Useful Sources Of News For Investors

Being across all the news is very useful for investors of all types. It helps us anticipate major events like Covid19, and strategize accordingly; ideally before everyone else. Unfortunately it’s a full time job keeping ahead of everything, so it’s good to have a few good sources that help keep abreast of things.

I thought I’d share some of the sources that I find useful. Here’s my list:

  • NZX / ASX – All company specific developments that meet the respective bourse’s criteria for listed companies have to be publicized here first.
  • ShareTrader – Take this with a large pinch of salt, as it’s community data from often biased sources, but it’s a good place to ensure you don’t miss anything.
  • Share Chat – A nice little summary of the day’s share related events.
  • ASB Morning Brief – This (alongside associated ASB reports) can be emailed to you each day if you subscribe to the service.
  • Stats NZ – This is a great source of data, which is used by Stuff, NZ Herald and other media outlets to write articles (which are essentially second hand data, which may have been misinterpreted or otherwise warped by the journalist). Best to get the information from the source. Many investors don’t watch this too carefully, so it’s a great place to get ahead of other investors.
  • Global News – I’ve mentioned this before, but subscribing to these emails is a great way to get a news wrap up.

All of the above sources have some sort of email subscription facility, which I recommend that you take advantage of.

If this article helped you, perhaps you could share your own sources in the comments below this article.


Chinese Coronavirus Vaccine

I can’t find anything in the news media about this yet, but it seems that China may be distributing a vaccine. I take this news with a big pinch of salt, because the information is 4th-hand to me. My source is the colleague of someone I know, whose family living in Wuhan (the Chinese province from which Covid19 is said to have originated) tell him that they have been given a vaccine.

Unfortunately that is all I know – it could be that grandma doesn’t know the difference between a check up and a Covid19 vaccine, or perhaps it’s a wind-up, or perhaps it’s a general (non-Covid19) Coronavirus vaccine for other strains, or something completely different.

Nontheless, it’s interesting to hear stories of how people in China are coping with Covid19 via personal contacts as these often differ from what is in the media. For example, the stats from China suggest that they are quite on top of the outbreak, but personal accounts strongly suggest otherwise.

If this is true, this could negatively effect the performance of companies such as Fisher Paykel Healthcare who (as macabre as it sounds) benefit from the Coronavirus outbreak.


Troubled Times Ahead For Scales?

Long term readers will know that I’m a big fan of Scales (NZX:SCL). I like the management, the share price (up until today), the balance of land ownership with a business extracting value from that land, and the fact that the product is never going to go out of fashion (food).

However it is a farming business, and it’s therefore subject to the ebbs and flows of the industry. Weather, disease and other factors are annual risks that can cause fluctuations in the share price.

While I had factored recent logistical issues (which caused a drop in sales) into my share price calculations for this stock, there have recently been some new developments that I had not considered / foreseen, which I believe will effect the share price going forward.

Specifically, the industry is expecting to have trouble importing workers to harvest the crop and prune the trees (I know they complain about this every year, but this time I think it’s different because of Covid19).

A little bit of research suggests that tree pruning should occur now, and picking at Mr Apple (the subsidiary owned by Scales) will need to start in February.

This will be a problem because the crop will not be harvested, and costs will increase as Scales will have to pay more to entice New Zealanders to harvest them.

Upon reading this, a thoughtful person might make a connection with the job losses due to covid19 and assume that NZ has enough free labour to do these jobs, especially when they pay $25-$27ph. Unfortunately history shows that New Zealanders simply aren’t willing to fill these jobs as the unemployment benefit is more attractive and people are unwilling to move for the work.

It is my hope that the foreign people who worked in the ailing NZ tourism and hospitality sectors would be willing to work as pickers while their industries recover. I suspect that the uptake on this won’t be sufficient to fill the required number of jobs, but I assume that it will be enough to get by without Scales having to raise capital. I say this because the company delivered a normal dividend in June, which suggests either a lack of foresight from management (unlikely), a miscalculation of the effect of Covid19 (possible but improbable) or that they planned to struggle though, treating it as a BAU problem (as it’s difficult to get seasonal workers each year).

What Are SCL Shares Worth?

Well, it is a difficult question to answer. I’m going to have to make some assumptions.

According to an article from Stuff, Jacinda may relax border restrictions for skilled workers, but Nick Bibby (Business Manager of agricultural worker supply company Thornhill) says this will be too late. He infers that Jacinda is holding them to ransom (a “bribe” as he puts it) in exchange for being reelected, if as he says, pickers can be considered “skilled labor”. Implicitly, the current government does not intend to fix this particular labour problem, and I assume that it will be too late for any other government post election. There will certainly be some labour for this work, but costs will be higher. Frustrating as it is (because there’s no need to have this problem), there could most certainly be a problem harvesting apples for Scales.

I think the assumption that I will make is that they won’t have to raise capital and therefore there will be no shareholder dilution. I’m also going to assume that the economy is not going to be hot going into the next year, and that there will be a subdued share market. Because of this, I will assume that the opportunity cost of buying shares in SCL is high. In fact, to put a value on this, I will assume that SCL will return nothing in the coming year. Consequently they will need to return 8% minimum for a year in the share price to have any value. As I’ve previously valued SCL at about $5, this would place them at about $4.60.

However, if I was to value them on the same terms of growth that I had previously valued them, they would be worth less than this.

The valuation is pretty subjective based on your required ROI, labour cost (and supply) expectations, but either way I think it’s clear that there is potential downside for this stock in the coming year.

If the market takes a short term view (which I expect that it likely will, at least at some momentary point) then the potential downside could be significant. In that scenario there could be a major buying opportunity within the coming 6 months or so.

Personally I’ll be holding my current position and looking to top up if there’s a major crash in the price that goes below what I think they’re worth at that time (which will depend on my other opportunities and the state of the company’s financials and guidance).