Brian Feroldi (🧠,📈)

Brian Feroldi (🧠,📈)

05-03-2022

17:40

Tom Engle has lived the F.I.R.E. lifestyle for 40 years He worked for 9 years, quit, and has lived off his portfolio since the 1980s How? He's a GREAT investor and he has a BRILLANT cash management strategy. Here's how it works:⬇️

Tom is a hybrid growth/value investor He owns dozens of stocks, but he keeps most of his capital in 25 "super stocks" These are high-quality, profitable businesses that he believes can grow revenue/profits for 10+ years thanks to a strong "growth hook"

Examples of a few "super stocks" that Tom has identified in the past: $AAPL $AMZN $ATVI $BKNG $CMG $GOOG $MELI $NFLX $SAM $ULTA

Let's say Tom's portfolio is worth $1,000,000 He's happy with this number and wants to keep it safe He mentally calls this $1,000,000 his "protected value" All his portfolio cash management decisions are based on this number

Tom studies the market and always has an idea if it's expensive (after a bull market), fairly valued, or cheap (after a bear market) Here are his portfolio cash targets in all scenarios: Cheap: <5% Normal: ~12% Expensive: 20%

Note: This is just his portfolio cash He also keeps a few year's worth of living expenses in cash on the sidelines in case another 2008 comes along This personal cash is NOT accounted for in any of his portfolio decisions

He tells which market we are in based on how many "obvious bargains" he can find Cheap = Bargains everywhere Normal = Some bargains Expensive = No bargains anywhere His cash target are based his $1 MM "protected value" Cheap = <$50k Normal =$120k Expensive = $200k

Let's say a bull market comes next His portfolio rises 30% and is now worth $1,300,000 Tom can't find any obvious bargains and thinks the entire market is expensive He trims steadily on the way up, building cash. He stops at 20% of the protected value, which is $200,000

The bull market inevitably ends and starts falling He slowly adds to his favorite stocks as valuations steadily improve and "obvious bargains" appear With each purchase, he notes down the: ▪️P/S ▪️P/E ▪️P/FCF ratio Always trying to add at "better and better value points"

Let's say it's a "normal" bear market. His portfolio value falls back to $1,000,000 He targets ~12% of his portfolio in cash, so that's $120,000 This figure moves up and down based on how many bargains are appearing

Tom keeps adding as long as valuations keep improving In a bad bear market, Tom's OK with his portfolio value falling below his $1 MM protected value If that happens, he knows he's getting TONS of great deals with his continually buying

Let's say the bear market is really bad (2008) Tom's portfolio falls to $700k, down ~50% from the peak and below his $1 MM protected value At that point, Tom knows that HUGE bargains are everywhere. He keeps buying all the way down to 1% of the protected value ($10,000 cash)

Tom can handle this volatility because of his personal cash position He dips into it when the market is doing really badly He likes to keep 3 years' worth of living expenses to handle extreme events

Eventually, the bear market ends and the next bull market starts Tom's portfolio skyrockets, especially from bargain purchases made when his portfolio was worth ~$700k He slowly lightens on the way up at "worse and worse" value points, building back his cash position

Within 3 to 5 years of the bottom, his portfolio doubles to $2,000,000, powered by his "super stocks" and bargain buying during the bear market He's happy with this number, so it becomes his new "protected value" His cash balance target is now $240,000 -- 12% of the $200,000

Tom rinses and repeats for each market cycle He builds cash when valuations are expanding He builds positions when valuations are contracting

This strategy allows Tom's cash position to "grow at the same rate as my portfolio" Both are not growing at the same time (cash balance moves inverse to portfolio value) But they are growing at the same rate

The example above is obviously an extreme bull/bear market Tom's cash balance has only been 1% once (Feb 2009) And it's rare for it to be 20% He's usually between 5% and 15% of the projected value based on the number of bargains that he finds at any given time

I love the idea of a "protected value" It gives Tom a target to focus the cash in his portfolio around Tom also says that the protected value "never goes down -- it only moves up" Tom increases it every few years

Tom taught me to buy at "better and better value points" Here's how to do that:

Like this thread? Follow me @brianferoldi I tweet about money, investing, and personal finance

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Thanks to Tom Engle for sharing so generously and for being a fountain of investing wisdom


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