Investing In Avocado Toast


When the stock market has a bad day, (like it did this Wednesday) do you feel bad about losing money?  When the economy goes into recession and markets drop day-after-day, do you feel yourself getting depressed?

“Oh no! All that hard work, down the tubes!  Years of savings destroyed by the uncaring stock market!”

This fear is what keeps people from investing, and actually achieving financial independence.  Instead of investing, they hoard cash and buy low-return investments to keep their dollars “safe”.

That’s great, except it’s a completely wrong-headed way to think about investing!

Yes, it’s time once again to get on my angry pulpit!

 

Falling Markets Are Actually A Good Thing!

“Dow sheds 370 points; stocks close lower and wipe out monthly gains on Trump fears”

“The Dow and S&P recorded their worst day since September of last year.”

“The Nasdaq composite posted its worst session since June 24.”

On Wednesday, these headlines absolutely get my tentacles tied in knots!  The financial media may be right about the facts, but was ABSOLUTELY WRONG in the interpretation.

As an investor in shares of companies (either directly or indirectly through funds),  I absolutely want prices to fall.

Why?

Think about it — if I go to a restaurant for avocado toast, and it happens to be 20% off today… then that’s fantastic!  I do my little happy dance and eat my toast, because I’m paying 20% less for exactly the same thing!  Better value for my money.

avocado toast
Would you be sad if your avocado toast was 20% off? Of course not! Low prices on things you will consume for a lifetime are a good thing!

Investing is no different — I want to buy my avocado toast at the best possible price.  On days when prices are down, that’s a good thing!  I’m buying business assets for less!

So why do people constantly want shares to go up?  It’s an exceedingly common way to think about investing, but has people looking at exactly the wrong thing — market prices.



You Don’t Invest In the Stock Market

Part of the reason why I think this backwards thinking exists, is because people believe they’re investing in the stock market.

Sorry, no!  You’re not investing in the stock market!

stock exchange.
Take note: When people claim they invest in the “stock market”, they (usually) don’t invest in the actual market itself (pictured above).

A market is just a place where things are bought and sold — Like a farmer’s market, or that fancy hipster organic market where you feed your avocado toast addiction.  You don’t actually invest in the market itself!  (Not unless you’re buying shares of ICE.  Then, yes, you would be an actual owner of the NYSE.)

Instead, you’re buying pieces of businesses at the market.  If you’re buying index funds, you can think of a fund as one giant business you buy at the market.

When the stock market “goes down” on any given day, you’re not actually losing any money (assuming you don’t buy or sell).

What’s happening, is Mr. Market is merely offering prices.  On a “down” day. he’s not feeling very confident in future prospects, so he offers a low prices.  On “up” days, he offers higher prices.

You don’t have to take Mr. Market’s offer!  As an owner of a business (or businesses) you should know exactly what it’s worth based on the state of the business….not what some random asshole offers on any given day.

Think about it — if Mr. Market offered you $50 for your house or your car, would you take it?  OF COURSE NOT!  Because you know your house is worth far more than that.  Besides, you still need to live in your house and drive your car.

rusted car
You wouldn’t sell your car for $50 would you?  Well, maybe if it was this car.

But what if Mr. Market offered to sell you his share for $50?  You’d absolutely love to buy at the discounted price!

Stocks (and avocado toast), are absolutely NO different.

In most cases, when I invest, I plan to own my businesses for decades.  I’m a very long-term shareholder.

Unless I see a business environment deteriorating (like I did recently), there’s absolutely no reason why I would need to sell.  Instead, I’m mostly waiting around for Mr. Market to sell me his shares at silly prices.

This is why I focus on dividend growth investing.  My money comes from the business, not from trying to buy shares low and then selling high.

My early retirement is derived from the income generated by assets, NOT from market price differentials.  I simply sit back and sip my iced tea… occasionally checking to see if any new dividend checks arrived.

Ask yourself — “Where does your money come from?

 

But What About Retained Earnings?

Inevitably, whenever I talk about dividend growth investing, some smart-ass in the room always asks about retained earnings…

“But Mr. Tako, most large companies retain a significant amount of money to fund future growth.  Those retained earnings should be reflected in growing stock prices.  Selling those shares to fund my retirement should be exactly the same as a dividend.”

Yes, well it’s not exactly the same.

When a company retains earnings, it’s not like that money sits around in a bank account.  In most cases that money can (and will) get spent on ANYTHING — hiring new people, paying for private jets, “research and development”, gold plated washrooms, executive bonuses, catered lunches, corporate “retreats”, new carpet for the boardroom, etc etc.

While all those things make work “fun” for certain individuals, they don’t increase the ‘asset’ side of the balance sheet from which shareholders benefit.

Typically only a small fraction of retained earnings gets spent on assets that generate additional cash flow.

Remember, you have absolutely NO control over how retained earnings are spent.  You hope management does something smart with the money.

Hope is not a strategy.  Certainly not one that’s going to fund your early retirement.

The beauty of a good dividend is that YOU (the shareholder) get to waste that money, not some corporate executive who wants to “live the good life”.

 

Final Thoughts

In my (sometimes) humble opinion, the behavior that creates this irrational thinking, is watching prices… not watching actual business activity.

Every day people sit in their cubicles, with real time quotes pushed directly into their eyeballs.  They watch the Dow or the S&P, and maybe a stock or two… because that’s where the vast majority of their money is invested.

People call this “investing”, but they never look beyond share prices.  Is that really “investing”, or is it merely “speculating”?

One of the more common themes of my blog is to “dig deeper”.  Go to the places where mere mortals fear to tread.  Go deep.  Head to the depths where only the Kraken resides.  Don’t be just be a know-nothing investor.

Find the dividend growth rate of the S&P 500 in relation to earnings growth.  Calculate the earnings yield of your favorite fund.  Understand how corporate earnings change in relation to GDP growth.  Read 10K’s and 10Q’s.  Learn how your businesses work, and where your money comes from.

Whatever you do, don’t just watch prices rise and fall.

Now… if you’ll excuse me, I’m going to go “invest” in making some avocado toast.

 

[Image Credit:  Featured Image, Flickr2, Flickr3]

25 thoughts on “Investing In Avocado Toast

  • May 20, 2017 at 4:56 AM
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    Interesting analogy between an avocado toast and stocks. The only thing I was thinking was: once you guy an avocado toast and eat it, it’s gone. You will not get any return from its future increasing price. If you buy a stock or asset, however, you can hope to reap some benefit down the road with a higher price. Maybe that’s why people hope prices in the stock market will go up?

    I don’t invest in stocks at the moment, but we do check the prices of our house every once in a while and hope it’s forever increasing. I know we should think long-term (>5 years), but it’s fun to see the prices not going down, I guess.

    Happy Saturday!

    Reply
  • May 20, 2017 at 5:26 AM
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    Good article. As you say a true FIRE is living mainly on dividends and isn’t overly bothered about what happens to the market in the short term. Eventually we may draw down on the principal, but that will hopefully not be for a long time.

    Market drops should always be seen as an opportunity.

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    • May 22, 2017 at 9:06 PM
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      I am a true FIRE and I’m making lots from many avenues other than dividends… e.g. rental real estate, asset-backed high interest rate loans, growth stocks, private equity, etc. Most of my fortune has been made from growth stocks the past two decades. There are so many ways to make money, dividends are just one piece.

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  • May 20, 2017 at 5:57 AM
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    Oh sure, point your tentacles at me again huh? Yeah, I’m one of the guys who freaks out when the market nose dives. Yes. Like. Wednesday. I just wish there were better choices than NASDAQ gambling or money crawling at 1% in some CD. I’m fully indexed – that’s the best I feel I can do.

    I just can’t seem to find the middle ground. I got killed in bonds last fall too – safe? No. And I don’t want to be down in the dark and see the Kraken – I feel I’ll just make a biger mistake in the deep water! Obviously I don’t have a spine but I’m going to check the box below anyway.

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    • May 20, 2017 at 12:52 PM
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      Wasn’t pointing at you specifically Bob. I understand everybody isn’t a deep water swimmer. In which case, don’t look at the prices.

      Just remember — Sharks like shallow waters. The prey is easier. Keep your eyes open.

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      • May 20, 2017 at 12:55 PM
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        Great. Just Great. We are in Honduras next week…. snorkeling! Thanks Tako.

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  • May 20, 2017 at 6:04 AM
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    Set it and forget it is my motto. I look at the overall market when the tv is on at the gym but that is it. Otherwise I might worry myself.

    Crazy how the avocado toast thing went crazy this monty. Honestly, I like it with some eggs in the morning. Otherwise I am okay without it.

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    • May 20, 2017 at 12:48 PM
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      Yeah, I don’t understand why it’s so trendy…but hey…whatever…I’ll go with it!

      One must keep up with the times, even in retirement. 😀

      Reply
  • May 20, 2017 at 6:26 AM
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    For dividend investors in particular, drops in stock market prices shouldn’t be scary. Picking up shares of companies for cheaper prices and higher yields? Don’t mind if I do. Also, investors with long time horizons shouldn’t be fazed by short term market gyrations either – they’re simply opportunities to pick up stocks at bargain prices. So many great points in this article, thank you for being a voice of reason!

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  • May 20, 2017 at 7:29 AM
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    OK, I will admit that South Arkansas is sort of a cultural backwater. We do have avocados and we certainly have toast but the idea of paying $15 to $20 for a combination of those two things is what we’d affectionately term as insane. In fact it sounds like it should be eaten with a $6 Starbucks latte (we don’t have Starbucks either). I’m thinking that maybe Google translate would translate avocado toast as a Big Mac?

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    • May 20, 2017 at 12:44 PM
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      Funny you should say so, but I believe the original analogy when I first heard it *was* hamburgers. I merely updated the concept to more modern (i.e. trendy) foodstuffs.

      Reply
  • May 20, 2017 at 7:37 AM
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    Thank you for your kind defense of the humble Avocado Toast. Some things you eat to live…others you LIVE to EAT! Wether the current price of the S&P or the cost of avocados, everyone needs to calm down and slowly back away from the produce aisle. I have few joys left in my life, surely the delicate flavor of Avocado Toast accentuated by the roiling riot of lemon pepper should be protected as a unique delicacy worth investing in, just like the intriguing relative stability and growth of the S&P. Thanks for the rant. I’m now hungry and hopeful.

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    • May 20, 2017 at 12:42 PM
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      I don’t think I was defending it so much as gently making fun of it’s trendy nature. 🙂

      Reply
  • May 20, 2017 at 10:24 AM
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    New to your site. Certainly, you are in a nice position with substantial liquidity and solid passive income from dividends. My biggest complaint in investing in the stock market is low rates of steady income return (typically 3% range). I am able to achieve around 20% cash on cash return and 30% all in return on my rental properties. I reside in a relatively low cost of living area so this is obviously a huge factor to others that live in a high cost of living area and cannot find value in the real estate rental market.

    So where you live plays a big role. But where I live (Midwest US) it just makes it a lot easier to have a very nice income stream without saving huge sums of money by investing in rental real estate. Granted stocks appreciate over time as well. However, stock prices to me seem a bit artificially inflated today given the multiple years of low interest rate stimulus. No one knows when the market is going to take its next dive but we all know markets do not keep going up forever.

    I think the bottom line is there are multiple ways to become FI and personal circumstance / where one lives plays a major role. I also acknowledge that not everyone wants to be a landlord. I spend around 8 hours per week managing my rentals so I do not consider it a major hardship relative to the overall benefit.

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    • May 20, 2017 at 12:41 PM
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      20% cash on cash return is pretty good. Congrats to you.

      If I tried to rent property here, I’d be looking at 2-3%.

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  • May 20, 2017 at 12:13 PM
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    Let’s not confuse accumulative and a distributive portfolios. At this moment, i am in a buy-and-hold mode of VTSAX. A down month on the market is heartily desirable. But were i to be selling shares to buy catfood for supper, my outlook would be consistent with the cable news noise makers. The trick is to accumulate a big enough ‘stache to never need to touch the principal.

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  • May 20, 2017 at 4:17 PM
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    I don’t always eat waffles and when I don’t, I eat avocado toast… Love the motto and the meaning, but all I could picture when you said “dig deeper” was Shaun T shouting it in his insanity videos. I think that saying is humorously ruined for me.

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  • May 20, 2017 at 4:34 PM
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    Our portfolio barely moved on Wednesday so I barely noticed. Meanwhile we continued getting paid dividends.

    People who obsess over day to day changes in Mr.Market aren’t investing, they’re speculating–just like you said. No one can predict where the market is going in the short term, but in the long term it always goes up. Just chill, ride it out, and revel in those sweet sweet dividends! Great post!

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  • May 21, 2017 at 4:10 PM
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    Avocado on toast has been a topic of discussion here in Australia too. There are critics that say if you stop buying avocado’s on toast then you will be able to save towards a house. While this might be true for some states, in Sydney it is not. Some one bedroom apartments can fetch up to $1 million dollars.
    The same goes with stocks, sometimes you can’t get the best and brightest stocks (Apple, Amazon etc.) sometimes you have to settle for a lower appraised stock and let it grow with you. That’s my philosophy anyway.

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  • May 22, 2017 at 8:59 PM
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    You want prices to fall because you have cash, either from ongoing income or from uninvested assets. A retiree that doesn’t have ongoing income and isn’t timing the market probably would prefer markets to go up rather than to go down.

    I guess another fear is that the US stock market would behave like the Japan stock market, which had a major crash and stayed down for decades. I wouldn’t call it impossible to happen in the US, its stock market is currently inflated from years of low interest rates, easy money, and fed manipulation.

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  • June 5, 2017 at 7:33 PM
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    “When the stock market “goes down” on any given day, you’re not actually losing any money (assuming you don’t buy or sell).

    What’s happening, is Mr. Market is merely offering prices. On a “down” day. he’s not feeling very confident in future prospects, so he offers a low prices. On “up” days, he offers higher prices.”

    Glad I read this this morning, thanks for the reminder. People often talk about investing like they’re betting on red or black (i.e. stocks go up or down, as if they’re watching cockroaches race) and not owning a part share business they bought at some price – at a discount or that is currently on discount.

    Reply

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