The thing about goat herds is that they are capital and they produce. The goats, if they live long enough, are a store of value and are potentially a well-understood medium of exchange (money), they are more-or-less mobile, they produce milk and cheese (dividends), they reproduce (non-ergodic capital growth and compounding or maybe earnings yield or something), and there is always the goat meat to be roasted (sustainable withdrawal rate) or sold (asset allocation). In a word, I'd say the herd is what can be called fecund (as we used that word in a past post in a financial context) and, given a bequest motive and no goat plagues, this kind of thing is sustainable forever i.e., think of goats in this context as an endowment or long-duration trust. If we were to eat too many goats too fast we are into a more traditional retirement finance model. Roast them all and we're maybe closer to teenage magical thinking, an NFL retirement party or a typical election promise.
In the past post and its link, James Garland made the case that the long term fecundity of a portfolio (herd), when viewed in its all-equity form anyway, resides somewhere between the dividend yield (milk and cheese) and the earnings yield (let's say reproduction and net survival rate over some interval). The decision on how much goat meat to roast, relative to the need of current and future self as well as legatees, has to be somewhere in-between those two levels to make sure that you can eat during your life and also hand the herd to your children. Eating below the div yield is possible but seems a little irrational unless the cheese is sold in exchange for other food or new goats.
I can't remember in the last post (yeah, even I don't want to read my own stuff sometimes) if we discussed the current spend-rate range that that "rule" implies but here is the chart from the last post:
where the orange line is the div yield of the S&P and the blue line is the earnings yield, both smoothed with a simple 10Y moving average. Garland posited a "130% of div yield" as a plausible consumption rate for endowments for reasons all his own. That's the blue dashed line. I put in, just for reference (grey dashed), the average of blue and orange. Orange, if you didn't get it yet, is the milk and cheese; blue is the boundary of how much, theoretically, goat meat you can eat. How much you can eat is probably less in real life than it is in theory. Hence Garland's blue dashed line.
So, where are we today?
Blue: 5.2%
Grey dashed ((B+O)/2): 3.6%
Blue dashed (130% x div): 2.6%
Orange: 2.0% which is really close to a perpetual withdrawal
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Unlike many of my friends, I actually like roasted goat meat. If financial Armageddon were to threaten, I would not be totally averse to a real goat-hedge as it were. Either way, it seems like a decent, and very ancient, financial model that is not too far removed from what we are trying to wrestle with today.
I don't really like goat meat, but I like goats. And their babies are some of the cutest babies of any babies in the animal kingdom.
ReplyDeleteBut, you are right on. Good capital.
And, you can rent them out. I was renting once from a place in the almost country where the fire marshal came by and said we'd have to cut the grass or get fined.
It was a huge lot. Doing it by human labor took forever. Would have been much easier if they had goats.
Oh, and in your previous article, I love Alli. She's a great writer. I pretty much agreed with everything you said. That's why we're cutting sugars way, way down.
Not completely out, but almost. I can never give up weekly ice cream or a small piece of high quality chocolate.
My Goat Roofing Squad: https://tinyurl.com/y26dqw28
ReplyDeleteWe do pay union wages and offer a Pension Plan.