6 Signs We’re In a Market Bubble

In The Big Short, there’s a scene where Michael Burry (Christian Bale) is confronted by two of his biggest clients over Burry’s claim of a housing bubble. The first client, Lawrence, tells Burry that “actually, no one can see a bubble. That’s what makes it a bubble.” Burry responds: “That’s dumb…there’s always markers.”

It’s true. There are always indicators, as history has shown. We are currently in the midst of the longest running bull market in history, going all the way back to March 9, 2009. Last February began a large, COVID-induced selloff that corrected course by summer and actually put the market in the green by the end of the year. It was the first time ever a market dropped by 30% and ended green in the same year.

So are we on the verge of the next “Big One?” Here’s five reasons that say we are.

1. Wrong Side of History

As mentioned, we are currently in the longest running bull market of all time. Prior to the 2009-to-present run, the longest was the 1990s, which ran for 113 months. Our current run is at 143 months. Market commentators called last year’s 30% drop the “end of the bull market” but because it came immediately back and then broke the old high I do not consider it the end of the market run. The correction was hefty, but the long term trend line was not broken.

Looking at the list above, prior to our current run starting in 2009, the average bull market lasted 56.83 months. The current run is nearly three times that. Not only that, but the S&P percent change if you include 2020 and 2021 is up to 437.54% taking out the old record from the Roaring 90s.

Simply put, we’re far overdue for an ending to this bull market.

2. Margin Debt is at a Record High

Margin is the difference between the total value of the investment and the amount you borrow from a broker. Basically, you’re using cash or securities you already own as collateral to make more investments in hopes of making a profit. As with other loans, you have to pay back the money you borrowed plus interest. But margin trading comes with risks. If the amount you borrowed gets too large relative to the value of your securities, you will have to deposit more funds. Otherwise, your broker may sell off some of your assets. And remember, even if you lose your entire investment, you’ll still have to repay what you borrowed, with interest.

Website for Robinhood

Any investment bought via credit always runs the risk of margin calls and, eventually, liquidation.

Barry Ritholtz

Margin debt in 2020 reached a record high. Advisor Perspectives has compiled the amount of outstanding margin debt in the S&P 500. The correlation between the amount of debt and the S&P 500 level is not an accident; after all, buying stocks on credit allows you to buy more than you could just on cash alone. By borrowing money from a bank or brokerage to buy stocks (in hopes they go up), funds and investors drive up the market.

The expansion of credit also correlates with past bubbles (and crashes) in the market: the dot com bubble of the late 90s, the housing crash starting in late 2007, and the sharp drawdown in 2020. However, in Jan 2021, the outstanding margin is higher than it’s ever been, lost to the point of going parabolic. The chart below gives a better illustration as to the growing debt burden (or negative credit) overall in the market:

Margin can only expand so far. A bank or brokerage will only lend so much before either the servicing payments or interest becomes too great. There’s also the possibility that a drop in price will precipitate a margin call and the brokerage has the legal power to start selling securities in your account to repay loans. The risk at that point becomes systemic, with multiple brokerages liquidating accounts to get their money back.

For example: I have $100 and I buy 5 shares of AT&T (T). The shares go up in value. I can then use them as collateral to borrow another $100 from my brokerage to buy more shares of T. It goes up, so I borrow another $100 to buy more, and so on. My parents did this during the housing boom in the 2000s: take out a home equity loan to improve the house. The value of the house went up, so the line of credit in the home equity went up, so more could be borrowed for more improvements…and so on. So in my brokerage account, I have over $300 in T stock, only $100 of which was my own money. If T’s stock price drops, the value of the collateral drops, so I get margin called. Worse, if it drops below the price I bought it with my original $100, I could be wiped out. I owe the brokerage $200 regardless, so if all the shares I bought are sold for $200, I have no money left and no shares.

Total wipeout.

Margin debt relies on the “greater fool” theory that pervades every stock market bubble. Essentially, I’m willing to take on the risk of borrowing money to buy stock because I believe there will always be someone (a “greater fool”) to buy it from me. Eventually, there wont be any buyers because prices will reach a point where no one wants (or can) afford a stock. Now you’re stuck with stock quickly losing value that you bought with credit. And if everybody holding that stock tries to sell at the same time or is forced to sell via margin call…well it turns into a landslide.

According to the Financial Industry Regulatory Authority, outstanding margin debt at the end of 2020 was $778.04 billion.

3. Record New IPOs

Jordan Belfort Takes Steve Madden Public in The Wolf of Wall Street (2013)

An Initial Public Offering, or IPO, is when a private company “goes public” by offering shares of the company on the stock market. It is the late stage of start ups: venture capitalists or investors invest money into a company (or person) with an idea, build the company up until it’s functioning and offering a product or service, then sell it via IPO, recouping their investment plus profit. Imagine investing in Apple or Tesla before it went public, then being able to sell off your shares of the company at big returns.

Large amounts of IPOs are also generally seen as a market top or bubble — just look at the dot com craze of the late 90s. Internet startups were dropping shares all over the NASDAQ, with investors desperate to grab anything with “internet” or “dot com” in the name. It eventually became a racket — companies like pets.com that had no real business model or even revenue were being sold to the public.

And now it’s happening again.

In 2018, the number of IPOs of companies with negative earnings (i.e., don’t make money) reached 81%, which happened to be the same ratio in 2000, when the dot com bubble burst. In 2020, the trend only continued. As InsideHook put it in an article titled “Stock Market Mirrors Dot-Com Bubble as IPOs Mysteriously Skyrocket”: “Why are unprofitable tech companies soaring during a pandemic?

According to the Wall Street Journal article “Record IPO Surge Set to Roll On in 2021”:

Defying expectations, investors piled into initial public offerings at a record rate in 2020, and few expect the euphoria to wear off soon.

Companies raised $167.2 billion through 454 offerings on U.S. exchanges this year through Dec. 24, compared with the previous full-year record of $107.9 billion at the height of the dot-com boom in 1999, according to Dealogic.

The coronavirus pandemic turned the typical rhythm of the IPO market on its head, with $67.3 billion raised in the fourth quarter. That amount is roughly six times the total for the first three months of the year.

A lot of this could be driven by retail investors over the course of last year. Axios calls this “The Robinhood effect.” If you recall in my last post titled “Gamestonk,” retail investors (more on them in a minute) dove headfirst into trading stocks using stimulus checks and Federal unemployment bonuses to buy up companies like Tesla.

Even as I write this, the IPO for dating-app Bumble just opened 77% higher than it’s IPO price on its first day of trading. The app disclosed 2.4 million paying users as of September 2020, but also a net loss of $84.1 million…with a net loss margin of 22.3%. With it’s current stock price, the dating app company is valued at $14 billion.

Make no mistake — this is mania. Retail traders are buying shares in IPOs of companies they recognize: AirBnB, Uber, Lyft, Pinterest, and Slack. These are apps and software they know. And they all want to get in on the ground floor in case the stock is the next Tesla or Apple. Just like people didn’t want to miss out on pets.com being the next…well, whatever. Perhaps even more maniacal is the ubiquity of SPACs or “Special Purpose Acquisition Company.” Without going too far down the rabbit hole, here’s The New York Times’s definition: “

These vehicles have only one purpose: to find a private company and buy it, usually within two years. SPACs are sometimes known as “blank check” companies — as in, investors give them a blank check to go buy a business, sight unseen.

Those checks are getting bigger and bigger, with SPACs raising nearly $26 billion in January, a monthly record in an already red-hot market.

As the Times article also asks, “What could go wrong?

4. Crazy P/E Ratios

In case you don’t know what a P/E ratio is, I threw out the formula from the get go. More bluntly, it’s the measurement of how far from reality a company’s stock is. If a company that has 1,000,000 shares makes $2,000,000 than its earnings per share (EPS) is $2.00. Now the same company’s stock is $200/share. So $20 divided by $2.00 is a P/E of 10. Therefore, the higher the share price (or lower the earnings per share), the higher the P/E. A P/E of 10 means it would take 10 years to earn back your initial investment through company profits. Another way of looking at it is, people are willing to pay $10 for every $1 a company earns.

This little bit of math is important to understand the impact of a runaway P/E. For the most part, P/E is used as a way to compare valuations between companies. A company with a P/E of 20 might be not be seen as overbought as a company with a P/E of 50. Remember, a P/E of 50 means it would take 50 years to earn back your initial investment through company profits.

Now take a popular stock like Tesla (TSLA), that had a huge run last year due to retail investment interest and cheerleading by ARK’s Cathy Wood. It’s current P/E ratio is 1,268.

If you bought Tesla right now, it would take you over twelve hundred years to earn back your initial investment through Tesla’s profits. Other stocks like Shopify (SHOP) and Square (SQ) have current (as of time of this writing) P/E ratios of 900 and 413, respectively. As a point of reference, a P/E in the mid-20s is traditionally considered “high”. These stocks have become detached from any real financials.

Now expand P/E to the entire stock market, where you aggregate all the companies’ P/E to determine the market P/E. The historical average P/E for the S&P 500 is between 13 and 15. The current P/E for the S&P 500 is 39.87.

For long term P/E analysis, a lot of companies will use something called CAPE — Cyclically Adjusted Price Earnings — or “Shiller PE”. This is the price of a stock divided by the average earnings of the last 10 years. It’s a better way of showing trend over time. Here is the the Shiller PE ratio going back several decades (courtesy of longtermtrends.net):

A December 2020 S&P Global article points out that the market P/E CAPE ratio has now just crossed the 1929 pre-crash level:

The cyclically adjusted price-to-earnings, or CAPE, ratio for the S&P 500 hit 33.1 in November, above the 32.6 level it was at in September 1929, the month before the crash that preceded the Great Depression.

“The fact that we’re beyond the September 1929 levels is obviously an important milestone, and will only add to concerns that current US equity valuations have become disconnected from real economic performance,” Jim Reid, a research strategist with Deutsche Bank, wrote in a note.

To be fair, the article also chalks some of the frothiness “was dismissed by some equity analysts due to the uncertainty of the coronavirus and its impact on forward guidance from companies.” But there’s no denying P/E ratios — like Tesla — are certainly overvalued.

5. Rise of the Retail Investor

“Early in 1928, the nature of the boom changed. The mass escape into make-believe, so much a part of the true speculative orgy, started in earnest.”

John Kenneth Galbraith

I covered a good portion of the boom of the retail investors in 2020 in my Gamestonk post two weeks ago. As of July 2020, retail investors made up over 20% of the entire stock market, fueled by stimulus checks and unemployment bonuses. This was up from 10% only a year prior. A retail investor is defined as someone who buys and sells stock for themselves and not for an entity, fund, or organization.

Global X published an article in October 2020 called “The Renewed Rise of the Retail Investor” and highlighted a key component of the retail investor boom: leverage.

A growing trend within the retail community is the use of leverage to enhance returns. A Yahoo Finance/Harris poll found that 43% of respondents have used margin, options or both since the beginning of the pandemic.19 Traditionally, investors use margin to enhance the returns of small-gain strategies. But it seems that many inexperienced traders today want to supercharge already highly volatile portfolios, bringing them closer to the gains they desire.

Clients are regularly denied access to margin and options strategies due to their inexperience. This wasn’t the case with Robinhood, where higher-level options access originally required a high risk tolerance profile and a certain number of options trades entered on the platform.20 This progression-based system encouraged traders to increase their options activity while potentially overlooking the education component necessary for responsible use. The firm has since updated their options offering, increasing eligibility requirements and educational content.21

Investing can seem easy for the uninitiated when the market’s surging. This makes sense when all you’ve seen is a strong bull market, punctuated by quick pullbacks, over the last decade or so. In this environment, mistaking luck for skill is easy…

Long story short, there’s a party going on right now in Robinhood with loose credit and unchecked greed from inexperienced traders. This sounds exactly like the Investopedia definition of “euphoria”, which occurs in a bubble environment before ‘smart money’ begins profit-taking. “Caution is thrown to the wind as asset prices skyrocket.” It also reeks of pre-crash 1929, with retail investors taking out loans to buy stocks. Financial Times recently published an articled titled “Investor Anxiety Mounts Over Prospect of Stock Market ‘Bubble'”, noting that the rise of “inexperienced amateurs as a particular concern.”

As the old Wall Street maxim goes, the trader on the street is the last one in and the last one out.

The combination of inexperience, high leverage, and total risk aversion is what usually leads the herd to drive the bubble to the point of popping, usually when the credit runs out. There’s also another big obstacle coming in the next 60 days…

A lot of these ‘newly minted’ retail traders starting buying stocks during 2020’s pandemic lockdown out of boredom and checks coming in from the government. With the surge in the market last year, a lot of the common-name stocks saw profits. Now those same retail traders are going to owe capital gains taxes on any profits realized — and given so many of them were short-term investments (owned one-year or less) they’re taxed at ordinary income rates. With the tax bill for 2020’s investing gains due, traders may have to sell current stocks to pay the tax bill. Given that so many Robinhood traders last year were new to buying stocks, they may not be fully versed on how capital gains tax works, and could be in for a shock.

But it’s not over yet.

For those who lost their job or were furloughed and received the $600 weekly unemployment bonus from the Federal government, those checks are also taxed. For a lot of these pandemic stock traders, huge tax bills could be coming. Some may be aware, others may not. As of May 2020, 20 million Americans were receiving the extra $600 Federal unemployment bonus — most of them on the hook for income tax on money collected. With an unexpected tax bill, a lot of these novice retail investors may look to start selling stocks (taking further short-term profits that will be taxed for 2021) to cover tax bills. Remember, these retail investors currently make up over 20% of the stock market. If a large portion begin to sell to cover taxes, well…

The fuse is lit.

6. Companies Pressured into Debt

Last week Bloomberg noted that companies were being pushed towards taking out more debt due to demand in Junk bonds. In “Junk Buyers Desperate For Debt Are Pressing Companies to Borrow,” the authors call to attention the huge demand for “junk bonds and leveraged debt” that investors want to buy up. Junk bonds are typically considered risky, which is why they pay higher yields (junk bonds are also known as “high yield” bonds). The fact that junk bonds are in such demand means investors are clamoring for high yield or better returns on their investments. This means money managers need to keep issuing new junk bonds to meet demand. And to issue a junk bond, a company needs to borrow money — a shaky company that is at risk to justify the high yield.

This likely means companies that probably shouldn’t be going further into debt are being pressured to go further into debt so money managers can sell their junk bond.

This seems freakishly similar to the housing boom, when banks were offering NINJA (no income, no job verification application) loans just to get the mortgages so they could sell them off. Mortgages were being sold to buyers who were unlikely to afford them, or buyers who already had one or more mortgages on other properties. Cue that other scene in The Big Short:

“I own five houses. And a condo.”

Eventually, risky companies are going to be saddled up with debt payments, and it only takes one or two of them to be unable to make payments and the junk bond is defaulted on.

Honorable Mention: The Buffet Indicator

What kind of post would this be if I didn’t mention America’s favorite investor? The ‘Buffet Indicator’ is a ratio favored by Warren Buffet; simply defined as the entire value of the stock market divided by the U.S. Gross Domestic Product (GDP). The idea is to see how the stock market measures in relation to the country’s economy: a ratio of 1 would be a stock market in parity with economy, basically comfortably supported by the products and services of the nation. To measure the ratio, Buffet likes to take the Wilshire 5000 Total Market Index and divided by the most recent quarter GDP number. Buffet himself calls this “probably the single best measure of where valuations stand at any given moment.”

The Buffet Indicator just hit a record high of 195% this past week.

If you look at the chart above, you can see just how far the ratio has pulled away. In the dot com crash of 2000 and the housing bubble of 2007-2008 the indicator isn’t even close where where it is now. The recent parabolic spike comes as no surprise either — lockdowns and COVID-19 have impacted the service and travel industries, reducing the GDP. But the market continued to go up.

From a February 12, 2021 Bloomberg article:

“It highlights the remarkable mania we are witnessing in the U.S. equity market,” said Michael O’Rourke, chief market strategist at JonesTrading. “Even if one expected those (Fed) policies to be permanent, which they should not be, it still would not justify paying two times the 25-year average for stocks.”

They don’t Buffet the ‘Oracle of Omaha’ for nothing.

I never intended for Quit Your Job to become an investment blog, but investing is a key component to getting out of your soul-crushing 9-to-5 and becoming financially free. Anyone who read my post on Robert Kiyosaki’s Cashflow Quadrant knows the cruciality of the “I” Investor Quadrant. Being an investor means more than buying Apple (AAPL) stock and holding into infinity. You have to know what’s going on in the market, in companies, in economic trends, or you can find yourself wiped out.

And back to the 9-to-5 in no time.

Disclosure: I am not short the market at this time, nor do I have any positions that would benefits from a market drop. I am not a professional investment advisor, nor do I hold any certifications or degrees in finance or economics. I’m just a guy who reads a lot.

Edit: This article was originally published as “5 Signs We’re In a Market Bubble” on February 13, 2021, but after discovering just how high the Buffet Indicator had gotten I wanted to include it in this post. I revised the post from 5 to 6 and added in the BI.

Gamestonk

2020 was a rough year. That goes without saying. It was hard to find motivation in writing a blog about Quitting Your Job when so many people were losing their jobs and seeking unemployment assistance. Their jobs quit them. So I watched and waited, trying to find that spark for inspiration to return to the blog-space.

Then came The Big Meme Short.

Because this event is playing out better than any movie that came out in 2020, we’ll take it one step at a time. It will also be partially subjective, because I “took part” so to speak, buying into the market — more for the experience than in any attempt to actually make money. Personally, I believe in investing and do so. I believe in acquiring assets and utilizing dividends (read my post on building a dividend ladder portfolio here). I bought up stocks in April last year and did well. What happened this week was not sane investing and I don’t recommend getting involved (it’s not over as of this writing) and if you do please exercise caution.

That being said: I am not an investing professional or hold any certifications or fancy paperwork that shows I’m a qualified analyst or that you should listen to me. Trade accordingly and consult a financial professional!

Prologue

Beware the average man the average woman…

Charles Bukowski “The Genius of the Crowd”

GameStop had been mentioned in investing circles over the past year, primarily because of Dr. Michael Burry taking a sizable position. Burry, if you didn’t know, was one of the prime movers of The Big Short (played by Christian Bale) and one of the first to bet against housing. As of June 2020, his fund, Scion, owned 4.26% of available GameStop (GME) shares. Fast forward to this past Monday, where Burry’s position of 1.7 million shares rose to $271 million — and that wasn’t even GME’s weekly high.

Meanwhile, on the other side of the internet, subreddit r/wallstreetbets, essentially a stock trading club of retail investors who discuss stock market strategies, was turning into an angry beehive. It’s worth noting that around the time the GME play got going, the subreddit had about 2.2 million subscribers. It is now up to 5.7 million ‘degenerates.’ Having lost large amounts of money in previous market plays to the big guys on Wall Street, the…shall we say, collective…of wallstreetbets came across the perfect target for revenge.

It involved shorts (I’ll try to keep this brief, but some context is needed). Yes, the same as Burry’s The Big Short. A short is simply a bet against a stock or asset. ‘To short’ something is to bet against. That’s the general term which comes from a ‘short selling’ action where you sell a stock short. An investor on the street can do this by borrowing shares from their brokerage, selling them immediately at market price, collecting the money as profit but owing the brokerage the shares.

Example: I short sell 100 shares of Big Company stock at $10/share. I collect $1,000, but I owe my brokerage (Fidelity, E-Trade, Schwab, etc) 100 shares of Big Company. The stock goes to $5/share, I buy 100 shares of Big Company and return them to the brokerage. I sold for $1,000 and bought back for $500, a difference of $500 which I keep as profit. Brokerage gets their shares back, the trade is over.

Shorting can be dangerous. Imagine if I sold Big Company shares at $10/share and it went to $15/share. Now I’m OUT all the profit AND still owe my brokerage the shares. In most cases, if the trade goes against you, the brokerage will demand their shares back (cause they’re losing money on the value increasing, this is called a margin call). They could also have the power to start selling other stocks in your account to buy back the shares you owe them.

Shorting is a common tactic on Wall Street; it’s done by big banks and hedge funds all the time. The ugly part of it is that with so much weight and money behind it, these funds can actually move the price of stocks in the direction they want them to go. Imagine being able to short Big Company stock and short so much of it it drives the price down in your favor (this is because of volume; when sellers outnumber buyers, the price goes down and vice versa).

So back to r/wallstreetbets. What they discovered was that GameStop (GME) was shorted by Wall Street by over 140%. What does that mean? It means GME stock was heavily bet — the number of shares shorted OUTNUMBERED the amount of available shares. And, if you remember from the example above, the shorted shares must be re-bought to close the position. So, ipso facto, there wasn’t enough shares available to close the position. When the trade was due to close on Friday, January 29, 2021 (last trading day of the month), Melvin Capital, and the other funds behind the short, would need to buy shares to close the short.

As anyone who invests knows, the law of supply and demand rules.

Part One: Short Squeeze

I don’t know when the move to buy up GME started exactly. From the stock chart, the first big move was January 13, where volume spiked and the price rose sharply. For the purposes of this post, we’ll start there.

r/wallstreetbets was at a mere 2.2 million followers or so, but had garnered full buy-in from it’s members on the GameStop play. The price started to climb, more joined in. By the end of last week, I was seeing news about GameStop and ‘short squeeze’ in my news feed, but didn’t bother to look into it.

A ‘short squeeze’ occurs when the price of shorted stock suddenly and sharply rises. In order to ‘stop the bleeding’ (e.g., stop taking losses) a trader or hedge fund will begin to buy the stock back to fulfill the short trade. This, of course, causes the stock to continue to rise because the short seller has started buying too, and it feeds off itself. Stock rises, short seller buys to cover before the price goes up further, which causes the price to rise more, which causes the short seller to buy back more…et cetera.

To use my earlier example of shorting Big Company stock. I borrowed 100 shares and sold at $10, expecting it to go down. Instead, say it goes down to $6 but then starts to come back up. Panicked (and not wanting to lose my profit), I buy 25 shares at $6 — which adds to the increase in price. I still owe my broker 75 shares and the price is rising. So I buy 25 more shares at $8, still owing 50 and my profit is shrinking fast… If it goes to $10, I lose profit on my remaining 50 shares and if it keeps going over $10 I’m losing money. The phenomenon of the price rising against my short and me adding to it is a short squeeze: I’m the one getting squeezed.

I first checked the price of GameStock (GME) on Tuesday at the market open, finding it at about $143/share. My first response was “this is absurd,” the company is in no way worth that. This is a stock that back in October was under $10/share and their business model wasn’t very forward thinking (brick and mortar as games moved online). I checked the stock chart of GME:

At this point, I still had no idea r/wallstreetbets was behind it or what was even going on. From a chart and price perspective, this just looked like a pure mania play. The RSI (relative strength index), the green blob in the top right corner, showed 98+ which means the stock is white hot and severely overbought. My first instinct was to bet against the move using puts.

First: Why bet against it? The reasoning is that it continues to take more money to push a stock price up. Someone (or some fund) must be willing to buy at the current price. In order to sustain huge price gains, there must always be another buyer. The minute no one wants to buy a stock at a certain price, the selloff begins. This is what happened with the dot com crash and any subsequent crash of a stock or market after parabolic moves. I had played a similar trade back in April 2011 in silver:

In late April 2011, silver had climbed to incredibly high levels very quickly. The RSI was high and I knew it couldn’t stay up forever. I bought puts on SLV and within a week the price of silver collapsed. Most money I ever made trading in a day. So, to me, it looked like a similar setup for GME.

I went to make my trade in my Fidelity account but found I wasn’t registered to trade options (my silver play was done in an E-Trade account I’ve since abandoned). I applied, but had to wait at least three days. So, with no trade to make that day, I decided to research exactly what was going on — would I still get a chance to buy puts later in the week? Would the stock mania still be going? So I started to dig.

And I realized something incredible was happening.

Part Two: Can’t Stop. Won’t Stop. GameStop.

It turns out that the story behind GameStop’s ridiculous rise wasn’t the typical ‘rumor mill’ drive up found in past stock manias (remember JDS Uniphase?). It wasn’t a case of “Blue Horseshoe Loves GameStop.” It was a grassroots movement to ‘strike back’ against a faceless enemy in the Wall Street hedge fund. Resentment towards Wall Street for the 2008 housing crash was channeled now into this new play.

What savvy users like /DeepFuckingValue, Roaring Kitty, and r/wallstreetbets discovered was that the big players were extremely exposed on GameStop stock and would be required to buy it at any price. They could create an extremely painful (and expensive) short squeeze against the hedge funds shorting the stock, particularly Melvin Capital. So word was spread, and the degenerates of r/wallstreetstock began to buy GME stock. More importantly, they didn’t just buy — the message was to HOLD.

They would buy up as many shares as they could get their hands on and deny them to the hedge funds. Then they would get their friends, family, and anyone who would listen, to buy and hold too. Because GME was shorted over 140%, more shares were needed to cover than were available, so denying ANY shares further would make things exponentially more painful. Supply and Demand was on full display as GME price rose.

As the price climbed, the redditors’ strategy appeared validated. The truth is, it was a smart play. They caught Melvin with their pants down. Why such a huge short play on GME? I don’t exactly know; GME had a been the target of short plays over the past two years. Maybe Wall Street knew they were a weak target whose stock price could be easily pushed down, particularly with GameStop closing their stores during the pandemic last year. A more insidious theory would suggest Melvin and others wanted to short GME to zero, folding the company and not having to buy back ANY shares, thus keeping 100% of their profit. Regardless, GME’s price was starting to “moon” as it climbed faster.

By Tuesday I noticed the stock and its chart. The grassroots movement was working. Profits garnered interest in what was going on. Interest prompted more buyers — but for the redditors it wasn’t necessarily to get rich, it was to be part of the experience. The GME play had gone viral…like a meme. GME was the first “memestock.” The real memes was also appearing.

When the pandemic started in 2020, lockdowns began and people on the street found themselves stuck at home, receiving stimulus checks and $600 Federal unemployment bonuses. With nothing else to do and/or no work, many took to the retail trading platforms Robinhood and M1 Finance. According to the NY Times, in the first three months of 2020, Robinhood “users traded nine times as many shares as E-Trade customers, and 40 times as many as Charles Schwab customers,” and according to CNBC, retail brokers in 2020 saw “record new account openings…despite the pandemic.” Credit where credit is due: Robinhood and M1 Finance and their $0 commission fee for trading helped force other larger brokers to compete, like Charles Schwab and Fidelity, and drop their commission to $0 as well.

These new retail investors moved like a swarm in 2020, charging after hot name stocks like Tesla (TSLA). The GameStop phenomenon presented itself as the next big target to buy. r/wallstreetbets (now up to 7 million followers in the second day of writing this post) would soon attract these millions of new street investors to their cause. Together, they pushed GameStop up to dizzying heights.

By Wednesday, GME was over $300 and Michael Burry — up 1,500% on the rally — was now calling the GameStop price rocket “unnatural” and “insane.”

Then something else began to happen. r/wallstreetbets continued to dig and found heavy short positions on other stocks too (just not has hefty as GME). From highshortinterest.com here (as of the end of the week of January 25th) the stocks with the highest short interest (GME lower than the 140% originally, down to 121% which means some shares were bought to cover some of the short):

On Wednesday I decided to enter the fold, just for fun. I had no plans to dive into GME stock head first and my options trading still hadn’t been approved by Fidelity (and still no word). For my own entertainment, I chose AMC stock — I love movies and it seemed an interesting play. It hadn’t rocketed up quite like GME did and maybe it would. I got to play a company related to movie and feel like part of this cultural event.

Someone clearly wasn’t happy with r/wallstreetbets. By Wednesday afternoon the subreddit was knocked out of commission, going ‘private’ and not being available to anyone who visited. Even further, the WallStreetBets Discord channel was banned outright. The subreddit would appear public again late Wednesday evening or early Thursday morning, but to this date, the Discord server is still gone. Was this a co-ordinated attack? There’s no doubt at this point WSB was pissing off powers that be.

I would personally experience the coming “fuckery” first hand the following day. It would also validate my original thesis on why GME was a good put choice back on Tuesday (again, before I knew anything about r/wallstreetbets involvement). As if things couldn’t get any wilder, Elon Musk tweeted that day just after market close, driving the price up even more with foreign investors:

Part Three: The House Always Wins…Or Does It?

On Wednesday I was in the game. There were struggles out of the gate; most major brokers were suffering delays in filling orders, likely due to heavy volume. At Tuesday’s close, AMC was just over $6. By pre-market, it had climbed over $12. I was able to finally get my trade through after the bell at 9:30am at $16.50. On Wednesday AMC climbed and closed at $19.90. News came out after the closing bell that Melvin Capital and Citron had exited their short (after getting absolutely leveled). The amount lost by these two hedge funds has varied in the news — Melvin Capital has supposedly lost $7 billion, 53% of their assets under management. GME was over $340/share and the trade was moving in the direction the Redditors planned. Wednesday evening, investing commentary site ZeroHedge reported “Hedge Funds Are Puking Longs to Cover Short-Squeeze Losses.” “Puking longs” means hedge funds are selling long positions to get cash to cover losses incurred due to losses caused by the short squeeze. This is what being margin called looks like.

On Thursday morning, the pre-market price of AMC hit $22. GME was up over $400. Both had been pushed up overnight by foreign traders in India and Europe. North America was getting ready for the next round of the fight when something I’ve never seen before happened.

Brokerages began to restrict only buying not selling. In fact, users were reporting Robinhood (and TD Ameritrade) had REMOVED the buy button for certain equities, namely GME and AMC.

So for all the “meme stocks” (e.g., the heavily shorted stocks pointed out by WSB), Robinhood and TDA were not allowing their users to buy. Promptly, the price on these stocks began to fall. With the retail traders shut out en masse, the sellers would overwhelm the buyers. My shares of AMC were down to $12 when the market opened, wiping out over $7/share in profit. GME price took it on the chin.

Robinhood was blasted across social media for the restrictions, prompting many to suggest alternatives. A Change.org petition appeared to remove Robinhood from the App Store. “How to delete Robinhood” was quickly trending on Google later that day as well. Protestors appeared in-person on Wall Street to demanding that “Robinhood has got to go.”

Robinhood was claiming they were restricting the stock purchases to protect themselves AND their investors. What it looked like was Robinhood was trying to prevent the dreaded failure to deliver (FTD) that would destroy Robinhood and its capital investors. By failing to deliver, they open themselves up to lawsuits and bankruptcy. By restricting purchases, it helps protect against FTD, but the PR damage was total. RH was a accused of being complicit with the hedge funds to help cover their GME shorts. If retail investors couldn’t buy and only sell, it helped drive down the GME price for the hedge funds to recover. In addition, only being able to sell and not buy might cause panic to the retail investor to get OUT of their Robinhood account, making them hit the “sell” button, thus driving the price lower.

Anyway, at this point I could see the severe shenanigans going on. AMC dropped to the $8 range and I was in the red in my tiny position. I debated just holding and waiting. Then I noticed that every time AMC started to climb back up, the price would halt. Somebody was enacting a trading halt on AMC and GME; I counted no less than 10 halts on the price of AMC before noon alone. Something was happening. After some debate, and the price climbing back to $10/share, I got out. I could have held — I thought about it — but I didn’t like the manipulation and dark forces at work. I took the loss and I’m totally fine with it. It was fun to play and dip my toe into this cultural event.

But Robinhood preventing people from buying shares of GME or AMC was only half of the situation. According to several RH users, the app was also selling their GameStock without their permission. Robinhood later denied this had happened, but users took to social media to share screenshots showing the confirmations their accounts had executed sell orders:

One redditor, Palidor206, described everything happening with Robinhood as such:

And meanwhile…

Part 4: Welcome to Thunderdome

This is a long post, so let’s recap:

  1. Savvy Redditors and a YouTube identified an exploitable play on short sellers of GameStock (GME) shares. They began buying up shares and holding, which encouraged others. The price of GME began to climb.
  2. Early this week GME climbed over $140/share and the number followers of the subreddit r/wallstreetbets exploded. On Wednesday at market open, brokers (including my own, Fidelity) lagged and struggled to keep up with volume.
  3. On Thursday, Robinhood and TD Ameritrade began restricting purchases of the ‘meme stocks’ — GME, AMC, NAKD, BB, NOK, etc. At first the buy button for these stocks was removed; eventually users were restricted to only 1 share. The sell button was always available.
  4. Public backlash at Robinhood exploded, with people protesting and flooding the App Store with 1-star reviews of the app (which Google later removed 100,000 of)

On Friday, although Robinhood restricted purchasing, GME price was back up. AMC was back up (dammit). Nokia (NOK) and BlackBerry (BB) either didn’t have the same force behind them or truly were just a meme as they slid, apparently due to lack of interest.

By this point, the emotions behind this retail investor flood went far beyond greed. Followers of r/wallstreetbets began sharing personal stories of why they were doing this. To them, it was personal. They remembered 2008 and what the hedge funds had done to their friends and family. It was payback. Braveheart memes abounded. Perhaps most fascinating about this whole thing was that many of these investors were on suicide missions: it didn’t matter if they made money or if they lost it all. They just wanted to make the hedge funds hurt.

Here’s the story of Space-Peanut on reddit (which has since been removed by a reddit mod, but is available here)

Here’s another one from chickenweng65:

These people don’t care if they lose everything. They don’t care if GME goes to $0. To the reddit investor this is war. They don’t care if it crashes everything down. It’s a new form of populist revolt. As Space-Peanut put it, “Taking money from me won’t hurt me, because I don’t value it at all. I’ll burn it all down just to spite them.”

It’s like being in a gunfight with Doc Holliday — he’s not afraid to take a bullet because you’d just be doing him a favor.

By the way, while writing this, r/wallstreetbets is now up to 7.5 million ‘degenerates.’

The redditors with new found money are now using it to taunt Wall Street publicly.

5. You Are Here

GME is at a mania pitch. The memes are coming hard and fast. There’s reason to think there’s some panic on Wall Street, or at least concern for the chain reaction caused by the Robinhood debacle. See, on Wall Street, everything is interconnected. Brokerages deal with banks and clearing houses. You buy and sell stock in your broker account and it seems instant, but a lot of time it takes days to settle or ‘clear.’ Worst of all, perhaps, is no one knows how deep things can go from one short squeeze.

It’s Sunday afternoon and markets will open in a few hours. What will tomorrow bring? Will GME continue its meteoric rise? Where will the reddit ‘hive-mind’ turn to next? This event with not be without consequence — hedge funds will probably need bailed out. Expect government regulatory commissions and investigations. Will things reach 2008 levels again?

Maybe. Who knows?

WSB has kicked over a rock, exposing what was beneath it. Then they picked up the rock and threw it at a bees’ nest. I expect WSB to be demonized by the media and ‘powers that be.’ These market distortions are they’re fault, after all. If only they had left GME alone this wouldn’t have happened.

What does all this have to do with Quitting Your Job? This blog is certainly not advocating jumping on a bandwagon or chasing the herd for profit. But the biggest takeaway here is the old Boy Scout maxim of “Always Be Prepared.” Weeks ago redditors found a great stock market play. Who knows when the next one will arrive. That also applies in the event the market crashes; if you’re ready, stocks or assets can be bought for cheap while everyone is selling. The other thing I see happening in r/wallstreetbets and Twitter is people on the street becoming interested in financial education — how the stock market works, how stock is traded, what terms mean what. They’re a long way from being savvy, but the interest and desire to learn more is there.

I’m still out on all these meme stocks. But I’m bingewatching the show and it’s fascinating.

Disclaimer: I do not own any of the stocks mentioned in this post. I do not hold GME. I also do not use Robinhood. Caveat emptor.

5 YouTube Channels You Should Be Subscribing To

Just a quick disclaimer: I am in no way affiliated with any of these channels. There’s no kickback or monetization for mentioning them on my blog. I personally follow them and wanted to recommend them to anyone interested in personal finance, investing, or wealth.

The following are five informative YouTube channels I subscribe to for ideas, inspiration, or just taking my brain for a jog. If you have an interest in personal finance or want to become entrepreneurial, these are a great place to start.

#1. Ryan Scribner

Ryan Scribner is a great intro to personal finance. He targets beginners and those early in the investment game. His videos cover passive income and ways to earn it, the stock market, and social media growth strategies. Recent videos have shifted to more gimmicky topics like “I Bought 7 Boxes of Amazon Returns” but I recommend any of his videos on passive income or stock market investing.

The other thing I like about Scribner is he isn’t shy about sharing his end of things. He’s very open about showing his metrics and actual revenue. One of my favorite videos he did is one where he spent two hours online taking surveys for money. Online surveys are always touted on blogs or online lists as easy ways to make money from home: just fill out surveys and get paid! Scribner actually tried several sites and found them to be essentially a sham (unless you spend thousands of hours doing it, and even then you’re not assured you’ll see any real money).

#2. Valuetainment

Patrick Bet David is an eccentric fellow. He’s a physically huge, fast-talking, money-making businessman. A Persian Wolf of Wall Street, minus the criminal element. Valuetainment is an interesting mix of financial philosophy, motivation, and an interview series. Videos include things like “How to Start a Business for Under $500“, “Hiring Your First Employee as an Entrepreneur“, and one of my favorites, “The 20 Rules of Money”, which is embedded above.

The interviews have a variety of guests, from financial gurus to comedians and athletes. I find myself unable to binge watch this channel, probably because it is so eclectic and wide ranging. I like to pick and choose from time to time for what I’m in the mood for and I can usually find something to fit the mood. Bet David is also a prolific poster, constantly generating new content.

#3. Practical Psychology

This channels covers a lot of ground. The topics are many and cover habits, mindsets, and general human psychology. There is also the occasional book reviews and ‘takeaway’ videos, such as one of my favorites above: “14 Big Lessons from 341 Books.” The channels is not one I watch so much for investing or money, but to learn more about how my mind works.

If you’re looking to change your habits up or understand more about why you do the things you do, this is a great place to start. Each video consists of a whiteboard animation with voice over, so the look of the videos can become repetitive over time.

#4. Joseph Carlson Show

This is a recent discovery for me. If you’ve read this blog before, you know I’m a fan of dividend investing, which happens to be Carlson’s focus. The channel has a very specific theme: Carlson opened an investing account for the purposes of illustrating dividend investing and he posts regular updates on how the portfolio is progressing. (Each video thumbnail gives the current value of the portfolio.) He takes the time to breakdown his portfolio, why he chose what he did, and how dividend reinvesting and adding more of his own money over time creates growth and profit.

Recently, he’s also beefed up his channel by adding economic commentary, news, and financial trends. It’s informational and interesting, while showing what dividend investing looks like in real-time. If you’re interested in investing or new to it, this is a great place to learn more from the ground level.

I have a soft spot for Mike Maloney. Born dyslexic, Maloney had a difficult time reading and writing that plagued him into adulthood. He finally discovered the dictation function on his Macintosh computer that allowed him to eventually correct and moderate his reading and writing issues. He has since gone on to author several books on investing! Maloney’s YouTube channel serves several purposes, including advertising his company GoldSilver.com, which deals in investment-grade precious metals.

I like Maloney’s presentations and level-headed economics criticism, but the real wealth (so to speak) in his channel comes from his documentary series “Hidden Secrets of Money.” Maloney goes back to the beginning — the earliest days of human history — and revisits money through the ages. More importantly, he defines what money is and its relationship to currency.

The real knockout is episode 4 of the series, entitled “The Biggest Scam In The History of Mankind” where he dissects how the Federal Reserve system and our current monetary system works. It’s a dense, cryptic topic that Maloney easily breaks down for the casual viewer. It’s well done, highly informative, and, in the end, shocking to see how things really work. It’s impossible not to walk away from without having an impact.

Required Reading: 5 Takeaways From Cashflow Quadrant

“The only difference between a rich person and a poor person is what they do in their spare time.”

Robert Kiyosaki

One of the segments I want to do with this blog I’m called “Required Reading,” which essentially is a combination book review and recommendation. I’ll write a post on a particularly educational or useful book and break down the top 5 takeaways.

If you’re reading this blog, you’re probably familiar with the name Robert Kiyosaki. He burst on the scene in 1997 with Rich Dad Poor Dad and has built an empire around financial literacy and education. Cashflow Quadrant was the follow up in 2000 to the hugely successful 1997 book and the Kiyosaki book that had the biggest impact on me.

I usually recommend this book very early to people who want to change their financial lives. It’s not a how-to book. It’s not a “baby step” book that tells you what to do. It’s a book that rewires your brain and changes how you think about money, jobs, and wealth. Kiyosaki breaks it down in very simple terms, exposing the reality behind things we take for granted, such as being an employee and the tax system. Cashflow Quadrant is very much required reading for anyone looking to break out of the rat race. Below are my top 5 takeaways from the book (but you should really read the whole thing):

#1. As an Employee, The System is Against You

The said ‘quadrant’ of the title is made up of four types of income: “E” (Employee), “S” (Specialist or Self-Employed), “B” (Business Owner), and “I” (Investor). The vast majority of people are “Es” and are also the most disadvantaged of the four. As an employee, taxes (income, social security, medicare, etc) are taken from you before you get any money. You pay taxes and get what’s left. As an “S” or “B” you have tax advantages, such as deductions and depreciation. These lower the amount that’s taxable; you spend money and pay taxes on what’s left. To make matters worse, “Es” are also taxed at the highest rates!

“Your boss cannot make you rich,” Kiyosaki writes. “The reality is, your boss’s job is not to make you rich. Your boss’s job is to make sure you get your paycheck.” Which is then taxed. If you remain an employee, you’re working hard for taxes and what’s left. Being an employee also usually takes away a lot of your time. You’re at the whim of a manager or company — you must adhere to their schedule and demands. If you’re unwise about your money skills and budgeting, “then all the money in the world cannot save you…if you budget your money wisely, and learn about either the “B” or “I” quadrant, then you are on your own path to great personal fortune, and, most importantly, freedom.”

What’s even more messed up is the fact that The System only gives tax breaks for “Es” if you go further into debt. Think about it: as a business owner, your expenses and the “cost of doing business” are deductible from your income, reducing what you pay taxes on; as an “E” the only tax breaks you get are from taking on debt like a home mortgage or student loans. These two (usually large) loans have tax deductible interest. But you have to go into big time debt just to get the deduction. Simply put, you want to get out of the “E” quadrant as fast as possible.

#2. In Debt vs Indebted

“The more people you are indebted to, the poorer you are. And the more people you have indebted to you, the wealthier you are. That is the game.”

This one is brilliantly simple. If you owe a bank a mortgage, another bank credit card debt, another institution student loan debt, your parents $100 you borrowed, you are in debt to someone else. Your earned money is taken away by these debts. However, if someone owes you, you earn money by these debts. As a property renter or bond buyer or lending via a Peer-to-Peer lending service, people are indebted to you. “We are all in debt to someone else,” says Kiyosaki. “The problems occur when the debt gets out of balance.”

“The world simply takes from the poor, the weak, the financially uninformed. If you have too much debt, the world takes everything you have…your time, your work, your home, your life, your confidence, and then they take your dignity, if you let them. I did not make up this game, I do not make the rules, but I do know the game…”

#3. Mind Your Own Business

Kiyosaki shatters “Industrial Age” adages and beliefs against the rock of reality that is the 21st century. “Go to school and get good grades, so you can find a safe, secure job with good pay and excellent benefits,” he points to as out-of-date advice. “Work hard so you can buy the home of your dreams. After all, your home is an assent and is your most important investment.” “Having a large mortgage is good because the government gives you a tax deduction for your interest payments.” “Buy now, pay later.”

As Kiyosaki points out, people who “blindly follow” the advice above often end up as employees (“making their bosses and owners rich”), debtors (“making banks and money lenders rich”), taxpayers (“making the government rich”), and consumers (“making many other businesses rich”) The people following this advice are making everyone else rich but themselves! “They work all their lives minding everyone else’s.”

To break out of this, you must move into the “B” and “I” quadrants. Move from the employee to the employer. How do you do this? Start a business. Offer a product or service. To enter the “I” quadrant as an investor, learn about finance and investing. Buy stocks or bonds that generate income. Or buy an existing franchise! Don’t work at McDonald’s, own one. It may seem like a leap, but as Kiyosaki will repeat over and over, it’s about financial education. Don’t grow other people’s businesses, grow your own.

#4. Assets and Liabilities

Find any YouTube interview with Kiyosaki (or read any of his books) and I guarantee you will hear him mention these two things. “An asset,” he likes to say, “puts money into my pocket. A liability takes money out of my pocket.” He punctuates this always by stating “your home is NOT an asset!” The mindset is that buying a home with a large mortgage is an asset — this is archaic thinking — because the mortgage interest is tax deductible. But you still have the monthly mortgage payment. And property taxes. And Private Mortgage Insurance (PMI) if you put down under 20%. Plus you have renovations and repairs. But a home becomes an asset when your rent it. The rent brings in monthly income. The repairs and renovations become tax deductible as business expenses.

Thinking more about these two things really changed my focus on spending money. When I spend money now, I think “is it an asset or a liability?” “Will it make my money or cost me money?” I get excited when I buy a new stock or more shares of a stock I already own. They’re going to go to work for me and make money. I had to buy a new car not long ago and groaned about the new liability — but if I use it to Uber or Amazon Flex, now it’s an asset because it puts money in my pocket. The gas I use and tires I purchase are now business expenses.

Assets and liabilities are as core to wealth as supply and demand.

#5. Other People’s Time and Money

“OPT” and “OPM” as Kiyosaki calls them are “found on the right side of the quadrant.” A “B” Business Owner and “I” investor become wealthy using other people’s time and money. It sounds sinister, but think it through. If you’re an employee, you have a job because someone built a business around an idea or product. Your paycheck is the direct result of someone else’s time and money. Put yourself on the other side of the equation: by putting in the time and money to start a business, you begin to earn back both at the expense of someone else’s who works for you.

The “I” quadrant is the most unique. In the “I”, Kiyosaki says “money works for you.” This is why I love investing so much. If I buy shares of Coca-Cola, the company is doing the work for me. The stock may increase in value, making me money. Then, every quarter, they pay me money in the form of a dividend. I don’t work for Coca-Cola. I don’t attend any meetings or drive anywhere. I don’t even get a paycheck from them. I get increased asset (there’s that word again!) value and a dividend. Best of all, I still have all of my time to dedicate to something else (or nothing, if I chose).

Kiyosaki: “A few years ago, I read this article that said most rich people received 70% of their income from investments, or the “I” quadrant, and less than 30% from wages, or the “E” quadrant. And if they were an “E”, chances were that they were employees of their own corporation.”

I have barely scratched the surface of Cashflow Quadrant with this post. It was one of the earliest books I read when I wanted to change my thinking on finances and wealth and it had one of the greatest impacts. It pulled back the curtain. It shook me out of a sleepwalking daze of going to work day in and day out, collecting a paycheck that was heavily taxed and withheld. It put me on the path to financial freedom. I cannot recommend it enough! To help you on your own personal wealth journey, I added a link to buy a copy below by clicking on the cover or here.


How to Build a Dividend Ladder

“I believe non-dividend stocks aren’t much more than baseball cards. They are [only] worth what you can convince someone to pay for it.”

Mark Cuban

A dividend ladder is the rich man’s way of making their own paycheck. It’s an awesome tool to generate income, merely by holding stocks in various companies. You’re paid a set amount at a certain time, on a schedule, and you don’t even have to get out of bed in the morning to earn it. But before we can discuss what a dividend ladder is, you have to know what a dividend is.

Simply put, a dividend is profit paid out by a company to its shareholders. Think of it as a reward for holding on to a company’s stock. It only makes sense, for as a shareholder, you OWN part of that company. If it does well, you get to share in the proceeds. Not all companies pay dividends, however. It’s usually up to the discretion of the company to pay any dividends, and the company can lower the dividend or even outright end it if it sees fit. For example, the company I used to work for T-Mobile (TMUS), stopped paying a dividend in May 2013.

Great, so dividends are cash paid to shareholders by the company. So what is a dividend ladder?

Most dividends are paid on a quarterly schedule. To stick with telecommunications companies, take a look at Verizon (VZ). Verizon pays a dividend in January, April, July, and October. The dividend is currently $2.41, paid quarterly — so in each of the above months you would collect about $0.60 per share. A thousand shares of VZ would pay you $600 every three months, regardless if you do a shred of work or not. BP or British Petroleum, pays in February, May, August, and November about $0.59 per share. A thousand shares of BP nets you $590 every three months, but in different months than Verizon.

Let’s take a third stock, Walmart (WMT). A share of WMT currently pays $0.53 per quarter, but pays in March, June, September, and December. One thousand shares of WMT would pay you $530 three different months. So with your three stocks, you now collect $600 in January, $590 in February, $530 in March, and repeat throughout the rest of the year. You collect a monthly paycheck from your assets, and you didn’t have to lift a finger. That is a dividend ladder.

The strategy comes in the stock picking. It’s not all WHEN the dividends pay, it’s also other factors such as dividend yield, dividend history, the health of the company, and the risk of having a dividend cut or suspended. A company like Coca-Cola (KO) has increased their dividend for 56 years straight. AT&T (T) is known for prioritizing their dividends, paying them even through the 1930s Great Depression. REITs (Real Estate Investment Trusts) are required to pay out 90% of their profits to shareholders as dividends (tax rules are a little different, again check with your CPA) so they make reliable sources of dividends. MLPs (Master Limited Partnerships) are another example. You also want to diversify your holdings, not buying only consumer companies or only tech companies. There’s protection in splitting up the sectors your holdings are in.

If you’re not one for stock picking or don’t want to do the research, there are plenty of ETFs to choose from. ETFs or Exchange Traded Funds, are baskets of stocks that are already diversified and made up of many holdings. An ETF like Vanguard Dividend Appreciation Index Fund (VIG) is merely a basket of dividend stocks. It pays just like individual stocks would.

The best part about a dividend ladder is you can start before you quit your job. It will take initial investments to get it going. So what if you don’t have a lot of money to invest yet? Start by buying a few shares. When the dividends are paid, you can use your brokerage’s DRIP (Dividend Reinvestment Program) to reinvest the dividends when they’re paid — this means the money from a stock’s dividends is used to then buy more shares (or fractions of shares if it’s not enough to buy a whole share). Or, you can let the money pool in the account and buy more shares. It works like a snowball, start small and let it grow over time. If you start before you quit your job, you can have a nice portfolio paying you monthly when you do leave.

To get started, I recommend check out http://www.dividend.com’s Dividend Stock Screener to look through the list of all dividend-paying companies. Always do your homework when it comes to stocks! I’ll be publishing more posts on stocks and dividends, so stay tuned!

Full disclosure: I do own shares of T and VIG in various accounts. I am in no way affiliated with Dividend.com, but I do use it on occasion for research.