I. Current Theme#
This CLEC episode focuses on asset allocation and accounting standards (ACC), explaining the relationships between assets, liabilities, and net worth, as well as the calculation and significance of ROA, ROE, and ROI. It emphasizes the importance of extreme optimism in investment, believing that the market will definitely break through new highs. Furthermore, James and the students delved into the latest developments in the AI field, particularly the potential impact of DeepSeek on the industry.
II. Briefing Content#
1. Assets, Liabilities, and Net Worth#
- Assets: Generally refer to all resources of economic value owned by an individual or household, including current assets (such as cash, deposits, stocks) and fixed assets (such as real estate, cars, collectibles). In everyday conversation, the “assets” or “wealth” people talk about usually refers to total assets.
- Liabilities: Refer to the debts owed by an individual or household, including short-term liabilities (such as credit card debt, consumer loans) and long-term liabilities (such as mortgages, car loans).
- Equity (Net Worth): The balance after deducting liabilities from assets, representing the true wealth owned by an individual or household. This is an important financial indicator that reflects the true financial situation.
- Formula: Net Worth = Assets - Liabilities
- Example: If you own a house worth 5 million, but still owe 3.5 million on the mortgage, then your net worth is 1.5 million (5 million - 3.5 million = 1.5 million).
2. ROA, ROE, ROI#
- ROE (Return on Equity): A metric that measures the efficiency of investing one’s own funds, reflecting the return generated by each unit of net worth.
- Formula: ROE = Net Profit / Net Worth
- Example: If your real estate net worth is 6 million (total price 15 million, loan 9 million), and the property appreciates by 500,000 in a year, then your ROE = 500,000 / 6 million = 8.33%.
- ROA (Return on Assets): A metric that measures the efficiency of total asset utilization, reflecting the return generated by each unit of total assets.
- Formula: ROA = Net Profit / Total Assets
- Example: If you invest 15 million in total assets (real estate) and earn 500,000 in a year, then ROA = 500,000 / 15 million ≈ 3.33%.
- ROI (Return on Investment): A metric that measures the benefit of a specific investment project, reflecting the return generated by each unit of investment.
- Formula: ROI = (Investment Gain - Investment Cost) / Investment Cost
- Special Case: If all assets are used for investment and there are no idle funds, then ROA ≈ ROI.
3. Stock Investment and Borrowing#
- Impact of Borrowing: If borrowing is used for stock investment (such as margin trading, credit loans, mortgages, etc.), then the return on equity (ROE) will increase significantly because you leverage a larger investment scale with less of your own capital.
- Example: If you have 15 million in stock assets, of which 9 million is borrowed and 6 million is your own capital. The stock investment yields a 14% return in one year (2.1 million). Then ROA = 2.1 million / 15 million = 14%, and ROE = 2.1 million / 6 million = 35%.
- Impact of Cash: To control risk, investors usually don’t invest all of their funds in the stock market and instead retain a portion of cash. This portion of cash reduces the overall return on investment.
- Beta: Beta < 1 indicates that the volatility of the investment portfolio is less than the overall market volatility, usually meaning holding cash or low-risk assets.
- Example: If you have total assets of 15 million, of which 2 million is cash and the actual stock investment is 13 million. If the stock return is still 14%, then the total return is 1.82 million (13 million * 14%). ROA = 1.82 million / 15 million ≈ 12.13%, ROI = 1.82 million / 13 million = 14%.
- ROI of Short-Term Operators: Short-term operators or options traders typically only invest a small amount of capital. The “return” they talk about is often ROI rather than ROE. For example, they may have 1 million in funds but only use 100,000 for options trading and earn 30,000. They may say their ROI is 30%. But in reality, their ROE is only 3% (30,000 / 1 million).
4. Investment Advice and Philosophy#
- Buffett’s View: Warren Buffett emphasizes that whether evaluating a business or a personal investment, one should focus on ROE (return on equity) rather than ROI (return on investment). ROE more truly reflects the efficiency of capital utilization and profitability.
- Independent Thinking: Don’t easily listen to other people’s investment advice. Develop your own investment system and judgment through self-study.
- Risk Awareness: If you are afraid of market declines and losses, then you may not be suitable for high-risk investments.
- Long-Term Investment: Invest in index funds such as QQQ and adhere to long-term holding without easily selling.
- Avoid Individual Stocks: For most investors, avoid investing in individual stocks because they are riskier and can easily lead to significant losses.
- Extreme Optimism: Maintain an optimistic attitude towards the market, believing that the market will move upward in the long run and continue to reach new highs.
- Retirees with Insufficient Funds can consider high-dividend ETFs (0056 or HSPHD) to increase cash flow.
5. Retirement Asset Allocation#
- Single Investment in QQQ: If only investing in QQQ (or 00662), one can withdraw 2% of assets annually as living expenses.
- QQQ + High-Dividend ETF:
- If 2% of living expenses is not enough, consider allocating a portion to high-dividend ETFs (such as 0056 or HSPHD). These ETFs may have a dividend yield of 4%-5%.
- For example: Invest 50% of the funds in QQQ and the other 50% in high-dividend ETFs (80% in 0056 + 20% in 00864B).
- Core Goal: The core goal of retirement planning is to obtain a stable cash flow rather than simply pursuing asset appreciation.
6. Emphasis#
- Learning: Encourage everyone to watch CLEC’s past videos, starting with 00451, to gradually understand investment philosophies and strategies.
- Communication: Welcome everyone to ask questions via email, but it is recommended to watch the videos first to build a basic foundation of knowledge.
- Optimism: Emphasize that investment should be extremely optimistic, believing in the long-term upward trend of the market.
III. Q&A Session#
Kate#
- Question 1: Previously, it was mentioned that investing in QQQ/00662 contributes to the capitalist market, but if you buy a 2x leveraged ETF, which is essentially deployed through futures, does it still contribute to society? Is the contribution the same?
- James’s Response: There is a contribution, and it is a double contribution. Because there are many ways to hold assets, you can choose to directly hold the underlying stock or use financing (borrowing money) to expand the investment scale. Some 2x leveraged ETFs achieve this through borrowing, while others use futures and other derivatives. Regardless of the method, it is putting capital into the market, supporting the operation and development of businesses. Capitalists contribute the most to society by investing and allocating resources to the most promising companies. Investing in an index fund like QQQ means allocating funds to the best companies on the market, supporting their innovation and development, and thereby creating value for all of humanity.
- Question 2: The student’s concern is that a large part of 2x leveraged ETFs consists of futures, and futures trading is perceived as a zero-sum game, where one party’s profit necessarily means another party’s loss. Would this contradict our previous emphasis on the concept of “contributing to society”?
- James’s Response: First of all, not all the funds in our investment portfolio have to be used for investment. We can keep a portion of cash. Secondly, futures trading can also be understood as a “pre-purchase,” similar to a “red slip” (pre-sale contract) when buying a house. You pay a deposit, locking in the future right to purchase, which provides financial support to the developer and promotes market liquidity. Futures trading is similar in that investors commit to buying or selling assets at a specific price at a future date, which provides liquidity and price discovery mechanisms to the market. Therefore, our investments, including the use of leveraged instruments, contribute to the market.
Jenny#
Share 1: Asset allocation of 433 and 442 should strictly follow the proportions of QQQ/QID/short-term bonds. In Taiwan, these are 00662, 00670L, and 00864B. Do not arbitrarily combine different targets, as this may deviate from our calculated expected returns and risks.
- James’s Comment: If you have a mortgage or credit loan, it usually means you are still working. If you are retired, it is best not to have these loans, as this will increase your financial pressure. Retired people should not borrow credit loans and should pay off their mortgages. Net worth after retirement is the basis for calculating your retirement income (50 times your annual expenses). If you are still working, you can moderately use leverage (such as stock pledges), borrowing 2% of your stock assets for consumption while continuing to increase investment. As your assets increase, gradually adjust the proportion of borrowing and consumption. Also, remind everyone that if friends do not watch our investment tutorial videos, then do not advise them to invest, because investment requires doing your own homework and making decisions.
Share 2: When combining your own investment targets, you must clearly understand the volatility of each target. We understand the characteristics of the QID or 00670L we recommend. If you combine them yourself and do not understand the volatility, you need to do your own simulation backtesting, otherwise the risk will be very high.
Question 1: I currently have 1/4 of my assets under my adult child’s name, and I plan to retire in 3 years. Can this portion of assets under my child’s name be included in my retirement fund calculation?
- James’s Response: No, once you have given it to your children, it is their asset. If you can freely access their money, then of course it can be counted as your asset, but you have to consider the possible legal and family relationship issues in the future. I suggest you transfer the money back into your account first, and only consider giving it to them after you are truly retired and your assets exceed 50 times your annual expenses. Before retirement, it is not recommended to give money to your children; just give a small amount of lucky money.
Question 2: If I include my child’s account, I can retire now; but if I don’t count this portion, my assets do not yet reach 50 times my annual expenses.
- James’s Response: If you want to retire, transfer the money back. Otherwise, there may be changes over time. After you retire, if your assets appreciate to more than you need, you can consider giving it to your children. At least this will ensure that your own retirement life is not affected.
Question 3: I have invested in VOO and QQQ. When I see the market at a high point, should I sell first and buy back when it falls to a low point?
- James’s Response: Our investment strategy is to buy when we have money, hold for the long term, and not time the market.
Question 4: I bought an annuity many years ago, investing 150,000, and now I can only receive a few hundred dollars back each month. This annuity expires next year. Should I redeem it and invest on my own?
- James’s Response: If you can hold for the long term without easily selling, then the return on an annuity is usually very low, and you can consider redeeming it. But the premise is that you can withstand market fluctuations, even if the market falls 80%, can you still persist in holding on? If so, then redeem the annuity and invest in index funds such as QQQ.
Yami#
- Question 1: A friend recommended an ETF called GYLD, which is said to have a high interest rate with a yield of 10%-12%. I would like to ask the teacher’s opinion on this ETF.
- James’s Response: This ETF has a high risk. It has fallen more than 50% from its high point. Do not easily listen to advice from people who do not understand investing. We invest in QQQ, and even if it falls, it will eventually rise back. But a Covered Call ETF like GYLD may never rise back up if it falls.
- Question 2: I would like to understand the specific operating mechanism of Covered Call ETFs.
- James’s Response: This is more complicated, and I won’t explain it in detail here. In short, it is not recommended to invest in these types of ETFs.
Danny#
- Question: Is long-term holding only suitable for index funds like QQQ? I used to buy some individual stocks, such as Chinese solar companies, and in the end, these companies disappeared.
- James’s Response: Individual stocks are very risky; you shouldn’t have bought them in the first place. Don’t buy individual stocks anymore. Just buy index funds like QQQ.
- Question 2: What is the difference between the QQQ and SPY index funds?
- James’s Response: There is a big difference. We do not recommend investing in SPY, especially for young people. SPY has a lower long-term return and is also more volatile.
- Question 3: After retirement, is the main source of income mortgaging stocks and borrowing money to use?
- James’s Response: Yes, but the premise is that you fully understand our asset allocation and risk control strategies.
Y5#
- Question: I currently use a long-term holding strategy and put some ETFs into dividends to cover my living expenses. The rest are some bonds and value growth stocks. After listening to the teacher, I really want to convert some of these things into QQQ and leave the dividends behind. Is this good or bad?
- James’s Response: First, you need to determine whether you are retired, how much assets you have, and how much your annual expenses are. If you are retired and the dividend ETF is already enough to cover your living expenses, and you still have a surplus for investment, then you can continue to maintain this state. However if, you want to measure whether you have achieved financial freedom, for example: can you and your family travel to Europe and easily afford all the expenses? If you feel that your current state is very stable, very at ease, and you have enough tolerance for market fluctuations, then you can continue to maintain it. But, if the market declines, you may not be able to withstand it, so don’t change it easily.
- Suggestion: You can consider selling all your assets and buying 80% 00662 and 20% 00864B. Withdraw 2% of your assets annually as living expenses, and this completes the adjustment of asset allocation.
- James’s Response: This method needs you to be able to bear it yourself. It takes time to adapt to a sudden change in investment methods.
Si Wu#
- Question: I would like to invest my two children’s annual lucky money, and I don’t know what type of account I should open for them. Is it a regular brokerage account, an IRA account, or a Roth IRA?
- James’s Response: If the children are still young and have no income, then they cannot open a retirement account such as an IRA or Roth IRA. You can open a regular brokerage account for them, and you are the custodian of the account. You can set a deadline, such as when the children reach 22 or 24 years old, when the control of the account will be handed over to them. Until then, you manage the account entirely. If you withdraw money from the account, you need to pay capital gains tax. But our investment strategy is to hold for the long term without easily selling, so we usually don’t need to pay taxes. Only when you have no work income and need money do you consider borrowing from the investment account.
Hao Qin#
- Share: I have been thinking about a problem recently. Assuming we invest in QQQ, after deducting inflation, the annual growth rate of actual purchasing power is about 10%. If a young person in the Bay Area has annual expenses of $120,000, how many years will it take to achieve financial freedom? If he saves $500 per month, calculated at a compound interest rate of 10%, it will take 46-47 years to accumulate more than 6 million. If he saves $1,000 per month, it will take 40 years. If he saves $3,000 per month, it will take 30 years. Like James retiring at the age of 42, if he only uses 20 years, then he must save at least $8,000 or more per month. Therefore, in addition to basic expenses, all the money that can be saved must be invested in the stock market to accumulate wealth as soon as possible. If income is not high, you can only exchange time for money.
- James’s Response: Retirement is not that difficult. The key is to be stable and stick to it for 20 years. Young people should adopt a 442 asset allocation (40% QQQ, 40% QLD, 20% cash or short-term bonds), so that the beta coefficient is 1.2, and the annualized rate of return can reach about 17%. In this way, if you invest $3,000 per month, you can accumulate $6 million in 20 years. Therefore, young people must use leverage. A low rate of return is the biggest risk.
Danny#
- Question: I have been studying with you for three years and have invested in QQQ/00662, 00864B, and 00670L, which I feel has been very helpful. I plan to retire in 4 and a half years. My current asset allocation is 721 (70% QQQ, 20% QLD, 10% cash), and the beta coefficient is 1.1. Should I adjust the beta coefficient to 1.2?
- James’s Response: If you are still working, you can adjust to 1.2. But be aware that 4 and a half years is relatively short. If the market falls sharply, your assets may shrink significantly, making it impossible for you to retire as planned. Also, you mentioned that your current assets are about the same as your mortgage. If you still have a mortgage to pay after retirement, then your retirement income may not be enough. Assuming you have to pay 50,000 per month for your mortgage, that’s 600,000 per year. Based on 50 times the retirement income calculation, you need to prepare 30 million to cover this expense. So, you need to carefully evaluate your assets, liabilities, and income after retirement before deciding whether to adjust your asset allocation. After retirement, leveraged funds should no longer be used.
Chen Feng#
- Share 1: I would like to emphasize that whether we invest in prototype ETFs or leveraged ETFs, we are contributing to businesses and society. Even if you put money in the bank, the bank will use that money for investment. Including buying short-term bonds like 00864B provides capital to the government or businesses。
- James’s Comment: There is a contribution, but the degree is different. Putting money in the bank means the bank is making the contribution, and your contribution is limited. Investing in QQQ supports technological progress and contributes more.
- Share 2: Recently, there has been a phenomenon in Taiwan where many people are borrowing heavily to invest through stock pledges or credit loans, even borrowing up to 60%. I’m very worried about this.
- James’s Comment: We have always emphasized that borrowing for investment should not exceed 10% of total assets; otherwise, once the market falls sharply, there is a risk of liquidation.
Mike#
- Share 1: About DeepSeek. The demand for AI will only continue to increase, and the demand for computing power has only just begun. The emergence of DeepSeek has shown some small companies opportunities. Some small software companies in Taiwan, South Korea, and Japan have found new business models.
- James’s Comment: DeepSeek is a driving force for AI development. It adopts a more underlying development method (assembly language) that lowers the barrier to AI development. This makes AI applications more popular, allowing more companies, even companies in the third world, to participate.
- Share 2: Musk has not commented on DeepSeek this time, but he may be doing it quietly. If there is no internet data, can AI continue to develop? This is a question worth considering. Also, some Taiwanese companies are starting to pay attention to edge computing, which is also influenced by DeepSeek.
- James’s Comment: Can AI replace existing industries? It’s not clear yet. It’s more about improving the efficiency of existing things. AI applications will become more and more common, but AI itself may not be a “paradigm shift.” In addition, AI may have an impact on search engines. People may use tools like ChatGPT more often instead of traditional search engines.
Brian#
- Share: DeepSeek technical analysis.
- DeepSeek uses a more underlying technology (assembly language) to optimize data from open-source models such as Owen, LLaMA, and ChatGPT, reducing computing power requirements.
- The key question is how many H100 chips DeepSeek actually used. Too many, or failure to achieve expected results, could trigger market turbulence.
- DeepSeek may not be a technology transfer, but it is a new idea that prompts people to rethink the computing power requirements of AI and data center construction.
- DeepSeek may have used a specific dataset (math Olympiad question bank) when testing, which made its performance appear better.
- Share: The part of the human brain that consumes the most energy is image processing.
- James’s Comment: So developing images creates a large demand for electricity.
- Share: Writing down what you have learned can get you rewards, and AI can learn from them.
- James’s Comment: Creation and thinking are more important. You must improve every day compared to yesterday.
- Share: Can AI be fully mechanized?
- James’s Comment: Use data to decide.
- Share: GPT training will always change
- James’s Comment: There will be retraining.
IV. Key Takeaways#
Investors should always face the sunshine, and the market will definitely break through new highs. – James
James repeatedly emphasized the importance of a long-term perspective in investment, believing in the long-term upward trend of the market and not being disturbed by short-term fluctuations. Only by remaining optimistic can one persist in the market and obtain long-term returns.
Capitalists are the biggest contributors to society and the people who contribute the most to the world. We have made the most effective allocation of resources. – James
James believes that capitalists, through investment, allocate resources to the most promising and efficient businesses, supporting innovation and development, thereby promoting the progress and prosperity of the entire society.
Living well is the most important thing. Don’t save on taxes. We often say that saving on taxes is very important, but when it comes to inheritance, it’s not your business, it doesn’t matter. Inherit as much as you can, but it’s important to live well and with dignity. – James
James, when answering questions about estate planning, emphasized that the quality of life for individuals during their lifetime is more important than the amount of inheritance. Don’t sacrifice your current quality of life in order to save on taxes or accumulate excessive wealth.
No investment is a life sentence. With investment, you usually get out in 30 years, 30 years at the latest. – James
James encourages everyone to start investing as early as possible, even small amounts, as long as they persist in long-term investment, they can accumulate considerable wealth and eventually achieve financial freedom.
You want their interest, and they want your life. – James
James, when commenting on high-yield Covered Call ETFs, reminds everyone to pay attention to the high risks behind high yields. Don’t be misled by high yields and ignore the potential loss of principal.
Having a house is being a rich poor person. It looks like you have a lot of assets, but you can’t spend them; you can’t spend freely. – James
James believes that although real estate is an asset, it is illiquid and cannot be easily converted into cash, which may limit personal spending power and quality of life. Over-concentration on real estate investment may lead to the predicament of “having assets but no cash.”
It’s not that general companies that adapt to AI usually fail, because that cost will be beyond your imagination, and it will slow down your performance. – Brian
Brian pointed out, when discussing AI applications, that many companies may encounter problems such as high costs and reduced efficiency when trying to introduce AI. The application of AI technology is not easy and requires careful planning and implementation.
Why do you find that the Tesla Model 9 has been completely changed? The whole thing cannot be gradually changed from the old one, gone, retrained. – Brian
Brian mentioned that updates to Tesla’s self-driving system usually employ entirely new models rather than incrementally improving existing models. This illustrates that the iteration and development of AI technology may be leaping, and old technology may be quickly eliminated.
To achieve creation and thinking, you have to be better today than yesterday. How can anyone catch up with you that way? – James
James emphasized that continuous learning and innovation are key to staying competitive. Whether in the field of investment.
Buy with money, never sell no matter what – James
James summarized that the best strategy for long-term investors is to choose quality assets (such as the QQQ index fund), hold them for the long term, don’t time the market, and don’t sell easily.
V. Summary#
This CLEC episode is rich in content, with both basic knowledge explanations on asset allocation and accounting standards and in-depth discussions on the latest developments in the AI field. James once again emphasized the importance of long-term investment and an optimistic mindset and reminded everyone to pay attention to investment risks and not blindly pursue high returns. At the same time, through interaction with students, he answered various questions encountered in actual investment and provided valuable advice.