What I Talk About When I Talk About Building Wealth

SuperGirl

When people ask me about asset allocation, I guide them towards family wealth.


Over your life, you will see things blow up.

  • Jobs will be lost
  • Divorces will happen
  • Guarantees will be called
  • Companies will fail
  • Investments will go to zero

Certain habits make us more prone to blowing up:

Debt – fixed obligations can ruin you in bad times.

Lack of emotional control – this runs deeper than, say, anger management.

People who make a habit of rationalizing a lack of control in one domain (elite sport, closing a sale, acting in a client’s best interest) rarely have the capacity to control themselves across domains. If you might get caught, then you’re fragile.

Substance Abuse – it’s more than the cost of sorting yourself out – it is the lost opportunity of a life well lived and the impact on the rest of your family, especially your kids.

Spending vs Cash Flow – personal spending, burn rate and fixed costs => the more spending you have relative to cash flow, the more fragile your finances.

The above is a long way of asking, “What aspects of your life might blow up?

Which is a polite way of saying, “I’m not sure asset allocation is the most pressing issue in your life.

If you work in an ethically-challenged field, have a lot of borrowings, have a high burn rate or are surrounded by peers with issues…

…then tweaking portfolio construction is a lower priority item than immediately removing what might ruin your life.

I’ve done it. You can do it. It’s better on the other side.


How large is your current portfolio when compared to your lifetime portfolio? – AKA you might have more wealth available in your career than your portfolio.

Investing is different at 25, 40 and 55 years old.

The nature of “different” depends on your personal circumstances.

#1 => Consider your Core Capital. The single best thing I did out of college was save four years of personal living expenses, $100,000 in the mid-1990s. It sat in a bank account, while I worked my ass off at my career.

Having that money enabled me to choose better and choosing better became a habit.


Very, very, very (!) few people can be professional investors – AKA can I get rich by beating the market?

Take an honest look at the people that you know in finance. How many of them “got rich” from their own money? Remember these are the experts.

In finance, most people get rich due to the rules of their game and collecting pools of other people’s money (your money, by the way).

With your portfolio, keep it safe, simple and low-cost. A target-date fund makes a nice core holding.

Having my Core Capital enabled me to take more risks in my career path, and life experience => not with my Core Capital.


Once-in-a-lifetime opportunities happen once a decade – AKA great deals happen when credit markets are shut

Here are the assets I own and why I own them:

  1. Index funds => long-term, diversified, not linked to my home real estate market
  2. US Treasuries/Core Capital => 5 to 10 years family expenses
  3. Boulder real estate => A relative value play against California, a cost-effective way to raise a family and a fantastic outdoor life. Think very carefully before locking yourself into any location. As a young man, my lack of ties enabled me to jump at great opportunities.
  4. Cash => my early retirement was funded by three deals I did coming out of the last credit crisis. Once you have your Core Capital (say, five years living expenses) then building up a pool for “great opportunities” is a consideration.

Starting out? Read this PDF.

Be wary of home bias => you can see it in my portfolio => even more risky is having your balance sheet, retirement and job reliant on the success of your employer.


Switching Costs – AKA think carefully before you sell good assets

I have assets in my portfolio that I would not buy at today’s prices. Financial theory tells me I should sell these assets.

  • I have zero confidence in my ability to predict the future.
  • If I sell assets then I pay taxes and commissions.
  • After selling, I have to figure out where to put the capital.
  • I doubt any “new” plan will be better than my current plan, which is simple and low-cost.

Release yourself from constant optimization => good enough is good enough.

Put your efforts into being a better version of yourself.

 

Impossible Conversations

trooper

Around the house, I’m fond of saying, “Good people can make bad decisions.” I say this because I’m aware of my past misdeeds and my continued capacity for misjudgment.

However, out in the real world, telling someone that you believe they made a bad decision can have unpredictable outcomes => especially with people who have not come to terms with their own role in a situation.

If you feel cornered, and have been asked for your opinion, then here is a useful fallback…

I will never know the facts. What I do know is I believe in forgiveness and want the best for you and your family.

You’ll preserve the relationship and can move on.

Forgiveness doesn’t mean you have to associate, do business or live with someone.

Forgiveness means you free yourself from the burden of carrying around the past.


By the way, I’m reading a book called Impossible Conversations.

My #1 “unhelpful” conversation habit is parallel talk – both out loud and in my mind. I have a bunch of other habits that hold me back but I can’t tackle too much at once!

The book is worth your time.

 

Where Markets Fail

2019-10-06 15.14.46A decade ago, I tried to assemble a group of investors to build an aquatics facility in Boulder. The project was getting its land for “free,” yet we struggled to get the economics to make sense.

Fortunately for my family, the taxpayers of a neighboring county approved a school bond issue that financed a world-class aquatic facility.

My kids have some of the best memories of their life associated with this building.

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I’m reminded of a few things each time I visit.

It’s impossible to capture the value given, and problems avoided, by making athletics available to all the young people of your community.

The picture below shows what I mean: 8-18 year olds improving themselves, daily.

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I’m grateful to the taxpayers, school district and people who made it happen. People I’ll never know.


The facility is dedicated to our veterans and there are plenty of memorials around the property to spark conversations.

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#1 for me is the plaques remembering the district’s graduates, who died in foreign wars. Most were just out of high school, not far off the age of my kids’ favorite cousin.

Tom was CJ’s age when he was killed in Vietnam.

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That’s a lot of living given up, by people I’ll never know.

The older I get, the more I feel their sacrifice.

When people talk about the challenges facing our country, they’re correct.

However, the challenges are not unprecedented. I will never know what it’s like to go to war out of high school and watch my buddies die in a foreign country.

My kids might not understand for a while.

Athletic and Business Humility

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When I think about success, I experience the human quirk of self-attribution bias.

In other words, I believe that my failures are due to external circumstances (those damn flat tires) and success is due to my own efforts (my life today).


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In athletics, I played the game of Ironman Triathlon (swim 2.4 miles, bike 112 miles and run 26.2 miles). Two observations about the game, at the time I played it:

  1. Very few people were willing to subject themselves to “proper” training
  2. Most winning times (today, any venue) would have been world-records when I raced

Two ideas flow from these observations.

First, if “winning” is important then find a narrow niche where you enjoy working your a$$ off.

Second, in a field where not many people are willing to do-what-it-takes, be cautious with your self-assessment.

World class is a lot easier when you’re not competing against the world!


thegirls

I was able to play triathlon, because I spent a decade playing Private Equity, in Europe and in Asia.

The only way you can lose this game is by going bust:

  • Gather money every five years => each fundraising created a stand-alone “fund”
  • Split each fund into a dozen deals, invested over 3-5 years
  • Use borrowed money as well as equity
  • Wait 4-6 years then sell the deals and keep 20% of the profits

What makes this game interesting is the “house” received an annual commission (2% of equity).

Over the last fifty years the sector went from ZERO to over $500,000,000,000 annual volume => generating a lot of fee income and creating a buyer’s circle where your competition bid up the assets you already own.

If you think you missed out because you weren’t in finance then you might be mistaken. Similar dynamics have been in play in your real estate market (and sectors touched by venture capital).

From 1980 onwards, rapidly increasing assets under management wasn’t the only tail wind.

There was the long term debt cycle (10-year treasury rate from 1/1/1979).

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Chart looks similar if you use 30-year treasury rate…

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…the debt cycle fed into the stock market (y-axis log scale, SP500 from 1/1/1979).

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I started high school (37 years ago) in the bottom left-hand corner of the stock chart. Is it any wonder that I expect things to always work out?

It is human nature to associate my effort with my results. Some will say this association is obvious!

I am not sure. I know that I ignore external factors and hidden evidence:

  • of people who worked hard and didn’t succeed
  • of crooks and bozos that have done very well

My mantra, “Let’s be careful and remember we are far less talented than we think we are.”

Enhancing Family Harmony

byrn_kids_2019Here’s how I run my house.

It saves a lot of hassle and reduces resentments that build, then blow, when people feel obligated.

I repeat these mantras, out loud, in front of my wife and kids.

I get buy-in, across generations and between households.


#1 => All family is optional.

Opt-in or opt-out, I’m ok either way.

If you opt-in with a difficult person then best to limit the interaction to short visits where you go to them.


#2 => It’s OK to say no.

When someone blows their stack, it’s often a result of their inability to say “no.”

People that have trouble setting limits need to be constantly reassured that it is OK to set limits!

Likewise, if you happen to have a person in the family that uses social pressure to manipulate others then you may need to find a non-threatening way to remind everyone that it’s OK to say “no.”

For example, my kids like to try-it-on with new babysitters. On the first day, we have an “all parties” meeting and I explain they are likely to test boundaries and it’s OK to say “no.” I also give the sitter the option to call me up and I’ll say “no” for them.

Keep a look out for someone saying “no” to you and your mind starting a dialogue that they are wrong. Slap yourself down and remind yourself that it is OK to say “no!”


#3 => If you can’t stand someone then, chances are, someone can’t stand you.

Impossible, you say?

Maybe you’re perfect but I’m certainly not.

So it’s best if we mutually agree that we’re going to do our best to be polite to each other and get along as best we can.

If we can’t get along then there’s always mantras #1 and #2.


Bonus Tips

A => Don’t invite someone over, get rocked and tell them what you really think of them! How on Earth will that make things better for anyone?

B => Close but not too close => A mantra from the most successful multi-generational family I know. Three adult generations, who get along, do a lot together and always maintain their personal space.

 

What To Do

2019-09-23 08.07.06-1Between summer day camp and the school year starting mid-August, I’ve had two months of a relatively quiet household.

I used this time to re-read Taleb and Munger. You can find my full notes here.

My initial purpose of re-reading was to figure out “what to do.”

It is far easier to be certain about what NOT to do.

Do you know what can ruin your family’s life?

I do.

  • Racing, especially high speed downhill => physical ruin leading to a downward mental spiral.
  • Alcohol use => historically, my average daily consumption is either: (a) zero; or (b) slowly trending upwards.
  • Anger => if I am going to screw up a key relationship then it will be when I act on anger.
  • Death by Accident or Avalanche

What is your list?


Assets and spending do not create a life with meaning.

My true job is keeping our cost of living down so we maintain the ability to control our schedules.

  1. Be wary of adopting the preferences of others. It’s easy to sign yourself up for millions of lifetime spending that won’t mean a thing to you late in life. Worse yet, you will pass these values to your kids and they blow whatever you leave behind.
  2. Pay attention when you notice “better” doesn’t make a difference. “Wasn’t worth it” happens to me a lot.
  3. Pay attention to the cost you pay in time and emotion => it costs me a lot of worry and stress to get more money. Way easier to spend less.
  4. Once you are beholden to a third-party, you’ve lost.
  5. A lot of times “worse isn’t worse.” We adapt very quickly to setbacks.

We discuss case studies at home. Housing, vacations, cars, the endless “needs” my kids and I dream up.


So while I’m removing things that can ruin me, and beating down my hedonistic tendencies… What to do?

Wait for the fat pitch.

A key benefit of a good position is being able to wait until the credit cycle swings in your favor.

The longer we have to wait, the better the opportunities. Cutting rates, running trillion-dollar deficits at the top of the economic cycle… there will be great deals eventually.

I’m not excited about any asset class right now.

  • The bond market is telling me that we’ve pulled 5-10 years of returns forward.
  • Net yields are under 1% for real estate that I’d like to buy.
  • The rest of my balance sheet feels like “enough” exposure.

I’ve decided to make no material new investments. We are going to periodically rebalance and I am going to reduce my cost of living.

What to do?

Enjoy nature with my family and pass my value system to my kids (by living the life I wish for them).

Time and Attention

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Early in my fatherhood journey, I created an effective cover story => the need to generate cash for the family.

My cover story was a socially acceptable justification for being away from my family.

As additional kids arrived, and I watched my wife deal with the day-to-day, it became obvious that my avoidance strategy would not take my life where I wanted it to go.

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I have a quirk => I “see” and “feel” the risk of future regret.

Due to my quirk, I will usually choose the path of least regret, regardless of short-term pain.

My thinking went like this… having been through one divorce, is my avoidance strategy moving my marriage towards where I would like it to go?

And this… you know, my friends tell me that parents have very little impact on their kids, even if that’s true… Do I want to spend the last twenty years of my life wondering if the kids would have had a better outcome with me around?

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Once I re-framed, the choice was obvious.

Time to do a better job at home.

However, at that point, mourning for my past life set in.

It lasted for five years!

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A key parenting principle:

if you show interest in something I enjoy then I will reward you with time and attention

In offering myself to my family, I seek to offer my best self:

  1. We do it their way – their speed – their level of competence.
  2. I don’t teach, coach or instruct. We simply spend time together.
  3. We do the activity one-on-one.

My primary goal is to establish the link between:

  • fun – Dad – camping
  • fun – Dad – skiing
  • fun – Dad – biking
  • fun – Dad – hiking

No agenda with regard to pace, duration and difficulty. No agenda!

Keep the trip short. The pictures in this blog are from an 18-hour mid-week camping trip. As another example, our youngest has precious memories of skiing with me => initially, the skiing took less time than the driving!

Train before the training. The world gets a better version of me if I’ve done a workout first.

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So if you’re feeling bummed, or avoiding life altogether, then get out of the house and start making the association between fun and what you like to do.

As I tell Axel in the backcountry…

It’s self-rescue or sit down and die.

By the way, if you look deeper then you will see the association of “fun” is really between you and your kid.

…or you and your spouse.