How Wealth Endures

2020-02-11 12.19.27

Over time, human nature does far more to address income inequality than the policies of your favorite politician.

Families that succeed across generations have certain traits we can learn from. While you can’t control your birth situation, there is a lot you can do to influence family wealth.

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My great-grandfather was one of the wealthiest men in Canada and I have an early memory of seeing him on the cover of Fortune magazine. Down my branch of the family, the magazine cover endured longer than his finances, which found their way back to society within two generations.

On the other side of my family tree, my great-great-grandfather was wealthy, but not cover-of-Fortune wealthy. A small amount of his money will eventually pass through to my children. I get a kick out of this as he was born in the mid-1880s.

Living rich is different than living well and it takes generations for this difference to become apparent.

2020-02-09 14.12.13

A favorite quote, “there has never been a more expensive time to be rich.”

Dropping this gem will likely get you a smirk and an eye roll from most young people. However, it touches on a truth of our time and provides a warning to wealthy families.

Over the last 40 years, a billion people have been lifted out of extreme poverty. Lifting the bottom of the wealth curve has impacted the top of the curve.

While we were lifting hundreds of millions out of poverty, “the rich” started to live differently. Morgan Housel’s article touches on these changes and reminded me of a valuable legacy from my great-grandfather (the one on the Fortune cover). A non-financial legacy that made it four-generations down my family tree.

Camping.

The fondest memories of my childhood happened at a YMCA summer camp. A camp largely unchanged from when my uncles attended 20 years before me.

40 years on, I ask myself:

Am I willing to constrain myself to get a better outcome for my children’s future selves?

Somewhere between childhood and adulthood, you may develop “requirements” that increase your baseline cost of living. Your “requirements” are your business. However, know that your luxuries will become your children’s baseline.

These cultural baselines have unintended consequences in family systems. The kids who can keep up with their spending aspirations have a greater risk of neglecting their families in favor of money. The kids who can’t keep up are more likely to reject you, to protect their self-identities.

I’ve known five generations of my family and have witnessed this pattern across each generational transition => the increasing spending of the ascendant, and the pain as the descendant fall out of their childhood demographic.

I believe there is a better way.

I’m going to offer three areas for you to consider.

I’ve made mistakes in each area. Having kids later in life (highly recommended), the main people who have had their values skewed by my errors are my wife, and myself.

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The three areas are vacations, housing and education.

Your first filter is to ask: Are we living well, or are we living rich?

To keep yourself honest, search for your reaction when other people live a certain way.

2020-02-09 10.39.37

VACATIONS

Cultivate interests that hedge your need for cash flow.

Camping, driving distance from home, has a very different long term cash flow impact than Surfing in Kauai, via private jet.

I’ve spent a small fortune trying to make family trips work (catamaran charters, seaplanes, traveling staff, ship’s captain with deckhand).

Everyone had a blast but what did I achieve?

I increased the hedonistic baseline for my wife, my kids and myself. Not a big deal to make a mistake. However, if I create a habit then what happens when three kids, and five grandkids, scale my choices across their lifetimes?

Simple, one-on-one trips in nature is where I focus these days.

We will come back to the scaling effect.

2020-02-09 07.54.22

HOUSING

Housing is the most consequential capital purchase most of us will make and it’s a tricky one because of the changes happening in many of the places where we grew up.

My wife and I went to high school in cities (Boulder/Vancouver) where many of the graduates are unlikely to be able to afford to live in their childhood homes. The winners of global wealth creation have bid up local real estate values.

My notional share of my great-great-grandfather’s estate is about $100,000. Money that would have proven very useful if I had chosen teaching, rather than finance, for my first career.

If you ask my seven-year old what type of house she’d like to live in then she’ll describe something that looks a lot like my grandparent’s homes: 1,500 sq ft per person, swimming pool, grounds… you name it. She’d put us into a 7,500 sq ft mansion with seven bathrooms.

She’s not alone. As soon I as I had the cash, I bought myself a monstrous house. Buying at the top of the market, I was lucky to avoid financial disaster.

Am I willing to constrain myself to get a better outcome for my children’s future selves?

Yes I am.

Coming out of the last recession, we downsized and bought two rental properties in our school district. I’m positioning the family to do a similar thing coming out of the next recession.

The kids were disappointed to learn that the next house was going to be smaller but I’ve been watching what they do, rather than their aspirations. When my kids can pick, they want all of us jammed into a bunk room => they love a seething, noisy mess!

Beware of the preferences of others and pay attention to where you are happiest, rather than what you think you should like.

What you don’t see when you “get the house” is the life you don’t lead as a result of living there. The time you don’t spend together, the energy spent managing a large asset you don’t need.

Once again, these lost opportunities for connection scale across time for your grown children and grandchildren.

2020-02-07 12.30.10

EDUCATION

Graduate debt-free with skills enabling you to get paid

This implies a few things:

  • working in high school, and for a long time thereafter
  • public education, as long as possible
  • parents who are willing to let you fail, experience poverty and learn from your own mistakes

Unless your family is exceptionally wealthy, or you are an outstanding student, you are going to be much better taking the bulk of your family’s education dollars and investing them over a 20-25 year time horizon. The goal being to enable your family to (continue to) live in a great public school zip code.

For example, the Boulder Valley School District isn’t (yet) priced out of reach. BVSD just built a school in the eastern part of the county and we have strong political support for local investment in education.

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Are you seeing how all of this fits together?

  • Moderation of spending, regardless of being able to afford it
  • A modest allocation in personal real estate assets
  • Over time, yields long-term capital within the family system
  • A focus on helping the family stay local and avoid shackling themselves with education loans
  • When graduating debt-free, young adults repeat the cycle

This works so long as everyone pays their own way, for the way they wish to live.

Collectively, the family system avoids subsidies towards personal consumption.

Each branch, and generation, of the family defines their values, and lives with the consequences of their choices.

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Further Reading

Rent vs Buy in Vanity Markets

2019-12-07 09.28.44A vanity market is one where the main benefit you gain from ownership is telling your pals that you own.

Similar to my observation that I was wired to buy a “big” house, there are other purchases our ego gravitates towards: cottage at the lake, ski chalet, big-city pied-a-terre, beach house, farm…

Our ego’s weaknesses depend on our cultural background, childhood memories, current mood and social situation.

My ego can lead me far astray, particularly with non-yielding real estate, and depreciating assets.

I’ve been battling with myself since I first visited Vail, Colorado. I’ll illustrate with real figures from the neighborhood of East Vail. It is a niche market, which I’ve been following for 16 years.

The “buy” => $1 million buys you the opportunity to spend another $375,000 to renovate, and furnish, a property that was build in the 1970s. After your renovation is done you pay ~$25,000 per annum in taxes, insurance, HOA and running costs.

The “rent” => $25,000 to $40,000 all-in rental cost for the same property.

Something we noticed about skiing, most skiers don’t ski.

Put this observation another way… there’s a lot of empty real estate around.

I’m sure every empty place has a history of buyers, who were certain they’d use the property more often than they do.

A useful rule of thumb is to assume that every $1 million, in a vanity property, costs your family $50,000 per annum. Renting makes (some of the) opportunity cost real, and allows you to calculate the cost-per-night of what you’re using.

Above is what you can see and calculate.

What about what you don’t see?

#1 => the option to change your mind, without cost or hassle. This is a powerful argument when framed correctly.

Honey, the kids are going to grow up and leave. When that happens, our life will change in ways that are impossible to predict. We should maintain the flexibility to change our minds.

#2 => the option to buy in a downturn. About once a decade, property values snap downward. Waiting does not feel like a valuable option but it is. I’ve seen brief, 50% markdowns numerous times.

#3 => what I think I will like does not match what I actually like. I am a master at fooling myself. Fooling myself with regard to location, views, amenities, garages, layouts… you name it.

Renting “forces” me into different types of properties. Because mistakes are so expensive, I write down the lessons from every new property.

Here’s the best lesson of all…

Assets don’t create the life you want to lead.

Focus on shared experiences with the people you love.

2019-12-07 13.11.17

Family Real Estate 2019

2019-12-01 17.07.49I like investing in residential real estate for several reasons:

  • The market is dominated by unsophisticated buyers/sellers, who are often driven by external events and emotions;
  • The availability of long-term fixed-rate non-recourse finance; and
  • Favorable tax treatment.

There are some drawbacks:

  • It is extremely expensive to buy and sell => a mistake will cost me 10% (gross), if I am lucky. If borrowing, even conservatively, then I can lose 35-50% of my equity in a year.
  • It is lumpy => if you need the money back then it is very difficult to gradually drawdown your investment.
  • It is illiquid => if we _really_ need to cash out then we won’t be able to cash out
  • Humans are hardwired to over-buy => as soon as I could afford a huge home, I bought one. It took me years to get my capital back. I was very lucky => I purchased with a large margin of safety (no leverage, big site, big building, prime neighborhood).

Taking the above, together, real estate is a useful core holding for money that won’t be needed for 10+ years.

2019-11-14 14.33.15

I follow two types of markets:

Markets where growth in prices is driving by “wealth feelings” in the top 0.01% of society => Vail mountainside homes, Boulder view properties. These properties have done well, appreciating to levels where implied yields are -2% to 2%.

I prefer to invest in traditional markets => markets where price growth is backed by a combination of real-economic growth (ability to pay), construction inflation (replacement cost) and discounted cash flow (net yields above my cost of capital).

Both markets are influenced by the availability of credit. Both markets benefit from scarcity and desirability in location selection.

Remember that even a “cash buyer” is influenced by easy credit. Credit conditions influence the value of ALL assets => wealth effects. These wealth effects cut both ways => highly wealthy people can feel “poor” when their balance sheets are shrinking.

2019-12-02 06.29.25

When I buy, I create a margin of safety by seeking:

  • Land for cheap => is there extra land I could sell off or am I buying in a very desirable location.
  • A lot of square footage for cheap => ideally, I’d like to get the land for “free” by paying less than the replacement cost for the building. Even if you never build, it helps to know building costs.
  • Distressed seller => life happens, often at inconvenient times.
  • Closed credit markets => by ensuring I have the ability to hold through tough times, I can use unallocated capital to buy during down markets.

I’ve been preparing for my next deal by improving my credit worthiness:

  • Building up a capital reserve.
  • Improving my credit rating – paying credit cards early, taking advantage of a 60-month 0% car loan offer, always paying my mortgage on time => taken together these strategies added 80 points to my credit score from 2012 to 2019.
  • Reducing leverage => paying down my mortgage and car loan. Closing out my second mortgage.

2019-11-21 08.02.40

We’ve seen significant house price inflation in Boulder => supported by: (a) rising construction costs, (b) local economic growth, (c) inward migration of wealthy coastal buyers, and (d) easy credit terms.

In 2019, I looked at deals to increase investment in Boulder (buying apartments and renovating houses). In the end, we decided to decrease investment in real estate through a sale-and-leaseback of our home. 

The leaseback costs me some tax (today) and positions me to borrow long at favorable terms. The option also costs me the future capital appreciation of my home, which won’t be mine any more. We retain exposure to the Boulder market through rental properties we own.

I’ve structured the deal with vendor finance, allowing a gradual drawdown of the proceeds. The net monthly cash flow covers our cost of living through my youngest daughter’s high school graduation. Having our cost of living covered protects my ability to control my schedule => highly valuable to my family in a way that’s difficult to quantify.

This is the cheapest way for me to sell real estate and positions us to buy when conditions swing in our favor.

Raise money before you need it.

 

Considering Wealth at the Real World Risk Institute

2019_HalloweenTo shake up my thinking and expose myself to highly-believable people, I attended the two-day program at Nassim Taleb’s – Real World Risk Institute.

You can find my daily notes here. Cleaned up digital version of my notes here.

What follows is my thinking on wealth inspired by what was presented. Mistakes are my own. I can hear things differently than what was actually spoken, so don’t assume my attributions are strictly accurate.

To prepare for the clinic, I re-read the Incerto and I’m glad I did it. Each pass through Taleb’s work provides additional insight. You can find his lectures and lessons on YouTube => well worth your time!

We live in a world where a single bad decision can have massive costs => a few thousand dollars and four days of my time is a small price to (try to) think better.


One of the aspects of my job is guiding the transition of wealth between generations. This sounds sophisticated but it’s a role played by elders and parents in every family system.

My personal greed makes me too focused on financial wealth. It takes effort to step back to see wealth as including:

  • The ability to say “no” to others
  • The ability to keep promises to myself
  • Control of my schedule
  • Health, athletic functionality and contentment within my body
  • Love and companionship – the ability to share experiences
  • Engagement via teaching (my kids, my students, anyone who’s open to implementing what I’ve learned)

What I’m shooting for is creating a strategy, so effective, so straightforward, that an idiot could execute it and preserve wealth access generations.

This is what Taleb calls “Zero Intelligence Investing” but we are focusing on a broad definition of family wealth, across generations, through time.


The impossibility of prediction

Joe did an excellent job of demonstrating how complex systems (even those built on very simple rules, defined by the observer) can be impossible to predict. More specifically, certain systems can only be understood, defined, by running them forward in time. He laid out a host of reasons, any one of which could prove the folly of prediction.

Consider your own life. Cut your age in half, how would you have defined wealth at that age? In my case (25 years ago) the list might have looked like:

  • Wine, women and song
  • A ton of work that pays well
  • Watching my personal balance sheet grow
  • Being very strong in the gym
  • Travel to new places

There was no way to predict my values (today) without living through the 25 years from then to now (the divorces, the insolvencies, the setbacks, the pain of toddlers, the post-traumatic growth).

Because of the role of time in life, we can not predict the future.

However, we can have useful ideas about what not to do. We can get a handle on what might ruin our families.


So if my goal is to preserve, ideally grow, the collective wealth of my family system what can I do.

  • Be vigilant about ruin (in fat tailed environments)
  • Spot, discuss and remove fragilities
  • Position the family to benefit from positive optionality

One of the things Taleb does best is consider his best ideas across domains, gain insight then translate his insight to the reader via real-world examples. It is the secret sauce of his success.

BUT, reading great ideas doesn’t improve my life! I need to go the next step and tinker with a limited number of outstanding ideas.

Who gets the benefit of your best ideas?

Taleb’s best ideas…

Ruin via the fat tail hitting my fragilities => fancy way of saying don’t blow yourself up! I’ve written about this a lot: Taleb’s written about Russian Roulette => his 1,000,000 chamber gun story in Fooled by Randomness changed the direction of my life.

In the seminar we talked about the non-zero risk of a “zero-risk first cigarette.”  Why does a (near) zero-risk choice have a non-zero risk in our lives?

“In life, you must assume that you’re going to take the risk again, and again, and again.”

This completely changes the calculation with regard to the “first” taste of risks that might ruin you: alcohol, rage, opiates, cocaine, sleeping pills, infidelity, felonies, roulette, recourse leverage, luxury spending, unnecessary capital projects… things with the potential for large and unpredictable downsides. Bad habits are always trying to seep into my life!

So, to preserve wealth, you need a process to remove your fragilities, because these are what’s going to ruin you. My family history has persistent, recurring fragilities that hit us hard.

The first step is to gain control of your schedule and create space so that you’re able to think more clearly about what can ruin you. Simplify.

Another great insight – life is not about avoiding risk…

“Take chances, lots of them, and focus on areas where volatility works for you.”

In an uncertain world, one of the best sources of optionality is non-recourse finance.

My first career (Private Equity) could be described as getting overpaid to hold a call option over other people’s work, using other people’s money, without recourse.

Negative action is powerful medicine, with low side effects.

It’s tempting to ask Taleb “what to do.” I did, twice, and he didn’t seem keen on advising positive action with regard to an unknowable future. That’s probably good, as I’m not equipped to implement, or even understand, his technical advice. However, his negative advice (on what to remove) generated huge wealth for me => my total cost was the price of buying Fooled by Randomness on Amazon ($10.17 in December 2005 – my Christmas 2005 reading list, you can skip the flat earth book, the rest were great).

There are many sources of optionality:

  • where I have limited competition
  • where I understand the domain as well as anyone
  • where the cost to enter is small

A few ideas:

Get married, have kids, then take excellent care of everyone (!) => dementia is in my family tree => doing well by my family is the “cost” of a call option for times of future stress => an option that has a constant payoff in companionship, personal growth and a semi-captive audience for teaching.

Technical education in a robust field => look back in time for Lindy professions => spend time and effort for continuous education

But be careful, the “honors” part of my college education (1st class honors Econ/Fin) proved to be technically useless. However, it helped get me a seat at the table in Private Equity. The overall degree taught me valuable skills with regard to financial accounting, programming, mathematical finance and calculus.

Knowing how to count, and being exposed to the way people seek to cheat you, these are useful life skills to prevent ruin. – quote mine

Other sources of optionality => tinker within your social network, attend conferences (and force your introverted self to speak to people), write (then publish), talk to believable people that disagree with you, donate time to people who might benefit from your technical skills (especially within your local community)…

Your body can be a call option on: future mates, future physical experiences, the ability to lift your carry-on overhead as you age…


So the “how do I stay wealthy” answer is about removing fragilities => cutting back a high cost of living, habits with large potential downsides, physical weakness…

The “how do we best grow wealth” answer is about exposure to opportunities that open up the possibility of growing True Wealth (connection, experience, engagement) => each generation can, and should be encouraged) to, contribute based on their current, unpredictable and changing definition of wealth.

Together the family creates its own definition of wealth.

Each generation re-defines wealth based on its collective values.

I would have learned more if I stayed for the entire week but it’s Halloween tomorrow and I got more than enough from the experience.

Hidden Debt – Hidden Risk

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This is the debt story of zip code 80301-80305.

As many won’t follow this post, I’ll give you a rule of thumb.

If you are under 50 years old then reduce your social security and defined-benefit pension assumptions by 35%.

…and plan on working an extra five years.

What follows is why.


Back in 2005, I came across covenant free loans => banks lending money without rules or restrictions. That observation, combined with reading Fooled By Randomness, started a process of de-risking my life.

Despite taking a whack to my family’s net worth in the last recession, life has worked out well.

It worked out because I had reserves to get me through the tough years.

Collectively, our reserves are being spent on our behalf.


This fall Colorado is asking voters to approve a modification to TABOR, our state’s “bill of rights” for taxpayers. The supporters have a strong pitch, if you vote in favor then the money goes to schools and roads => I love schools and roads!

At the last recession, I was burned because I increased spending to the top of the cycle. So I’m inclined to keep the state’s powder dry for other uses.

What other uses?


PERA => our public employees retirement fund => we’ve been told the fund was fixed last year. The fix assumed net returns of 7.25% per annum going forward. However…

if PERA’s actual returns are 6.75 percent, the debt grows by $5 billion.

Round numbers, every 1% shortfall in PERA net returns creates a need for an additional $10 billion. As I publish this article the 30-year treasury is trading at 2.24%. A net return of 5% over treasuries strikes me as unlikely.

How does that potential shortfall compare to State Tax & Excise Receipts?

Fiscal year 2019/20 Colorado revenue receipts are forecast to be $12.6 billion.

Now, you don’t need to fund a pension deficit immediately. It can be dealt with gradually with a mix of benefit cuts, increased employee contributions and increased government funding. That’s what all parties did with the 2018 fix.

It’s a safe bet that state taxes are going up and benefits are going down.


In the last recession, my unemployment resulted from the credit markets slamming shut and creating a liquidity crisis…

  • The bank went bust
  • The developer went bust
  • The general contractor (and many of its subs) went bust
  • The management company went bust
  • The equity went to zero (within 90 days)

All of the above, culminated with the CEO going bust.

Chains of debt are lethal in recessions.


Noticing the debt bomb sitting in Colorado PERA, I asked myself, “Where else have people borrowed on my behalf?”

  • School district borrowing => ~$800 million in my district => money very well spent to strengthen our future tax base
  • CU Boulder is my neighbor => ~$1.5 billion on their books => the university has a big impact on my local economy and real estate market
  • City of Boulder => ~$225 million => big ballot initiative coming as they want to borrow big, take technology risk and purchase utility assets on our behalf
  • County of Boulder => ~$200 million at the end of 2018
  • State Level => ~$10 billion at the middle of 2018 => over $50 billion if PERA used a rate of return similar to my own

Sitting above it all => $1 trillion Federal Deficit and $22.8 trillion of National Debt.

There could be some double counting and I might have missed another public entity that can issue bonds on my behalf. The precise numbers don’t matter.

This is what matters…

#1 – there is leverage through the entire taxpayer chain with no consolidated visibility or oversight. No consolidated financial statements for you, the taxpayer. The ratings agencies have the entire debt chain rated as very safe. Does this sound familiar?

#2 – every single government entity that touches me has a debt-financed cash flow deficit and off-balance sheet commitments. This sounds familiar as well.

Debt financed, cash flow negative entities blow up.


I remind myself:

  • As a society, we can’t increase taxes at every level simultaneously. This counters my thought, “it will work out, I’m lightly taxed right now.”
  • 600,000 members of PERA are at risk and probably taking comfort from 2018’s fix.
  • If you are planning on receiving a defined-benefit pension then cut your assumptions and plan on working (at least part time) until you are 70 years old.
  • People are going to be pissed when financial reality hits their benefits.

What to do?

Protect your family by saving, investing conservatively and reducing your “total tax bill” as a percentage of net assets => this limits the government’s ability to hurt you via tax increases. I’ve been doing this since 1990 and it works.

Let’s say that again because your financial advisor will not focus you on this number…

“Total family taxes” as a percentage of “total family net assets” is a number you should manage downwards across your career.

Knowing that the system is highly leveraged:

  • keep personal borrowings low
  • be careful with long term obligations (leases)
  • don’t issue personal guaranties
  • don’t capitalize luxury spending

Being able to take pain => how might these scenarios impact your family?

  • 6 months unemployment
  • retirement benefits being cut by a third
  • social security benefits being cut by a third
  • portfolio value cut by a third

I’ve lost jobs, written down portfolios (65% in 90 days, ouch!), put my employer into insolvency (on my 40th birthday) and muddled through multi-year cash crunches (2009-2012).

Bad things happen and life remains pretty good even when they are happening => my wife’s companionship and leadership got me through.

Be careful out there.

Vision Sixty

2019-08-20 07.58.18Seven years ago, I asked my smartest pals to share their experiences with sabbaticals. It was a very useful exercise. Rather than a sharp, and sudden, sabbatical, I made a choice to change slowly. I gradually shrank my working life and replaced it with more family engagement.

Over the last year, I’ve been tapping my supervet buddies in a similar exercise. I am asking about their 50s => any lessons, any tips, how’d you find it?

2019-08-20 06.26.25The answers have been all over the map.

  • Everything gets easier
  • Worst decade of my life
  • Best years of my life

ZERO consistency in what people say, but clear themes when I look at what they actually do. They keep on, keeping on.

Despite what we tell ourselves, there is little practical decline through 60. Obviously, I’d be miles behind my 37-year old self in any sort of race. However, even in my sedentary pals, it’s more of a “slowing down” than a decline (in function). I saw this in the supervet athletes I coached. A clear, annual, decline didn’t start to happen until ~70 years old.

In comparing me-with-me, there’s very little lifestyle change forced upon us. The changes are more about coming to terms with “less.” Less vision, less skin tone, less aerobic capacity, less recovery capacity…

Middle age struggles tie back to seeking “more” => relationships, heart problems, injuries, dissatisfactions… the damage comes from the stresses of striving.

My happiest older pals have found a way to come to terms with what they have, and what they’re not going to have.

2019-08-20 08.53.10-1

If “more” is going to challenge you then it will be obvious (injuries, depression, a-fib, drama, binging, addiction).

I like to remind myself, “Reality is enough.”

My mind is ALWAYS spinning ideas for more. I pay close attention to how “more” makes me feel – exhausted, neglecting my family, worried I’m going to get caught out.

2019-08-17 09.20.59Get your winning done early and pay attention each time you taste a lack of satisfaction after striving.

Look deeper into your drive, passions and interests => what lies beneath your compulsions?

For example, I like spending time in forests – my speed of movement through the forest is something I track, but has no impact on my satisfaction.

What’s your gig? My gig is sharing a connection to nature with people I love.

The “lack” is deeper than the “more” we seek. I had to back off to find out that satisfaction was behind me.

2019-08-15 17.22.14How would you describe your desired outcome over the next 5-10 years?

Active, polite, easy-going, positive. These are the traits of my older pals that I enjoy spending time alongside.

Thinking through consequences

2019-07-16 08.01.59A friend confided in me that his FOMO (fear of missing out) is running hot. Stories of easy money have got to him and he wants to get in on the action!

This reminded me of 2005 – a year when I was planning a future life of luxury. I had a road map for how I would spend my paper profits… a house in Santa Barbara, a flat in Paris, summers in the high-country. The constant focus on acquiring more should have tipped me off, but I didn’t notice.

For Christmas 2005, I bought myself a copy of Fooled By Randomness.

It humbled, and deeply concerned, me. You should (re)read it.

In my business life, I had a personal guaranty outstanding. The guaranty was a modest amount of my “paper” assets but more than 100% of my liquid assets.

In my personal life, I had established a line of credit to pay my living expenses.

I realized I could be wiped out.

2019-07-16 08.21.00Taleb’s teaching…

There are some games you don’t want to play.

Some risks we should never take.

Across 2006/2007/2008, I secured my financial life. This decision saved me from ruin.

I had NO idea about what was going to happen (still don’t).

I had a clear idea of the scenario that would wipe me out. Approaching 40, with a new wife, I didn’t want to get wiped out.

I addressed what I controlled: my cash flows, my debts and my obligations.

Do you know what could wipe you out? Look to your borrowings, your obligations and your cash flows.

2019-07-16 07.57.56

Do you notice triggers that could create a shock to the system? In what ways is the recent past skewing our vision of the future?

  • Debt-fueled political stability in Asia
  • Negative yielding sovereign/corporate debt in Europe
  • Easy money at a time of multigenerational employment highs in the US
  • Global debt double 2008 levels

Across all markets, a low-interest rate policy:

  • Delaying the consequences of poor decisions
  • Pulling forward future returns
  • Reducing interest service obligations => while global debt has doubled the price of debt has more than halved

It impossible to predict when the credit cycle will play itself out.

It is possible, and advisable, to understand how you are exposed to ruin.

  1. Cash flows compared to fixed commitments (taxes, debt service, core cost of living)
  2. Asset purchases via debt finance => particularly negative yielding luxury purchases
  3. Credit quality => Who can go bust and hurt you?

Things go wrong when people build assets, and debts, to the top of the credit cycle.

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The photos were taken on the Twin Sisters in Rocky Mtn National Park – mountains provide an opportunity to teach about consequences.