Winning The Loser’s Game – personal finance book, Charles Ellis

2019-06-16 08.44.50This one sat on my shelf for a while, probably due to a concern that I might have to change my mind on something if I read it!

Well, just because something is unpleasant to consider, doesn’t mean it’s wrong.

Besides, I can handle bad news.

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Fortunately, there wasn’t much bad news inside this book and it was an excellent read.

Takeaways…

Nearly everyone will be working into their 70s, at least part time. This is a result of success, not failure.

  1. Success in following a healthy lifestyle and benefitting from modern medicine => much longer lifespans.
  2. Success in financial well being => implies our baseline spending at 50, 60, 70… is higher than anticipated.

A working life of 50+ years implies:

  • We will be technically out-of-date before we’re halfway done!
  • Multiple careers, unexpected transitions, continuous technical education
  • Start with something the enables you to get paid well on an hourly basis and become world-class in a niche market
  • If you spent your early career not doing a whole lot then you still have many decades left in your working life. Hit the reset button and get yourself educated without borrowing a ton of money.

Despite “retiring” 3x (!) since my 30th birthday, I’m still working part-time. I had been expecting this to end at some stage. This is not going to happen, and I shouldn’t wish for it to happen.

I should be on-the-lookout for attractive part-time employment and training myself for my next career(s).

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As you’d expect from a bestselling personal finance book in its 7th edition, there are excellent sections:

  • Six self-assessment questions (p 80-81)
  • Living under your means as a form of savings (p 161)
  • Annual personal review questions (p 197-198)
  • Contributing time, talent and money to your community (p 227)

I was also reminded of my personal weaknesses as an investor by the author’s advice to “give compounding time to work.”

Across a 50-year working life, that is a lot of time!

A Little Economic History

2018-10-31 07.52.14It is much easier to position your life before, rather than during, an economic crisis.

It’s also truly amazing how fast a credit crunch can sweep across markets.

This month, a decade ago, was the mid-point for the toughest 90-day stretch of my financial life. Taking it back to October to December 2008…

  • My prospective earned income went to zero at a time when…
  • My Business/Personal cash burn rate was $10,000 a week. Simultaneously…
  • My net worth dropped by 67% and…
  • I was facing a potential claim 20x in excess of what remained. The one bright spot was my family life…
  • Our first child was born and we were very happy within our marriage.

The only reason I didn’t follow a friend into bankruptcy was a pre-crash restructuring. I had been scared by four events :

  1. The US was offering loans without income verification.
  2. The UK was offering loans without bank covenants.
  3. Down in New Zealand, I used both of the above and borrowed to pay my living expenses at a time when…
  4. I had a personal guarantee outstanding that covered most my assets, and all my net worth.

There is a line in Fooled By Randomness about Russian Roulette. It goes something like…

Even if the gun has a million chambers, there are some games you don’t want to play.

I was enjoying my life and didn’t want external circumstances to force a financial reboot at 40-years old. So… 2005-2007 was a time of significant change.

The restructuring took three years (2005-2007). It prevented ruin, but still resulted in a lot of pain when credit markets slammed shut in 2008.

At the time I was working in the UK. The entire chain of my business life went from Great-to-Insolvent in 180-days (bank, joint venture partner, developer, general contractor, sub-contractors, employer, CEO).

Just like that.

Gone.

2009-2012 were spent clawing back.

Key steps:

  • Downsized family home, spending and aspirations. Embrace Your Hubris!
  • Invested the downsized capital into a Downtown Boulder rental property. Two units, where the little unit’s rental income would enable us to live for “free” in the larger unit.
  • Invested our remaining funds in a redevelopment opportunity that I could hold FOREVER, because it was debt-free and cash flow positive.
  • Turned a loss making triathlon hobby (draining $75k annually) into a cash generating consulting business ($4,000 per month).

By 2013, we achieved cash flow break even. We were so blasted from our young family (up to three kids) that I don’t remember appreciating the significance of what we achieved.

Within my financial peer group, our story is not unique. Lots of people had a similar ride. However, they don’t necessarily blog about it.

Financial memories are short.

Remember.

You don’t get killed by prices falling — price volatility is emotionally painful but not financially fatal.

Companies, Your Personal Ethics, Friends and Families… All can get crushed by running out of cash in a banking crisis.

Where’s your cash flow statement?

Towards An Antifragile Life – Living With Volatility

I’d encourage you to read Taleb to experience the hero, and anti-hero, directly. Acting on his books saved me from personal bankruptcy. I owe him much of my personal freedom.

Separate from his tips for financial living, what are the lessons that I can bring into my larger life?

Don’t Tinker, Let My Winners Run, As Much Nothing As Possible – I blow at least $10,000 a year forgetting these points. My sin is neglecting the benefit of “no action.” Every year:

  • I cost myself money by tinkering with my winners
  • I waste emotional energy by getting involved in situations that will work themselves out with my help
  • I spend goodwill via over-correcting the people close to me

The tip about letting my winners run is so persistent in my investing errors that I’ve sent myself an email that I see every time I log into gmail. The other email is designed to make me a better man.

Inbox Almost Zero

Inbox Almost Zero

Maintain Personal Freedom – Taleb’s style is about freedom. Freedom to do what he wants. Freedom to say what he wants. I get that. I need to be cautious with choices that restrict freedom.

Debt – my family has one loan, a mortgage on a house that I could leave and rent for more than my mortgage/insurance/taxes.

Taleb, and others, challenge conventional wisdom about the use of debt, particularly with regard to College. My wife and I left college debt free and that colors our judgement. Friends of mine, that are doctors, talk about debt-free doctors being able to “do medicine right.” Statements like that, bring home Taleb’s advice to use as little medicine as possible.

Pay For Optionality & Avoid Open Ended Commitments – I’ve made both necessary, and ill-considered, commitments in my life. I pride myself on reliability so feel pain when I’m falling short on a commitment, or need to exit. As a result, I’m willing to pay a premium for flexibility and accept less success to avoid long-term attachment. The pain I feel is an Anglo-Saxon cultural phenomenon, in some Asian cultures, it is expected that relationships will change with circumstances. I smile when I think about Northern Europeans doing business in China and India.

Relationships – Taleb is big on parties, especially ones with lots of different interesting people. My goal at a party, if you can get me to go, is simple. Avoid being the most boring person there! I’m selling myself short. While it would help, the solution isn’t to liven up. The solution is to understand that exposure to many different people is helps create a life with meaning and opportunities to use our skills to help others. Networking is about using volatility to our advantage and the most valuable form of networking is having fun while sharing a mutual interest. I’ll go a far out of my way to share a bike tour with a buddy! I’ve made most of my best friends while exercising!

Insurance & Legal Structuring – insulate yourself from the improbable via insurance and appropriate legal structuring (links to blogs that tell you what I actually do).

Toxic People – have you considered the emotional payoff profile of the people that are close to you? Taleb talks about asymmetric outcomes in the financial sphere but far more common is the downside associated with certain individuals. Some people have a poor payoff profile and others consistently make me feel fantastic.

Think about the people you spend time with – how do they make you feel about yourself? Create space for great people by ditching the toxic folks.

By the way, if you’re truly courageous then think about how you make other people feel about themselves – especially people that have no recourse against you. Too often, I come up short here! When I’m tempted to criticize, I ask myself three questions:

  • What are my goals here?
  • Will criticism serve my goals
  • How am I making this person feel?

Taleb rails against bankers and senior management. Speaking as an insider, he is 100% right about how those sectors operate. The deck is stacked, and will remain stacked, in favor of the insiders.

If you find yourself in senior management, or finance, then think back to what was “enough” when you started.

Too often, the compromises associated with success are the seeds that create Black Swans in our personal lives.