The Road Ahead

Four recent reads.

A neat concept from Pasricha is to view a week as three bins of time.

  • 168 hours in a week.
  • Splitting into thirds, we get three bins of 56 hours.
  • Most folks drop two bins (112 hours) into sleep, work and commute.
  • Leaving 56 hours for everything else, which happens to be the subject of his book.

The author encourages us to have a look at our allocation. Here’s mine…

  • Sleep and unscheduled personal time – 65 hours
  • Kids — meals, bedtime, homework, housework, dad time and school drops – 40 hours
  • Exercise, strength training, time in nature – 21 hours
  • Admin, taxes, legal, finances, writing – 15 hours
  • Travel, Driving – 15 hours
  • Open, Reading – 12 hours

When I bring energetic action, time and expert instruction to an area of my life… I get results.

If it’s not happening then it’s not a priority.

Better to tell the truth — especially to myself!

Younger Next Year was written for Baby Boomers but I found it entertaining and useful.

Around 2030, I’m going to have a 40-hour slice of time land in my lap. Leaving my desk job in 2000, I have been through much of the author’s story. What I haven’t dealt with is aging and decay!

This winter, I learned to ski well. Learning to ski was humbling — I found myself lacking in absolute power, power endurance and quickness. Add that experience to the gradual deterioration of my vision. Aging and decay!

Through an explanation of Harry’s Rules, the book reminded me of other potential gaps in my life — connection, commitment, passion.

“Kids” have taken a big slice of time in my forties. Because we’re likely to have another 15,000 hours to come, I’ve been working on up-skilling everyone.

Some day the “kid” slice will be gone. My marriage will remain.

The two books by Gray (as well as The Soul of the Marionette) were fabulous and challenged the narrative my local community tells itself.

When I’m doing, connected and engaged…

…I don’t overthink any passing emotional state.

It’s worth making an effort to fill-the-gaps.

High Finance

2016-09-24-10-14-55Keep your ears open this week. There will be a rare opportunity to learn about finance.

For my international friends, many of the American techniques (in the news) are available in your home countries. I have been applying finance, across four continents, for more than 25 years.

2016-09-25-18-48-42The overall financial system works great. However, when I try to explain certain shortcomings to my friends, their eyes glaze over and I lose them.

I wish I was more skillful.

Whether your favorite billionaire is a Cuban, a Koch, or a Buffett, we can learn a lot from insiders. A constant refrain from wealthy insiders is “complexity creates opportunity for the system to be gamed for economic benefit.”

Finance is a complex system. The system has been gamed extensively.

  • Offshore accounts (Panama Papers type stuff)
  • Thinly-capitalized investment vehicles, with lots of debt
  • Applying non-cash losses today, while deferring cash gains to tomorrow
  • Receiving preferential tax rates on gains associated with financial work
  • Using trusts to avoid estate and generation skipping taxes
  • Using special accounts to shelter income and gains across generations
  • Income reclassification to avoid income and payroll taxes

If the collective wants to run the system like that then I’ll bow to its will. However, I’m not sure the collective knows what’s up.

2016-09-28-10-43-49-1Like professional sports, my beef isn’t with the system. What irks me is the lack of integrity when insiders pretend the system is different than reality. The politics of the people I named above are different but their observations are often similar.

I’m grateful I can explain my personal reality without fear of banishment or loss.

Living a life you can disclose saves a lot of suffering.

How To Make Money At Real Estate

taxiEffective last month, my family owns a house in North Boulder for a net cash cost of US$100,000. It took me a decade to get that deal done. I did a similar one in New Zealand in 2001.

When I buy, I look for a good asset, at a fair price, with built-in options that can create upside.

If you’re going to make superior returns then it will be due to an option embedded in the deal.

For example:

  • Excess land gives the option to subdivide (Boulder 2010)
  • Buying outside my “home” currency of US dollars gives the ability for international arbitrage (New Zealand 2001)
  • Buy homes for less than their cost to build (Tucson 2010)

The goal is not having a property that you would be proud to show off to your friends. Until recently, I owned a “pride” property. A 6,000 sq. ft home that earned my family nothing for the time we lived in it. Truly fantastic house, mediocre investment.

Likewise, the option should not be created by using a ton of leverage. High leverage is appropriate only when you’re using other people’s money in a non-recourse vehicle. More here.

When should you buy?

#1 – Buy when you need the asset. You rarely need the asset! Be patient.

#2 – Buy when the cost to own is FAR less than the cost to rentsee my free ebook for how to do this calculation.

#3 – Buy when banks are foreclosing – banks, governments and trustees often sell for less than fair value.

#4 – Buy when the local debt market has collapsed – a cash buyer in a liquidity crisis will receive favorable terms.

Note, these tips apply to every asset and you’re going to need substantial liquid assets to take advantage.

All of the above, imply that you should study your target market for a decade before you buy. I also recommend that you limit your equity investment to 15% of your family’s balance sheet.

Right now, we’re in a bull market and you probably feel like you will never get another chance to buy at distressed prices.

You’re wrong.

In my working life, I remember bear markets in 1990 (UK), 1997 (Asia), 2000 (US) and 2009 (Global).

Take your time and remember you don’t need to do the deal.

Once a decade, the patient investor will be sent a fat pitch.

 

Understanding Your Family’s Risk of Ruin

nightwalkIn my previous piece on effective wealth, I made the case for linking wealth to spending.

  • Individual wealth => 5 to 10 years cost of living
  • Generational wealth => 10 to 25 years cost of living
  • Multi-generational wealth => 25 to 40 years cost of living
  • Surplus (excess?) wealth => beyond 40 years cost of living

Spanning 25 years and a range of industries, my careers have had one thing in common… clients can sustain significant losses.

Early in my working life, permanent financial loss didn’t concern me.

  • I had limited assets
  • I was an employee
  • I was insured by my company
  • I was indemnified by my clients

Over time my exposure changed and, eventually, I realized that I had a significant risk of ruin.

My definition of “ruin” has changed over time. It’s worth writing out your own and discussing within your family.

For example, “losing everything I own:”

  • didn’t concern me at 25 – I had a small balance sheet relative to my future earning potential
  • would have been a huge problem at 35 – I had limited earnings, moderate personal leverage and a balance sheet containing more than 15 years cost of living
  • isn’t a problem today – low leverage, small personal balance sheet, greatly reduced cash flow deficit relative to my young family’s assets

Today, ruin consists of adverse events with my family’s human capital.

While I run our family structure, it’s a very small piece of what I do.

Because… the purpose of getting family structure correct is to enable a focus on what matters – human capital and shared experience.

  • marriage
  • kids
  • family
  • health

Get the structure right so that you can focus on things other than the structure!

  • Simple
  • Straightforward to manage
  • Cost-effective (time, expense, future flexibility)

Consider:

  1. Are you worth suing?
  2. In what capacity could you be sued?
  3. What’s the nature of the losses that could be sustained by any party?
  4. What can go wrong outside of lawsuits? Personal disability, for example.
  5. Can financial, or legal, structuring reduce these risks?
  6. What’s the cost to insure these risks?

Brainstorm the answers and schedule consultations with:

  • an experienced litigation attorney – quantify and understand how you will be ruined 🙂
  • an experienced trust and estate lawyer
  • a fiduciary with experience advising families similar to your own
  • a family that has managed two successful generational wealth transfers – what does success look like when you’re gone?

Write out your notes from these meetings, discuss with your family counsel and reach a rough consensus on your family values.

Here are reading resources to help you understand family wealth.

  • Consult widely
  • Seek out smart people that disagree with you – you’ll both benefit
  • When family members disagree, pause
  • Change slowly

More on the specifics of my own journey in a future installment.

Micro Courage

axel_lionHow do I cultivate deep strength and resiliency?

We might describe resiliency as…

  • The capacity to continue despite life’s setbacks
  • The ability to become stronger due to stress (anti-fragility)
  • The strength to handle anything

They sound great, grand and completely unattainable!

I’m going to guide you through how I break it down into something that I can action in my daily living.

Start by flipping it on it’s head, what are the characteristics of the not-resilient? Think of the biggest head case you know…

  • Angry
  • Anxious
  • Depressed

When I think about anger and anxiety, they strike me as cultural expressions of fear. At some level, we see angry men and anxious women as normal. I feel both emotions all the time and they make me less effective.

What to do?

Over the last two years, I’ve been experimenting with micro-courage.

I started by printing up 50 life lessons and highlighting the ones that I wanted to focus on (11, 12, 18, 26, 27, 28, 37, 42, 49). If you come by my office, you’ll see they are taped near my printer…

lifelessonsReflecting on the lessons, I paid particular attention to three:

  • Let your children see you cry
  • Forgive everyone everything
  • Yield

I’d encourage you to find your own (triggers).

The game is to focus your actions on situations at the edge of what you can handle.

Here’s an example:

  • There are lots of homeless folks on the Boulder Creek Bike Path. Some of these folks are violent, others are mentally ill, still others are addicts. As a group, they scare the crap out of me.
  • While I have pals that work with the homeless, I don’t have any clue how to “fix” this problem and often wish the problem would go away (so I don’t have to deal with my inability to deal with it!).
  • Anyhow, there’s one guy that sits by the creek in the 28th St underpass and says good morning to everyone that runs, rides and walks past him. He’s a drinker and can get a little sloppy towards the end of the day.
  • I can’t fix the city’s homeless challenges but I can offer the guy a bit of human connection as I ride by. I look at him, smile and take a breath in. On the face of it, I’m smiling at him but, in reality, I’m staying open to the fear within myself. That’s micro-courage.

The story repeats itself in every part of my life that I want to close off.

I try to “stay open” as many times a day as I can.

The problem can be homelessness, litter, aggression, poor driving, manners, food quality… keep it small, remember to breathe in through your nose with a tiny smile.

Staying open to a small fear, a slight inconvenience, a little bit of sadness… I call it micro-courage.

The habit has been transformative in situations that I used to find overwhelming.

This is what I meant when I wrote that strength comes from staying open to little fears.

Courage is a powerful antidote to fear, anxiety and anger.

Be brave.

A Fiduciary’s Reading List

I’ve completed William Bernstein’s recommended reading from his eBook, If You Can.

The reading humbled me. With a 1st Class degree in Econ / Finance, and 20 years experience in international investing, I was left feeling intellectually arrogant and ignorant. Each of these books challenged my beliefs while explaining financial history.

I’d recommend making these books compulsory reading for your advisers and key family members.

Good people can be found in the field of finance. I appreciate the significant time that each of the authors spent to educate willing readers.

The Millionaire Next Door – introduces the key concepts of wealth, saving, investment and taxes

Your Money & Your Brain – a solid summary of the latest on behavioral psychology as it relates to finance and investment – why I will always fool myself

The Great Depression: A Diary – an inside look at what it is like for a conservative, professional family to live through a depression – 2008-2010 was easy compared to the 1930s – could your family survive on minimal income for multiple years?

All About Asset Allocation – the early chapters were the most useful – simple explanations of the role that volatility plays within a portfolio – reading this book, you’ll be tempted to seek the perfect portfolio mix – my decision has been to keep it simple

Common Sense About Mutual Funds – a wealth of information – Bogle picks apart the industry by making his case for simple and low-cost investing – the book makes one wonder how brokers and financial advisers can sleep at night – readers will learn about the industry structure that silently fleeces its customers

Side Note: if you worked in finance from 1980 to 2000 be sure to adjust your brilliance for volatility and leverage using Bogle’s updated charts. We had one heck of a tailwind. Humbling!

How A Second Grader Beats Wall Street – don’t be fooled by the child-like title – this book will save your family tens of thousands of dollars in fees and taxes

Devil Take the Hindmost – a history of financial speculation – hedge funds in the 1860s & derivatives in the 1600s (!) – as Taleb says, we’re never going to get rid of greed, the challenge is to build the system so the greedy don’t inflict suffering on the good

+++

To Bernstein’s list, I’ll add Estate & Trust Administration for Dummies – a good primer to get you thinking outside of your own self interest.

+++

If you are in an advisory, or trustee, relationship then tick off one book per meeting with your professional team.

Read a book, take notes and discuss how the book impacts your family (or your firm).

Challenge yourself with exposure to the best ideas available.

Studying new approaches can be painful but we all benefit from a bit of cognitive dissonance.

What Do We Need To Retire?

My post showing how a 1.2% fee differential can cost you 131% of your pension contributions inspired Paul Meloan to write an article about The Clear Value of Financial Planning. The article lays out Paul’s case for his work in the field.

To help you understand the cost/benefit relationship, have your advisers write out the dollar amounts that you’re paying in fees, expenses and taxes. Be sure they include all the soft costs that are buried in your mutual funds.

In Paul’s article, he lays out questions for a family to consider. I thought I’d answer these questions, as viewed from a life outside the box.

#1 – How large of a pool of assets do my significant other and I require in order to live in the manner which we desire for the rest of our lives?

The most important thing for you to remember is to declare victory immediately. You have more than you need and are in a position to think about the future. Many, many people are less fortunate than you. Spending time with the less fortunate will temper your needs and get you to financial freedom more quickly.

The financial services industry is built backwards from your true needs. If you listen carefully then you can hear the industry say, “you can be happy tomorrow if you have more.”

Be happy now, with less.

I recommend that you flip question #1. When I look at my family’s net worth, I express it in terms of “years of current expenditure.”

For example, if your net worth is $500,000 (Assets Minus Liabilities) and your current expenditure is $125,000 per annum then you have FOUR years of current expenditure (500,000 / 125,000).

Why is this is a useful way to consider your position? It’s useful because it changes the conversation from

  • What do I need to be happy tomorrow?; towards
  • How can I spend wisely today?

The years-to-burn exercise reminds me that the fastest way to improve my financial position is to reduce my current expenditure, not take more risk.

In terms of years-to-burn, my peak wealth was 13 years ago. I was living out of a Subaru and sleeping on a friend’s floor in LA. My life was extremely simple – eat, sleep, train. It was one of the happiest periods of my life and my net worth was 1/6th of right now.

It’s worth repeating… I increased my net worth by 600% and feel less wealthy.

Historically, most my spending has been wasted.

  • luxury air travel
  • high-end hotels
  • excessive childcare
  • personal assistants
  • office space
  • non-performing assets
  • personal luxury expenditure (clothes, cars, boats, vacations)

I ditched most of these because I discovered that they were bandaids healing myself from a lack of satisfaction with daily living. My spending was driven by our culture rather than my needs.

Choose your hometown and your buddies carefully! I assure you that the exact same family will have needs that vary by geography. Consider:

  • Manhattan vs Boulder
  • Aspen vs Truckee
  • Palo Alto vs Greenville
  • Santa Barbara vs Hood River

I came close to moving to Palo Alto to spend more time with my pals (love you guys and gals). It would have changed my life – not better, not worse – but absolutely different.

The more time that you spend helping people that have less than you, the smaller your retirement fund will “need” to be. There are examples of this all around us.

Finally, the benefit of wealth is not to leave work. The benefit is to feel secure enough to choose meaningful work, regardless of compensation. Hang out with people that are rich in personal satisfaction (artists, priests, teachers, ministers, caregivers, coaches, guides) – you’ll know them when you speak with them.

#2 – What should be the composition of that pool of assets, and how should they relate to each other in terms of risk and expected returns?

You can beat all of your pals by using Bogle’s Little Book of Common Sense Investing.

As a bonus, the strategy is simple to understand and easy to execute.

If you can’t figure the book out then call Vanguard and they will help you in exchange for a fixed price fee when you need help.

If you keep screwing up then get yourself a financial coach and pay a fixed fee to hold you to your plan.

We all do better when someone is watching – that’s why I have a blog.