The Antifragile Family

My family owes a debt to Taleb as applying his books, Fooled By Randomness and The Black Swan, enabled me to avoid personal bankruptcy in the Great Recession of 2008/2009.

His latest book, Antifragile, extends his work beyond business and finance. I highly recommend this book – here’s a link to his Wikipedia page for a short-form intro to his thinking.

As a father, I have two heuristics that I apply to my kids:

  • Keep the kids alive
  • Don’t protect from failure

My wife and I have debates about the second point and she’s a good counterbalance to my approach. I’m willing to let my kids get dirty, hurt, sick, upset, cold, hot… especially when I think there’s a chance they will learn by doing. My goal being to teach personal responsibility and put ‘failure’ in perspective.

I’m willing to let my kids struggle because Taleb makes the point that we want to do as much nothing as possible. He makes the point with regard to medicine and I’ve heard Buffett make the same point about investing. Both authors note that “doing nothing” is very difficult to achieve and always open to criticism (because it is difficult to attribute the benefits of no-action).

The authors of Siblings Without Rivalry share that the wise parent acknowledges conflict then gives the kids an opportunity to learn how to resolve themselves. What’s the minimum intervention that will help my kids learn to get along in the world?

Recently, my daughter was having trouble playing with older kids. Lex is the first born and defaults to total domination in relationships – the older girl (also first born) yelled at her and Lex came to me to ask if I would intervene…

  • Lex – tell her to play with me
  • Dad – it made you feel sad when she yelled at you
  • Lex – yeah
  • Dad – you want to play with her and her brother
  • Lex – yeah
  • Dad – I could tell her to play with you but kids don’t like being told what to do – why don’t you act a bit more calm and see what happens

Total time investment – ten seconds – kids worked it out over the next ten minutes without any adult intervention. An intervention was required a little later when she nearly slammed a toddler’s fingers in a door (that was a chance to teach “do no harm“)

The message that tinkering leads to adverse outcomes is repeated in many fields. So what to do? I think Taleb would advise:

  • Remove fragility – child-proof the home
  • Limit the effects of asymmetric negative outcomes – seat belts, health insurance, long term care insurance
  • Gain exposure to positive asymmetric outcomes – have children, change careers, meet new people
  • Then stand back, let it ride, avoid noise and spend your time learning

Asymmetric means that the outcome is much greater in one direction than the other. For example, my friends tease me because I always drive the speed limit, or less. I drive slow because the cost (time) is tiny compared to the benefit of less fatalities. An avoidance of negative Black Swans is why I wear seat belts, helmets and don’t run lights & stop signs. It’s also why I don’t yell at strangers, especially in America.

Because Taleb shares stories of multi-million dollar investment profits from applying his knowledge, it’s tempting to consider how we can make a lot of money from his advice. For example, a reader sent in a question about “barbelling” a small portfolio. My advice would be to barbell your life. There is far more upside for a young person to focus on asymmetric outcomes with their human capital, than their financial capital.

I’ve been thinking about my family’s exposure to positive Black Swans and my children keep coming back to me. Little people require a lot of change in the lives of parents but their lives provide the opportunity for positive events to enter the family system. 

How can I help my family benefit from positive asymmetric outcomes?

Readings To Strengthen Your Family

With three kids, I needed some expert input on family dynamics and management. These titles have been quite useful for me to consider the life we want to lead.

While it’s tempting to manipulate my kids via parental approval – I wrote them a how-to–manual with my last book – these books reinforce the reality that success comes from respecting differences and working towards the goals of each individual.

While the books are geared at the wealthy, the tactics and challenges faced by families are universal. Seeing financial wealth rise, fall and disappear between generations becomes a metaphor, rather than metric, for family success.

With all the titles, what I found most helpful was thinking about human, rather than financial, capital. Secondly, considering the goals of each individual, as an individual, within the family unit. One can apply these principles into any organization.

Family Fortunes – Bonner/Bonner – interesting ideas, many contrarian to my own views. Caused me to think through, then revise, my own thinking.

Wealth In Families – Collier – practical in approach, filled with excellent questions, timelines for education and checklists.

Preparing Heirs – Williams/Preisser – results from studying generational transitions. Considering this book in light of my family history had unintended consequences that I’ll be sharing.

Family Wealth – Hughes – the deepest study (out of what I’ve read so far) on the concept of human capital. If you enjoy this title then you can go further with his follow up book, Family: The compact among generations.

In studying my own family, I realized that success between generations doesn’t require wealth, or its preservation. Education (in terms of practical skills) and opportunity to apply those skills proved most useful across the last five generations.

Secret Lives

This past year has been a tough one for confidence in my peers. Historically, I’ve had some form of ethical event about every five years and 2012 will stand out. The developments in cycling, and their implication to my sport of triathlon, have impacted me quite deeply.

My wife thinks that I’ve been focusing on Lance but it’s the implications for my athletic life, combined with local scandals, that have been most difficult for me. 2012 saw the discovery of many secret lives in my peers.

If you read Charlie Munger then you’ll find examples of the corrosive effects of creating incentives for people to lie. What starts as an individual tragedy flows into society when a class of people starts lying to themselves (sports figures, politicians, financiers). Living in a society that is filled with secret lives damages everyone. I prefer wide latitude for personal freedom with clear, and certain, punishments for crossing the line.

Secret lives come in many forms – drug use, alcoholism, theft, marital infidelity, disordered eating, overeating, sexual preference, sexual deviance, financial fraud, agency risk…

Coming out of cycling, the best confession (for personal ethics) that I read was Floyd saying (and I paraphrase) that he did it and he’d probably do it again. Pretty much everybody else has fallen back on the “I had a dream” defense and/or “I was only following orders.”

This hits me hard because I’ve left a marriage, a partnership and put companies into bankrupcy because I felt it was necessary to remain true to myself. The short-term costs to me have been material but far outweighed by the long-term benefits (and I can sleep at night without presciption medication).

Everybody doesn’t do it.

Perhaps Floyd’s honesty is mirrored behind closed doors – it’s better in the long run to be honest with yourself. As Gordon Livingston tweeted this week – it’s easier to tell the truth to others when we’re not lying to ourselves!

In Boulder, we’re highly indignant of doping cheats (that get caught). However, we’re surprisingly lax about other forms of cheating that have a much greater impact on families. I wonder if the haters would be as venomous if they knew the moral ambiguity pervasive in elite segments of society. Perhaps they’d share my 2012 crisis of confidence.

Would helping you connect the dots increase, or decrease, suffering? I’m mulling that over. Suffice to say, the public only knows a faction of what happens in sport, in finance and in business. I keep changing fields and it keeps following me.

Anyhow, I have come up with an idea to be part of the solution with respect to elite sport and will be sharing my biological passport over at Endurance Corner.

very smart friend advised me to stay positive and stay on message. Reading all the hate is wearing me out – no need to add to that, or bring down my pals.


Back to my original point about secret lives – if you read about cycling (The Secret Race, Racing Through the Dark), you’ll see what kills (non-sociopathic) people is knowing they are living a lie. Forcing good people underground weakens society.

We might think that raging against the dopers is just but do we want to train an anger response in our lives?

Consider eating disorders – I have a number of pals that have confided that they can’t come forward and tell everyone what it’s really like because ‘everyone will think I’m a headcase.’ Truth is most top athletes are headcases – there aren’t too many ‘normal’ people that want to exercise themselves towards their maximum genetic potential.

Or sexual preference – imagine being born a certain way and living in secret, often from your own parents. Even with tolerance and compassion, it isn’t easy rolling through life as a visible minority. Collectively forcing these men and women to live a lie is unjust and sets up a corrosive internal rationalization that can take years to unwind.

Closest to home is sexual abuse. I graduated from a Catholic high school, where I won a student-of-the-year scholarship. Ironically, my award was named after a priest that abused my friends. The boys have become men and continue to carry a pain from being victims of a very ill man.

Far better to release the past than carry the pain forward.

Live an open life.

More Recommended Reading

You’ll find a list of reading at the back of my most recent book. Over the last few months, I’ve been able to get through some excellent titles. In order of importance to me:

Siblings Without Rivalry – Faber/Mazlish

Absolutely outstanding with practical tips for parents as well as case studies to better understand existing (adult) family dynamics. They gave this book to us when we left the hospital with our second child – it took me a year and a half to read it and I’m glad I did. Essential reading to understand yourself and others.


Antifragile – Taleb

Taleb shares his thoughts on a life well lived. He uses a wide range of examples to help us consider asymmetric outcomes in our lives. I will share a series of articles considering its lessons for my family. I highly recommend this read.


The Thing You Think You Cannot Do – Livingston

Livingston shares thoughts on honor, virtue and courage as components of a life with meaning. He combines stories of personal courage with examples of errors of misjudgment. I admire Livingston’s honesty with himself and his courage to share his opinions about living well. As I look forward from middle age, Livingston provides me with examples of what I’m likely to face in old age.


What Money Can’t Buy – Sandel

I enjoyed the Harvard Justice lectures so picked up this title as a way of saying thanks to the professor. An enjoyable read that encouraged me to consider the larger impact of my career in finance and my family’s tendency to isolate ourselves within our bubble. The book is a well-reasoned account of the benefits of civic virtue and the price we pay for crowding out non-market norms.


The Social Conquest of Earth – Wilson

I started this book because I enjoyed Wilson’s award winning title, Consilience. I figured, rightly, that he would have something interesting to say. The book challenged my thinking about free will at an individual, and a collective, level. As a specific example, I wonder if I am exercising an illusion of individual free will within a community that is highly predictable.


Trust – Fukuyama

Fukuyama takes the reader on an exploration of community, family and business structures around the world. I enjoyed the author’s hypothesis about business organizations being driven by cultural factors. A useful read if you’re curious about cultures outside your own or work internationally. He also spends considerable time exploring the role of family in different cultures.



Sport In The Context Of A Just Society

A friend asked my opinion – this is an edited version of my reply.


This essay might help you place your feelings:

I was introduced to Rawls by the Harvard Justice course.

For me, “just” success comes from an honorable path. It’s a fundamental error to let the pursuit of winning get in front of the pursuit of honor. The value of athletics to society comes from the virtuous pursuit of honor. It sounds like a quaint concept but that’s what athletics is about.

Early in my finance career, my Dad passed along advice that he received from the owner of the bank where we worked – always be willing to make a little less money to maintain your ethics. I’ve taken that further to “always be willing to be a little less successful.” The ability to leave a little on the table greatly reduces the chance that we’ll end up in jail or disgraced.

Livestrong is a powerful shield for Lance because it gives the appearance of a large benefit to the masses from one man’s success. That is an extremely powerful concept in terms of social justice (see Rawls). Based on the public facts, Livestrong may be an illusion. The clearest example is the splitting of the .com and the .org to personally benefit the founder – the fact that the millions of dollars from Nike, Trek and Oakley weren’t enough is telling. 

The joy we felt was real and you should feel lucky to have the capacity to feel joy from sports. I’ve lost most the joy I felt with elite sport. I know what lies beneath the surface and the illusions held by the masses bother me at some level.  I’m surrounded by constant reminders of athletic cheating.

Hold on to joy, release the hate and focus on being a good guy within your family. You’ll get the best return for your own life by emotional investment in those that are near to you. They know who we are and like us anyway!

The elites in society have a duty to hold themselves to a higher standard – most (many? some?) top athletes fail that test. Criminal violations by elites should be punished.

By “elites” I mean the top 1% of our society, not some poor guy making $35k a year with a pro triathlon card!


Financial Independence

Fear of failure, or looking stupid, holds us back from learning new skills. Whether you are learning to swim, or figuring out the risks with borrowing a certain amount of money, it pays to develop your beginner’s mind.

If you had trouble following this series then get a copy of The Richest Man in Babylon. The book uses stories, rather than case studies, to teach about money. 


When I ask people to define financial independence, most back into their answer based on current spending. Other people have no idea about their spending so they toss out a huge number that they think would enable them to stop working. Both of these methods fall short because the answers they imply are unrealistic.

I started this series by asking you to consider if a million dollars was as much as you thought. To balance that idea, I showed the power of saving $20 per day.

While it seems attractive to have our financial needs covered via passive income (see Four Hour Work Week), the idle rich are poor role models and the active rich are often held in bondage by their spending.

Constantly saving money to have the ability to spend whatever we want at some future date is a lousy goal. First, we might never achieve our goal. Second, it overlooks a much easier, and more valuable, target. Financial independence is about having the ability to choose your location and occupation.

Additionally, financial reserves give you the ability to say yes to what you want to do and, most importantly, make it easier to define what you are unwilling to do. Many wealthy people end up in prison, or dishonored, because they forget that financial wealth makes it easier to say NO to bad ideas

For example:

  • Do I work in a team that shares my personal values?
  • Should I keep my mouth shut when senior management break the law?
  • Should I lie and cheat the bank, tax man, shareholders or government?
  • Should I invest in companies that sell products that hurt my fellow citizens?
  • Should I sell a product that I know is not in the customer’s best interest?

I’ve had to make decisions on all of the above. These choices cost me (a lot of) money in the short term. However, my choices helped maintain my freedom, and honor, over the long term.

When I think back, a few of my ethical decisions appear irrational based on the economics that I learned in school. Perhaps we undervalue self-respect, or fail to capture the rapidly diminishing returns beyond our basic needs. Perhaps there is a value, of freedom, that we’re not capturing in traditional economic analysis.

A reserve fund, and a mantra of being willing to make less, changed my ability to stand for what I believe in. Optimizing for self-respect is easier with the reserves to sustain unemployment! I’ve chosen unemployment more than once. 

If you haven’t created financial freedom for yourself then set a small daily goal and get started. Make time for the financial education of your kids and spouse. In teaching others, you will remind yourself of the basics:

  • Spend less than you earn
  • Protect core capital
  • Be wary of leverage
  • You only need to achieve financial security once
  • Wealth is about freedom, not money

These topics are poorly understood and largely ignored.

Start small and stick with it.


Mortgage Debt As Inflation Insurance

If you’re under 40 years old, and live in the West, then the only world you’ve ever known is one of declining interest rates and reducing inflation expectations. In this world, inflation happens in textbooks and far away places. Last week, I tried to show that it wasn’t always so.

I want to share a case study about how you can use mortgage debt to provide inflation insurance. While I am very cautious with using leverage, mortgage rates are at a level where it made tremendous financial sense for my family to take advantage of the opportunity I’ll outline.

The numbers that follow are based on a deal that I did last month. You can find my workings in my Financial Education spreadsheet.


What I’ve done for this example is adjust the numbers from a December house purchase to reflect actual values per $100,000. These numbers are for Boulder, Colorado so you’d need to crosscheck for your own geography.

I assume a conservative debt:equity ratio of 50%. You might be able to borrow more but the interest rate that you’ll pay might increase.

Our loan provider gives us a single payment for the mortgage, taxes and insurance. 2/3rds of that amount relates directly to the mortgage and is fixed for 30 years. 1/3rd of that amount, as well as 100% of the other ownership costs, are subject to inflation. You’ll find a checklist for the costs of ownership on Page 55 of my book.

Using the scenario from last week, I imagine a decade of mild inflation (2.5% per annum) followed by five years of historically high inflation (7.5% per annum). This increases prices by 84% over 15 years.

Currently, for the type of property that we bought, the cost to rent is similar to the cost to own – about $300 per month per $100,000 of capital value.

What happens if prices rise by 84%?

  • My cost to rent is likely to increase by inflation and rises to $544 per month.
  • My mortgage payment is fixed so inflation only applies to half of my cost of ownership, which we assume rises by 84%. This means that my future cost to own is $424 per month.

In an inflationary environment, borrowers of low-cost fixed rate debt benefit relative to: (a) people that don’t own assets (the poor); and (b) people that aren’t leveraged (debt-free prudent citizens). What concerns me is the largest borrower of low-cost fixed rate debt is my government.

In an environment where public and private debt levels are high, inflation is a politically painless way to reduce the real value of debt. It is an “easy way out” for elected officials (and overleveraged companies/individuals) to deal with high levels of debt.

I have no idea if we’re going to have high inflation. However, if we experience high inflation, then it is valuable to my family to have a strategy where we can stay put with a payment that is lower than our cost to rent.

Additionally, even with moderate borrowing (50:50), the case study projects that the value of our home equity grows at 7.7% versus inflation at 4.1% per annum.

30 years from now, when I’m 74 years old, we will have a debt-free asset. The family will have the option to use this asset to take care of mom/dad in their senior years. If my wife and I pay down this loan over our working life then we remove end-of-life financial pressure on our family. 

The house we bought was the smallest that met our requirements in the one of the best neighborhoods in our city. You will be tempted to size up in a secondary location – this is a mistake. Choose location first then get the smallest place that meets your needs.

Convenience is my #1 criteria for “best.”


Other Considerations

This house is well located – I suspect that real economic growth in Boulder will be higher than the national average – real economic growth is a key driver for local property values.

Make sure that you get your cost of ownership calculations correct – there are many hidden costs of ownership that I cover in my book.

Inflation might not happen – make sure you are comfortable with low, and no, inflation scenarios (prices could even fall).

Make sure you understand what it would take for you to be unable to service your loan. I’ve been unemployed once per decade in my adult life.

Variable debt, especially loans that reset or are linked to the Prime Rate, can bite you in the butt. The 30-year fixed rate loan, effectively offered by the US Government, is an essential part of this case study. The inflation insurance comes from the fixed-rate loan.


Final Notes

The only thing I know for sure is the future will turn out differently than this projection. It will be fun to revisit this post in 15 years!

Prediction is not the purpose of running scenarios. The purpose of looking at alternative outcomes is to provide information so you can ensure that you are comfortable with any outcome.

One of the best decisions I made in my 20s was focusing on my career and maintaining complete geographical flexibility by renting. This allowed rapid career progression. Even in a rapidly rising market, I “made” much more money by excelling at work, than I would have done with real estate ownership.

Understanding Inflation

I’ll kick off this piece with some charts. The first one is historical inflation in the US, UK, Japan, Germany and France (1950-1994).


The exact numbers aren’t important – what catches my eye is two periods (early 50s & mid-70s) where inflation was at, or over, 7.5% per annum for a few years. To see why this matters, let’s do a case study.

You have $1,000 stashed in your mattress (or yielding close to 0% in a bank account). Across the year, prices go up by 2.5%. With the gradual increase in prices, how does the effective value of your money change over time?

I view inflation like a negative interest rate. Instead of earning money across the year, you “lose” money because your purchasing power goes down.

In our example, $1,000 on January 1st would buy the equivalent of $975.61 on December 31st.

$1,000 divided by (1 + inflation rate)

You can’t buy as much a year later because prices went up, and you didn’t earn anything on your money.

To be able to buy the same amount of stuff, you would need an after tax return of 2.5%. When your investment return is equal to the inflation rate, you stay neutral. In our example, $1,000 times (1+0.25) = $1,025 is required to stay neutral on December 31st.

Real Return = After Tax Return minus Inflation Rate

Most people will feel happy when $1,000 goes to $1,025 over a year. However, in our example, you haven’t moved forward. Your return has let you stay in the same place.

Right now, the return on low-risk assets is small and the inflation rate is small. So parking your money in low-risk / low-return assets has little cost to your purchasing power. However, doing this for many years can be a poor investment strategy. Inflation hurts consumers slowly and, aside from the price of gas, is largely hidden from our collective consciousness.

Consider the chart that follows – it assumes a baseline inflation rate of 2.5% per annum and a five-year block where inflation jumps to 7.5%.


The chart shows the purchasing power of $100,000 over time. I used $100,000 because that’s the target that I’m going encourage my kids to achieve by the time they’re 30. It’s do-able if they save $20 per day from the time they are 18.

When my balance sheet was largely low-risk, low-return cash equivalent assets, the chart (above) was on my mind. The steep drop in purchasing power due to a five-year period of higher than average inflation would hurt my family’s purchasing power. With extremely low interest rates and rapid Central Bank money creation, I thought (incorrectly) that significant inflation was right around the corner.

How low are today’s rates? The chart below (posted yesterday by Ritholtz’s blog) gives an idea. Note that the chart goes back to 1790.


In 2009/2010, I made a decision to shift into real estate. The market was falling and debt finance wasn’t available. For me, it was the perfect time to buy and I expected Boulder real estate to hold its real purchasing power. In other words, I expected the long-term value of my investment to link closely to the inflation rate. I wasn’t trying to get rich, in a very uncertain time, I wanted an investment that was likely to hold purchasing power. We hear this argument about gold but gold lacks many of the benefits of residential real estate. For an explanation of long-term real estate valuation see Shiller – Irrational Exuberance.

For what it’s worth, an alternative investment that I considered was buying two large-cap stocks (GE/WMT) with attractive dividend yields. I wasn’t able to achieve my target entry price on the stocks so missed that window.

In addition to an expectation that real estate would hold its real purchasing power, the net yield on real estate is attractive if interest rates fall to very low levels. Real estate offers some income protection against prolonged very low inflation and even lower interest rates. I didn’t expect rates to fall as far as they did but considered “what if.”

Here’s a chart that plots US rates against the post-bubble history in Japan:


The precise numbers aren’t important. What’s useful is to consider a scenario where low-risk assets have yields under 1% for five, or more, years. What type of investments make sense in that environment? For me, high-quality real estate makes sense. There’s a substantial section in my latest book about real estate.

Other investments that make sense are my kids 529 college accounts and low-cost index funds. The 529 program that we use is has a 0.46% expense ratio and is tax-free, or tax-deferred, depending on use of funds. In 2012, I started small, weekly investments in Vanguard funds for my kids. With Vanguard, the index products (VTSAX/VTIAX) have expense ratios of 0.06% and 0.18% respectively. I’ve only used the US fund so far but am considering adding international.

The index funds have yields that are lower than what I earn on real estate but they are far easier (and less costly) to sell. 

My point: inflation can be a risk, or a benefit, to your family finances. When thinking about portfolio strategy, consider how changes in inflation, and interest rates, will impact your life. Be comfortable with every scenario and remember that we are in a highly unusual situation.

Next week I’ll share a case study of using a mortgage to protect your family from unexpected inflation. I think it’s a much more practical strategy than speculating in commodities, like gold.