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.

What I Know But Cannot Prove

sxm_beachI came across a finance blog asking about the limits of statistical proof in the world of investing.

It reminded me of an old surgeon who shared, “Half of what I learned in med school turned out to be wrong.”

So I ask you…

What do YOU know but can’t prove?

You may talk about your faith.

But for me, the lesson runs deeper.

What is the ONE thing of which I can be certain but can’t prove?


I start by asking myself, what did my grandparents believe that we now know is false?

I came up with smoking and trans fats. You’ll probably get a more exciting list!

Anyhow, the lesson isn’t to switch margarine brands…

The lesson is to be skeptical with my own beliefs.

I can be certain that some of what I now know will turn out to be incorrect for my grandchildren.

However, I can’t prove which of my current facts are incorrect.

I can only be certain that some of my knowledge is wrong.

So I should be careful when I find wise people on both sides of an issue.

I might be best served by acting as if they were both right.


This article influenced by Russell: Sceptical Essays (first edition 1928!).

The Lindy Effect is a good way to sort knowledge. The longer an idea lives, the greater its life expectancy.

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.

Should I Own Shares In My Employer?

In the late-90s, I committed half my net worth into an investment scheme sponsored by my employer. The scheme was effectively leveraged 20:1. The deal worked out and was part of how I doubled my net worth within 24 months.

Emboldened by my success, in the early 2000s, I ended up with 100% of my net worth in a startup that was effectively leveraged 30:1. Taking out a home-equity loan, to cover my living expenses, triggered a desire to sell down my exposure.

The second deal worked out OK but it was painful. My returns fluctuated between +100% and -65% per annum. The ride up was fantastic, my net worth swelled 1,500%. The ride down was far less fun. In four months, the company crashed, I was unemployed and I watched 50 years’ living expenses go up in smoke.

So my answer, about owning your employer, is, “it depends.”

Depends on what?

Age – How old are you? What’s the implication of losing everything in the company, including your job? How long will it take you to earn your capital back?

The first time that I “bet the farm” I was 28 years old and able to save five years living expenses for each year I worked.

The money that I lost with the second gamble is gone forever. I’m grateful that I restructured my life to sustain that sort of loss.

Total Net Worth – What is your exposure as a percentage of your net worth? What is your exposure in terms of years living expenses?

Annual Free Cash Generation – Put your exposure in context. Based on the cash that you can save this year, how many years savings are tied up?

ProTip: the free cash generation check is a good way to review personal debts as well as the capital that you have tied up in your home. As our earning/saving potential changes, many of us are more exposed than we realize.

The above is an important cross check. If you’re sixty years old and 10% of your net worth represents ten years worth of savings… then you’re in a very different position from a twenty year old where 30% of net worth might equal six months worth of savings.

Reserves & Undrawn Bank Lines – after you make the investment, what are your liquid reserves and undrawn bank lines? Look at these in terms of gross annual salary, core family cash needs and your family cash flow forecast. How long can you last if everything blows up?

In my case, 50 years of living expenses went up in smoke but I knew that I had five years to figure out what to do.

Not wanting to make my life too easy, I had three kids in that time, which tripled my core cost of living. I didn’t anticipate that shift, but you can.

Contingent Liabilities – Does the investment have the ability to make further cash calls? Housing Associations, home ownership, private equity funds, partially paid shares… all can make cash calls at short notice.

Finally, be ruthlessly honest when you estimate your true exposure:

  • Salary
  • Bonus
  • Vested Equity (Shares & Options)
  • Unvested Equity (Shares & Options)
  • Pension / Retirement Account Exposure
  • Cash that you’ll spend if your employer disappears

The employees of Enron, Arthur Anderson, Lincoln Savings & Loan, and Lehman Brothers experienced a severe shift in less than six months. There are many more stories but it’s human nature to talk more about the boom, than the bust!

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.

Getting Crushed Financially

Market Moves

I love this chart.

Blow it up, print it out and study!

Jerry created the chart to show nearly a century of bull markets but what caught my eye was the nature of the eight bear markets.

  • Duration of 3 to 34 months
  • Scale of loss (peak to trough) of 22 to 84%

If you’re an investor then it’s important to realize that it is perfectly normal that you’ll get crushed once a decade. Knowing that it’s normal won’t make it hurt less, but it might make you realize that your pain is temporary.

Personally, my worst bear market was 2008. It was a doozy.

In the space of six months:

  • my family’s net worth fell 65%
  • I lost my job
  • My dependents doubled
  • I discovered that my (joint & several) partner was involved with fraudulent activity
  • I was exposed to the risk of civil prosecution

Absolutely awful.

I share this story to help you remember that THE world isn’t ending when YOUR world collapses.

Setbacks are part of life and my making it 20 years without a major financial setback was abnormal. In fact, I had several setbacks along the way (15% hits) that I’d forgotten.

Save the chart for a rainy day and I’ll retweet at the next recession.

Less Misery, More Efficiency

It’s been over 1,000 days since I realized that my relationship with email had to change. Not only was my inbox making me miserable, it was consuming my life.

What follows is a summary of how I spent three years changing my workflow and improving my life.

#1 – Reduce the fire hose of inbound flow by:

  • Using inbox-zero techniques
  • Making your default reply not more than two words long. For example, “got it” or “ok” work well. What works even better is my preferred response – “can I delete this message now.” Delete, delete, delete, delete, delete
  • If you’re in management at company that doesn’t use a threaded email client then you should be fired. If you don’t know what I’m talking about then switch yourself, and your company, to gmail.
  • Let others reply for you – wait a day before you dive into mass email threads.
  • Unsubscribe as much as possible – if it’s important then you’ll track it down. Once you unsubscribe to everything, you’ll realized that most of the internet is waste and noise.

Recognize that your subconscious mind is terrified of being out of the loop!

Until you remove it, you won’t see how the noise in your life is ruining your capacity for effective thought AND making you miserable.

If you can’t see it in yourself then look around. Most people are not informed – they are filled with useless, and ever changing, noise.

If you find that describes everyone around you then what makes you think you’re different? This was a powerful, and painful, realization for me. Email, social networks and constant connectivity were making me miserable AND clueless.

Once you’ve created the space to think…

2 – Improve your ability to retain information by:

  • Take one slow breath (in and out) before reading any email that you can’t delete, or unsubscribe.
  • Take two slow breaths before any reply that will extend beyond one line – you’ll find your composition is better.
  • Give the sender what they need and no more.
  • Take one slow breath and re-read every reply before you send it. You’ll be amazed at the number of type-os you catch.
  • Take an honest inventory of your productivity across an entire week. At best, you’ll be productive for three hours per day (broken up into 2-4 segments). Once you realize that you’re spinning your wheels go for a walk.

If you think the above sounds hokey then pay attention to how much you hold your breath when working, driving and waiting in line.

Walking is useful to consider, and compose, your best work.

3 – When you must do your best work:

  • Exercise early
  • Eat a healthy meal
  • Wear earplugs
  • Close the door
  • Shut the internet browser
  • Write it out by hand
  • Review when you transcribe it into your computer

Let’s review…

A – reduce the fire hose of inbound to create space for thoughts that matter and reduce the misery you’re experiencing with email

B – stop holding your breath and triggering irritation with your current habits

C – with a less cluttered mind, create a routine for producing high-quality work

The above will make you FAR more happy with your work life and this will make you a better employee, spouse, parent and person.

Living behind a screen, and the back-and-forth nature of email, reinforces habits of inefficiency. Once you start to increase your own free time, be proactive about not wasting other people’s time.

  • Schedule a telephone call for any email that will require more than three replies
  • When you set a call, specify two choices and a preference
  • In advance, send a written agenda
  • Take notes
  • Write (or review) a summary of the call

What I tell myself:

  • It’s incredibly hard to say no and reduce the background noise in our lives.
  • Keep chipping away.
  • Change is difficult but worth it.

Start to pay attention how your current work habits are making you feel.

Even if you are the only person that changes, it’s still worth it.

Be grateful that you had the courage to change!

Antifragile Thinking – Nothing and Waiting

How can I use volatility to improve my investment decisions?

When I read Taleb, I’m tempted to go for the big bet using options with skewed payoffs. I think the real lesson is more straightforward than using out-of-the-money options, which is good because I’m not trained in derivatives pricing!

I have a favorite game that I play with any purchase. Determine value before I find out price. In the context of real estate (or buying companies), value the asset before you find out the asking price.

In 2009, I saw a “for sale” sign come up in my neighborhood. I played my game and priced the property in my head. Unfortunately, the property was listed at 25% over my valuation. So nothing happened, I waited, watched the property and the sign came down.

In 2010, the sign came back up and I checked the price. It was listed at a 40% reduction. Yay! I immediately put in an offer slightly below listing price. The owner countered my offer and we agreed a deal that everyone was happy with.

In 2009, I followed my investment mantras:

  • I don’t need to do a deal, I need to do a good deal
  • Let volatility do its work and create a situation to buy at an attractive price
  • My work is to build core capital, educate myself and be patient

My family needs one deal like the above per decade. Putting that in context, If the family is changing strategy more than one month in a hundred then we might be taking too much action. An “active” strategy would be anything that requires strategic change more than one month in fifty.

I don’t need advisers that earn fees when I take action. I need systems that prevent me from tinkering for no gain.

So the game is: deciding what I want, educating myself and waiting. Eventually, volatility will bring a great opportunity my way – at that point, I need to be willing to commit in size.

I tell my wife that was my strategy with our marriage – I also admit that I got lucky with her being better than I imagined. Elite swimmers have hidden options (loyalty, persistence, patience, internal motivation) and being OK with long term incremental progress.

To cope with the amount of “no action” inherent in the above strategy, I work on case studies, study history and, especially in relationships, improve myself.

One deal per decade.

Antifragile Thinking – New Old Ancient Nature

How can we use volatility to improve our thinking?

Rank the incoming information according to age – New Old Ancient Nature – if in doubt then choose the older option.

Remember that time will kill most ideas and concepts. Be willing to miss out on the latest/greatest – pay attention to concepts that are proven by time.

I coach a surgeon and his Dad was also a doctor. Now retired, the older doctor noted that “everything I learned in med school turned out to be incorrect.” Now clearly, everything wasn’t wrong! I would love to ask the doc, out of everything you learned, what was right?

We might get a list like:

  • Hygiene – do it
  • Blood pressure as leading indicator of a need for lifestyle change
  • Smoking – avoid it

Thinking back to my own education (economics and finance). What proved to be correct?

  • Track the cash
  • Interest rate trends
  • Mean reversion
  • Compounding

Another field that interests is endurance sport:

  • Consistency
  • Variable Stimuli
  • Strength and Stamina
  • Specific Preparation


  • Restrict the “new” – refined, processed, modified, engineered
  • Focus on the “old”  – ingredients your great-grandmother could have eaten

In a field that interests you, what are the three concepts that have stood the test of time? Focus on those concepts.

As you discover the power of this concept, you’ll benefit from reducing the fire hose of noise that reaches you daily via the media, advertising and social networks. These sources of info are “new” and. therefore, useless at best. More likely, they are misleading and reduce the quality of our thinking.

To improve my thinking, I need less noise in my head. “Not-thought” is what makes “good thought” clear to me.

Turning this on it’s head… if I can increase the amount of “no-thought” then the depth of my insight will increase and I’ll be able to see the useful info contained in what gets through. Implications:

  • Reduce email – a favorite from Taleb’s AMA is limit to 15 messages per day
  • Restrict media and eliminate the most noisy sources – television, chat forums, Facebook, reality TV, talk radio
  • Schedule breaks to settle mind (exercise, mediation)
  • Replace mental habits that clutter thinking
    • envy replaced by being happy for others
    • over-correction replaced by finding the good
    • Tinkering replaced by letting it ride
    • anger/fear/sorrow replaced by gratitude

I find that I don’t need to be charitable for the above to work. 

“Thank God, I’m free to act differently than that person.” triggers gratitude and let’s me move on.

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.