Tag Archives: business

The Money Value of Time – Personal Pricing – What Am I Worth

Posted on by

This is a useful calculation for time management.

Print this page out, write your answers beside mine, don’t think too much!

Annually, I make the calculation at the level of Business, Family, Household and myself.

Today, I share the calculations for my consulting business.

Start with time:

  • How many weeks a year do you want to work?
  • How many days a week?
  • How many hours per day?

Weeks * Days * Hours = Billable Hours

That’s the time that you have in a year to generate revenue.

What should you charge per billable hour?

Desired Net Income + Overheads = Gross Revenue Req’d

Gross Revenue Required / Billable Hours = Rate Per Hour

A case study from my 40s to illustrate:

Screenshot 2014-12-16 09.13.06

The first column was my 2009 goal for my athletic consulting business.

  • Generate $5,000 per month net cash contribution to my family
  • One week per quarter spent training alongside the team
  • Four hours of focused work per day
  • One day off per week

The second column was reality, and it was a good life.

  • Work every day
  • Discover I can only be productive for three hours per day
  • Take two weeks off and return to 1,500 email messages – realize that I can’t “bill” for my email inefficiencies!

The third column is a goal for my 50th birthday.

My goal either seems small, or large, depending on where you’re at.

It helps that I work for people that “bill” at large multiples of my target.

  1. Understand: Your average billing rate is your new minimum
  2. Vow: I will stop doing low-value work
  3. Consider: Where can I deliver 2x my billing target in value added

Can I be 3x more efficient than a $35 per hour coach? Yes. The two-year transition was painful but I got there.

However… when I arrived at the middle column, I needed to make a decision moving left (for a little more time) or moving right (for way more time).

Increasing my value added per hour requires more than simply guiding exercise. Shifting towards far greater value added makes sense.

How much of your time is spent on what brings satisfaction to your life?

The table below came from a recent coaching clinic – I asked the coaches why they coached.

why_coach

In business, family, love and parenthood…

What’s your why?

Share experiences with the people that love me.

Ten Lessons From The Great Recession

Posted on by

pawneeFor my family, September 2014 marked the the end of the Great Recession, which (for us) had started in October 2008. Navigating the recession took a year longer than my worst case assumption of five years.

I wanted to share my lessons as I can feel the temptation to ignore them returning!

#1 – You can’t know your partners – I’ve lived with friends for up to six months at a time and had no idea about their personal situation – my favorite quote here is one about knowing your marriage… “if you’re lucky then you might know 50% of your marriage, YOUR half.”

#2 – Burn rate kills – Between October 2008 and March 2009, I lost 100% of my net income. Without significant changes, I knew the loss of income would screw up our family finances. I would have really freaked if I knew that interest rates were going to zero! Staying variable enabled us to cut 90% of business expenses and 50% of household expenses – these were gone by April 2009. The lesson here is to be very careful of building up long-term financial commitments.

#3 – Real Estate, even prime, is only liquid in a bull market – there is an urban myth that real estate is a low volatility asset class. Until 2009, there were many national markets that had NEVER gone down! I will not be able to time the market – I should always be willing to sell early – future purchases should only be made for assets that the family is willing to hold for more than 25 years.

#4 – For my core capital, my benchmark return is zero – there is a portion of my family balance sheet that would be very painful to lose. Don’t risk capital for tiny yield – examples here are constantly pedaled by brokers (foreign currency deposits, derivative-linked investments, highly-leveraged investment schemes, alternative assets, growth stocks).

#5 – I’m a better man when I’m constrained – This applies in all areas of my life. At the peak of the boom there was tremendous ego and waste in my life. I’m very fortunate that life gave me a kick in the butt and I had to make choices. I don’t have the emotional maturity to be unconstrained in action, maybe someday!

#6 – Create plans B, C and D – ring fence different aspects of your life, and finances – NEVER guarantee another person’s obligations (see #1 above). In 2014, my life has a series of fallback plans to deal with potential setbacks – I spent the recession taking steps to protect myself, my wife, my kids, and my family.

#7 – Investment properties should avoid furnished rentals, anything with a material housing association payment, and anything with a cost to hold (vacant) that’s greater than long term interest rates – I made good money by investing in real estate through the bottom but would have done better by focusing on properties with a lower cost to hold.

#8 – low-cost passive index investing gives me what I need. The best gamblers I know take a profit-share on other people’s money and use non-recourse leverage.

#9 – stop trying to win – I misallocate energy, money and time when I forget that a simple life is a good life. Reaching for external success and excessive financial wealth leads to poor decisions and choices. I make my best choices when I measure wealth in terms of health, controlling my schedule and sharing time with people I love.

#10 – don’t capitalize luxury expenditure – particularly, second homes and depreciable assets – stay variable!

My errors and misjudgments persist across cultures and generations!

Choose Wisely

 

Better Thinking About Taxes

Posted on by

Taxation is a topic that’s guaranteed to tip most people over the edge of rational thought.

Let’s see if I can help you make better decisions by slowing down your thinking.

The first thing you need to do is add up all the taxes that you’ve paid in the last year. Your total might include:

  • Federal, state and city income tax
  • Payroll taxes, worker’s compensation premiums and unemployment insurance contributions
  • State, county and city sales and use taxes
  • Real estate taxes and rates
  • Transfer taxes and stamp duties
  • Value-added tax (for my non-American friends)

The first step is painful. It’s a big number for almost everyone.

In fact, this step alone creates a level of pain that drives many smart people to over-react. Wind farm investments, geographic relocation and massive personal overheads are often reactions to a sense of injustice with regard to tax policy.

When I moved to Colorado, I was surprised to discover that it’s a low-cost place to live. In fact, it’s a far, far cheaper to live here than London, Hong Kong or Bermuda – all locations where I’ve paid significant taxes.

Taxes are best considered in light of our total cost of living. The cost of which includes education, housing and healthcare.

At the end of 2000, I left the low-tax environment of Hong Kong and ended up in New Zealand. In New Zealand, my marginal tax rate increased significantly but my core cost of living dropped by 95%.

Years later, working in Bermuda, I spent a small fortune on travel and living expenses to keep my average tax rate down. Eventually, I did the calculation that I’m sharing in this article and had an “a-ha” moment.

Today, in Boulder, my total tax bill (all of the bullets above) is roughly equal to the cost of a single private education in London, Hong Kong or Bermuda. With three kids, the life of an expatriate would be expensive. In fact, I’d have to work so much, I’d rarely see my family.

While an American city with a good school district is a low-cost location – even better was New Zealand. Moving to NZ, I lived with roommates, was covered by single-payer health care and worked for European / North American clients. I read about young people doing similar arbitrage with a bases in Asia, South America or small North American towns.

If you’re motivated then you can find opportunities to optimize your cost of living. Rather than worrying about your marginal tax rate, focus on the best location for your current life situation.

++

As for the psychological impact of a tax increase, I often let my emotions get the better of me.

To understand your true exposure to tax rates, take your total tax bill and divide it by your net worth. That percentage is the true “take” of taxes from your family.

For example, consider a young woman earning $70,000 per annum. Her total taxes are  $17,500 and her net worth is $40,000. With an average tax rate of 25% (17,500/70,000), she’s paying 44% of net worth in taxes each year (17,500/40,000). She has a significant exposure to tax increases.

Compare the above to an older woman who’s been saving for many years. Her gross income is $165,000, her total tax payments are $50,000 and her net worth is $3.5 million. Despite having a far larger tax bill, her taxes represent 1.4% of her net worth. Her exposure to rising tax rates has been limited by decades of living below her means.

Smart savers free their families from exposure to tax policy.

++

Takeaway points:

  1. Taxes are a component of living in a civilized society
  2. Analyze your cost of living in the largest possible context
  3. Healthcare, childcare, education, housing and real estate expenses must be incorporated in any discussion of taxation
  4. To understand your true exposure, consider taxes (and all other spending) relative to your family net asset statement

Should I Own Shares In My Employer?

Posted on by

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!

My Financial Domain and Legacy

Posted on by

You can find my Part One here and Paul’s thoughts on Part One here.

#3 – What are the other things in life that are critically important to me, and for which I will be financially responsible?

This is a great question.

Be sure to run your answer by your therapist.

Why?

Because people that are high-achievers and good savers tend to take on responsibilities outside of their domain. I’ve watched families make themselves miserable by taking ownership of the financial wellbeing of adult relatives.

What’s my financial domain? Myself, my spouse and my minor children.

Watching people that I love struggle is no fun at all. However, I respect the people that had the courage to let me suffer as a result of my own choices.

#4 – What are the risks in the universe which may prevent me from fulfilling my responsibilities to myself and to others, and how might I defend against them or at least mitigate their impact?

Another great question!

Humans are lousy at assessing risk and statistics. An excellent investment you can make is reading Taleb’s Antifragile – please don’t use the book as motivation to set up a personal derivatives strategy!

Pro Tip: use insurance products to insure an identifiable risk, not make investments.

#5 – If I have accumulated wealth that exceeds all of the above requirements, how might I best utilize that wealth to derive the most personal satisfaction available from life?

It’s a shame that it takes so much money for people to realize they had won before they even started.

Value your time, more than your money.

Diversify your time towards helping people that have less of what you think you need. Specifically, teach what you’ve learned.

Improve your family’s human capital, starting with your health, your manners and your gratitude to the society that enabled your success. Start with small, simple changes:

  • Physical movement AM and PM
  • Get strong
  • Eat real food
  • Be a little more kind
  • Be a little more fun
  • Optimize your health markers via diet and exercise (blood pressure, cholesterol, blood glucose, body composition)

If you are a self-made person then love the people closest to you by ensuring that they have the opportunity to prove their self-worth via their own initiative and through their own passions. Tell your kids when they impress you.

Be willing to constrain yourself to create harmony within your family and community.

Laugh out loud.

Getting Crushed Financially

Posted on by

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.

Vanity And Victory

Posted on by

Kids have an amazing capacity to reflect and absorb the world around them.

I can see this ability, most clearly, in how they pick up the phobias and idiosyncrasies my spouse. With regard to my own traits, I see my strengths reflecting in the kids. By the way, my wife sees the same thing – just reversed.

There is a great scene in the movie, Parenthood, where Steve Martin exclaims, “I just can’t figure out where he gets this obsessive behavior from!” I think about that quote a lot and smile at myself. I own obsession in our household.

As an elite athlete, I valued physical power, domination and winning. You can see these characteristics expressed in other fields (finance, business, perhaps the military). These values have strengths and weaknesses. For a young person, they help you get a tremendous amount of work done (good) but they can leave you blind to the feelings of others (less good). Lacking empathy isn’t always a bad thing, say if you’re combat infantry. However, when that value flows up the organization, it can lead to harassment and corruption.

Over the last two years, I saw the risk of maintaining my values of vanity and victory. I became aware of corruption and scandal throughout the lives of my peers. We always tell ourselves that we’re different but the evidence was so overwhelming that I had to admit that I was fooling myself. Elite performance is a high risk field for ethical strength.

Most athletes sort the world into fast/slow and fit/fat. This differs from business, expressed as rich/poor and beautiful/ugly.

I get resistance when I point these splits out of people (they are obvious in my own thinking). If you can’t see them then listen to other people talk about individuals with mixed characteristics. For example, fast/fat and slow/fit create confusion in athletic populations.

Back to the start of this piece – my children learn little from what I say but they learn most everything from what I do. Bringing them up in a household that prizes winning, and looking good, above all else might not be the best way to play it. They’re going to get plenty of that in the local Boulder community.

Widening the net, consider an individual that achieved the difficult task of creating a lot of wealth. If your #1 value (expressed in peer admiration) is wealth then you are setting up a conflict with your kids, who crave your admiration. If they reject you then they might be protecting their self-image from realizing that they can never be successful on the terms you prize. Look outside your family for examples, they are easy to see.

Millionaire, Champion, CEO… these are difficult to achieve – you deserve respect for the work required to achieve.

  • Achievement become identity
  • Identity becomes values
  • Values become skewed
  1. Remember that the value lies in the work, not the achievement
  2. Goodness requires neither beauty nor money
  3. Listen to how your friends speak about others
  4. Consider if you may need to adjust your friends

As always, I’m talking to myself, not you.

Taking Money Off The Table

Posted on by

With markets high and interest rates creeping up, some people might be thinking about selling portions of their holdings.

I’ve had the opportunity to “cash out” on more than one occasion. Looking back, I completely missed how freakishly lucky I was to have the opportunity to choose.

One time I didn’t take the money, the other time I did. Both decisions worked out OK so I’ll share my process.

+++

First, when I make a buy/sell decision I try to value the asset independently as well as consider what the situation is worth to me.

For example, my current business (consulting) is worth far more to me than it would be to a third party. Unique benefits are: gives me a voice, allows me to get paid for what I like to do, allowances for vehicles/home office, gives me an opportunity to help my local community, brings me close to my friends.

Always consider the non-financial benefits of your current situation – these are hidden to third parties, who rarely give you value for them.

+++

The biggest decision financial decision of my life was when I chose to hand back a partnership in a private equity firm. I was 31 years old and, while the opportunity cost was huge, I figured that I could get back to my old situation if I was willing to take a pay cut.

Again, I completely missed my extreme good fortune to be able to choose. Not surprisingly, my peers and family thought I was nuts.

Take Home Point: my downside position was my old life back with less money coming in.

Take Home Point: once you get five years living expenses off the table, it gives you flexibility in an uncertain world. I achieved that goal early in my first career and it gave me freedom to take risks. With this goal, the toughest part is lifestyle humility. I was lucky to start my career working for a very humble man.

Implications of Failure/Black Swans: Getting things wrong at 31 wouldn’t have been that big a deal as my fall back plan was asking for my old job back. Consider your fallback plan.

+++

Roll forward five years:

I was out of the PE business for five years, recently married and co-founder of a company that did property development. In the intervening five years, I co-founded a fund management business that was doing well.

Age – 36 years old, still young but now with a wife and new life that wouldn’t make it easy to return to Private Equity.

Net Worth – illiquid with a personal g’tee into the General Partner of the fund management company. I had placed myself in a position where I could lose more than my total net worth. Not smart!

Implications of failure/black swans – personal bankruptcy, loss of personal freedom, starting from scratch, return to big city living – highly unattractive, especially given my love of inexpensive living (cycling, forests, reading, writing).

I told my business partner that I wanted to sell out and would accept any terms that worked for him. He bought me out over three years at a 50% discount to third party offers we received. He wanted control and the price was good enough.

In this case the intangibles (control) made the deal highly attractive to the buyer. I didn’t get wrapped up in fair value, what I needed was a deal that was “good enough.” When you are selling to the operating management, you are very likely to take a discount on fair value.

+++

From twenty-five years of spending time with the 0.001%, here is what I’ve noticed about money and wealth.

A – having 5 years living expenses, in cash, gives tremendous flexibility. Whatever that # is for you, it represents the highest utility aspect of your financial life. Nobody can make you do something you don’t want to do when you are able to hit the road and know that you’re OK for a long while. This is huge.

B – if you’ve built a successful business then you’ll never be out of work unless you are permanently disabled (insure that risk now). That said, consider if you are comfortable with the worst case scenario. Reading Taleb saved me from personal bankruptcy.

C – depending on your age, there is a magic number where you will be able to survive without working for the rest of your life. Most the wealthy folks that I know (call them the 2%) scale their lifestyle so they never get there. They don’t even get to the enviable position of being able to work at what they love.

Keep it real. Spending time with people that have 5-10% of your net worth is a smart use of your time.

With fitness, and finances, most people aspire to spend time with people that have FAR MORE than them. This screws you up.

If you want to feel good about your life then teach people that have less.

A couple weeks each year I live like I did when I was a student – I look forward to these weeks as they keep me grounded and get me OK with personal downside scenarios.

Small businesses have limited exit windows. Part of what pushed me to sell was a funding environment that seemed crazy to me. Separate from my views on valuation, I knew that the easy money wouldn’t last. I got the timing wrong on the contraction but it came eventually.

Mentors and Peers

Posted on by

How can I stack the deck in favor of being a good guy?

First, I try as much as possible to get positive influences to visit me.

Second, I’m willing to travel to hang out with people that are what I’d like to become. Back when I was an elite athlete, this drove my travel schedule. These days I travel less but it remains a big chunk of my year.

My family allocates 14 weeks per annum for my travel.

  • 4 weeks of that is my wife and me
  • 2 weeks is used for continuing education
  • 8 weeks is for my own uses – these days split between non-Boulder family visits and personal trips, mainly to ride.

My daughter joins me for two weeks of the above and we do another two weeks worth of in-state travel together.

Pulling it together, I have a job description that gives me 16 weeks per annum of variation from my normal routine.

Before my daughter was 2 years old, this allocation would roll between 30 and 40 weeks per annum. As I’ve simplified my life, and released my expectations for triathlon greatness, I feel more free with less travel.

In considering a trip, I ask myself three questions…

  1. Are the people that I will see infused with goodness?
  2. How do the people make me feel?
  3. If I turned out like these folks, would I be ok with it?

There are plenty of people, and companies, who pass the test. Make a note when you meet these people and keep them in your life. 

While its tempting to vacation in, say, Vegas, we are more likely to generate success by keeping the goodness in our lives. For the key relationships (bosses, mentors, clients, peers) visiting on their home ground will broaden your understanding, and keep you humble with your capacity to predict. The on-the-ground situation is nearly always different than I imagine.

The focus on “the good” is an ethical litmus test. I’ve caught myself valuing winning over kindness, an occupational hazard if you’ve spent time in a field (sport) that values relative performance. I’m also prone to errors of judgement due to wealth and beauty.

Choose Wisely.

What’s Your Gifting Strategy

Posted on by

I love riding my bike with friends. To create more opportunities for that to happen, I give away a lot of cycling gear each year. When my friends wear the gear, I hope they think of me – even if they don’t think of me, it makes me happy to give gear away.

Here’s what I’ve learned about gifting…

It is an essential and effective way to influence behavior.

At some level, most of us feel that we deserve gifts. I need to be cautious about reinforcing entitlement in recipients.

The best gifts are items we can use while doing a favorite activity. An athlete-buddy of mine gave me a set of nordic ski underwear and gloves. I think she wanted me to learn to ski! I use her gift weekly and think about what a considerate person she is. The shirt makes me so happy (it’s my favorite color) that I wear it as casual wear. It’s not surprising that my pal scored a homerun with her gift, she’s a psychiatrist.

Gift frequency is better than size – for example 4 gifts of $250 generates more happiness than one gift of $1000. However, see habituation below.

Random is better than scheduled – I like random gifts. If I see something somebody will like, I get it and send it over to them.

Value is highest at point of award, not receipt – important to remember this for children, employees, heirs and other important people that you gift towards.

Consider my piece last week about Class Dojo, earning the ten points my daughter needs for a treat gives her more pleasure than the treat itself.

An example from the corporate world… At the private equity firm where I worked, the partners would award annual profit sharing points – there were 10,000 points available for each investment fund and we’d earn our share of 1,000 points annually. This system spread the allocation across many years, rather than having it back-end loaded when the investments were sold.

Things that people will use often, and associate with you are excellent – think about my friend’s gift of a shirt and gloves. To give me the same amount of pleasure she would have had to send me $5,000! A well-selected gift is worth far more than its monetary value.

Gifting to people’s children, ie via education, is deeply appreciated – parents have a sense of obligation towards their kids.

People (employees, spouses, kids, yourself) adapt very quickly to changes in standard of living, and forget how they got there. I avoid gifts that eliminate the self-esteem that comes from taking care of one’s self.

Be wary of reinforcing feelings of entitlement – for example, beautiful people and skilled athletes are trained that the world will take care of them. As they age, they experience pain when their gifts of chance (beauty and athletic prowess) fade.

+++

Some people gift publicly for reasons of family, or corporate, strategy. Others prefer to gift anonymously. Considerations:

  • Be wary of the motivation of recognition.
  • If you ask your pals to support your causes then you will feel an overwhelming need to reciprocate (and you might not feel the same desire to support their causes). Of course, remember that it is OK to say “no.”
  • Most of us have small budgets for gifting – pay particular attention to situations where a little time and money can have a big impact.

If you need more of something then have a strategy to gift some of what you need.