Tag Archives: decision making

Looking At 50

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unitedIf I followed the path of the majority of my mentors then 50 would see me gearing up for a Big Push. The push might be towards athletics, or business, or a career path that I neglected earlier in my life.

Instead, I find myself asking, “How can I make a lasting difference for my family?”

That’s surprising, based on my younger self, but not surprising if I take the time to learn about the natural progression of men in my situation. So that’s been a clear lesson, the illusion of individual experience. If you can’t see this illusion in yourself then spend some time with a teenager.

Late last year, I had lunch with a young man that works in finance. He lives in Hong Kong. He drives a wonderful Italian sports car. He makes plenty of money. He’s one of the fittest employees in his firm. He’s engaged to a fantastic Chinese-Canadian woman.

It got me thinking.

You see… I was having lunch with a man who was living my former life in Asia.

It was humbling. Humbling because it drove home how I’m prone to fooling myself about success being due to the special nature of myself.

Don’t take the good, or the bad, too seriously. Take time to learn from the many who have walked before us.

Ultimately, all that we will be left with are memories of what we’ve done:

  • taking action that serves the collective
  • being open to those that love us
  • focused time on marriage, family, friends, community

Choose wisely.

When To Review Strategy

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dad_axI’ll start with my answer… now is not the time to change strategy because I know…

  • The more often I change, the greater my opportunity for error and increased costs
  • The more changes I make, the worse I’ll do

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Q2-2015 marked the completion of the five-year plan that I put together at the end of 2008.

When to consider change?

A major life event is a good time to consider change.

  • In 2008, I was faced with unemployment.
  • In 2000, it was a divorce.
  • I’ve seen friends face criminal charges, bankruptcies, health emergencies and deaths.

A crisis can be a sign that, absent change, things are likely to deteriorate. It can also provide a nudge to endure the discomfort of change.

In my case, a high-spending rate combined with unemployment to tip me off that I was heading towards a major problem.

The plan required us to move (twice), establish new careers, achieve a dramatic reduction in spending and change the allocation of 95% of our balance sheet.

I expected the changes to be costly and forecast our balance sheet to decline by 20%. I was wrong. In reality, the balance sheet increased by 2% per annum.

Why?

  • I’m good at cost control – we made changes early, and severely.
  • We maintained exposure to favorable events – things like promotions, bonuses, babies, cheap mortgages, new friends, equity options.
  • Despite my fears, the world tends to improve.

I was also wrong about the price that we would achieve for the assets we sold. On average, we sold 10% under my estimate of “fair value.”

The Endowment Effect shows that we overvalue what we own. It’s valuable knowledge to be reminded that I’m prone to the standard forms of human misjudgment.

These two lessons are important to remember:

  • Things are likely to turn out better than I expect
  • I overvalue what I possess (jobs, assets, habits, the status quo)

I paid close attention to my “good days” since 2008. They were nothing like I expected and have influenced my thinking in how best to spend the next 1,000 days.

Elder, Mentor, Adviser

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foxy_ladyMy youth, my 20s and my 30s were characterized by a lack of charm.

Fortunately, I had some habits that smoothed the waves I left in my wake!

What habits smooth relationships?

  • I’m on time
  • I do what’s asked of me
  • When I can’t do something I tell you
  • I express myself clearly

If we invert those points then we arrive at a list that will ensure you move away from success…

Chronically late, inability to complete simple tasks, no/slow replies and indirect communication.

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About clear communication… it takes trust to have the courage to speak clearly and directly.

It also takes emotional depth to be able to receive honest feedback.

Two things that I’m working on here:

  • Be conscious of my effect on the world
  • Stop when I am triggered and search inwards, rather than attack outwards

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I was chatting with a member of my family council about the best fiduciary we know.

What makes our friend outstanding?

It’s not his capacity to execute, his technical knowledge or his connections => all of these are excellent.

He has three characteristics that are rare to find in a highly competent individual:

  1. The ability to sit, listen and observe
  2. The capacity to entertain points of view that are outside his preference and training
  3. A willingness to inconvenience himself to do the right thing.

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I’ll share with you that my idea of active listening is forcing my mouth shut while I struggle to hold a list of “to do” items in my head. When a gap appears in the conversation, these pour out of me.

Like me, you might be prone to the mistaken belief that you have to fix every thing you touch.

My friend, a world-class non-executive director, is effective by listening, considering alternatives and being open to small acts of assistance.

Beyond Positive Addiction

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rainbowPopular culture is filled with inspirational stories about people leaving the darkness of negative habits by shifting towards a positive addiction.

If you make the change, and awaken the giant within, then you may find a huge source of energy.

With this burst of energy, you will start to attract people as well as “what you think you need.”

This isn’t wishy-washy philosophy. It’s how the world works – positive results flow from positive actions.

Consider a charismatic leader, especially those with a dark backstory, and note their ability to attract what they want.

Students, wealthy clients, groupies, money, notoriety… all of these flowed (on a small scale, thankfully) as I tapped into my positive addictions.

At this point, there is a trap waiting for us.

The trap is thinking that embracing a positive addiction is The Way.

A more accurate description is embracing a positive addiction can be an effective way to shift self-destructive habits.

But what next?

If we’re not careful then we might become a guru of positive addiction!

Which might work, until it doesn’t work.

When life starts to fray, our addiction will remind us that we run the risk of returning to our old life. It might say… you must continue along the path of positive addiction or you’ll slide back towards obesity, sloth and alcoholism!

After 20 years of better choices, I’m starting to realize that my fears don’t fit the facts.

What to do?

Continue the path of self-improvement by releasing the grip of my positive addictions:

  • Competition
  • Vanity
  • Greed
  • External Validation
  • Emotional Pain

Allow myself to consider the alternative of gently letting go of habits that don’t seem to be working any more.

When more ceases to work, consider trying less.

Too Kind Too Generous

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ax_and_bellaHow do you deal with someone telling you that you’re too kind or too generous?

What if the person telling you is your inner voice?!

I wasn’t sure how to handle, so I went for a bike ride to consider my alternatives.

Riding along, I laughed when I realized that people never tell me that I’m too kind to them, only too kind to others.

A little later, I laughed again when I realized that I seem to have everyone fooled. My too-kind-too-generous strategy is solely in my self interest.

So, rather than get grumpy. A better reaction is to share that…

You are a good person.

Remember that my capacity to help another person isn’t limited to them. It’s how I treat you.

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I looked a little deeper and considered the times where I felt that life was giving someone else too much of a good thing.

These feelings are related to the difficulty that I can have with other people’s success and happiness.

I realized my criticism was flowing from a fear that there wasn’t enough for me.

+++

I’ll end with a song that my son learned when he was two-years old.

The song is called Magic Penny and this is my favorite part…

Love is something if you give it away,
Give it away, give it away.
Love is something if you give it away,
You end up having more.

It’s just like a magic penny,
Hold it tight and you won’t have any. 
Lend it, spend it, and you’ll have so many
They’ll roll all over the floor.

My children are excellent teachers.

An Unexpected Teacher – The End of The Little

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ax_fro_yoThe early years of parenting are a blur but two memories persist from the first time I was living with a three-year old.

One memory is hiring a full-time nanny and explaining her job description as “get our oldest out of the house.”

The second memory is trying to generate compassion for our daughter by thinking about how sad I would be if something happened to her.

Now that our middle kid is three, we’re in familiar territory. However, this time it feels different.

I wasn’t able to see what follows until I was taught to look for it.

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We have a mixing bowl that has each of the kids’ names in it.

We draw a name from the bowl and the kid that wins is Kid-of-the-Day.

Kid-of-the-day gets to choose where s/he sits in the car and what shows we watch.

When we drew Bella’s name out of the bowl, my three-year old (Axel) was jumping for joy because it was his sister’s “day”.

The capacity to experience joy for another person’s good fortune.

I’m grateful to be able to see that in my house.

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I don’t meditate about my kids dying anymore but I often think about my own death.

Through my contemplation, I can see the transient nature of my little boy. He’s arrived at the end of being little. The “little” phase is nearly done.

It was awesome.

I miss him before he’s gone.

I’ve been working with that feeling to get a better appreciation of life.

As the bumper sticker says, these are the good-old days.

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When things were very difficult with my eldest, I would assign motive and intent to her behavior.

…she knows what she is doing to me…

In speaking with child development experts, they assured me that it was impossible for a little kid to have intent. Possibly, the kids are picking up on my internal struggles and reflecting them right back at me.

Most likely, my experience is dictated by the turmoil in my own mind.

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One of the most amazing things about three-year olds is their capacity to switch between emotional states (tears – to joy – to tears – to laughter – to tears),

I remember one time my son had me on the edge. It was the second hour of putting him to sleep, I was exhausted and he was making request after request after request…

I was spending considerable energy not acting on my frustration, and feeling like crying, he says… Daddy, I love you.

…and reminded me that we will never regret not acting on our anger.

Handling Criticism with Grace

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2015-03-14 11.37.55

I was dropping my kids at school and overheard a conversation between a parent and teacher.

The parent was running through a shopping list of needs for her little one and explaining how the teachers had been falling short.

As I listened to the parent, I could feel myself digging in on behalf of the school and the teachers.

…don’t you know how long we’ve been doing this

…do you really thing you know better

…does any of this truly matter

Instead, the teacher listened carefully and let the parent talk herself out completely.

She replied,

Those are good ideas and I want to thank you for your patience with us.

Absolute brilliance!

The reply took the energy out of the situation and the parent was grateful that she was heard.

I took the “thank you for your patience” and have been working with it.

I use it with myself – stay calm be patient.

I use it with my family – I am working to improve, thank you for your patience

And, I use it when people offer correction – those are good ideas and I want to thank you for your patience.

 

Intro To Margin Finance

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snow_mtnBDC asked for an example for my post How Leverage Kills.

If you don’t understand debt then assume that the only time it might make sense to borrow is when your 30-year fixed-rate mortgage payment (including taxes & insurance) is less than your cost to rent. Assume that all other forms of debt will hold you back, prolong being a wage slave and reduce your retirement income.

The people that take issue with the generalizations above are probably trying to sell you something, and working on commission.

My family’s only borrowing is a 30-year fixed rate mortgage. Our mortgage payment is 60% of what it would cost us to rent. I made a calculated bet that our mortgage debt would provide a hedge against rental inflation.

Homeownership isn’t necessary for financial freedom. I bought the house because:

  • I have a young family
  • Don’t mind being geographically restricted
  • Live in a great public school district
  • My youngest won’t graduate high school until 2030
  • Our city is likely to experience above average real economic growth
  • I’m in a better part of town

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Let’s assume our investor has $100,000 and owns an asset that yields 2% after expenses ($2,000 net income).

  • Along comes her investment adviser and offers a portfolio loan – rates are low right now so the loan will cost her 3% per annum.
  • Our investor decides to borrow $50,000 and purchase more of the same type of asset.
  • Now she has $150,000 of assets, still yielding 2%, so $3,000 of income each year.
  • The loan is interest only and costs her $1,500 per annum (3% of $50,000).

Where things get wonky is if the asset’s yield disappears — for example if a rental property is vacant — OR — if the capital value drops significantly — for example if a portfolio of stocks falls 50% in a bear market.

Let’s look at the 50% asset value decline.

  • The value of the asset falls from $150,000 to $75,000.
  • The value of the debt stays the same $50,000.
  • Therefore the net equity value falls to $25,000.
  • The net cash flows stay the same $3,000 from the asset, $1,500 interest to pay, $1,500 net after interest.

If you generate enough cash to pay your interest then you can ride out the bear market and wait for asset values to return to pre-crash highs.

However… a common feature of margin lending is the bank can ask for their money back… ….and they have a habit of asking at the worst time.

Sometimes, they don’t ask, under the terms of your loan they have rights to sell you out of your position.

Let’s have a look at what happens if the bank asks for their money back at the bottom of the market.

In that case, you crystallize a 75% equity loss ($100,000 to $25,000). You are left with $25,000, which will be worth $50,000 (earning $1,000 per annum) when the market recovers to pre-crash levels.

If you didn’t borrow, you earn your 2% per annum through the bear market and end up with $100,000 (earning $2,000 per annum) when the market recovers.

Market Moves

The chart shows major bull and bear markets.

Using your own money, a habit of margin finance could wipe your investment out every 10-25 years.

Some risks aren’t worth taking, especially with money that you can’t afford to lose.

So Why Borrow?

In a bull market, it’s tempting to borrow a much higher percentage of the total investment. Hedge funds, and investment banks, can get over 90% leveraged, against shareholders funds (also known as other people’s money).

When you guess right with other people’s money, the “house” will get rich quick. I worked in a business that received 20% of the profits generated.

When you guess wrong, the clients take the losses.

More on leverage in Part Four of my free eBook Live Long & Prosper – specifically pages 46 to 51.

Structuring A Family Pension

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Ax_iglooThree questions for your next family meeting, or your financial adviser:

  1. How long of a retirement should we plan to fund?
  2. As a couple, what is our joint life expectancy?
  3. As a family, how do we invest considering our collective life expectancy?

Today, I’m going to take you into the future of your retirement, your children’s retirement and your grandchildren’s retirement.

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Retirement

If I make it to 63 then my wife will be 55. At that point, there is a 50% chance that at least once of us will last another 31 years. Here’s a calculator that you can use.

It’s worth repeating – as a couple we have a joint life expectancy of 31 years when I reach 63 years old (17 years from now). Today, my wife and I have a joint life expectancy of 47 years.

That’s a heck of a long time for inflation to act on our cost of living.

Inflation of 2.5% for 47 years brings each $10,000 of current expenditure up to $31,917.

In other words, despite being middle aged, our core cost of living is likely to triple across our lifetime.

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Children

The joint life expectancy of my daughters (6 and 2) is 90 years. Their cost of living is going up 8-10x over their lives.

Can I insure against the risk that my surviving children run out of money late in life?

Let’s look at a case study.

At the end of last year, I was considering an expensive vacation. I couldn’t justify spending the money on myself and the calculation that follows is part of the reason.

As a family, we can make the decision to invest $10,000 per annum. There would be no impact on my quality of life.

What could it do for my children?

  • $10,000 per annum, invested for 47 years, 5% rate of return is $1,781,194
  • $1,781,194 invested for an additional 13 years at 5% is $3,358,707
  • Over $3 million in 60 years from redirecting my vacation budget

Let’s talk in 2015 dollars. I have no idea about future inflation, let’s assume 2.5%.

  • The $3.4 million will be worth a lot less in 2075 than today
  • $3,358,707 discounted back to 2015 at 2.5% is $763,379

In case I’ve lost you.

  • The cost is foregoing $10,000 of annual expenditure for the rest of my marriage.
  • The benefit is my survivors share a 30-year retirement income with a current purchasing power of $49,658 per annum.

The payment is calculated with 5% rate of return, over 30 years, with $763,379 starting value.

It’s never “too late” for compounding to work for your family. I’m closing in on 50 and can leave a valuable form of insurance to my children by changing my current habits.

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Grandkids

Run the exact same scenario except I have 85 years to grow the capital.

  • Invest $10,000 per annum for 47 years
  • Roll up for another 38 years (85 years total)
  • Discount back 85 years at 2.5%
  • How much income for the surviving grandkids (in retirement)?

30 years of $90,705 per annum in 2015 dollars ($1.4 million of present value, 5% rate of return).

It’s worth the effort to learn finance and tweak your wealth behaviors.

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This post inspired by Nick Murray’s book, Behavioral Investment Counseling

Link to a google doc that let’s you tinker with my assumptions. Make a copy before editing.

Freedom of Occupation – Choosing Personal Freedom

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Lexi_airportOver the last year, I have been offered attractive opportunities to return to full-time work.

In evaluating the opportunities, I realized the interaction of two variables.

  • The value that we can add to a situation. Call it my “value-added per hour.”
  • My core cost of living.

In the course of my career, I’ve lived the life of an athletic coach as well as an executive. Sometimes I’ve done both at the same time.

An excellent coach, or personal trainer, might net $35 per hour.

A skilled executive will be closer to $500 per hour.

Who has more personal freedom?

When I was younger, I was inclined to believe that more pay results in more freedom.

I’m not sure.

When I think through my pals, the individual who’s daily life most closely resembles my own isn’t who you’d expect. He is a $35 per hour consultant. My friend can live well on $500 per WEEK and has no net assets. He’s created a life where he has freedom of occupation and can say “no” to anyone.

Because of the value-added per hour differential, my buddy works about 25 hours per week. He nets more than his baseline needs. He lives an abundant life, free from financial pressure. He travels internationally. He can work from anywhere and enjoys freedom of location.

What about the executive?

A corporate lifestyle is highly variable, bouncing from 20 to 65+ hours per week. Sleep is often sacrificed and it’s common to spend much of the year nudging health back on track. Vacations are spent immersed in passions that take a back seat to the primacy of career (hobbies, sports, marriage, family).

My point is we all make trades => to get more, of what we think will make us happy, we can be tempted to pay in health, in failed relationships, in reduced freedom and, occasionally, in ethics.

When I speak with highly-paid professionals, they focus on the need for increased assets, and passive income, to attain the freedom they desire.

They ask my help to create a plan that results in freedom.

Freedom to do what?

The freedom to be healthy, to be serene, to be a great spouse, to do my job the right way.

Freedom might be closer than you think.