Last week, Mark Spitznagel’s book came out (Safe Haven). Don’t expect any specific strategies for constructing Safe Haven insurance. Do expect to (re)learn useful concepts:
- a reminder of the central role of time in our lives – the capacity to sustain action, cognizant of time, is extremely rare
- a reminder that we think in terms of arithmetic averages but experience geometric averages (COVID, portfolio compounding, fitness, nutrition, body composition)
- a reminder that downward moves (in %age terms) have the same impact, regardless of their position in the time series – the counter to this => absolute dollar losses are best taken later in the time series (down $100,000 wipes me out at 25 y.o. – not so at 60) // by the way, creating negative net worth early (via education loans) is a very nasty geometric headwind.
- a reminder to consider the cost of your insurance strategy, including the decision not to insure. Health, accidents, portfolios, relationships, nutrition => “insurance” comes in many forms.
Also some great parables/examples to help explain mathematical concepts that I’d previously failed to grasp, most importantly, the negative waterfall of financial ruin in a geometric environment.
Related to geometric returns, some useful illustrations of how/when diversification fails, despite its enduring appeal.
Finally, using Eternal Return when assessing risk. With any important choices assume you’ll be stuck repeating that choice over-and-over. I’m not sure I would have been capable of applying this advice as a young man. At 52, my life continues to benefit from this mindset (health, accidents, portfolios, relationships, nutrition…).
Today, I want you to think about the past, present and future.
Specifically, I want you to look backwards 10-15 years, as well as forwards 10-15 years. This will give you a 20-30 year time span in which to consider family strategy.
We call 20-30 years a generation. For family leaders, it’s the shortest period we should be considering. Let me illustrate:
- 2004 – met my wife
- 2008 – birth of first child
- 2032 – youngest child graduates high school
- 2037 – youngest child self-sufficient financially
For our family finances, a generation will be closer to 40 years than 20.
Act with 25+ year time horizons => the Eternal Return is a useful mindset for multigenerational family systems.
Family Earning Capacity Over Time
The biggest change of the last 15 years, for us, has been the quasi-retirement of the two largest earners in our family system. Looking forward 15 years, the biggest change will be the addition of new earners into our family system.
The shift in earning capacity every 30 years, or so.
If you are the prime earner, today, then here is a question for you. Does your family system have the assets, earning power and desire to continue to run the overheads you have built over the last five years?
Current choices can create a “geometric” headwind for the next generation.
Family Risk Management Over Time
The demographic that seems to worry the most about financial risk is the Top 2%. Makes sense, they own most of the assets and, therefore, have the most to lose.
The easiest way to manage family financial risk is to create a cash flow statement with many different inflows, while having the capacity to painlessly chop outflows. I’ve been working on this for 20+ years, covering fixed overhead categories with a mix of inflows.
The option to shrink cash spending is valuable. Specifically, looking at your cash flow statement and seeing how much of it you could chop, at will.
For example, there are excellent reasons to borrow right now (inflation hedge, low nominal rates, negative real rates). However, the costs and negative-optionality of debt are hidden and difficult to price – particularly in a near-zero rate environment.
- What is the correct way to price the ability for a lender, or my fixed overheads, to force me out at the bottom?
- How do I price the capacity to invest during the next credit crisis?
- What’s it worth to not have a boss?
- How much is a lack of financial stress worth?
In my memory, all the remains from the 2008/2009 crisis is a note I wrote to myself to NEVER DO THAT AGAIN. Ten years along, there is no “pain scar” from the stress I endured.
With our next generation a decade out from starting to earn, we’re debt free, and happy to be there. It’s worth more than I can prove mathematically. I do not have the capacity to think in terms of negative optionality. I can’t price ruin.
I’ll finish with another note I wrote to myself:
Moderation is easier when the prime directive is simply staying in the game.
This applies to my appetite for risk, further wealth, spending choices and personal fitness => interestingly, my greed focuses on various forms of external winning, while my quality of experience is internal.