Family Financial Structuring

Following on from my Estate Planning Docs post.

Trust vehicles can be useful to your family and I will illustrate with a couple of stories.

First thing to remember => trusts work best if you set them up long before you “need” them.


Grantor Trust

Part One: Around the time I turned 40, I found myself in a situation where I had joint & several liability with a business partner who’d made poor choices. As fate would have it, these choices were made inside an insolvent group with over $100 million of borrowings.

Now, the banks were not going to be getting their money back by suing me but (even the remote possibility of) being wiped out late in life was highly unattractive.

Part Two: Long time readers will remember that I used to do bike-focused training camps with top age-group athletes. I would ride, on open roads, with doctors and CEOs who were completely exhausted. If an athlete was killed, or permanently disabled, then it would be easy to prove a large financial cost to their family.

As a business, we dealt with this risk through waivers, event-specific insurance and a family-level umbrella insurance policy.

When I added up the cost/time/worry of this approach it was expensive, even more so once I had my own family to protect.


Take the two parts together => I was working in two fields. The first field was similar to being a director/fiduciary of a company. The second field is similar to being a professional exposed to allegations of malpractice.

One day, I was talking to a tax accountant about what was going on in my life, and the changes that were expected in Estate Taxation. He recommended I speak with a local trust attorney.

An initial meeting showed me that the cost to set up a new structure would be the same as one year’s insurance bill. Because I have the skills to run the fiduciary aspects, the ongoing cost would be a fraction of what I was paying my insurance company.

Step One was setting up something called an Intentionally Defective Grantor Trust. From a layman’s perspective, I put my share of my house and rental property into a trust that benefits my spouse and kids. I retain the tax liability for the trust, for my life.

From my point of view, the main asset I am left with is my earning capacity, balanced against future tax liabilities. I’m a much less attractive target to any potential litigant.

From my family’s point of view, the trust is similar to an annuity, tied to my life. When I die, they can sell assets and/or move into a small rental property, while living off the rental income produced by the larger rental property.

The specifics are technical, there’s a bunch of tax considerations and you should take expert local advice.

This change gave me a more secure feeling than the insurance policies.

Over time, I exited the disaster-prone aspects of my life and that helped too.


Irrevocable Family Trust

I’ll illustrate with a recent example – my brother-in-law died and his balance sheet will flow into my wife’s family.

What follows isn’t what is going to happen, but it could have => check with an expert in your jurisdiction if this seems useful.

Here’s a story… assume Andy had a brother called “Dude” (he didn’t).

Andy had planned ahead and wanted to leave assets to Dude. However, Dude didn’t need the money, or Andy didn’t like Dude’s wife, or any number of reasons Andy might not want to support Dude’s personal balance sheet.

So Andy set up an Irrevocable Trust. Let’s call it The Dude’s Trust => Dude, and Dude’s descendants are the beneficiaries.

Andy then drafted his will, or his Living Trust, to leave everything to Dude, but gave Dude a specific power of appointment to nominate The Dude’s Trust in his place.

Before Andy dies, he would also have the ability to make gifts to The Dude’s Trust.

Did you see what happened? Andy was able to achieve what he wanted => money to Dude. Dude is left with a choice to inherit directly, or into a family trust.

In a world with an unknowable future, this is a valuable option.


The current Estate Tax Threshold is $11.58 million per individual, double for married couples. I’m far, far below that threshold.

However, that limit sunsets in 2025 and who knows what tax regime will be in place when I turn 75 (some time after 2040), or beyond 2080 when my kids age up.

I can imagine we shift to a regime I’ve worked with outside the US => deemed sale at death, zero personal exemption, no step-up in basis, the estate pays capital gains tax and the net flows to the beneficiaries of the estate. It’s simple and I like tax simplification.

In that scenario, trusts that were established prior to the change in rules could be grandfathered, particularly if they already own assets. To get around assets sitting in a trust “forever,” the IRS might create a rule for the deemed sale of trust assets, this rule exists in jurisdictions outside the US.

Even if everything stays the same… given the asset protection benefits of a trust, and the ability to “finance” the structure through reduced insurance payments, it made sense for my family.


This is not legal, tax or accounting advice – seek local experts.

Combination article, with chart, from 2013 is here.

COVID Finances

Local fires make for dramatic sunsets. This was last night at swim drop.

What strikes me most about COVID is how little we’ve been asked to do.

For those of us who avoided unemployment:

  • Stay at home
  • Wear a mask
  • Spend a lot of time with our children

I embraced all three, eventually.

Seven months in, our youngest can run her home school:

  • Print daily schedule
  • Follow links to online classes
  • Turn in her work
  • Make lunch and snacks

It’s not ideal but it’s good enough given the underlying reality.

An interesting part of the underlying reality is how well the top of tier of our society has been doing.

The noise of the election has been drowning out this story.


2 out of 3 kids returned to in-person learning on Tuesday and I hit the road for a day trip to the Collegiate Peaks. COVID has enabled me to feel grateful for things that appeared unreasonable at the start of 2020.

I made three financial decisions this year.

  • Sale & leaseback of my house (January)
  • Roll two years cash flow from bonds to equities (March 18-24)
  • Ski local, reallocate ski money into a new car (Q4)

Similar to 2009-2012, I expected to do a lot more.

However, I’ve done enough. Enough to set up the next decade and enable me to focus on what matters.

That’s a lesson.

If you’re focused on “what matters” then there’s not going to be many decisions to make. Most of your focus is going to be on the day to day (exercise, family, admin, relationships, marriage).

If, like me, you are someone who likes getting stuff completed then you’ll do well to create an outlet (other than churning your portfolio) for this aspect of your personality. Otherwise, you’re going to run up a lot of expenses, pay excessive fees/taxes and greatly increase your chance for unforced errors.

In your larger life, if you don’t give yourself something useful to do then politics, social media and petty pursuits will fill your time.

I need to watch out for these distractions => they bring out of the worst aspects of my personality.

Pay attention to who, and what, brings out your best.


The best investment I made this year was the month I spent weaning myself off social media.

It’s difficult to see the net negative return of Facebook/Instagram until you are outside of their feedback loops.

At its core, Facebook makes it easier for bullshit to reach me.

For others, Facebook makes it easy to argue.

For all of us, the algorithms reinforce confirmation bias and reduce our ability to think clearly.

The algorithms are everywhere – they live in every web interaction we have.

Instagram stimulated my desire to buy stuff and reduced my satisfaction with who I am.

Both platforms are pleasurable but what’s the source of the pleasure? The source is external validation on appearances.

Far more powerful is an internal validation for the actions I take, daily, for myself and my family.

True power is the capacity to create a feeling of goodness for the actions you take, daily, in your own life.


My biggest fan

What was your biggest problem of 1, 5 and 10 years ago?

Can you even remember?

I can.

The biggest challenge of my last decade was a little girl who doesn’t exist anymore.

She’s gone and has been replaced by someone who’s an absolute star.

The difficulties of COVID enabled her, and me, to shine.

Parents, children, teachers, students, superiors, subordinates…

What we see, as a problem, will disappear over time.

…and time is the most valuable asset in our portfolios.

Spend it wisely.

Wealth and the price of money

One of my best assets – I always wanted to have hair like that!

I graduated from university in the summer of 1990. I didn’t know it at the time but it was an excellent time to start a career in finance.

The price of money has been falling ever since I graduated (1st Class Honors, Econ/Finance, McGill). My first real finance job was the most junior member of a very successful private equity team in London.

It doesn’t enter into popular consciousness but many of us have had the benefit of a 30-year tailwind. This tailwind impacts every aspect of our lives and, like oxygen, we’re largely unaware of it (while it continues).

For the first half of my finance career, a modest interest rate cut was sufficient to get everyone excited.



At this stage of the cycle, it takes a healthy dose of shock & awe to move, or steady, the markets.

It’s important to remember:

  • It is impossible to know the future in real time. If you find yourself saying the Fed is making, or not making, a mistake then you’re fooling yourself.
  • It is possible to assess the risk in the system => leverage, debt service, off-balance sheet liabilities, derivatives obligations, debt:equity ratios, months of cash on hand vs monthly cash burn rate… there are a lot of useful measures. You should know these measures for your country, state, county, firm, family and self.

I don’t want to comment on right or wrong. I simply want to share observations that, hopefully, will help you think better about money.


In my line of work, I hear a lot of themes.

I’ll share a couple themes and my counter-dialogue.

The market is so high, I need to sell or I will lose money.

  • Volatility isn’t loss – come back to this one in the next down cycle.
  • Constantly tracking the price of anything will cost you time, lower your return and lead to misery. See Fooled By Randomness, by Taleb, for the best explanation of why you should ignore the volatility of a good-enough portfolio (or life for that matter!).
  • My entry prices are 30-60% below current market. Instead of focusing on a fear of loss, I focus on the cash flow being generated from wise past decisions.
  • If you exit then you need to put the money somewhere. The benefit of a good position is you don’t need to figure this question out. The less I need to think, choose and act… the better.
  • Every positive action costs expenses, taxes and introduces the possibility for error.
  • Most the people who worry about money, don’t need to worry about money. Beware of using financial news as a distraction from what you really should be doing with your life.

Price vs Happiness vs Wealth

  • Price is an illusion – all assets move in cycles.
  • Price changes are not wealth changes.
  • If you build a habit of happiness with price increases then you will experience a multiple of pain with the inevitable declines.
  • Equanimity must be trained, and re-trained.
  • Financial wealth comes from productive capacity, which is the ability to give the world what it wants.
  • What does the world want? My world wants…
    • Cash flow generation
    • Saving time
    • Reducing hassle
    • To survive

When you create a lot of money (see chart above and, note our constant, longterm Federal stimulus), the money needs to go somewhere. When money “goes somewhere”, especially when debt is available on top, prices go up.

The effect is not wealth creation, the effect is asset price appreciation.

The first principle is that you must not fool yourself – and you are the easiest person to fool

Feynman’s rule on foolishness

In 2020, all this money creation might be saving us from disaster. At best, we’ll get a chance to argue in hindsight.

Don’t fool yourself by acting as if your wealth has been increased.

The risk in the system has been increased.

All That Remains

We finished our volcano science unit with a trip to a volcano! This was the first field expedition of Home School.

Someday my kids will move out. This is a summary of what I hope they take with them.

Here’s what’s most important to remember:

  • We’ve already won
  • It’s ok to say no
  • We can handle the truth
  • We can do difficult things

Lunch on top – my wife catered the kids and I made a huge error by self-catering!

There’s a great book out there called Winning The Loser’s Game – a “loser’s game” is one where you win by not beating yourself. The book has an investment angle but, in many ways, a successful family is created with a similar approach of avoiding error.

Errors such as… financial ruin, substance abuse, fractured relationships and emotional upheaval.

Many unforced errors occur, and repeat, because their causes are deeply programmed into our consciousness, and family culture.

To avoid errors, we need to think slower and whittle away at the habits that hold us back.

So how do we slow down our thinking?

We take away feelings of obligation, feelings which can lead to blame and lack of personal ownership => All family is optional

We don’t let pressure build up… Everyone can speak, about whatever they’d like to discuss, and we commit to a “no secrets” policy.

Secrets, taboos, not being able to speak => these habits make it easier for evil doers to do bad things.

Ask child abuse survivors to describe their family culture and you will find a consistent pattern, of repression and secrecy, that enabled their abusers.



I got the next tip from a four-generational family, where the patriarch was deeply successful (work, family, financial, community). The family has multi-generational quarterly meetings and has successfully managed two transitions between generations.

Close but not too close – via staying in your own space – via sorting your own food – with a respect for differences.


Take the above and invert them…

…a feeling of obligation, never being able to say what’s on my mind, staying in close quarters, eating different food…

then… add alcohol, relentless toddler noise, politics or any emotional trigger..

and… BOOM!

Not winning!


Carrying weight is a privilege. On the way down, I grabbed his pack and he busted out a quick hill repeat. Blood was tasted, apparently. He gave himself an introduction to “race cough.” The kid has a passion for hills!

What does winning look like?

We enjoy sharing experiences with each other, usually in nature.

It is about shared experience and, frankly, it need not be all that fun. My son and I find meaning enduring difficulties together.

Each generation, each household, each adult needs to affirm its own set of values and define winning on its own terms.

If there isn’t a consensus then we remember… it’s OK to say “no” and all family is optional.

Also… we don’t need to agree to be buddies and I’ll respect your right to not have an opinion.


Some multigenerational thoughts…

Seek to connect not correct. Do not put a spotlight on people, just ask an easy, “how are you doing.”

Down, and up, the generational chain remember our goal is shared experience, not optimization.

Joys, and disappointments, with founders/followers/descendants are best used to motivate positive personal change in myself.

The most powerful form of teaching is living an open life where people see us modeling the best we have to offer.

Pay attention to those who bring out your best.



What about money and finances?

The fundamental point is everyone pays their own way and we do not create incentives to consume more. By the way, COVID gives you a useful opportunity to make changes in your family spending choices.

Any capital that become multigenerational is managed in a custodial capacity.

What does that mean?

It means you take care of things you didn’t create so others can enjoy them.

When financial decisions need to be made, we remember we are less likely to make errors if we keep it…

  • Simple
  • Low cost to hold
  • Focused on long term capital gain
  • Tax effective
  • If it won’t make a difference then wait

I use the above as a checklist because it slows my decision making.

For me, the three most important factors to remember are: cost to hold, leverage/borrowings and wait if it doesn’t matter. Together they nudge me to avoid the most common errors of investing => fees, tinkering, borrowing leading to ruin, cost to hold resulting in cash crisis….


After I’ve taught the above, I will hand it off and focus on modeling grace through what remains of my life.

Take what’s useful and make it your own.

Celebrate Success

South Arapahoe Peak, yesterday

Given the simultaneous outbreaks we have in the US, our media is going to have plenty of fodder for negative stories this month.

If you follow the news cycle closely, then this could be a tough few weeks for you.

Consider scheduling a few days offline.


The route follows the left skyline – it was at my limit for “unroped spicy with two of my favorite people”

If you’re sucking in a lot of negativity then you might find spillover inside your head. The spillover may manifest as a negative voice beating you down internally.

A lot of us aren’t able to “hear” the soundtrack in our heads. As a coach, I would notice it when my athletes had a habit of negative expression in voice and written words.

To counter a habit of negativity, I’d assign an excerise => buy a small notebook and end each day by writing down one positive thing that happened.

Every single day.

Life happens where you focus.

Change your focus, change your life.


Ax-man was a little buried by the end of the weekend. When it comes to fatigue, he has developed excellent coping skills.

Our Science Fair was a huge hit.


Secret ingredients to the traditional vinegar/baking soda lava recipe – a little dish soap, a little water and red food coloring – you can see the red chunks in the lava

Public speaking starts at home – learning to listen (and not correct) also starts at home

Spoiled is when you think your life is difficult but it isn’t.

Living under COVID is difficult in many ways. We are learning to embrace and enjoy our challenges.

It would have been very difficult for me to engineer rapid positive change without the challenges of closures, home school and social isolation.


Byrn Family Fitness Center – if there’s a will then you can figure it out. Picture is our Saturday morning fitness program. My son is finishing his “walk back” – I’m running my hill repeat in the background. The local college kids have embraced our street and we see some spectacular runners blaze past.

Personal responsibility is a key value of mine. In the past, this was to the exclusion of maintaining relationships. My kids have helped me do better with finding a balance between hard and soft skills.

Lots of personal responsibility was on display this past weekend: packing our own gear for a climb, learning to recover from a deep bonk (with grace and without blaming anyone), taking care of siblings.

The habit of having to take care of ourselves at home is spilling over into our larger lives.


Ax looking down the wrong turn I was about to make for my family. Thankfully, we managed an upward traverse back onto the main route.

Money and Kids

The basics:

  • An unconditional allowance set at $1 per week, per year of age
  • Money sits with Bank of Dad and yields 10% APR – I want my kids to get very excited about compound interest – we have a generation of kids growing up in a no-yield environment – this will have a HUGE impact on our societies – don’t know specifics but do know it will change finance for a long time
  • I hold a veto on any spending out of the “allowance account” – there is no obligation for me to be reasonable – if you disagree with my decision then…
  • Buy it yourself, kids can earn their own money – own money equals own choices – I want my kids to get excited about providing value to others and earning money for themselves – this is much more important to me than winning in sport
  • Summer reading prize – read every day across the summer and get a very good prize – it costs me $100 per kid, per summer, to create a habit of morning reading, without being asked!

The incentive structure has been successful.

Our latest addition is babysitting – our oldest taking care of our youngest. We’ve settled into $7 per hour for the oldest with $2 per hour to the youngest at the same time. We give them a written schedule with some easy chores to complete. This is the easiest “kid combo” for us to manage – the older sister/younger brother dynamic hasn’t been figured out, yet.

Another popular product is exterior cash wash at $5 per car, per kid.

Our oldest makes scrunches, masks and children’s stuffies. Orders, pricing, manufacturing, delivery… all sorted by her. Since school ended, she is averaging $75 per week of supplemental income.


Dawn breaks near the 4th of July Mine, Indian Peaks Wilderness

Helping Friends and Family


Tuesday’s essay generated interesting questions.

These three questions touch on my work as a fiduciary.


#1 – What are the best types of incentives?

There are so many issues here.

Who is deciding, why are they deciding, what is the goal of assistance, does helping help, are you seeking to “parent” an “adult”, what does the situation require, where will this take us in 10/20/40 years, where is my energy best spent… and on and on.

A starting point for tackling these questions is this reading list. If you’re operating in a fiduciary capacity then the linked books are essential reading.

Before we get into thoughts about others, how are you doing? How’s your life? I ask myself this question over and over because of certain realities:

  • I am more likely to be successful helping myself
  • My ability to influence people outside myself is limited, prone to error and usually leads to resentment
  • The people most open to my help don’t need it
  • And the biggest thing I have found… what we think is “right” will most certainly change over time

How do you react when others try to help you? Many of us believe we already know what’s required of ourselves. Having an outsider give us more information rarely causes improvement.

Do you care enough to change? By this I mean, “Do I care enough about this individual to inconvenience myself?”

Am I willing to spend time with this person, consistent & frequent time, to help them achieve their goals?

…and it needs to be their goals. Not a goal of pleasing someone else. Not a goal scaffolded onto them by someone who thought it would be good for them.

If you “flow chart” the above then you’ll see there are high hurdles to overcome before you’ll be in a position to consider helping someone, beyond your daily example and the choices you make.

…and that’s a good thing because what most people truly need is you to listen and hear what they think about their life.

Listening, without knowing, and taking small actions will greatly improve your relationship and that’s more valuable than any external incentives you might apply.


#2 – What do you think about financial incentives inside family systems?

I believe in universal support: such as childcare, health insurance and value-for-money education.

Reduce stress inside the marriage (childcare), reduce the risk of ruin (health insurance) and improve human capital (education). Modest, achievable goals.

I do not believe in subsidizing personal consumption choices.

I do not believe in making it easier for a family member to enter the housing market. Learning how to wait, and buy modestly, is an essential life lesson.

A core value, that was taught to me by three prior generations, “everyone pays their own way.”

When considering financial support to an individual, run the numbers on providing the same benefit to everyone in the family system for 20+ years. Small choices have large impacts when repeated across decades and extended to successive generations.

Just like when you evaluate risk, you must assume you will repeat this choice many times. The discipline to assume you will repeat, for a long time, will help you think better.


#3 – What’s my role?

Share knowledge from prior generations, to listen, to love and to set the absolute best example I can within my own life.

The gift I give is my time and a key benefit I bring to the family system is having my own life in order. I am living the life I wish for you.

I am keeping my life together, so I don’t become an emotional or financial liability to my grown kids. I won’t be able to avoid every problem but sticking to the basics will eliminate many unforced errors.

I cultivate the humility to appreciate that I am clueless about what’s best for you. I’m willing to share what’s worked for me but, beware, my memory is clouded by hindsight bias and an inability to see where luck has greatly benefited me.

If you’re unsure then… just love ’em.

Be the brand.

What I Talk About When I Talk About Building Wealth

SuperGirl

When people ask me about asset allocation, I guide them towards family wealth.


Over your life, you will see things blow up.

  • Jobs will be lost
  • Divorces will happen
  • Guarantees will be called
  • Companies will fail
  • Investments will go to zero

Certain habits make us more prone to blowing up:

Debt – fixed obligations can ruin you in bad times.

Lack of emotional control – this runs deeper than, say, anger management.

People who make a habit of rationalizing a lack of control in one domain (elite sport, closing a sale, acting in a client’s best interest) rarely have the capacity to control themselves across domains. If you might get caught, then you’re fragile.

Substance Abuse – it’s more than the cost of sorting yourself out – it is the lost opportunity of a life well lived and the impact on the rest of your family, especially your kids.

Spending vs Cash Flow – personal spending, burn rate and fixed costs => the more spending you have relative to cash flow, the more fragile your finances.

The above is a long way of asking, “What aspects of your life might blow up?

Which is a polite way of saying, “I’m not sure asset allocation is the most pressing issue in your life.

If you work in an ethically-challenged field, have a lot of borrowings, have a high burn rate or are surrounded by peers with issues…

…then tweaking portfolio construction is a lower priority item than immediately removing what might ruin your life.

I’ve done it. You can do it. It’s better on the other side.


How large is your current portfolio when compared to your lifetime portfolio? – AKA you might have more wealth available in your career than your portfolio.

Investing is different at 25, 40 and 55 years old.

The nature of “different” depends on your personal circumstances.

#1 => Consider your Core Capital. The single best thing I did out of college was save four years of personal living expenses, $100,000 in the mid-1990s. It sat in a bank account, while I worked my ass off at my career.

Having that money enabled me to choose better and choosing better became a habit.


Very, very, very (!) few people can be professional investors – AKA can I get rich by beating the market?

Take an honest look at the people that you know in finance. How many of them “got rich” from their own money? Remember these are the experts.

In finance, most people get rich due to the rules of their game and collecting pools of other people’s money (your money, by the way).

With your portfolio, keep it safe, simple and low-cost. A target-date fund makes a nice core holding.

Having my Core Capital enabled me to take more risks in my career path, and life experience => not with my Core Capital.


Once-in-a-lifetime opportunities happen once a decade – AKA great deals happen when credit markets are shut

Here are the assets I own and why I own them:

  1. Index funds => long-term, diversified, not linked to my home real estate market
  2. US Treasuries/Core Capital => 5 to 10 years family expenses
  3. Boulder real estate => A relative value play against California, a cost-effective way to raise a family and a fantastic outdoor life. Think very carefully before locking yourself into any location. As a young man, my lack of ties enabled me to jump at great opportunities.
  4. Cash => my early retirement was funded by three deals I did coming out of the last credit crisis. Once you have your Core Capital (say, five years living expenses) then building up a pool for “great opportunities” is a consideration.

Starting out? Read this PDF.

Be wary of home bias => you can see it in my portfolio => even more risky is having your balance sheet, retirement and job reliant on the success of your employer.


Switching Costs – AKA think carefully before you sell good assets

I have assets in my portfolio that I would not buy at today’s prices. Financial theory tells me I should sell these assets.

  • I have zero confidence in my ability to predict the future.
  • If I sell assets then I pay taxes and commissions.
  • After selling, I have to figure out where to put the capital.
  • I doubt any “new” plan will be better than my current plan, which is simple and low-cost.

Release yourself from constant optimization => good enough is good enough.

Put your efforts into being a better version of yourself.

 

Athletic and Business Humility

kona27

When I think about success, I experience the human quirk of self-attribution bias.

In other words, I believe that my failures are due to external circumstances (those damn flat tires) and success is due to my own efforts (my life today).


parade

In athletics, I played the game of Ironman Triathlon (swim 2.4 miles, bike 112 miles and run 26.2 miles). Two observations about the game, at the time I played it:

  1. Very few people were willing to subject themselves to “proper” training
  2. Most winning times (today, any venue) would have been world-records when I raced

Two ideas flow from these observations.

First, if “winning” is important then find a narrow niche where you enjoy working your a$$ off.

Second, in a field where not many people are willing to do-what-it-takes, be cautious with your self-assessment.

World class is a lot easier when you’re not competing against the world!


thegirls

I was able to play triathlon, because I spent a decade playing Private Equity, in Europe and in Asia.

The only way you can lose this game is by going bust:

  • Gather money every five years => each fundraising created a stand-alone “fund”
  • Split each fund into a dozen deals, invested over 3-5 years
  • Use borrowed money as well as equity
  • Wait 4-6 years then sell the deals and keep 20% of the profits

What makes this game interesting is the “house” received an annual commission (2% of equity).

Over the last fifty years the sector went from ZERO to over $500,000,000,000 annual volume => generating a lot of fee income and creating a buyer’s circle where your competition bid up the assets you already own.

If you think you missed out because you weren’t in finance then you might be mistaken. Similar dynamics have been in play in your real estate market (and sectors touched by venture capital).

From 1980 onwards, rapidly increasing assets under management wasn’t the only tail wind.

There was the long term debt cycle (10-year treasury rate from 1/1/1979).

fredgraph_10.png

Chart looks similar if you use 30-year treasury rate…

fredgraph_30.png

…the debt cycle fed into the stock market (y-axis log scale, SP500 from 1/1/1979).

SP500_40.jpg

I started high school (37 years ago) in the bottom left-hand corner of the stock chart. Is it any wonder that I expect things to always work out?

It is human nature to associate my effort with my results. Some will say this association is obvious!

I am not sure. I know that I ignore external factors and hidden evidence:

  • of people who worked hard and didn’t succeed
  • of crooks and bozos that have done very well

My mantra, “Let’s be careful and remember we are far less talented than we think we are.”

What To Do

2019-09-23 08.07.06-1Between summer day camp and the school year starting mid-August, I’ve had two months of a relatively quiet household.

I used this time to re-read Taleb and Munger. You can find my full notes here.

My initial purpose of re-reading was to figure out “what to do.”

It is far easier to be certain about what NOT to do.

Do you know what can ruin your family’s life?

I do.

  • Racing, especially high speed downhill => physical ruin leading to a downward mental spiral.
  • Alcohol use => historically, my average daily consumption is either: (a) zero; or (b) slowly trending upwards.
  • Anger => if I am going to screw up a key relationship then it will be when I act on anger.
  • Death by Accident or Avalanche

What is your list?


Assets and spending do not create a life with meaning.

My true job is keeping our cost of living down so we maintain the ability to control our schedules.

  1. Be wary of adopting the preferences of others. It’s easy to sign yourself up for millions of lifetime spending that won’t mean a thing to you late in life. Worse yet, you will pass these values to your kids and they blow whatever you leave behind.
  2. Pay attention when you notice “better” doesn’t make a difference. “Wasn’t worth it” happens to me a lot.
  3. Pay attention to the cost you pay in time and emotion => it costs me a lot of worry and stress to get more money. Way easier to spend less.
  4. Once you are beholden to a third-party, you’ve lost.
  5. A lot of times “worse isn’t worse.” We adapt very quickly to setbacks.

We discuss case studies at home. Housing, vacations, cars, the endless “needs” my kids and I dream up.


So while I’m removing things that can ruin me, and beating down my hedonistic tendencies… What to do?

Wait for the fat pitch.

A key benefit of a good position is being able to wait until the credit cycle swings in your favor.

The longer we have to wait, the better the opportunities. Cutting rates, running trillion-dollar deficits at the top of the economic cycle… there will be great deals eventually.

I’m not excited about any asset class right now.

  • The bond market is telling me that we’ve pulled 5-10 years of returns forward.
  • Net yields are under 1% for real estate that I’d like to buy.
  • The rest of my balance sheet feels like “enough” exposure.

I’ve decided to make no material new investments. We are going to periodically rebalance and I am going to reduce my cost of living.

What to do?

Enjoy nature with my family and pass my value system to my kids (by living the life I wish for them).

Years, Leverage, Time and Ruin

2019-09-10 07.55.51The benefit of creating a good position is you can choose not to leave it.

Each time I change strategy, I open the door for error.

2019-09-10 06.08.38A quick review, I calculate financial wealth as:

Net Family Assets [divided by] Annual Cost of Living

The formula spits out an answer in years, not dollars.

To figure out if an idea is “worth it,” I convert to years.

I also consider:

  • Leverage: do I have to borrow, what’s the total dollar value of my exposure, how large/far can things move against me?
  • Time: I have control of my schedule – might this idea change my ability to control my schedule?
  • Ruin: reputation, relationships, finances, health… how does this idea change my exposure to ruin?

I have a lot of (bad) ideas. Thankfully, most don’t get through my filters.

These filters work with EVERYTHING… alcohol & drug use, mistresses, felonies, off-balance sheet financing, sleeping late, losing emotional control, binges…

2019-09-07 06.15.45

How can I put “years” into family wealth without increasing my risk of ruin?

In 2009, we executed a four-year plan that put us in a better position.

A key part of that plan was downsizing, borrowing (30-years fixed at 3.25%) and pulling 65% of the equity out of our primary residence.

It was highly inconvenient to change and we expected the smaller place to be a step down. However, our minds adjusted and we love our existing place. The move paid off in “years”:

  • Our current place runs at half the cost of our old house.
  • The capital we withdrew, earns enough to cover the cost of our current place.

I looked at moving again but there wasn’t any benefit to us after taxes, commissions and hassle. So we’re going to wait and watch.

Remember, “doing nothing” maintains an option to (make a better) change later.

2019-09-05 19.33.32The Elephant(s) in The Room

Childcare and school fees have been a fixture of the last six years. It has been a big number – about double what we pay in housing costs.

Our youngest is in Grade One (yay!) and we just lost our favorite sitter (not so yay). The result is a big slice of the family budget gone.

My first thought was to replace help with even more help. I have a habit of throwing money and other people’s time at my problems. It’s a carryover from my days in finance – where I aimed for maximum subcontracting in my personal life.

Then I had a thought…

  • Consolidate the kids’ schedules (we often have three in three different places)
  • Help out in the afternoons (I’ve done nothing for a few years)
  • Take over the cleaning (ditto on my lack of input)

It’s ~20 hours out of my week => prior thoughts on money and time.

The other elephant in the room is my cash flow deficit. It’s been rolling at 4% of assets for years. I’ve ignored it because our assets have been appreciating at a faster rate. My comfort with deficit spending reminds me of 2004-2008.

So I could “buy” the family a shift from a cash flow deficit to a surplus. Worse case, I crack a bit and hire local kids to help me out. I’ll still cut my cash burn by ~80%.

When I explained my plan to my wife she asked if my plan would make me happy. I said,

“I don’t expect to be happier but I noticed that being a better man never made things worse.”