Tag Archives: finance

Property 2021

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My favorite real estate can’t be bought – Collegiate Peaks Wilderness Area

Our local property market has popped 30% since the start of the pandemic.

I did not see that coming.

Here’s a key insight => my lack of foresight had no impact on my family => our success does not rely on directional bets.

We establish a good enough portfolio then focus on: (a) keeping our cost of living in line with our cash flow, (b) shared experiences and (c) staying the course.

A recent John Mauldin note reminded me of two components of real estate.

Shelter – a place to sleep, ideally in a great public school district (links to my post on supporting public education)

Investment – the potential for reliable cash flow and long term capital gain

To those I would add:

Signaling – an example from my own life. Before my wife was “my wife,” I bought a townhouse in Boulder. It showed her, I was committed to Boulder. It showed her family, I had the funds to take care of their sister/daughter.

Asthetics – worth between “a lot” and “nothing” depending on my stage of life. As I age, increasingly appreciated. I was 50 before I could relate to the concept of a $1,000,000 view.

Community – In my early 30s, I found myself in Christchurch, NZ. The community was an excellent fit for the life I wanted to live (sharing outdoor activities with friends, elite triathlon). The South Island of New Zealand has always felt “right” to me. On the other side of the equator, was Boulder, Colorado. There I found love and decided to establish my family.

I didn’t need to own real estate for love, community or family. some qualities work best when inverted.

Location inverted => The principle here might be don’t invest anywhere your spouse won’t live.

Asthetics inverted => Absent financial duress, locations you can buy cheap tend to stay cheap.

You can extend to secondary markets.

My family loves Vail.

Rather than buying a 40 yo condo for close to a decade’s worth of core living expenses… we allocated 2% of the capital and joined a world-class ski club.

My annual family ski budget, including club and rental housing, is about the same as what the old condo would cost to own. The principle => don’t capitalize luxury expenditure.

I made this decision because I’m not confident about my life 10 years from now – when I’ll be an empty nester.

In making a decision to “not buy” I have maintained: (a) a cheap option to change my mind in the future, (b) I’m still debt free, and (c) my capital is available to be used elsewhere.

About elsewhere… I am very confident that my children are going to be grateful that I kept the family invested in the Boulder real estate market. Hedge the risk your family will be priced out of the place your kids grew up.

Of course, this assumes you are living in a place you don’t want to leave. It’s not just your spouse you should pay attention to…

The above components can work against each other.

For example, signaling vs return on investment. I’ll give an example…

Trophy house was 55 bags of leaves. Current house 5 bags. Little things have a big emotional impact on me. I love low hassle ownership.

After we married, I bought a very large house, not far off the size of a small school. The bills, and constant yard work, took the fun out of ownership. Being a big shot turned out differently than I expected.

This experience nudged me into a principle, apply the minimum capital to achieve the goal and pay attention to the cost of ownership (money, emotion, time).

And that’s really the point I wanted to make.

In a hot market

  • Consider the need you are seeking to fill
  • Pay attention to the cost in time, emotion and ownership
  • Remember that capital is precious and leverage can trap you in situations where a renter can easily exit
  • If your time horizon is less than a decade then rent

All of this is easier to see when you’ve been through a few recessions. At the start of 2009, I promised myself to never opt-in to avoidable financial stress.

The tough part is building the capital and credit capacity to be able to buy.

Whatever you were seeking to achieve, you achieved it BEFORE you purchased.

Hope this helps.

Why Would They Own That

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I started thinking about this with negative-yielding sovereign bonds. When something makes no sense to me, I pause and reconsider my assumptions.

The phenomenon, of not being able to understand buyers, has now spread across markets and asset classes. In markets I know well, I’m being out-bid by 20-25%. Missing by a lot, makes it easier to sit out.

The goals and incentives have shifted, and it’s taken me a long time to notice.

A big chunk of global capital sits as a hedge against the value of money declining. A decline in the value of money:

  • is not a risk for anyone rich in youth and skills
  • is seen as a risk for the financially wealthy – a very human trait of worrying about wealth that’s far above one’s requirements for a meaningful life

Over my lifetime, we’ve shifted to a society where wealth is controlled by:

  • People managing Other People’s Money, with access to debt and options on gains
  • Fewer and fewer people, managing more and more money

Toss in near-zero rates and we’ve reduced the incentive for investment discipline.

A shift away from treasuries is painful when they are yielding over 5%. Less so, today. The shift in attitude has happened very slowly – it took more than a decade.

For a species that worries about $4.99 shipping charges (when they save TIME from leaving the house)… Cash Returns Matter – the absence of cash returns gives an incentive to devalue safety.

With negative 10-year (!) rates, the European incentive (to flee safety) must be extreme.

Last 40 years – USD 10-year rate – check that bottom right hand corner

It’s emotionally easier to own marginal assets when cash yields nothing (and you are seeing paper gains across most asset classes).

Risk has been rewarded and reinforced across a generation, maybe two generations.

While it started with good intentions, recent monetary policy has had the unintended consequence of rapidly inflating the assets of the already (super)wealthy. When I think about the resulting incentives for risk tolerance, government spending and borrowing, that strikes me as bad policy.

I’ve no idea how, or when, this play out. Fortunately, I’ve set my life up so I don’t need to be correct with uni-directional bets.

Careful with margin-debt and recourse leverage, it’s been one heck of a run.

With yields this low, there is tremendous leverage built into the system.

I’ll be back posting in 2021 – it’s been a solid year of writing.

Thanks for reading.

Middle Age in the Free Money Era

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Controlling my greed is a useful first step.

But how does one do that?

Build a peer-group with better ethics, and less financial wealth.

Then let human nature pull me where I want to go.

Looking around, with my 1990s financial up-bringing, many popular assets look expensive at half their current values. That said, people are making big money and this can be tough to watch.

I work on creating a vibe that I can afford to miss out and seek to temper my envy.

I acknowledge I’ve done enough winning.

So. Much. Winning. 😉

Yesterday, I shared thoughts for my younger self. What about this time in my life?

I’m not young enough to earn it all back, nor am I old enough to lock-it-in and forego further capital appreciation. I checked our joint life expectancy and we’re 50/50 to get another 40 years.

Given that I’m debt free, I’m hurt more by a doubling, after selling, than a halving, and still owning.

Think that through – it goes against every emotion I have with regard to money (and I’ve had a lot of training).

Married, at 51, I need to be taking a 30-50 year view.

Accept the reality of my personal situation and remember the financial reality of near-zero rates.

  • Stay invested
  • Lean into severe downturns
  • Maintain options, and skills, to add value-added work
  • Stay debt free – while this is a great time to borrow against cash flow, borrowing against margin is nuts – at some point, the debt cycle will snap back and I do not want to get closed out in a sell off
  • Keep my spending choices in check – know that every choice I make sets a baseline for my kids to follow AND creates a cash flow requirement for the rest of my life

Here’s the key lesson from my early retirement => If I’d gotten spooked and sold out (I get nervous in rapidly rising markets) then I wouldn’t have had the capital to buy back my existing positions, which remain “good enough” for my needs.

In a Free Money Era, the risk many of us face is acting on our fears and being priced out of a portfolio we never needed to leave in the first place.

Control your risks by focusing on skills, spending, relationships and daily exercise. These are things I control. Global macroeconomic policy, less so.

Tomorrow, why the heck are people buying non-, and negative-, yielding assets at current pricing?

Sorry about the dud link yesterday at the bottom – it was the same as the one at the top of the page, which worked. Here is is again, it’s the link to a calculation which led to some major changes in my life. Putting a price on my time.

The Declining Value of Ownership

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Yesterday, I described the forces creating rapid lifestyle, luxury good and financial asset inflation.

What to do?

Aspire to skills, ignore asset-driven status.

Near-zero yields have created a very different world than I grew up in.

  • The skillful can easily lease their needs, at a tiny fraction of the cost to acquire.
  • Businesses, like property management, that charge based on a %age of revenue are bargains, for both sides of the relationship. Managers can scale valuations at PE ratios over 50x net earnings. Owners pay 0.1-0.25% p.a. (of capital) for expert services. Both sides of this equation were unimaginable 30 years ago. Another way to look at this => “Vanguard” pricing is moving across asset classes.
  • In a world with tiny cap-rates and huge PE ratios, Human Capital is very, very valuable.

Let’s look at an example.

I like to follow real estate, particularly Luxury and Vacation markets. In these markets, there are many people who own $1-10 million places.

Annually, these places cost $15,000 – $100,000 p.a. (cash) to own and, often, sit empty. The cost to hold is not a big deal for these owners because they can afford it.

I’ve always wanted to visit Jackson, WY so I jumped on Airbnb and had a look around. I can lease a Jackson Hole penthouse, roughly equivalent to my net worth, for a few days.

My cost is…

  • 1/20th of the annual cost to own,
  • 1/1000th of the capital cost, and
  • maintenance is someone else’s problem.

Thanks to Airbnb, there’s real value here, especially as I am the one who keeps his freedom.

  • freedom to leave
  • freedom to change my mind
  • freedom to allocate time, share of mind and capital elsewhere

This will be rolled across every under-utilized (negative-yielding and/or depreciating) asset class within our economy. Airbnb’s $100 BILLION market cap, Free Money and the 1000-fold increase in VC gains will make it happen.

Don’t get caught up in the ridiculous valuations we are seeing – what’s important is understanding the process of change.

In a micro-yield world, it costs me 1/1000th of the capital value to get all the annual consumption I desire.

The only reason to buy is to show off, and that’s what humans do. Actually, there is another reason to buy and I’ll touch on that in a couple days.

Given we will stay human, I do not see these changes as a bearish case for asset values, which are driven by the price of money, mood and scarcity.

However, I do think it changes the mental calculus for a young person. In a highly mobile, rapidly changing environment, the assets your (grand)parents aspired to own are a lousy place to put your financial capital.

Tomorrow, some nitty gritty for 16-21 year olds.

PS – I didn’t book the penthouse. I went for a (refundable) 3-bed condo across the street from a playground. I make most decisions assuming they will be multiplied (x3) by my children when they grow up. I like to leave my kids room to (hedonistically) improve on my choices.

The Free Money Era

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Watching DoorDash and Airbnb go public this week, brought home how much markets have changed from the 90s.

Big deals are up 1,000-fold in 40 years.

I graduated university in early 1990s, and was born in the late 1960s => part of the first generation to come of age after the very inflationary 70s.

The mentors, and wise-old-men, of my early career had been heavily influenced by their experience with price-inflation. In turn, when those vets had been young stallions, they were influenced by survivors of the Great Depression.

I received a very conservative financial education.

The two “mountains” are annual inflation peaks of ~12% and ~15%. Mid-70s and 1980. I have early memories of “grown-ups” buying CDN government bonds at ~15% with all available cash resources. Note the recession frequency (shaded) from 1970 to 1982.

These days we’re told we don’t have enough inflation.

I’m not sure about that => the price to buy $1 of cash flow has skyrocketed.

I’ll post the last 40 years of price inflation below.

Forward to now – from the 1980 peak. I agree, not much price inflation there.

Watching Airbnb/DoorDash/Bitcoin/Tesla, and looking at luxury real estate, I see inflation at work, but differently.

Inflation is not necessarily a bad thing – there’s never been a better time to be world-class at solving problems for people. More on that later.

I see a tsunami of money.

The tsunami is caused by a long-term decline in the real cost of money => approximately the gap between the red and the blue line in the chart above. Compared to the 80s and 90s, we are living in an era of “free money”.

At market tops, it is easy to find people congratulating themselves for their vision. A favorite quote (from a very successful friend of the family) is “some see, others saw.”

Something I failed to see, when I was on the inside, was the benefit received from:

  • The global money tsunami
  • Constantly dropping long term rates (the current 30-year rate implies a PE ratio over 50x)
  • Increasing investor allocations to our sector

Add non-recourse leverage, ring fence the deals/funds and there was no way to lose.

Of course, we didn’t see it that way => we were smart, we worked hard and we were visionaries.

Now, I’m not so sure.

Tomorrow => what this era might mean for my kids, effectively, two generations behind me.

Assets with high holding costs

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2020-05-13 13.49.25-1

With all the talk of indoor transmission being more likely (than outdoor), we’re moving martial arts outside whenever possible.

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I’m going to chat you through the financials of a rental property I used to own in Tucson.

This will help you understand the situation facing airbnb hosts and other owners of assets with high holding costs.

  • Picture a condo, bought and furnished for $75,000.
  • The condo has a current value of $100,000.
  • The condo doesn’t have a loan against it but costs $8,500 per annum to hold (8.5% of value). The high cost to hold is due it being a fully furnished rental => things like taxes, HOA, cable, insurance, utilities…
  • The furnished rental does great and yields net cash flow of $4,500 per annum after all expenses, taxes and commissions => 6% of cost.

This was a good investment but I sold out, and switched into Boulder real estate, with a mortgage. Here’s what I switched into:

  • Cost to hold the house (mortgage, taxes, insurance and maintenance) => 3% per annum vs 8.5% for the condo. Without the mortgage, the cost to hold the house drops to 1.25%.
  • Worth emphasizing the debt-free annual cost to hold comparison => condo 8.5% vs house 1.25%
  • House has rights to land, condo doesn’t include any land rights.
  • House has alternative uses… can live in it for the cost to hold, or rent and receive a net yield of 1.5% (2.75% excluding the mortgage).

Both locations worked out.

I checked on the condos yesterday and they were selling at ~$150,000 pre-virus, up significantly from 2008-2010 crisis values.  Boulder housing has seen similar appreciation.

What concerned me in 2012, when I sold, was the high cost of ownership, which can bite in a downturn.

Picture the condo debt financed => this is the issue facing aggressive airbnb hosts

  • A $75,000 purchase, with a mortgage of $65,000 against the property
  • To buy the place, you needed $10,000 of equity, which appreciates to $35,000 as the capital value rises (on paper) to $100,000.
  • The paper profit is 3.5x your money (yay) => you get this from 33% market appreciation, similar to what has been seen in many markets over the last 3-5 years.
  • But… the Virus pops up and the property is going to cost you $7,500 of new cash to hold for the 1st year of the crisis => 7,500 / 35,000 is a negative 21% return on equity.

All of a sudden, the warm feeling of paper profits is replaced by the reality of writing checks, monthly, for a vacant rental.

Depending on your tax bracket, one year cost to hold might be the equivalent of the last three years profits.

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The high cost to hold can bite in different situations.

Club Memberships => $50,000 to $250,000 membership initiation fees with annual dues of $5,000 to $25,000.

You can find yourself in a contractual relationship where you are required to pay 5-20% of membership value in a downturn.

Now picture a club with 10-20% of the membership unemployed, or ill with COVID.

+++

In a world with: (a) very low discount rates; and (b) professional compensation under pressure, the “penalty” for paying through a downturn/crisis is accentuated.

Many asset owners are likely telling themselves they are simply facing “one bad season” and things will get back to normal soon.

Perhaps.

 

 

Winning The Loser’s Game – personal finance book, Charles Ellis

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2019-06-16 08.44.50This one sat on my shelf for a while, probably due to a concern that I might have to change my mind on something if I read it!

Well, just because something is unpleasant to consider, doesn’t mean it’s wrong.

Besides, I can handle bad news.

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Fortunately, there wasn’t much bad news inside this book and it was an excellent read.

Takeaways…

Nearly everyone will be working into their 70s, at least part time. This is a result of success, not failure.

  1. Success in following a healthy lifestyle and benefitting from modern medicine => much longer lifespans.
  2. Success in financial well being => implies our baseline spending at 50, 60, 70… is higher than anticipated.

A working life of 50+ years implies:

  • We will be technically out-of-date before we’re halfway done!
  • Multiple careers, unexpected transitions, continuous technical education
  • Start with something the enables you to get paid well on an hourly basis and become world-class in a niche market
  • If you spent your early career not doing a whole lot then you still have many decades left in your working life. Hit the reset button and get yourself educated without borrowing a ton of money.

Despite “retiring” 3x (!) since my 30th birthday, I’m still working part-time. I had been expecting this to end at some stage. This is not going to happen, and I shouldn’t wish for it to happen.

I should be on-the-lookout for attractive part-time employment and training myself for my next career(s).

+++

As you’d expect from a bestselling personal finance book in its 7th edition, there are excellent sections:

  • Six self-assessment questions (p 80-81)
  • Living under your means as a form of savings (p 161)
  • Annual personal review questions (p 197-198)
  • Contributing time, talent and money to your community (p 227)

I was also reminded of my personal weaknesses as an investor by the author’s advice to “give compounding time to work.”

Across a 50-year working life, that is a lot of time!

A Little Economic History

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2018-10-31 07.52.14It is much easier to position your life before, rather than during, an economic crisis.

It’s also truly amazing how fast a credit crunch can sweep across markets.

This month, a decade ago, was the mid-point for the toughest 90-day stretch of my financial life. Taking it back to October to December 2008…

  • My prospective earned income went to zero at a time when…
  • My Business/Personal cash burn rate was $10,000 a week. Simultaneously…
  • My net worth dropped by 67% and…
  • I was facing a potential claim 20x in excess of what remained. The one bright spot was my family life…
  • Our first child was born and we were very happy within our marriage.

The only reason I didn’t follow a friend into bankruptcy was a pre-crash restructuring. I had been scared by four events :

  1. The US was offering loans without income verification.
  2. The UK was offering loans without bank covenants.
  3. Down in New Zealand, I used both of the above and borrowed to pay my living expenses at a time when…
  4. I had a personal guarantee outstanding that covered most my assets, and all my net worth.

There is a line in Fooled By Randomness about Russian Roulette. It goes something like…

Even if the gun has a million chambers, there are some games you don’t want to play.

I was enjoying my life and didn’t want external circumstances to force a financial reboot at 40-years old. So… 2005-2007 was a time of significant change.

The restructuring took three years (2005-2007). It prevented ruin, but still resulted in a lot of pain when credit markets slammed shut in 2008.

At the time I was working in the UK. The entire chain of my business life went from Great-to-Insolvent in 180-days (bank, joint venture partner, developer, general contractor, sub-contractors, employer, CEO).

Just like that.

Gone.

2009-2012 were spent clawing back.

Key steps:

  • Downsized family home, spending and aspirations. Embrace Your Hubris!
  • Invested the downsized capital into a Downtown Boulder rental property. Two units, where the little unit’s rental income would enable us to live for “free” in the larger unit.
  • Invested our remaining funds in a redevelopment opportunity that I could hold FOREVER, because it was debt-free and cash flow positive.
  • Turned a loss making triathlon hobby (draining $75k annually) into a cash generating consulting business ($4,000 per month).

By 2013, we achieved cash flow break even. We were so blasted from our young family (up to three kids) that I don’t remember appreciating the significance of what we achieved.

Within my financial peer group, our story is not unique. Lots of people had a similar ride. However, they don’t necessarily blog about it.

Financial memories are short.

Remember.

You don’t get killed by prices falling — price volatility is emotionally painful but not financially fatal.

Companies, Your Personal Ethics, Friends and Families… All can get crushed by running out of cash in a banking crisis.

Where’s your cash flow statement?

Towards An Antifragile Life – Living With Volatility

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I’d encourage you to read Taleb to experience the hero, and anti-hero, directly. Acting on his books saved me from personal bankruptcy. I owe him much of my personal freedom.

Separate from his tips for financial living, what are the lessons that I can bring into my larger life?

Don’t Tinker, Let My Winners Run, As Much Nothing As Possible – I blow at least $10,000 a year forgetting these points. My sin is neglecting the benefit of “no action.” Every year:

  • I cost myself money by tinkering with my winners
  • I waste emotional energy by getting involved in situations that will work themselves out with my help
  • I spend goodwill via over-correcting the people close to me

The tip about letting my winners run is so persistent in my investing errors that I’ve sent myself an email that I see every time I log into gmail. The other email is designed to make me a better man.

Inbox Almost Zero

Inbox Almost Zero

Maintain Personal Freedom – Taleb’s style is about freedom. Freedom to do what he wants. Freedom to say what he wants. I get that. I need to be cautious with choices that restrict freedom.

Debt – my family has one loan, a mortgage on a house that I could leave and rent for more than my mortgage/insurance/taxes.

Taleb, and others, challenge conventional wisdom about the use of debt, particularly with regard to College. My wife and I left college debt free and that colors our judgement. Friends of mine, that are doctors, talk about debt-free doctors being able to “do medicine right.” Statements like that, bring home Taleb’s advice to use as little medicine as possible.

Pay For Optionality & Avoid Open Ended Commitments – I’ve made both necessary, and ill-considered, commitments in my life. I pride myself on reliability so feel pain when I’m falling short on a commitment, or need to exit. As a result, I’m willing to pay a premium for flexibility and accept less success to avoid long-term attachment. The pain I feel is an Anglo-Saxon cultural phenomenon, in some Asian cultures, it is expected that relationships will change with circumstances. I smile when I think about Northern Europeans doing business in China and India.

Relationships – Taleb is big on parties, especially ones with lots of different interesting people. My goal at a party, if you can get me to go, is simple. Avoid being the most boring person there! I’m selling myself short. While it would help, the solution isn’t to liven up. The solution is to understand that exposure to many different people is helps create a life with meaning and opportunities to use our skills to help others. Networking is about using volatility to our advantage and the most valuable form of networking is having fun while sharing a mutual interest. I’ll go a far out of my way to share a bike tour with a buddy! I’ve made most of my best friends while exercising!

Insurance & Legal Structuring – insulate yourself from the improbable via insurance and appropriate legal structuring (links to blogs that tell you what I actually do).

Toxic People – have you considered the emotional payoff profile of the people that are close to you? Taleb talks about asymmetric outcomes in the financial sphere but far more common is the downside associated with certain individuals. Some people have a poor payoff profile and others consistently make me feel fantastic.

Think about the people you spend time with – how do they make you feel about yourself? Create space for great people by ditching the toxic folks.

By the way, if you’re truly courageous then think about how you make other people feel about themselves – especially people that have no recourse against you. Too often, I come up short here! When I’m tempted to criticize, I ask myself three questions:

  • What are my goals here?
  • Will criticism serve my goals
  • How am I making this person feel?

Taleb rails against bankers and senior management. Speaking as an insider, he is 100% right about how those sectors operate. The deck is stacked, and will remain stacked, in favor of the insiders.

If you find yourself in senior management, or finance, then think back to what was “enough” when you started.

Too often, the compromises associated with success are the seeds that create Black Swans in our personal lives.