Family Financial Review: Winning


Monday’s post here – tomorrow we will start using the data you’ve prepared.

Before we get into the analysis, let’s discuss the game.

My game is NOT won by building income, assets and spending.

Something I hope to teach my kids about money:

Any choice made to appear rich has an underlying effect of reducing family wealth.

My game => increase discretionary time while getting the net burn to zero.

I’m willing to wager you will not feel free, or serene, until you get close to that point.

“That point” being where you can sit back and not care about the ups and downs of the world. Being able to sit with equanimity will improve your thinking, and your relationships.

It’s going to take a while to get there. Here’s something I wrote in 2016 about the process.

I hope you read the link – I chipped away for 31 years and am a better man, on a smaller balance sheet.

The main thing to remember is each time you get an attractive opportunity to lock in a piece of your core cost of living, take it.

Pay yourself in time.


Philosophy of Status

Don’t think I have transcended my human drive to compete for status.

What I’ve done is (try to) channel it away from external approval, virtue signaling and consumption.

Needing a place to allocate this drive, it goes into my writing, marriage, quality of thought and daily actions. For a long time, my drive went into my sport.

Redirection is a whole lot easier than transcendance.

Family Financial Review: Set Up


The picture is what it cost to send a first class letter when I married my lovely wife. The 55c cost today (+34%) is a reminder that inflation ticks away one penny at a time.

When it comes to inflation/deflation, I like to maintain a neutral position. More broadly, I seek to avoid the need to pick winners.

I also avoid making predictions about an unknowable future. Most importantly, because it’s impossible (!) but also because I have no idea what my life is going to be like ten years from now.

What follows is present-focused.


Quantify Your Exposure

Start with your core cost of living – that’s what’s going to inflate and outliving your money is a key risk.

What’s in my Core Cost of Living?

  • Healthcare ($19,300 of premiums and $7,200 to a family HSA for a plan with a $14K family deductible) – this sector is ripe for disruption, I get little for my spending
  • Taxes, Utilities, Car Costs and Insurance
  • Food, Clothing and Kid Activities
  • Childcare – a massive line item 2009 to 2019, now a source of income for the family, our middle-schooler is a sitter
  • Mortgage, rent, car loans – my main project from 2010 to 2020 was getting this down to zero – once that was achieved, I went a step further and turned it into a source of income

Next, consider your sources of passive and active income. Rents, royalties, dividends, interest (at least in the good old days), consulting and any other forms of income. Write it all out.

Compare your Cost of Living with the Sources of Income and calculate your net burn rate, or your net annual surplus.

Net annual surplus gets routed to discretionary spending, luxury items and/or new investment capital.

The best investment decision I ever made had nothing to do with asset allocation. From 1990 to 2008, I routed 50% of my gross income to new investment capital.

In my early 20s – healthcare costs were peanuts, no childcare costs, living in a shared apartment… I saved a ton. Good thing, too. I had no idea how much my cost of living would pop when I had kids.

My 40s (2009 to 2018) saw unexpected unemployment combine with a big jump in childcare, healthcare and housing costs. This resulted in a burn rate that forced us to make a series of changes, and choices, which proved quite useful in hindsight.


Also write out your balance sheet – assets and liabilities.

Include a liability called “deferred tax and agent’s fees“. Estimate this liability as 6% of the gross value of all the real estate you own plus 25% of all the capital gains in your portfolio (exclude the exempt portion of the gain on your primary residence). Making this number real will help you avoid incurring unnecessary expenses by tinkering with your assets.

The best time to sell great assets is never.

Let it roll.

Why Would They Own That

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

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

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

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.

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.

Fear and Panic

Yesterday, my local CostCo sold out of Charmin in 15 minutes.

My cognitive capacity is so lit up I can’t remember my daily calendar.

Stress makes us stupid.

So…

#1 – execute my strategy, made before the current crisis

One of the nice things about following a rebalancing strategy is you are very likely to have sold (a little) at the peak. My pre-crisis rebalancing happened January 4th and I sold enough to cushion the psychological impact of recent declines.

I rebalanced on Monday and again today.

Limit down opens => phew!

#2 – lean into fear

Since 2014, my portfolio assets have been 60/40 in equities/bonds. For the last six years, I’ve expected bonds to get hammered by rising rates. It didn’t happen. Been wrong the entire time but it didn’t hurt me.

For my long-term capital, I’d rather use a 90/10 strategy (90% in equities). The trouble is getting there. I have zero confidence in my ability to pick the right time to shift. So I created a re-weighting strategy based on VTSAX/SP500.

A simple rule: as the market moves from 20% down to 50% down, I will rebalance equities upwards from 60% to 90% of portfolio holdings.

Today’s rebalance moved me to 63/37. The 63 is held 42/21 VTSAX/VTIAX.

Simple to execute => each time, I rebalance I check the %age off the peak, if we’ve set a new low then adjust the equity weighting upwards. Otherwise, steady as she goes.

This simple strategy is not easy to do => either I want to rush more money in (FOMO) or hold money back (plain old fear).

#3 – real estate

When your neighbors are stocking up on TP in preparation for the end times… it’s generally not a good time to be selling real estate.

What about buying? Real estate prices respond much more slowly to feelings/sentiment. At the last downturn, local real estate didn’t “get cheap” until 18-24 months after the crisis.

I suspect we’re going to see the residential market stop dead for a few months.

After that? I have no idea.

#4 – family

My family has been watching me stock the house for three weeks. They were amused but now we are ready.

I’ve been reassuring the kids they are going to be OK. There’s a lot of fear around.

At school, our youngest heard that “old people” were dying. She took me to one side and asked if I was going to be ok => Yes, Sweetie, I’m going to make it.

That said, a finance background is useful for understanding the impact of compounding. Our state saw a 33% increase in positive tests today. Keep that going through the end Spring Break and we will have 4,200 positives in 16 days (from 44 at Noon today).

Notwithstanding an absence of positive tests in Boulder County, I’m going to start home schooling on Monday. A significant burden on myself but a small price to slow the spread.

#5 – community

Will Colorado’s experience follow Italy, Hong Kong or Taiwan? I don’t know.

What we know for certain is there will be a large, sudden burden on the lower end of our communities. Consider giving a sizable donation to your local food bank.

We also know we will save lives by staying away from each other.

#6 – immunity

Something simple, but not easy, for readers of this blog => cut your training in half.

Take your program, cut it in half and watch what happens with the infection rate in your state.

If your state is on a log-scale infection rate then it will become apparent far more quickly than any fitness loss.

Your immunity will get a boost from this change and you’ll preserve all the health benefits from exercise.

#7 – cash, debt and leverage

If you have an emergency fund then this would be a good time to make sure it is liquid. I have three-months expenses sitting in my checking account.

Not willing to lean into the market downturn? Consider using surplus cash to pay down debt.

If the downturn persists then do you know what can ruin you? There are many types of leverage => I’ve written about this a lot.

 

 

 

 

Diversity of Thought – Things we can’t imagine

2020-01-05 14.39.11-1.jpgA popular theme in the media is handwringing about the divisive nature of political discussion. Everything would be much better “if we could just get along.”

I’m not sure.

Social systems tend to overshoot, overreact, over-everything. When we have widespread agreement (think totalitarian states) humans tend to drive the bus off the road.

Can you name an area where we have wide-spread agreement across the political spectrum?

I can.

Deficits, borrowing, bonding.

Left-right, north-south, east-west, up-down, local-state-national-continental => near total agreement on the benign nature of government debt.

Because disagreement limits the size of potential errors, total agreement worries me.

A surprise in my 2019 was my state’s voters not approving a change to our taxpayer’s bill of rights. It is the only constraint, on the ambitions of government, I noticed last year.

We should not expect government (or friends & family) to “do the right thing” in advance of a crisis. Human nature isn’t designed to work that way. An increase in our collective tolerance of regulation and taxation (ie pain) doesn’t happen until after a crisis.

Our collective problems won’t be addressed until after they blow up.

My individual risks, however, can be addressed right now.

A collective belief in the benign nature of debt is self-reinforcing. While the debt cycle expands, asset values are inflated, consumption is pulled forward and economic growth is nudged upwards. Because of its ability to feed on itself, debt expansion can continue for a very long time, particularly with interest rates near zero. Ultra-low rates enable lenders to fool themselves about the credit quality of the marginal borrower.

What to do?

Life is not filled with only bad news! Am I able to take advantage of unexpected positive surprises?

It’s counterintuitive but I’m positioning myself to borrow a lot of money. My 2020 project is creating an option to borrowing 30-years fixed at an interest rate that none of us can currently imagine.

How might unexpected negative surprises wipe me out?

Consider who is getting out of hand with their current borrowings. What’s the credit quality of… your employer? your family? your largest customers? your local/state/national government?

Do you work for a high-leveraged company, in a state with massive unfunded pension liabilities, while rolling your credit card balance each month?

Hidden liabilities lie (mostly) hidden. Ponzi schemes, unfunded retirement benefits, promises for future spending, fixed price contracts… think about your life. Where do you have exposure to a single person, CEO, manager, employee, fund, investment? In an easy-money environment, it is possible to hide significant liabilities.

Things we can’t imagine are likely to be underpriced.

Kinda tough to imagine the unimaginable! What seems impossible to imagine? Inflation, interest rates at historical norms, rapid nominal growth, credit crisis in a large sovereign, large hot-war…

For me, the goal is not to predict the outcome. My main goal is to protect my lifestyle from shocks and surprises.

To make it real, I ask, “what could blow up ski season?” Health, injuries, illness => my current risks are more human, than financial. Think beyond the money.

To focus on new ideas requires us to reduce the noise in our lives. Are you engaging in a policy of constant distraction?

There is a lot we can do to manage our exposure to the errors of others. Bad companies, bad relationships, bad government… many of us have the ability to pack up and leave. I’ve lived and worked in eight different countries, on three continents. Gradually working towards a situation where the main person who can hurt me is myself!

As a young man, I spent many years exposed to the errors of a single individual (my bosses and my business partners). More common is exposure to the errors of a single corporation.

With preparation, you can benefit in times of stress, but first you must survive.