Supply of Money and Interest Rate Transmission Mechanisms

BoCo in May

Feels like I’m getting to the end of my Thursday finance series!

Things I’ve noticed in May 2022:

  • Stablecoin instability
  • Pain at the retail level
  • Step-down price adjustments of stable businesses with mkt cap >$1 billion (disappearance of margin trade on reliable dividends, perhaps)
  • Buyer of my sale was 95% debt financed with a payment of 3x the gross rent I was receiving
  • Market down 19%, as I write

What I haven’t seen:

  • Widespread pain
  • Institutional capital destruction
  • Anything, anywhere, that looks cheap

Given the money creation of this cycle, those are key words to watch:

  • Pain
  • Capital Destruction
  • Cheap

Until those arrive, I’m going to be patient and live my life.


A reminder.

The Great Recession of 2008/2009 first got my attention with trouble in the interbank lending market (Early Summer 2008), this was after ~20% market decline.

There was a long way for the bear market to go, and its effect on real asset prices had years to run.

Great deals were available 2010-2012 => the equivalent of 2-4 years from “now”

Same thing in the UK Recession of 1990, my first out of school.

  • If we’re in a blip then rebalancing will be just fine
  • If we’re in for something more serious then it takes time to develop AND it takes years for price expectations to adjust

Live a life where you don’t need to be right.

Sunday Summary 15 May 2022

Tweets of the Week (by engagement)

  1. Better to REMOVE one thing than chase the latest thing
  2. Our Pelotons read power -29% to +15% (nested threads)
  3. There is no hurry in Early Base (or anytime, really)
  4. What I did to get Ironman Marathon under 3-hrs
  5. Recap of my 2nd round of Swedish 5:2

Data comes from my Public Dashboard on BlackMagic.So

Family

Workouts & Working Out

High Performance Living

A public forum a lousy place for topics that require 1:1 trust

The Choices That Define Your Financial Life

  • Act as if personal finance is a game where you only get ten tickets to play.
  • Invest as if you are holding a checkbook with only a dozen checks inside.
  • Speak as if you’re holding a six-shooter, is it worth one of your bullets to make the point that’s on your mind.

I’ve been hearing versions of the above my entire life. It’s been great advice and encouraged me to:

  • Slow down
  • Resist the urge to interrupt compounding
  • Keep it simple
  • Focus on the big decisions
  • Treat small movements like noise

So, we started your kids with the allowance game.

Then, we moved onto discussing the family’s allocation of capital towards education.

With that, we considered the impact, across generations, of borrowing.

What next?

Teach your kids their financial lives will be about no more than a dozen choices.

Here are mine:

  • Study finance (class of 1990)
  • Save 50% of my take home (1990-2007)
  • Partners investment scheme (late 90s, all in then, equivalent of 1 yr spending now)
  • Work to build a startup (2000)
  • Sell into the frenzy (2005-2007)
  • Move into a low-cost Vanguard portfolio (2008 onwards)
  • Boulder real estate (2010 & 2012))
  • Downsize (2012-2013)
  • Borrow long at 3.25% (2013)
  • Debt free (2007 & 2020)
  • Have kids with a kind woman from a humble background (on going)

Every other choice turned out to be noise. What to do?

Focus on actions, not outcome.

What does that really mean?

Do what moves you forward and have faith. Sport, marriage, money, all things… daily action is the fundamental force moving you towards “better.”

Education matters => I was given a chance in Private Equity because I had high marks in a useful field. Between my high school graduation (1986) and my youngest’s (2031) the nature of “useful” will have changed. However, the need for skilled people to “do” will endure.

The most useful part of my degree wasn’t finance! It was financial accounting, programming and mathematics => I learned fundamental knowledge in college. I learned my profession on-the-job. You learn the valuable part by doing work, for the best people you can find.

This keeps popping up over and over again (professors, partners, coaches, mentors, twitter follows). At 53, I’m learning from people less than half my age! Do work to learn.

Avoid Ruin => studying, then working in, financial accounting helps you learn when a situation doesn’t feel right. Embezzlement is an old game and it’s useful to learn the patterns. Financial fraud happens, and will continue to happen. Take steps to reduce your family’s exposure to ruin.

With the accounting, I learned the most with 9 credits spread across three courses. Financial Accounting 1, 2 and 3. Small investment, huge return. Do it when you’re young. Being forced to rely on others to do your financial math is a disadvantage that will cost you.


Let’s pull it together for you…

Starting your working life (in a useful field, with your financial accounting courses done)…

You are at least a decade away from making the shift to lifestyle sustainable, so you focus on:

  1. Learning by doing with the best people who will hire you
  2. Savingget that first $100K banked, you will be grateful when you’re older
  3. Waiting for the fat pitch – once in a lifetime investment opportunities happen once a decade
  4. Turning yourself into the sort of person you’d like to marry, the friend you’d like to have, the parent you aspire to be => meaningful connection is true wealth

Your mind will try to trick you into thinking it’s the investment choices that matter.

It is not.

It is the four habits I outlined above, and avoiding substance abuse.

Sunday Summary 27 Feb 2022

Getting A Better Body

Breaking Free From 9-5

Athletic Performance

Using High Performance Insights

Family

  • Kids & Screens
    • a daily habit of reading, chores and sport
    • know your why
    • my best strategies for kid tech

Sunday Summary 20 Feb 2022

You can follow me on Twitter. Likes, RTs and questions help guide my writing.

Getting A Better Body

Generating Family Wealth

Using High-Performance Insights

Elite Athletic Performance

Fortune’s Formula


Fortune’s Formula by Poundstone was recommended inside Safe Haven. The book touched on a number of questions/issues I’ve been pondering since attending Taleb’s seminar in October 2019.

Very helpful book!

What follows are a bunch of points I’m writing down so I can refer back later.


Insurance proceeds: Will I be able to access my money when I need it? Applies to everything, especially exotics.

All families are sellers, eventually.

This is an important point because crashes are most damaging when one is forced to sell into them. Ironic point is many (most?) of us choose to sell into them (or in fear of them).

Recently, I came across an article about CalPERS selling billions into a dip – even smart people make poor decisions, most often when they are custodians of other people’s money.

Most institutions have shorter memories than families. Keep reminding yourself of your mistakes – you probably paid a lot to learn your lessons.

Train yourself, and your kids, to be able to tolerate bad news. It saves time, money and emotion.


Counter-party Risk

Payout => who’s on the other side of my insurance trade and are they going to need a bailout to pay me? If my insurance company might need a bailout then am I really insured?

I’ve done my best deals when all buyers have disappeared. A delay in payout can have a huge opportunity cost to me.

Skill => reading financial history, I notice the people on the other side have… better analytical skill, superior computing power, faster capacity to execute, better (and inside) information, favorable leverage terms, assistance with “techniques” to defer/avoid/evade taxation.

These folks are on the other side of everything I do.


Ruin

Steer clear of most bets where there’s a chance you could lose all your money. Many useful examples in the book.

This doesn’t mean to avoid all loses inside a portfolio. Highly volatile bets can make sense when limited in size.

This does mean avoid creating a portfolio (or lifestyle!) with the potential for total loss.


Kelly Criterion

I do not have faith in my calculations of the probably of real-world outcomes. For me to use Kelly, I need to have a feel for the odds of various outcomes.

Using Kelly weighting (even fractional) runs the risk of fooling myself about the total amount of risk I am taking on. There’s probably a way to work backwards and see the implied odds within various prices – I do not have confidence in my capacity to compete with experts in the arbitrage pricing domain.

That said, the key point I took from the discussion, “never bet an amount that results in a chance, any chance, you’ll be removed from the game.” This calculation is simple to calculate and easy to execute.



Downturns & Drawdowns

With this in mind, there’s an important point about investing for long-term wealth. The likelihood of a major drawdown and the cyclical nature of exponential growth.

Put simply, most families, using a long-term wealth maximizing strategy, will spend a lot of time being “less wealthy than they used to be”. Page 228 of the 1st hardcover edition.

BIG POINT: many families trade a ton of return to avoid this reality // OR // over-bet in the short-term in an effort to avoid normal downward wealth fluctuations.

Worth emphasizing! Most people trade long-term return or increase their risk of ruin to avoid natural fluctuations in wealth (and fitness, for that matter).

Very few people have the emotional make up to roll with the punches when it comes to volatility.

One way to hedge yourself is to maintain the capacity to cut spending so you maintain your “net worth / cash burn” ratio. I write about this a lot because it can give you an emotional edge during a crisis.


Buyer Beware

OK, you say to yourself, I don’t understand how to tail risk hedge so I’m going to use an outside expert to do it for me.

Not so fast!

Focus on your day job. Be really excellent at what you know well. In your financial life, be extremely conservative.

Because…

In every field I’ve gotten to know well…

As a class, insiders consume the excess return for themselves.

…private equity, CEOs, elective-medicine, sports supplements, luxury goods, commercial banking…

Excess returns come from inside a field where you are world-class, not from tinkering on the other side of a trade with a finance whiz.

Crypto

The capacity to see beauty

I was going to take a break from posting but this topic gives me an opening to share something useful with you.

So here goes.


Sunrises

First, I know next to nothing about crypto.

Fortunately, my life has been set up to take into account that I am clueless about many things!

I think we can start by agreeing that crypto is volatile.

So I’d suggest you start by thinking deeply about how you, your significant other, your family and your coworkers tolerate volatility.

I don’t need to think deeply. My family abhors volatility. They get nervous about stuff we don’t own.

Personally, I tolerate volatility but tend to sell early. By way of example, I am absolutely certain that I would have sold Amazon 20+ years ago. Grateful I didn’t short it.

So, regardless of the fundamentals, I’m not a good fit for the asset.


About those fundamentals, I can’t see them.

I could learn about crypto but, while learning about an asset class that isn’t a good fit, I am not working on something else.

Let’s repeat that… while thinking about one thing, I am not thinking about another thing.

The opportunity cost of mis-directed thought.


Say I get there – I’m comfortable with the asset class, and I’ve gotten myself and my investment committee past the volatility issue.

Will it make a difference?

Buying, not buying, selling, not selling. Being right will not make a difference in my life.

The opportunity cost of incorrect focus. Big one.


Shades of green

If asset classes don’t make a difference then what does?

I was thinking about this on my run this morning. So let’s start with that… dropping fat, maintaining a stable weight, daily movement in nature, improved strength… big difference!

Since shifting my primary focus away from money, my body has had the opportunity to do a lot of cool stuff.

Trying to get more, of what I don’t need, can prevent me from getting something useful.


A flower

Leaving => I wrote about considering if an asset is a good fit for an owner. What about life?

Leaving makes a difference.. every single time I realize I have different values than my peers, I exit => patiently, quietly, doing a good job on the way out.

I need to watch this tendency. Making a habit of leaving is not going to take me where I’d like to go. Stay where I belong.


Building => Don’t look for easy money, build something.

I helped a friend build a business. Unfortunately, he lied to me and stole money from the investors. Interestingly, when the dust settled, that didn’t make a huge difference. If someone isn’t trustworthy then it’s better to know, as soon as possible. In the end, I learned a lot and walked away with 25-years living expenses.

Learning, while building capital => made a difference, up to a point of rapidly diminishing returns.


A reminder of my first kiss with my wife

As you age, I recommend you transition your focus from money to relationships. Because…

Family => marrying well, raising my children to be exceptionally kind and athletic… makes a huge difference, much more than spending the last ten years building wealth would have done.

Having the courage to change, so my kids’ values are a better fit with my own.


My smiling, lovable savages. You have my eyes…

We tend to over-value what we see.

We see crypto rocketing and we think it must be a good idea. It might be. Like I said, I know nothing about it.

But what we don’t see is often more important.

Thinking about that on my run… the decision “to not” has helped in ways I will never see.

Errors not made.

Not smoking, not using scheduled drugs, not taking sleeping pills, not giving into anger, not quitting…

1/. Will this make a difference?

2/. Will “not this” make a difference?

A useful filter on where to focus, and what to avoid.

Ski Math

The tiny dot in the middle of the frame is my son hiking up from a yard sale, in a gale, at the top of Pali Chair. FIVE minutes later he said, “Dad, I’m glad you’re as good a skier as me.” I’d kept my skis during the traverse! They have such short memories.

Our family ski experience is like my Pandemic Predictions => I got a lot wrong.

When I was shelling out for childcare/preschool, skiing struck me as a very expensive way to do a lot of driving, without much cardio.

Not interested.

A friend, with four kids (and a jet), made the observation… “you gotta be able to do something as a family.” Given his role, as the smartest guy I know, we decided to give it a try.


My wife didn’t believe me when I said, in advance, “We’re making a million dollar decision here.”

Frankly, I took it easy on her. The math is daunting…

But wait, there’s more.

Add-in the inflationary effect of surrounding yourself with the largest spenders in our society.

And… have a look around the parking area, with the smell of legal weed wafting across the empty beer cans… Is this an environment where I’d like to leave my teenaged kid unsupervised?

Still… “you gotta be able to do something as a family”.



$175,000 worth of opportunity cost later, I can ski any run, with any member of my family. This makes me happy during a time of year I used to dread.

Total immersion (5 million vertical feet, in three seasons) let me achieve my goal quickly… Something outside, at a high level, with any member of my family.

Unexpectedly worth it… but only after I figured out our family’s cash burn.


I cope with the “demographic” by focusing my energy on seeking to ski like an instructor, with the fitness of a ski patroller. These goals provide structure for my athletic year.

Like much of my outdoor life, my participation is conditional and always one major crash away from ending.

Stay variable.

Vacation Property 2021


One of the topics from our recent Couples Retreat was vacation property. I needed some time to show-my-work for why I’ve decided to stay variable.

The question, in the context of both buying and not-buying, was…

Will it make a difference?


The question gives me an opening to share some things I’ve learned from 25 years of real estate investing.

1/. I have yet to regret not-buying a vacation property. When vacation markets appreciate, so do investment markets.

2/. The ones-that-got-away have three main attributes: well located, easy to find tenants and decent cash yield. Vacation properties usually only have one attribute… well located.


I’ll share insights about capital allocation:

=> No one in the company is likely to care more about capital allocation than the boss – the CEO sets a cap on how much people will care about capital, and everything else for that matter.

Extend into your marriage, and family….

=> No one will care more about spending and capital allocation than the individual responsible for earning the income/capital in the first place.

Similar to work ethic… the actions of leadership set a ceiling on what to expect. No amount of legal documentation, and pontificating, can overcome this reality.

Don’t waste energy fretting about the way things are.

Be grateful when you’ve been able to create a team that, largely, follows your lead.


Now the math!

I’ve updated my #s for the two markets I follow most closely.

  • A vacation market with an effective yield of -3% (cost to own). I avoid fooling myself that I’ll be able to short-term rental myself to breakeven.
  • An investment market that is generating net cash flow of 2% per annum.

To “get my money back” in the vacation market, the value of the asset needs to grow by 2.5% per annum.

Money back does not mean purchasing power back. The “same” dollars in 15 years time will buy less due to inflation – just look backwards to 2005 in your home real estate market and see what your current place was worth.


We have no idea about what the future holds and 2.5% market growth is probably looking tiny when compared to what you’ve seen over the last year (+30% in my zip code).

You could be right.

I do, however, know markets that are just getting back to their 2008 peaks. In a negative cash flow scenario, that’s a painfully long time to hold.


My goal isn’t to predict an unknowable future. My goal is to answer the question “will it make a difference?”

In the get-your-money-back scenario (2.5% market growth):

  • Take time to calculate your true cost to hold.
  • Make sure you’re OK with permanently increasing your burn-rate, especially if there’s debt service.
  • Know your alternative use of funds => the investment property returns $1.75 for each $1 invested & Vanguard’s VTSAX is currently yielding 1.4%.
  • The vacation property requires an extra $0.45 for each $1 invested. This is before you decide to renovate and burn $$$s on rugs, curtains and furniture!

For that vacation property, here’s what I do…

  • Take the purchase cost
  • Make sure I’m OK with annually spending 5% of purchase cost, forever
  • Consider if I am OK with writing-off the equivalent of 50% for customization, the cost of ownership and agent’s fees

Then remember:

  1. My personal utilization of past destinations has been 15-45 days per annum.
  2. The future risk to my family is we are priced out of our home market (not that my spouse and kids might have to unpack/pack up from a rental).
  3. I tend to change my mind.

Feelings!

One of the challenges with new deals is my feelings are dominated by the expectation of the asset making things better.

I also enjoy the feelings associated with being able to provide for my spouse and kids.

Making things better & doing right for my family => it’s difficult to feel the benefit of doing nothing.

Once I have a good-enough position, the only person who can screw it up is me.

Property 2021

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.