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.
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.
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.
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.
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.
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.
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.
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.
My kids have started asking me “what’s next” in terms of high school and college.
I told them to save those questions for a few years – what’s important right now is learning the basics and enjoying themselves.
They did, however, get me thinking.
This starts out as a letter to our youngest.
I’ve spent the last 20 years with ~2,000 hours (per annum) of self-directed time. When I reach “normal retirement age”, I will have had an extra ~70,000 hours versus what I was told to expect.
Consistently making choices as if time is more important than money has been a defining characteristic of my life after 30. Those choices, much more than my personal results, have been what gave me a 1-in-10,000 life, so far.
By the time you get to my age, you will have a series of stories you tell yourself about why you can’t do certain things. You’re also going to have the habit energy of 30+ years of choices.
The good news is many of our choices matter much less than we think, I got past a lot of bad choices.
Avoid ruin, build good habits, persist and you can achieve a very useful form of freedom.
My adult life, that you didn’t see, splits into three parts:
High school (to 18 yrs old)
Early adulthood (18 to 25 yrs old)
Adulthood (25 to 40 yrs old)
Along the way, people will be giving you never ending advice — to seek your attention, to get your money, to convince you to serve their ends…
Most of this advice is going to be tactical, short-term, single-action oriented // not particularly useful and a distraction. To blow through this (largely useless) advice I hope you to make a habit of asking yourself three questions:
Who is this person?
How do they know?
What are they selling me?
You’ll have to figure out your own purpose in life. Here’s what my choices say about what I did from 18-40 years old…
Free to choose…
…how, where and when…
…I allocate my time.
What I’m going to share is a strategy for getting yourself time.
What’s the role of high school?
Create options for further study. Science, mathematics, engineering, finance, accounting, technology… choose your courses so you can take any of the challenging majors in college. In 1986, I could have gone any direction at any major university in Canada.
If you can’t pull that off then learn a valuable trade, or skill, where you have a shot at becoming world-class.
The above is your “to do” list. There’s a wide range of successful outcomes possible, if you avoid early setbacks.
Pregnancy – avoid it in yourself and your friends – free contraception saves lives
Early habits of addiction and substance abuse – hook yourself on exercise
Suicide – keep an eye on your friends, and yourself – get help when you need it – everyone needs help
Pregnancy and addiction can be overcome. With regard to suicide, stay in the game – your future self will thank you.
You must have faith about the impact of long-term compounding – it’s why I started saving your allowance in Kindergarten. Our brains are not set up to comprehend exponents.
What’s the goal here?
The best technical education you can acquire without borrowing money.
But what if I could join the professional class?
If you can figure out how to do it debt-lite then fine. Otherwise, be wary of the time you’ll give away to get there — and — the habits you create from living a debt-funded aspirational lifestyle.
The professional class are just as enslaved by the system as most other people — they have nicer cars, bigger homes and beautiful wardrobes — they still lack time and cope with status-anxiety.
There are, however, certain professions that are ideal fits for a life with meaning.
For example, my friends who are docs/surgeons get a ton of satisfaction from helping their fellow citizens. They traded a lot of time to achieve their positions – a good trade, as they are valuable members of their local communities.
At 25, I was a well-trained financial technician. Globally, there are tens of thousands of people with similar training. What made the difference?
I was young – option value of youth!
I trained myself to live on half my income – I didn’t, and don’t, miss the spending
I was debt-free with four-years living expense saved – four years living expenses saved at 25
Living below my means
Time for my net worth to compound
Time to follow my healthy passions (athletics, coaching, relationships)
Compare that to my smartest peers at 25 — better educated, negative net worths (due to college borrowing) and a higher baseline cost of living.
Like a lot of things, there’s no visible difference until you hit mid-life.
A favorite question of mine for friends who are over 60 – name something your grandparents could have done that would have positively impacted your life today.
It’s a tough question – we are talking 50-100 year timelines.
Many families settle on… core real estate holdings that enable shared experiences across generations and time — the mythical cabin on a lake, and similar (not always ideal) investments.
What might be required to achieve that vision…
Proximity – the family needs to live close to each other, but not too close
Time – the subject of this essay
Enjoyment – do we enjoy spending time with each other? What if we don’t? How much are we willing to compromise to get along with each other?
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.
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.
What was your biggest problem of 1, 5 and 10 years ago?
Can you even remember?
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.
Record prices, driven by easy credit, in a time of impaired fundamentals. I see this phenomenon happening all around us.
In times of uncertainty, I like to focus on maintaining:
The ability to change my mind
The ability to cut my cost of living
The ability to reallocate my capital
Holding onto these options requires careful, continual effort. For example, it’s easy to join a “tribe” with fixed views, or publish blogs (!), thereby making it much more difficult to change my mind later.
I try to be careful with what I write, say and think. An interesting tip I came across this year about knowledge…
Be wary of using current knowledge as a belief system.
I first heard this advice via the son of a surgeon. When the son finished his surgical training, the father shared that half of what he learned in med-school proved to be incorrect over the years that followed.
With capital allocation…
When I buy, I lose the option to “buy later” and create switching costs if I want to change my mind.
The ability to decide later
The size of my switching costs
The liquidity of my position
The impact on my debt capacity
The future value of the above is difficult to estimate, therefore, our minds tend to latch on to the perceived value of an immediate purchase.
We always underestimate the value of options.
Caution with your allocations at cyclical highs…
At the end of last year, I wrote about real estate in Vanity Markets, the key thing I liked about renting was the ability to change my mind later. The option to change direction became much more valuable during COVID.
A real-world example, we’re going to change the way we approach ski season.
We are not changing because I think I know what will happen.
We are changing to remove (some of) COVID’s ability to screw up our lives.
I wrote off a lot of money this year due to the virus. More importantly, COVID has been a continual drain on my time and emotion.
Money, time, emotion => you can earn the money back.
The time and emotion are gone for good.
So… we made a decision to ski local.
The savings are material: ski club, driving, ski passes, lockers and seasonal rental => my budget is 5% of last season’s actuals.
Besides saving money “now”, I get the psychic benefit of looking forward to adding back a “better experience” once COVID settles down. I’ve been watching myself for many years and looking forward to an experience is a key part of my enjoyment.
The ability to painlessly change my mind arose because I didn’t buy previously. I stayed variable in my discretionary cost of living. I followed this rule of thumb… Never capitalize luxury spending.
Longer version of the same advice… until your retirement is fully funded, focus on income producing assets (not ramping up current consumption).
There are other benefits.
By “going local” I give myself an incentive to teach my kids to uphill ski and camp on snow.
Knowing that I am saving (a lot of) money in one part of my life, reduces financial stress across all other areas of my life.
I also have a way to fill weekday afternoons, which have been challenging during online school: Morning school, Dad ski, Evening school, Bed. Do that Tuesday/Thursday and I give myself a mental respite from trying to fill the Noon-4pm slot.
A quick update on online school. My zip code contains several thousand CU Students, and all the frats!
Our positives are trending up, again. From Saturday’s paper…
I’m living in the hottest “COVID zip code” in Colorado right now. That said, if you were going to infect a bunch of Coloradans… we’re a healthy cohort! 😉
Because we were cautious “opening up” our bubble, there isn’t much change for us. The main challenge is we are in Week 26 of Home School.
It can be tempting to toss money (and other people’s time) at my “problems.”
During the pandemic, tossing my kids into the private education channel could reduce my short-term pain – if the angel of COVID flies past their new school without creating an outbreak.
However, one thing I’ve learned from six months of home school – the academic demands are easily managed by a policy of a-little-bit-a-day. The real challenge lies in the emotional demands of being around kids all day!
Similar to the ski example, I frame home school as paying myself to figure it out. I did private school math a few years ago. It would cost me significant time, and emotion, to earn the money for the private channel.
I’ll end today with the two best things I have learned about problems:
#1 => My “problems” will NEVER disappear => my mind simply focuses on something else. It’s my focus, not my problems.
#2 => I had better accept that I’m going to be chipping away at stuff daily, for the duration. While I’m chipping away, keep in mind the true goal is “better problems.”
Figuring out how to enjoy spending time with my kids is a great problem to have.
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
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.
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.
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.
Our Science Fair was a huge hit.
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.
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.
Money and Kids
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.