Real Owner

Robert Vinall (www.rvcapital.ch) describes his approach as “investing like an owner in businesses run by an engaged and rational owner with the capital of investors who think like an owner”. I like that definition. Despite how difficult it is to count, ownership connects us to the future. It isn’t a participation in profits (or losses). It is custodianship. Beyond individual contribution. Beyond ego. Beyond benchmarks, competition, and relative performance. Not a sport, but a purpose. It is about taking capital and putting it to work productively. Creativity is noisy. We look for outputs. The three key ones in businesses are cash, earnings, and dividends. The cash a business generates is the easiest to count in the short term, but hides how well the long term is being cared for. Earnings add scope for the view of management and standardise numbers for an attempt at comparison. Dividends are declared. Meaning management’s goal can be to pay a steadily increasing stream, in spite of the noise. To detach the natural ups and downs from the point of the business (long term wealth creation). The longer your time frame, the more likely you are to add real value. A real sense of ownership is the key.

"Potato Planting" Van Gogh

Big Waves

It is almost impossible to build Capital if the noise of life and money, is bigger than your earning capacity. Starting from zero is the hardest part. Pooling big risks is how we historically managed this. Groups of risk takers joining together and splitting the costs in “Mutual Societies”. Accepting a smaller loss for certain instead of a big loss that wipes you out. The biggest component of wealth creation is time. To have time, you need to be able to withstand the things you can’t control. My rule of thumb is to self-insure for things that won’t wipe me out. For the rest, get cover if you can. The three basic “big waves” are Death, Disability, and Severe-Illness. If you have dependents, then Life Insurance is necessary to stop your death meaning severe hardship for your loved ones. This is the history of “Scottish Widows”. Severe Illness insurance does the same, but you are still alive and may still work again. Disability cover is for when an accident prevents you from earning. Insurance allows the fire to start.

Mavericks (2010)

Shelter First

It takes time to build most things of significance. Especially if the thing you are building is intended to last. Creative Destruction is most unforgiving of those who are trying without deep roots. If your primary tool of merit is “trying” combined with “skills and knowledge”, the brutal forces of randomness and ambiguity will laugh you off. Context matters. Protection from the elements matters. Building anything of significance requires investment in the period over which you are judged. The harsh truth is that noise (luck and misfortune) probably means our lives are too short a time over which to judge. Wealth is built across generations. 10-15 years is the shortest investment period over which compounding can just be starting to take effect. Most businesses will fail in the first 10 years. If you can generate 5% real (after inflation) return for 15 years for a relatively stable stream of contributions, and can keep that average return up, you can build an Engine that can sustainably carry on paying an equivalent stream. 50% (invest half) for 15 years (time) at 5% (genuine creativity) touches on sustainability. Capital supports sustainability. That is a big ask when you are fighting the wind, rain, and sickness. First, find shelter.

Hubris Factory

Is it a club or is it a meritocracy? I think the answer lies in whether there is a mirror. If the person making the hiring/firing decisions is subject to the same harsh selection and rejection criteria. If you are willing to judge whether someone is good enough, you should be willing to be judged. I don’t accept the “you don’t have to swing at every pitch” principle when it comes to people. People aren’t pitches. I am not your pitch. Clubs can have crystallised privilege (Capital and strong Balance Sheets) to weather storms and buy time. They can have liquidity (Buffers and Cash) to meet their expenses even when profits disappear and losses feed from the trough too. It is a club when you admit that you have more interpretive charity for yourself than your competitors. It is a club when you admit that part of the selection criteria is being “like minded”. Don’t call it a meritocracy if everyone looks like you. Hubris factory is more appropriate.

"Factory at Asnières" Van Gogh

Mostly Sport

One of my friends from university was the master of seeing things for what they are. It’s mostly sport. In our first year, I quickly learnt from him the power of past papers and practice examples. Getting something right once isn’t the point. Letting it soak in till you know it, rather than just recognise it is. Treating the process of tests and exams like athletics, where you are embodying the skills and reducing the performance times. The second trick he exemplified was answering in the way the markers are looking for. We did a couple of projects together, and getting the Marking Schedule from students from the year ahead was the starting point. This is like looking at job advertisements, studying your mentors’ career paths, and speaking to recruiters before choosing what to study. On very few occasions are people genuinely pushing the boundaries of human thought. The answers are normally there for those who look. Who is doing what you want to do? Were they where you are? Is there a path?

Fist to Mouth

Creative Destruction dismantles long standing ways of doing things in order to make way for innovation. It scales the idea of “making yourself redundant”. There is a punch you in the face obvious problem with making yourself redundant. It requires trust. Fool me once, shame on you style. When you realise that someone has the ability to cut you loose like a gangrenous limb, after solving their problem, one option is to make yourself irreplaceable. To stop trusting. To create artificial barriers to entry and negotiating power. Little secrets people don’t want known. Stuff they know you know they wouldn’t want in the newspaper. Dirt. The only way to truly want creative destruction is to be an owner. Then, and only then, do you have an incentive for the problem to be solved. Otherwise, the real incentive is to make sure you, personally, are a part of the problem solving. You want the problems to go on. To release the power of creative destruction, we have to detach our identities from problems. To build buffers of cash, and engines of capital, that support us beyond hand to mouth living. That make us celebrate a job no longer being necessary, because it means a problem has been sustainably solved.

Man Behind the Curtain

When our institutions (Nations, Companies, Identities) fail us, we need to take the power away from the man behind the curtain. Small a anarchy inverts hierarchy. It recognises the danger in central decision making. The danger of lost information and distorted incentives that comes with the intentional creation of barriers to entry around wealth and information. Small a anarchy is not about creating chaos or lack of rule of law. Quite the opposite. When you empower individual decision and agreement making, you recognise and support the power of the multiple relationships that make up society. Imagine a world full of capitalists, in the sense that everyone had a buffer of cash and an engine of capital that allowed their No and Yes to be meaningful. Autonomy. Consent. This doesn’t mean people can do whatever they want. It means we are empowered to build agreements. It means a spontaneous order that has the resilience and endurance to deal with whatever comes our way. Learning. Unlearning. Contributing.

Left or Right

Step one is to become aware of the decisions you have the option of making. To get a sense of your left and right. A Galton Board is a demonstration of the law of large numbers. When things can go left or right randomly, most will “regress to mediocrity”. Some will, through luck (good or bad), go to the extremes. Some of those extremes will take the credit or blame for the “merit” of decisions taken by chance. Those extremes will get most of our attention. This is called the “normal Distribution” because it is such a common way that the random noise we deal with plays out. When nature doesn’t know, its answer is to do lots of small things. Three lessons from a Galton Board are (1) take stories of success (and failure) with a pinch of salt, (2) try be aware of your left and right, and (3) reduce the size of your trial and error when you are acting in the dark.

Galton Box