Financial Yoga - Stilling the Waves of Money Anxiety
We speak in chunks. A single word can connect to a world of shared meaning, or none at all. There is too much for us to understand, so we pick areas and hopefully have overlaps that allow the important bits to spread. Risk is a chunky word.
When choosing a path to financial security, risk was the overlap I chose to study. Actuarial Science is a framework for making financial sense of future uncertainty. Primarily through statistical and business understanding of the past using large data sets. It takes advantage of the law of large data sets.
There are different forms of uncertainty and risk. For most people, risk normally just means something going wrong. The study of risk goes wider than that. Looking at complexity, ambiguity, and the randomness of the world, and trying to find within that, “is there anything that we can rely on?”.
When you look at individual instances of something, life can feel like a spin of the coin or roll of the dice. But if they are fair, there are 6 sides of a dice and 2 sides of a coin. Actuarial Science is partly the study of, and attempt to weather, the storms of “the underlying” rather than the specific result. A consideration for the variety of outcomes that is a form of “there, but for the grace of God, go I”.
Life is a series of choices based on the options we are given. Where we end up depends in part on luck, in part on where we started, and in part on how consciously we play our part. A physical demonstration of this is the Galton Board. It demonstrates the idea of the normal distribution.
Even though there is a lot of randomness in the world, a step or two back often reveals a pattern. A wide variation for the individual, but a lot more predictability around central points. You get distributions of results. You get extremes. Our news and stories tend to focus on the extremes, and pay less attention to long term averages and normal people.
With a Galton Board, a ball will fall down, and it will go left or right, left or right, left or right. Facing repeated decisions. The situations we are in and the choices we make carry Karma. Choices have consequences. There are sometimes opportunities to correct mistakes but you have to work through historic consequences. What we do matters. History matters.
We don’t all have the same choices, but we can increase the set of tools we have to have a degree of autonomy over what lies in front of us.
No one has a view of the whole picture, or the ability to process it. We do not know in advance what the correct destination is, or what our future choices will be. We make our choices based on what we already know, with a limited glimpse forward of the possible consequences of our actions. There are individuals whose choices go against the grain, but if you look at a big enough picture, prejudices and bias starts to show.
Daniel Kahneman and Amos Tversky opened up the field of Behavioural Finance and the study of cognitive biases. When you look at groups and group decisions, you can get a sense of how our processes work. This doesn’t mean we aren’t individuals. But we are individuals who don’t live in isolation. Our choices are affected by the choices of those around us. They are affected by the constraints of physics, time, and our very human limits. Context is everything when grasping at the randomness, ambiguity, and complexity of wrestling with personal choices and understanding.
You can think of risk as stress, and stress is not all bad. “Discomfort is the entry ticket to a meaningful life”. In exercise, you have High Impact Interval Training. Putting the body under stress in a controlled fashion can be a good thing. That is the way we learn. The body follows a use-it-or-lose-it strategy, and is ruthlessly efficient at redistributing its energy. If you start doing press-ups, your muscles will get bigger as your body responds. If you stop doing those press-ups, your muscles will get smaller. If you go for runs regularly, you will get faster and it will become more comfortable. If you stop running for a while, you start getting tired when you go for random, irregular runs. The body directs resources to where they are needed, and takes them away when they are not used.
If you want to build up strength, you put your body under stress in a controlled fashion to build up your capacity for when you are in uncontrolled situations. Developing the strength and flexibility to maintain control when you are not in a planned environment.
I am not sure whether I consider myself a “risk-taker”. I go through waves, phases and situations where I am very risk-averse and others where I am comfortable with discomfort.
When I think of when I was a little guy, there are definitely stories where I was absolutely fearless, and others in the other direction. There was a big chap that I had an intense rivalry with at school. I was... not big. I was tiny. Smaller than most of the girls. Still, I played Hooker in Rugby until I was 12 years old. My fearlessness (at that stage) meant I didn’t seem to realise I was so small. My nemesis was in the first team, and I was in the second (of two) team(s), and we used to do drills against each other for tap-and-run. Jones would regularly take the taps, and I’d be the guy who would want to tackle him. Maybe it was because of our personal rivalry, but maybe it was because the bigger they are the harder they fall. If you get the tackle right, it doesn’t matter how big they are. It didn’t seem to matter to me that I normally didn’t get the tackle right and got munched. The (few) times I did were worth it. Risk and reward.
My growth spurt was delayed. After being a fearless forward in my introduction to rugby, I was introduced to high school. I had not grown, and my mother was not happy on the sidelines (not) seeing a tiny boy being swallowed up in the middle of a scrum with a habit of collapsing. I was not fast at all, nor particularly skillful with the ball, and didn’t have any strategic insight and overview of field positioning. The choice to move to the backline also seemed to sap my courage when monsters had run-ups. A friend of mine, Shaun used to delight in running towards me and screaming because I would just throw the ball away.
Fearless kicked in at various stages when my voice deepened, and centimeters stretched. I once again became more willing to throw myself into situations where I could potentially get hurt.
At the University of Cape Town, we had the RAG (Remember and Give) Olympics. I believe one of the events, the step races, has subsequently been dropped. Our version was not even as bad as in the early days, when they used to toboggan headfirst down the steps in front of the main hall with accidents regularly resulting in broken jaws. By the time we got our turn to be the stupid ones, we just used to run and dive. Strapped with a few bits of cardboard as “protection”. John, the guy who taught us what to do kept it simple, “just look over the horizon towards the mountains, and run straight.” .
Unlike other residences, we even had trials. I decided I really wanted to make the team, and even though I wasn’t fast, I could be stupid. In theory, if you land correctly with your feet, momentum will take you forward and you won’t get hurt. In the trials, I set off steaming a full 13 steps in a row. Sprinting as if I was on solid earth without even looking where my feet were going. It started well, and I steamed ahead, but after the disruption of the dive on the second landing... something went wrong. I tumbled down the remaining steps tearing the ligaments in my ankle. In the actual final, one of our (“successful” in trials) team members broke his leg in several places. Stupid can work. Temporarily.
In other events we would pick the smallest available guy to sit in a shopping trolley, and race around the loop through Oxford-style leaf-covered residences.
There is a long list of stupid things I have done.
In 2014, it could seem like a very risky thing to be doing for me to have stepped away from the Corporate world. No longer having the certainty of a salary. No longer wanting to work for money. But you need to unpack conspicuous risk. When you look at a salary, it is not as safe as you think. The idea of a job for life is not there anymore. You are dependent on the financial well-being of the company you work for. Part of stilling your own waves of money anxiety is being able to understand business in general.
How do you know whether a (your employer’s) business is in a position to survive? Businesses are more fragile than we think. It isn’t just about how good their product/idea is. The strength of their reserves (Capital) and container (barriers to entry) matter even more. Pushing responsibility to owners/managers to still our financial anxiety when creative destruction constantly attacks the forces of supply and demand, is a structural risk.
I got to have a stab at another way of approaching life, because I had built reserves and a container separate from my job or the companies I was working at.
When a country isn’t wealthy enough (e.g. South Africa), or even if a country is wealthy enough (e.g. the United Kingdom), to have a solid safety net, we start pushing responsibility to owners and managers saying, “they need to look after the employees and create jobs.”
In some ways I think that is fair. Firms can use team language when convenient, and treat people (employees and clients) as disposable tools at other times. The danger with that is the condescending idea that there is a class of people responsible for looking after people, and an underclass of dependents doing their bidding for a hand-to-mouth living. Both decision making and responsibility can be shared in a way consistent with autonomy and consent. If we build proper resilience and endurance. If we aren’t solely reliant on salaries or welfare.
What happens when companies go bust? What happens when countries can’t tax more or borrow more? As we have seen during Covid-19, a large number of the institutions we rely on are not designed for extended periods of challenge. To be creative, you need the capacity to survive the winter.
Wealth creation is at its heart, risk management.
A lot of maths used for the management of risk is problematic. There is a desire to make it look pretty, and come up with models and numbers to give the illusion of understanding. If you can measure it, you can manage it, the theory goes. The real value in models is simply a device for thinking through something. A tool to help us compare and communicate.
The danger is that when things are complicated, you often see whatever it is you are looking for. If a bunch of investors are looking for the best companies, and they define that as something that gives a return of 15-20%, you can be sure most of their models will spit out 15-20%. You don’t really understand risk if you then use that to rank various different analysts’ work. Your 20% is not my 20%. My 20% is not even my 20%. Add a couple of decimal places, and you realise that 36.79% of numbers are made up.
Having a summary number doesn’t give you a full understanding of risk. Doing the work gives you a clue. Getting things wrong gives you a clue.
I was told that when you go to university, you come out thinking you know nothing and when you go to vocational colleges, you come out knowing very specific and useful skills.
What Actuarial Science did was teach me a bit of humility. I failed academic tests for the first time. I had failed things before. I got my driver's license on the fourth attempt. Not because I couldn’t drive, more likely I failed because I was confident I could drive. I got some free lessons from an instructor who saw me in the newspaper. I should have been able to tell from the way he was reading the newspaper during the lessons that there was a problem. Maybe he was looking for new clients? But I “could” drive and backed myself.
The point of any test is not just for you to know what you are doing. It is to give confidence to the instructor that you know what you are doing. To follow the structure and rules and demonstrate the required methodology. The way you pass exams is by knowing what the examiner is looking for. I failed three times in short succession (twice in one day) because of observations. By not knowing what I was supposed to be conspicuously demonstrating. I then got a new instructor to smooth the edges and passed on a fourth occasion.
I had failed stuff before, but not academic stuff. When I got University, I was left dazed and confused on several occasions. Sometimes for time pressure reasons and the sheer volume of work to get through. I was made to fully realise the limits of my academic ability. My mantra getting through was, “This is not Rocket Science. You are not pushing the boundaries of human thought. Other people have done this before.”
One idea that I found really problematic coming out of the maths of finance was the oversimplifying risk to volatility. Volatility is quantifiable. It is how much the average observation, differs from the average of the observations. So, if you know the average, how far “on average” will one of the parts be away from that.
It is appealing if you can count something. If you want to believe in a world where you can clearly say return simplifies down to a number, and risk simplifies to a number. Then you can adjust the return for risk. Take the level of risk appropriate for your appetite, you choose the option at that level with the highest reward. Now, that seems beautifully simple. It is just wrong. You don’t get paid for taking risks. You get paid for value-added. You don’t get paid for complexity, you get paid for solving things. You don’t get paid for not failing. You get paid for getting to a solution.
You can’t simplify risk into a simple number to fully capture the “cost” of returns. There are various measures for risk, that ask interesting questions. All of them have problems. Volatility is the most commonly used, as a measure of noise. How different the average outcome is, from the average outcome.
If volatility is zero, there is no movement from the average. If sometimes it is higher, and sometimes it is lower, you are measuring the absolute difference from the average (whether below or above is ignored). If results are “normal”, you can get an idea of what the chance of an outcome being in a given range is.
Another measure of risk is the probability of ruin. What is the chance that you are not going to be able to play the game anymore? The most important thing in most games is staying alive. Value is created over the long term and compounds. Survival is essential. You always need to know that you are going to be at least 5% okay, so that you can rebuild. Always have the capacity to regenerate, even in a huge disaster. Hold something back. Something that allows you to have a deep sense of security.
Volatility, based on the past, can be zero right up till a point of ruin. There is no such thing as risk-free.
Nassim Taleb has written about Risk in a very accessible way. His books include “Fooled by Randomness”, “The Black Swan”, and “Anti-Fragility”. He writes about risk and decision-making. In particular, he looks at tail risk. The extreme events that have never happened before, but will have a dramatic impact. Events that fundamentally change everything. If you only look at what has happened, you assume that things are fairly controlled. That the world is like the spinning of a coin, or the roll of the dice, with varied but fixed outcomes. But it is more complicated than that.
Real risk is not normal. It has fat tails, so there are more outliers (unusual observations), than would normally be expected. That is on both the upside and the downside. When normal changes, it can change dramatically. When you think through risk, you need to ask, “What makes this go to zero?”. You need to know what will destroy you, and you need to protect for those risks.
Then you need to position yourself to be available for the positive surprises. Why could this go really well? You do not know that it is going to go really well. But you need to open yourself up to that possibility.
Risk can't be studied purely by looking at history, even though history matters.
Looking back far enough, there are lots of examples of extreme events. High impact, low probability events. Numbers we use for risk analysis make better questions than answers, because they never include the full picture.
A great book to read to give you a little bit of humility is the story of Long-Term Capital Management, titled “When Genius Fails”. It is an important book to read. Thinking in “distributions” (a range of possibility) rather than simple numbers is vital.
Howard Marks implores that we, “always remember the six-foot man who drowned in a river that was five-foot deep on average”. It is not just the average that matters. The statistical term is moments. You have to think in moments. How the range of possibility is made up. That includes thinking about tail risk, and what isn’t in the numbers (yet).
In scenario testing, you need to plan for what could happen, not just a single path. In the same way as looking at what did happen is not enough. What could have happened? You need to plan for your plan not covering everything. With hindsight, we think we understand the world. We think the lessons we learn through mistakes mean, “if I had done it this way, this is how it would have played out.”
In reality, if you had the chance again, everything would be completely different.
I played a lot of poker when I was at university and the early stages of work. Poker has a thing called “Rabbit Hunting”. When someone makes the decision to fold, but they ask the dealer to show what the next card “would have been”. It is irrelevant. If it is truly random, you didn’t know the rabbit when you folded. All the cards still in the deck, that you haven’t seen already, could be that card. Your decision has to be made in the light of uncertainty.
The world we are in is not a single safe path. There are multiple ways things can play out. You need to be able to take account of all those paths, including in how you judge yourself. Don’t judge yourself purely on how things played out. How they could have played out is just as important a part of the learning process. A decision can still be a bad decision, even if the result was good. Which is not the way that we tend to think.
Success carries far less information, and far more danger, than failure.
Broad Framing (see “Thinking Fast and Slow") is the practice of thinking of decisions in the context of other decisions. Rather than the specific (uncontrollable) outcome of any one decision, what you are really trying to refine is the underlying process of decision-making. How do you make decisions?
In terms of Narrative Therapy, you are reflecting on how your scripts work. What are your cornerstone events? What are your drivers? What are the ways that you think that often sit underneath your conscious thinking? In this particular situation, given your history, and the way that you think about things, how are you likely to respond? That is what you really want to do the work on. Constantly owning, and being conscious of your underlying scripts. The stuff we are normally not even aware of. And it is really complicated. We are not necessarily going to be able to understand everything.
We can get better at observing ourselves and our repeated behaviours.
In the study of machine learning, they started to see that you can simplify quite complex decisions down to a string of ones and zeros. The computer is not sentient. It has just learned through multiple repetitions of trial and error, with adjustments. Feedback loops added to complicated processes. It does not understand its own behaviour. Given the ones and zeroes, you can’t extract the knowledge they contain. You can only apply it and see what happens.
We are sentient, but even we do not understand ourselves completely. And we have to accept that we can not understand ourselves fullly. A lot of our behaviour carries deep knowledge that we can try to interrogate but we might not be able to come to the bottom of. We can constantly be on the path of understanding ourselves through self-awareness, self-search, and self-reflection. That includes recognition of limits, and creating an environment that can cope with lack of understanding and regularly being wrong. That can cope with lack of control.
It is important to practice the ability to detach. Not all the time. We also have to relax into and accept the way we are, but then build capacity for periods of reflection. Where you can look back and see, “This is a game. I am an avatar. What did I do?”.
It can be quite useful, for example, in work situations where you might have a boss that has treated you really badly. I can remember watching Game of Thrones during one of my periods of work that was really frustrating. I remember walking on my commute with one of those ear-worms of something that is bothering me. One of those ones where it just seems like there is no way out. But if you are able to step back and see yourself as a character in the story, you can see that it is not you. It is a situation that the character in the story is in. This provides a sliver of separation. That can offer a tiny gap of calm. Perhaps even some humour. This bit of the story will pass. Pages turn. Chapters end. Characters evolve.
Public Speaking is a great opportunity to practice detachment. Where people become confident is when they are no longer thinking of the audience as judging them. When they are passionate about the subject matter and that passion shows. The listener is thinking about the ideas and the person delivering the sparks almost fades away. Their thoughts are being triggered about things they care about.
Seth Godin points out that the audience may even be shooting off at tangents where they are being fired up about their own ideas. You don’t live in their heads but what you are sharing helps them connect dots that light up their creativity. Where your words spread in ways beyond your control. It ceases to be about you. They walk away from the talk excited about what they are going to do.
A lot of anxiety comes from judging ourselves and others. Weighing and measuring. Separating people into good enough and not good enough. Are they going to choose me? Are they going to kick me out? Am I going to fail? These negative niggles are what prevent us from honest reflection because they lack fundamental commitment. Feedback cycles only work with deep underlying security. Deep knowledge that not only is it okay to make mistakes, but that that is the way we learn. You are okay. You are enough.
We see based on the experiences we have had. We build an interpretation of the world. We filter the noise and interact with it as best we can. Which makes a feedback cycle essential. We can not help but constantly make mistakes unless we either don’t do anything, or don’t venture very far from what we know we can hold onto.
Boldness is built on nurtured insecurities. Boldness is built on a capacity to not only confirm what you already know. With security and a feedback loop, we can act in micro-ambitious ways. Have a go. See what happens.
If you have confidence that you have the capacity to unwind mistakes, depending on the unintended consequences, you can be more adventurous. If you are wrapped in fear, you will seek perfection that doesn’t exist, before you act. You will seek the correct way. If you accept that your way is just an interpretation, you can move. Embrace a sense of wildness, and diversity of attempts in which beauty exists. Where we can be open to the chaos of noise, silent periods, bright colours, dull colours, contrast, light, dark, and in all of that find the bits that resonate with us.
Consider the sheer volume of life that comes out of a jungle or a rain forest, rather than a mono-culture farm. Where there are rows and rows of green, but it is dead. Diversity and imperfection adds life cycles that cope. That reinvest and reinvent and relearn. Changing form like the water cycle.
Max Planck talks about science progressing one funeral at a time. Specific solutions running their course is a feature, not a flaw. If you want to be part of the journey, you have to hold on to specific containers lightly. Thriving involves not being too deeply connected to a solution that can’t accommodate change. Risk is proof of life. You can’t remove risk any more than you can remove a pumping heart.
You can manage risk... reduce it, mitigate it, transfer it, allow for it. Risk is the fact that we live in this chaotic place. This beautifully chaotic place.
A lot of financial planning is about determining someone’s risk appetite. Which is why generic financial plans aren’t helpful, because when you sit down with a financial planner the first topic of conversation is not about the solution. It is about you. The most important part of a financial plan is the ongoing conversation.
Financial planning is much less about number crunching and much more about understanding. A planner is more therapist than mathematician. Like a good therapist, the crucial factor is rapport. That you have a connection and that you respect them. But most of the work in therapy is done by you.
There are some basic rules and structures (like country-specific tax laws, and company-specific product processes) they will know, but in most cases the financial planners have administration teams that help them with that. They will have some areas of knowledge that you don’t have, and act like a teacher. Their main job is the conversation. More them understanding you, and you better understanding yourself. Understanding the way you see and respond to the world and setting up an (adjustable) plan that you can sustain. That you can sustain through various risks. Allowing you to build the capital to absorb and feed off uncertainty, and the containers to create and hold the things you value.
Insurance works on the “law of large numbers”. Unlikely events with big consequences are spread out over large groups. A small, certain, premium that can be afforded instead of a small, uncertain, chance of ruin. You can self-insure for a lot of events if you have enough capital that it won’t result in your ruin.
I built my Engine the traditional way. With a salary (from a job) that was bigger than my expenses. When I started, I took out life, earning ability, and severe illness cover. The world is designed around us living hand-to-mouth with our salaries defining our capacity to take and absorb risk. To snap that connection, you need a gap. Then that gap needs to be invested, and what it earns reinvested, until your Engine can be working and earning what you need to spend. It is only with a working engine that your life choices can be gradually freed from the constraints of money-making.
Good ideas that are not good business ideas are still worth doing. They need to be powered by good business ideas. Merit/worth/value (a good idea) is not sufficient. At least not in the beginning. With planning, you can increase your ability to be the one who decides what has value, and what you do with your time.
Building an engine (Capital which can work on your behalf) creates the capacity to stop focusing on yourself as an individual. We all have to eat. Many of us have dependents who rely on us financially. Which unfortunately means we can be seen as productive assets. Valued for the money that consumes the majority of our time.
A few get the perfect combination of “what you are good at, what people want, and what you love”. Applying all three filters cuts out a lot of activity. Things you are good at and love, that don’t pay? Things people want, and you love, but you aren’t “good” at? People can get stuck doing things that people want and that they are good at, but they don’t love.
Many people can’t pick and choose. They take the opportunities presented, and are too busy being a productive asset and meeting obligations to have capacity to breathe and change path. And life passes them by.
If you want to stop seeing yourself as a productive asset, you need to build an engine that replaces your need to earn money. If you need to earn money (as most people do), there will be real-world constraints of supply and demand that form the boxes in which we are paid. The hold of those constraints gets released if you can gradually create breathing space.
My dream when I “stopped working” in 2014 was not to do nothing. I just wanted to not have to think about how what I would do would make money. I also did not like my fate being in other people’s hands. In a pure meritocracy, everyone would line up on a theoretical starting line and the gun would go. In reality, there are plenty of gatekeepers to opportunity. There is not a path you choose and then knuckle down and crack on. So washing your hands of that rubbish, and saying “I am done” had incredible appeal. Front loading the effort, then constraining expenses going forward.
The problem with that idea is I do see myself as part of others. It does not help if I am not stressed, if others are stressed. Like the scene in Forrest Gump where he runs back into the forest (with one r) to rescue people. The idea of financial independence is an illusion. I celebrated stopping working for money as “Independence Days”, but the problem is we aren’t independent. We are interdependent.
So even though I talk of financial security and stilling the waves of money anxiety, the reality is it is a process of practice. The struggle to still the waves will continue. Part of stilling is acceptance and perception. Stillness where you are, not where you are aiming for. Stillness within the chaos, not after the chaos.
With lightly held detachment, you still care deeply and are involved, but you carry the sense that “this too will pass”. A single event/project/outcome does not define you.
You are making a contribution to something that exists outside you. There can come a point where you can detach completely. A form of “earned selfishness”. Handing over when your individual part of the story is over and you are able to extract yourself. That is a very yogic approach. The yogis talk of life stages called ashramas. The four ashramas are: Brahmacharya (student), Grihastha (householder), Vanaprastha (retired) and Sannyasa (renunciate). At the end, you are connecting more deeply with the permanent part of who we are, when your temporary role has run its course.
Detachment still allows you to be ambitious, in a micro-ambitious way. Small achieveable goals that add up. Capacity for small projects that you can wrap your head around. That is why we break things down into stories and categories that connect to how we understand. Little problems we can fix and move on to the next little problem. The more nimble you are, the more able you are. To adapt and adjust and accommodate the new problems and information that come in.
Even if you are micro-ambitious, you want to be able to keep momentum in the stuff you do. To be building on what you have done before. Constantly taking iterative steps. Trial and error. Learning, unlearning, relearning. We don’t know how the world and our path is going to play out. The information is not there. It is not that there is stuff you don’t know or that someone else knows and they need to tell you.
You get to the point where you realise we are all experiencing the world in a different way. That is great. That is something to celebrate. It is okay. To empower others, we don’t have to go out and convince everyone to see the world in the way that we do. We do not have the capacity to understand the world. It is too complex.
We don’t even experience the whole world. We experience a sliver of it. We get different information through touch, sight, hearing, smell and taste. It is fun to imagine yourself as tiny or huge, and how the laws of physics would change. Not in their essence, but in how they relate to you... and how you experience and interpret the beautiful chaos.
If you were incredibly small, and you came up to a little drop of water, it would be a huge bubble. We were about three foot tall when we were two years old. We were surrounded by people bigger than us. I am six feet tall now. I like imagining being surrounded by twelve-foot adults running around protecting us. I did my first ski lesson on the holiday my now wife proposed to me. I saw little kids being picked up by the adults as they were about to go into a snowbank. Swooping to the rescue. When I was about to go into the snowbank, no twelve-foot adult came swooping in.
Once we become adults, we build in our own protections and ways of making sure consequences are not too grave. We carry on. We build our own set of congnitive biases that help us relax. Biases help us make decisions quickly so we don’t have to think of every snowbank. We can just ski. That is what mastery is all about. When you trust your capacity to engage with the world and get to a level that is intuitive, the anxiety falls away.
We carry on.
Through reflection we can think about what short cuts we put in place to make our decisions. We can not avoid short cuts. Short cuts allow us to relax and act. Reflection is hard, slow, and taxing. We do not always want to be reflecting. Reflection allows us to embody our decision-making. You don’t have to think about how to walk. This means walking can be a small part of much more complex actions.
If you get hurt and need rehabilitation, then you do need to think about walking. Slowly rebuilding to the point where it is automatic again. Acting freely. Acting intuitively. Magnus Carlsen at his best, plays chess like Roger Federer at his best. Trusting their bodies. Trusting their decisions. It seems magical and is beautiful to watch. Yogis call this Siddhis. When mastery seems supernatural.
It is dangerous to be that brilliant, because the ego lurks. In the sense that you are godlike and above anyone else and in control... which is an invitation for a fall. The real mastery comes with cycles of lightly held, deeply applied, reflection. Part of risk management is creating limits. Self-imposed limits.
Investment managers will disclose their investment restrictions. The things they do, and the things they don’t do. Warren Buffett calls this the “Circle of Competence”. We have a nasty societal habit of thinking that a smart person can do anything. That when someone has proved themself in one area, we should take their opinion seriously in areas far removed from that because of the Halo effect. Creating limits helps you create little containers for your exploration.
I am a creature of habit. I am at my most productive when I have made up some rules. Often very arbitrary rules. When I was studying, I would take a very structured approach to learning. I would do 50-minute study sessions, then 10-minute breaks. I would have budgeted total time required, time available, and allocated by priority to the various subjects. I would record my actual learning, relative to the plan. Allowing for disruption, and breaks. These rules were self-imposed. I could, and did break them. No one else was making me do it. The rules provided a structure that worked for me.
I was also glad to eventually put that kind of structure behind me. It worked for a period, and then that period ended. “Everything in moderation, including moderation.”
Freedom is not the absence of rules. The biggest defenders of liberty will also be the strongest advocates for rule of law. Rules are just agreements. Not devine in nature, but between people. You can make agreements with yourself.
You can also ensure that you do not become too fixated on the rules that they are not serving the people who agreed to them. Anything without the capacity to change has increased capacity to break.
A university friend teased me because when we were in study-weeks I would arrange to meet him to watch a movie in a break. I would go to the Common Room to watch the movie, and he would be late, and there wouldn’t be time for the movie. I would be starting my next study session. He thought I was ridiculous. He was probably right. But that was the stage I was in. My rules likely made relationships and friendships more difficult because my structure had consequences for others. It is difficult to create agreements that work for everyone in every situation.
Still, we must create little bubbles for stuff that is important. Pockets of focus. Pockets of made-up limits.
The vast majority of people, even those earning a lot of money, live hand-to-mouth. One way to view meritocracy is that it shifts capital to where it is working the hardest. Another way to view meritocracy is that people who are "better", deserve to live better lives. That how much you spend should be in line with how much value you add to society. For that to be “true”, people need to spend what they earn, and be paid what they are worth.
That is not how capital, money, or price works. One of the challenges of building capital is that there are always emergencies. There are always events that can stop you and set you back to zero and hand-to-mouth.
In Australia, they have famously changed national saving habits and built huge superannuation funds. One of the philosophical questions is whether people should be able to access their retirement savings in emergencies. For proponents of Universal Basic Income, a key question stands around whether lenders should have a claim over those payments. Can you borrow against that guaranteed stream of money?
In the early stages of building capital, the waves of life can destroy any capacity to protect, cultivate, and invest in merit. It is hard to grow capital when it is being harassed. It is hard to see each other when we are living hand-to-mouth.
Building capacity for endurance and resilience requires space. One of the reasons it is hard to start saving and investing is because you first need to be able to handle the basic noise. You cannot build if there is nothing extra to build from.
The concept of extra can even trigger people as insulting. One of the biggest pushbacks I get as a campaigner for savings and investment is that for the vast majority of people, this seems ridiculous.
When I start saying you need self-restraint, and to spend less than your income. The trade-offs people must make are often hard. “Nothing kills an activist like a mortgage and school fees”. Life starts living people, rather than people living life. Responsibilities make people much more conservative because they have obligations. There is less capacity for flexibility because people have made commitments that are important to them.
Advice is usually autobiographical, because it is heavily dependent on the story of the person giving it and where they came from. These questions do not have easy answers, but how we create space is a beautiful question.
We do not all have the same skills and knowledge. We do not all have the same barriers to entry. We have different opportunities. We have different sources of funding. We are consuming resources unsustainably, yet the average global GDP is only about $11,500 per person. Can you live on $11,500 a year and still create space to save? If you are earning more than that, can you reduce your consumption to that level? Yet, there is a whole swathe of the world’s population living in poverty.
How do we raise people out of poverty, when we can’t all consume the amount that is being consumed by those who are consuming too much? How do we incentivize if consuming more is not an option? How do you get someone out of bed in the morning, if you are asking them to have a worse day than yesterday? Every day? These are difficult questions which require some fundamental reframing of how we make our decisions.
“Stubborn Attachments” by Tyler Cowen talks about some of the problems of financial decision-making across time. How do we balance actions and long-term consequences in guiding our choices? Discounting cashflows is one way to take into account the “Time Value” of money. A Dollar today is worth more than a Dollar in 5 years' time. Making decisions based on discounted cash flows ends up almost ignoring 15–20-year time frames. The underlying assumption is you can reinvest at the end of the period.
I take the essence of his argument as a focus on Maximum Sustainable Return. Sustainability is key. You need endurance to make sure you are in it for the long run. To extend what you are doing to the next generation, and the generation after that. To adapt your thinking from 5-year plans to 1,000-year plans. Consequences beyond "you". Where BIG interventions fizzle, but small sustainable actions have big long-term effects.
Epiphanies, vanity projects, and conspicuous victories are much less impactful than small sustainable adjustments. “Most people overestimate what they can achieve in a year and underestimate what they can achieve in ten years.” (Amara’s Law).
Time is the most powerful investment force.
Your ambition impacts your time perspective. If you think in terms of time value of money, high returns discount the future a lot. The higher the return available to you now, the more valuable today’s Dollar is relative to the future Dollar. If you start aiming for 15-20% returns and you are not committed to the investment because your underlying assumption is that you are just a temporary holder, that is going to fundamentally impact your choices.
The “Rule of 70” is a short cut to work out the doubling (or halving) time of an investment. 20% returns means doubling money roughly every 3.5 years (70 divided by 20). 10% would double money in roughly 7 years (70 divided by 10). Being able to get 20% returns would mean your effective “time caring” of future dollars shrinks.
Proper consideration of risk requires commitment. What if there are no escape hatches? What if future dollars count the same as today’s dollars? What if you must do the work to fix things?
There are consequences to the numbers we use. Yogis will argue it is only possible to think of one thing at a time. Multi-tasking is what the body does. The mind can hold one thing. It might jump around a lot, but it can’t be focused on more than one thing at a time. Which is why meditation is often the practice of thinking about your breathing. Breathing is a safe point to refocus on.
If you simplify everything down to a simple number for return, and a simple number for risk, you are going to make some poor decisions that ignore long term consequences. If you make the underlying assumption that opportunities to recycle your high return decisions into high returning alternatives is going to remain a possibility.
If what you are consuming is less than what you are creating, then that is sustainable. Then you can do it forever. If you aren’t considering the unintended consequences of your choices, and what lies outside the numbers, and outside your plan, then you are going to run out of breath at some point.
Calm and clear decision making starts with managing expectations. If your desire for returns is too high, you open yourself to a new world of dangerous projections. Visions of alternative lives and problems solved and trouble-free existence. Visions of replicating the lives of outliers who seem to orbit different realities. The numbers get ridiculous quickly. A good day, month, or year is not put in context. It gets “extrapolated” with a line, a ruler, an a poke in our vulnerable desires.
That is why Ponzi Schemes work. They are not sustainable. The numbers don’t work. They convince new people to join, and the the first exchange of money is from those joining the scheme. Joiners are promised a multiple of the money they give. The money does not work. Nothing is made. It sounds exiciting. It can even be wrapped in other clothes that make it seem caring/kind/not-about-the-money. No one asks “how does this end?” or “why does this make money?”. The new money comes from recruits, and recruits run out. Money is made by doing the work. Understand the work.
Stilling the waves is not about the waves disappearing. It is about having comfort with your point of focus. Reflecting on the compounding consequences of the habits that you are embodying and relaxing into. The patterns. The limits. The impacts. Looking beyond and beneath the numbers to what the fundamentals are. What are the priorities? What are the tradeoffs? What if you are wrong? Is there space for alternative views? It is a different way of looking at risk.
You don’t get paid for taking risk. You don’t avoid risk by settling for not changing. Risk is simply the fact that life can head off in multiple directions and we don’t and can’t know everything. Managing risk starts with accepting complexity, ambiguity, and randomness and building habits that build on what matters to you.
The waves can continue, but you will be still. You will create from where you are.
Financial Yoga - Stilling the Waves of Money Anxiety
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