Do Good Work

There is nothing more Free Market than failure. Bail-outs etc. are “third way” interventions where Government steps in. Particularly bad if they only step in when there is failure, and do not share in the up-side. A danger of basing your investment philosophy on a dance around what something is worth, rather than what it does, is that price and value can disconnect massively. It is particularly dangerous if you “bet” more than 100%, or are naked (have a position in something you do not own). You can trade anything with a pulse, the underlying thing does not matter as much as the person (legal or real) you are buying/selling from/to. You can leverage up a horrible asset to make great profits (until things go wrong). Investment is different. A basic principle of fundamental investing is that what you do matters. It is not gambling. It is capital allocation and problem solving. Shifting resources to where they are doing good work, and continuing to do good work over long periods of time. No one can force you to sell if the business is strong enough to carry on doing its work.

Off to Work

A foundational principle of Capitalism is that money can work. To turn ideas into reality, you need capital and containers. One form of container is Public Equity. An idea is turned into a legal person called a company. That company can make agreements. Which means “it” can make and sell stuff. If it is public equity, it means slices of ownership are sold on a stock market. This means you can put your money to work in any publicly listed company (if you find the price acceptable). Money carries less baggage than people. It does not have to deal with sexism, homophobia, racism, or xenophobia. For the most part, if the container (country) you were born in lets you move your money around the world, you can put it to work anywhere (without a job interview and someone projecting their insecurities onto you in a selection process). Capital is much more yogic than people. Yoga is the idea that everything is connected. It is people that we force into prefabricated ideas about what they can and cannot do. It is people’s worth we struggle to see. With money, what you do is much more important than any prejudices.

"On the way to the field" Van Gogh

In Power or Empower

If you want a problem to be solved quickly, all the decision makers need to be in one room with no distractions, and intimately involved in doing the work. If you want a problem not to be solved, make those doing the work write memos and get other people around a boardroom to make the decisions based on what is on that paper. There is deep irony in the loss of meaning around the word Capitalism. Adam Smith’s “invisible hand” is effectively a tearing down of the memo factory. Let decisions be made locally by those who they affect. Not in isolated bubbles with oceans between realities. Virginia Postrel vividly describes Tacit Knowledge (the stuff we know but cannot communicate) in the book which completely changed my mind about the desirability of benevolent dictators and central planning (“The Future and its Enemies”). The world is too complicated, ambiguous, and random to concentrate power. The way you build endurance, resilience, and creativity is by creating more decision makers. That means building buffers and engines of capital for everyone. It means letting other people make different decisions to you.

Good Enough

Meritocracy isn’t supposed to be a defence of privilege. It is the idea that capital and power get allocated on the basis of talent, effort, and achievement rather than wealth or social class. Similarly Capitalism was historically a push back against Mercantilism. Mercantilism looked at Nations as competitive containers designed to win. The aim, it was thought, was to maximise exports and minimise imports. Sell lots. Buy little. Win. The policies led to aggressive militaries and colonial expansion. Enter Adam Smith and the idea of Win-Win. Gunboat diplomacy was the use of conspicuous naval power to use the threat of war should the “negotiation” terms not be in line with what the stronger power wants. Smith made the convincing case that trade and reduced barriers to entry benefit everyone. Similarly, with Meritocracy, we only half heartedly want it. Limited, networked, job and client opportunities mean people are still suspicious of reducing barriers to entry. Meritocracy is now used as a defence of privilege as if conspicuous gunboat signals mean the advantages are deserved. The reason people don’t want real meritocracy is because they walk around thinking they are impostors. We all worry “I am not good enough”, if a great people sorting sees our flaws. 

"Seaport at Sunrise" Claude Lorrain (1639)

People with Capital

Most people live hand to mouth. All companies need capital to run their businesses. They can’t just rely on the equivalent of the work and pay-check cycle of employment. Some clients sign contracts, and great businesses have a way of developing sufficient client loyalty that they have a predictable stream of income. There are Capital light businesses but even they need enough Capital to pay the people involved. The payroll is the list of employees and how much they have to be paid. When things go badly, you still need to pay the staff if you want them to stay. No matter how good the business idea, the business needs a war chest that can get them through the challenging periods. The only thing that is certain is challenging periods. That is why so many businesses fail. A good business idea isn’t sufficient. Investing is about risk management as much as it is about creativity. The idea that people can live hand to mouth is an illusion whose time has passed. Risk management should start from the bottom up. With people, with capital.

Market Knowledge

Tacit Knowledge is the idea that there is stuff we know that we can’t explain. Virginia Postrel explores this powerful concept in “The Future and its Enemies”. That was the book that changed my mind about the pipe dream of a benevolent dictator, or even the desirability of central decision making. The stuff we really know is embodied. This means that decisions are best made by the people they affect. Not you. Not me. Not some undiscovered saviour. Real Adam Smith Capitalism is in the market-places where everyone has a voice. Small businesses. Small customers. Where price makes no pretence at being value. It is just an agreement between a buyer and a seller. Just a word that makes both participants happy. Capitalism is not Corporatism. Capitalism is the idea that you can build resources and reinvest them. That money/capital can be paid and our labour can be set free. Community Wealth (Capital) can empower people from the bottom up. Amplifying voices through an exchange is a much clearer indication of what people need, than a powerful representative (hopefully) making (good) decisions on their behalf.

Markets need Bottom Up Power

Your Own Believer

There are a limited number of jobs. There are a limited number of employers. Many of the jobs that people currently do are being mechanised and automated. This means that however you go about planning your career, you have to think about what it would look like as a business. Employers are a middle man between you and clients. The key to every business is identifying the needs of decision makers with money. Solving decision makers’ problems. You can divide work into the categories of cost centres and profit centres. Cost centres are things that don’t finance themselves. They can be very valuable, and even foundational to profit centres, but they don’t make money. They need money. Quality Content is a cost centre. Advertising is a profit centre. Without advertising, print media started dying. Cost centres need believers. Not all good ideas are good business ideas. Good business ideas make money. Fortunately, that doesn’t have to trap us in profit centres. Gradually we can reinvest money in profit centres, and turn ourselves into decision makers with money. We can be our own believers.

Newseum

Team Sport

Money making is not about you. Hand-to-mouth living is all about you. “What do you want to be when you grow up?” is all about you. Meritocracy, performance attribution, annual reviews, bonuses, status symbols and conspicuous consumption can become all about you. About being good enough. Being worthy. Leading a successful life. Being a really big deal. Capitalism done well is a team sport. A sport in which there is competition, but players and managers switch teams and everyone meets in the bar afterwards. No company exists without suppliers, customers, regulators, alternatives and complex knock on effects. If you want to understand money, stop thinking about yourself. The song is not about you. Start thinking about the needs of communities. Start looking at every business you come across. “How is money made?” is a question so much more powerful than “How can I make money?” that it can release you to change the What to a Who. Who (not what) do you want to be? Let Capital set our Labour free. Build Capital.

Foundational Space

The marriage between income and expenses is an unhappy one. Incentives matter. I can see the crude rationale behind a superficial meritocracy where spending more is a signal of success. A lack of breathing space is a fundamental flaw in this idea. If you spend everything that comes in, there is no capacity to pause. There is no space for seasonality. Periods of unlearning. Periods of re-engaging with the core of what is important to us. Periods of creation. Periods of appreciation. If we define ourselves by our labour, it becomes all about us. Us and a pay-check that almost lasts. Normally. Unless there are unexpected bumps. We have no vested interest in the complex relationship of stakeholders and institutions that empower wealth creation. We are not owners. We are work takers. There is a better way. If we all build Capital. Capital is connection to a world that works. If we all create interconnected breathing space. Inhaling and exhaling trial and error as we iterate towards a world with more endurance, resilience, and creativity. Together.

Creating Space for a Solid Foundation

Hot Capital

I am an Anti-Apartheid Activist. I grew up in the regime that gave Separateness legal form. That makes defending and encouraging the four freedoms of movement (Capital, Goods, Services and Labour) close to my heart. But Spidey, with freedom comes responsibility too. A criticism of “Hot Capital” is that money just flows in and out without commitment. Real wealth creation takes time, so if you are making “investment decisions” based on less than a 5-10 year period, you aren’t investing, you are speculating or trading. The “Investment Behaviour Penalty” is the difference between what investment funds return, and the return achieved by underlying investors. Usually investors chase returns, switching between funds and in and out of cash as if they can guess short term market movements. Imagine if a real business owner did that? A stock is a slice of ownership in an underlying business. It isn’t an abstract idea. Imagine if every time something went wrong, an owner sold the business? Real creativity comes from the ability to endure through challenges, and respond with the resources available. It’s not a game. You don’t play the market. You commit to something and you build.

Responsibility

Jam Factory

A focus on Real Return means looking through the noise. The default disclaimer for most investments is “past performance is no guarantee of future results”. Price is not Value, so regularly there will be things that increase in Price (even for extended periods) that make things appear like they are investments. I like to think of investments as Jam Factories. People want Jam at a price that attracts Capital Investment. Capital is invested. A Factory is built. Jam is made. Jam is sold. There is money left over to increase the size of the Factory. More Jam is made. 20 years later, much more Jam is made. The Factory is much bigger. The Dividends being paid are much higher. That, is an investment. If exactly the same thing is worth more, that is just a change in Price. Money is abstract. It allows smoke and mirrors through the story of cash, earnings, and dividends. You need to look through the show and see the Jam Factory. Real Return is created by adding value consistently for an extended period of time. Real Return is created by building something that wasn’t there, or solving real problems.

Staying Sweet

Capital can earn money. Capital can grow. If Capital is allowed to grow until it earns enough money, something magic can happen. People *have to* earn money. Most of us have to filter the decisions we make about how to spend our time through the question “How do I get paid?”. Capital can become the Engine for Human Creativity. At the heart of this idea is Sustainable Growth and Reinvestment. The idea that resources and activity can be like the water cycle. Being used in such a way that there is more once the creativity has been applied. That once the Capital is put to work there is a “Real Return”. After all expenses, there is something left. If that something left is regularly reinvested, and more is invested than consumed then activity can be a source for life. In “Honeyland”, the Natural Beekeeper insists on leaving half the honey for the bees. Consumption without constraint kills the source. It may make the Summer sweeter, but the Winter will get you.

Leave some for the Bees

Something Useful

Once the penny has dropped that money can earn a living if you don’t kill it, the question of what job to get it remains. Quality Financial Advice costs at least as much as a good therapist, because they are very similar. The advisor’s key job is to understand you, your goals, your skills, and your quirks. Generic advice is cheaper or free, but then you take full responsibility. Get your money a job. Don’t chase your tail. Stick to the plan. Two big risks are Churn (the grass is always greener) and Complexity (tax and legal structures to “optimise”). My preference is to keep it simple. There are no Gods of investing. Just pick someone who is doing something you understand. There are fact sheets, commentaries, and websites. The 4Ps of Due Diligence on Funds are People, Process, Performance, and Price. You are looking for consistency, reliability, stability, and trustworthiness. Stay curious and dig a little when something concerns you. Mostly, the advantage of building an Engine is that the key ingredient is time. Crack on with what it is that really floats your boat, and let your money build value. The most important thing is the simplest. Is your money doing something useful?

Keep it Simple

Go On

An Engine is Capital that earns (on average) more than you spend (on average). The key word there is the one in brackets. To see what is really going on, you have to be able to look through the noise. Often noise is the measure people use for Risk. Summarising uncertainty, complexity, and ambiguity into a single number. Then arguing that you need to take risk to make money. You don’t get paid for taking risk unless you are an insurer. You get paid for delivering. For adding value. The real risk is that you are not being creative. Smoothness (always earning/spending the same) can come at the cost of creativity. It can increase risk because you aren’t making mistakes, so you aren’t learning. It can increase the risk by raising false faith that the future will be exactly the same as the past. The big risks (both up and down) are often things that have never happened. That aren’t in the numbers. Tail risks. The foundation of creativity is sustainability. Sustainability requires endurance and resilience. The space and time for average to compound. For what’s really going on, to go on. And on.

Creative Noise

Start Again

Building an Engine (Capital) starts with finding an income. The raw material is the first person’s labour. Labour is like the Oil that started the Norway Sovereign Wealth Fund (now in a position to divest from Fossil Fuels). It starts with striking Oil. It's especially hard if you are a work taker with no work to take. Hard to develop the skills and knowledge required to kick start the process with no external assistance (Bank of Mom and Dad). Even then, the next obstacle is Emergencies. Even with Titan like self-discipline keeping outs (spending) less than ins, unavoidable bumps loom. Particularly if you are the first in a community to break free, and have obligations beyond yourself (Bank of Son or Daughter). Even when Governments legislate compulsory savings and investment (like Australia’s Superannuation Funds), the question of Emergency Access remains. What clear and present dangers are acceptable to etch-a-sketch all the Capital? To start again. What emergencies are worth borrowing against your future income stream, so that you end up endlessly working to pay off debt rather than building Capital? Forced back from the starting line. Finding an income is the hardest part, but even then, you may not be in a position to build an Engine yet.

Beyond the Numbers

Money making, once you release the question “what do I want to be?”, boils down to Capital allocation. Where will resources be most effectively put to work? What job will I get my money? Except money doesn’t face the existential questions we do. Where we are judged for our merit as a person by the choices we make, and the things we can do. Where respect and love are conditional. Money just does what it is told. Money makers still have a philosophy. They still face some existential questions about how to allocate Capital. Evidence mounts over time as to whether it has been well allocated, but there is a lot of noise. The holy grail is sustainable growth. Compounding over a long period of time. That requires looking beyond the numbers. At what could of happened, but didn’t. At things that have never happened before, but would be a big deal if they did. At what does happen at the core, but gets missed because we focus on the frills and glitter. Done well, Capital allocation leading to sustainable growth can free people from filtering the question “what do I want to be” through filters like “how can I make money out of this?”.

Filtering for Money

See a Stream

Disability Insurance covers the risk that you are unable to work. If you can’t work, you still have to live, and the way society is structured… it is a problem if you aren’t a productive asset. Should you get disabled, depending on the product you bought, the cover is paid out as a Lump Sum or an Income stream. This is intended to replace your earning ability, and the adjustments to your lifestyle. A useful analogy for Engine building. People don’t have to be productive assets. You can replace a salary stream with sufficient Capital. You don’t have to get disabled. You do have to build the Capital. The challenge is changing the way you see money. As something to look after, rather than something to spend. $1,000,000 is not a big pile of cash to be spent. It can be an income stream. Put to work on your behalf, it *can* last for life *if* you spend less (on average) than it makes (on average). 3.5% real return (after tax, inflation etc.) would give you $35,000/year. Capital for life. For life.

Streams create Life

Sustainable Growth

I am a fundamental equity investor. I think money is better at working than people, and people shouldn’t have to be productive assets. This requires building Capital. A space between hand and mouth so that something is left to put to work. It also requires an underlying optimism and faith in the future. If you are negative, now is all that matters. You could be hit by a bus. I plan to not be hit by a bus. This means I get my money jobs at companies I think can deliver Sustainable Growth. I believe most of us have a short-term bias. A long-term plan means “the next five years”. My ideal long-term plan is the next 1000 years. That makes you look at the underlying system, institutions, and deep roots. That makes you plant Oaks you won’t see grow to full size. That gives unborn people the same vote as those who are currently making the consumption v investment choice. Being a fundamental investor means what the money does matters. Matters deeply. It isn’t gambling. It isn’t playing. It isn’t a Win-Lose competition. It is building on what came before, responding to current challenges, and contributing to what comes next.

Not scared of Busses

Three Pot Slow Cooker

I have three pots in which I invest my Engine. I manage about 2/3rds myself. I then have one pot (in a Global Equity Fund) which I milk (when it goes above a certain amount) which has about 2/3rds of what is left. The last pot (in a different Global Equity Fund) I don’t touch, and is meant for later life. I have taken out more than I ever put in. Meaning I have already withdrawn more than I contributed. The pots are between 6 and 11 years old. How is this possible? The money is working. It is growing. If you see Capital as a living thing, consumption is a form of killing. We need to consume to survive, but it is all about living in balance. If you eat some of the fruit, you can live sustainably. If you cut down all the trees, you are also killing all the future trees that would have grown. And the fruit that would have produced. If I act as a good custodian, there is no reason why my withdrawals shouldn’t be infinitely more than my contributions. The song isn’t about me. If I live hand to mouth, then what you see is all there is. And if the opportunities run out because my mouth is too big, the music will come to an end. Sustainable Growth is the underlying beat. Conscious Custodianship the musician.

Three Pot Slow Cooker

Laying Groundwork

One objection to Capital is that the owners aren’t doing the work. There is a moral feeling that the people involved should be the people being rewarded. It’s complicated. Reward and input don’t go hand-in-hand. The feedback isn’t instant or clear. Often there is a substantial delay. If you look at an ultra-long-term growth chart of GDP in the UK, you will see that a lot of the value “has been added recently”. Rubbish. The majority of value gets added in laying the foundations. The dirty, unglamorous, upfront work. Like in Rugby. The match is won by the forwards, and the backs determine the scoreline. “Meritocracy” tends to financially reward the last decision maker in a binary, “what would it have looked like without this decision” way. That is lazy attribution. Capital allows owners to do the dirty work knowing they will benefit even if they walk away when different skills are required. Or they get tired and lose sufficient inspiration to overcome the attached nonsense. The challenge is hereditary entitlement. The balance between passing on unearned wealth, and recognising that most of the groundwork for today’s Merit has been layed over the 50,000 to 2 million years since we started speaking to each other. Community Wealth.