Ant Bridge Crossing

If you do manage to break free from the hand-to-mouth cycle, you will have to internalise spending discipline in a way that is far from ordinary... and very misunderstood. 

One of the tricks of the ability to hold shares of real businesses, is that wealth has to work. Instead of resources being hoarded, they get reinvested. In factories, in services, and various other forms of problem-solving. 

A twist on the story of the Ant and the Grasshopper. The Ant still works all summer to build up a supply of food for when she can’t work. During the winter, the food isn’t stored... it is still working somewhere else. The hard bit is that it is still not there to spend... beyond meeting the planned needs of the Ant not being able to earn and still having to eat. Every dollar that is consumed beyond that is a dollar fired. 

When there is nothing there, you don’t need discipline not to spend it. If you live paycheck to paycheck... there is never “extra”. The Grasshopper may look at the paper pile (the actual pile has been reinvested), and say... but you have plenty! 

Building breathing space in a world where most people don’t have it raises lots of existential questions. It is incredibly hard to build capital, partly because there are always profound needs and emergencies. 

You have to genuinely believe that the capital is ALSO working on solving problems. Balancing immediate needs with a structural long-term path to deeper breathing. If we always consume everything we make, we will never reach collective freedom.

Still Working

Couch Potato

You can view stock markets as sport or you can view them as work. You can “trade” anything with a pulse and a price. If someone else will give you money for it, it has a price. For something to be an investment, what is under the price matters. 

The truism about “time in the market, not timing the market” connects to the fact that fundamental investing is work, not sport. If you sit in cash for long periods of time to “avoid market risk”, then your money does no work. 

Cash is an important part of financial planning to create buffers for the unexpected. Emergency Funds of 3-6 months of your spending needs mean you don’t have to harass your investments when the unexpected pops up. Beyond that, the money is more couch potato than a Springbok World Cup-winning bomb squad. 

To “time the market” you need to pick both the highs and the lows, not just once... but every time you spin the dice. Investing on the other hand, grows because of the work the real businesses are doing, the real problems being solved, and the real customers being served.

No Work, No Pay

Reality Check

There are four broad categories of investors in Asset Management Funds. Institutional, High-Net-Worth-Individuals (HNWI), Retail, and those who get left out because the economics are hard. Institutional investors are Pension Funds, Fund-of-Funds, Company Assets, Insurance Companies, Endowments (e.g. Universities), Charities and Governments. Investment Committees make the decision to invest on behalf of others. They pool the assets to reduce the costs. HNWI are rich people. They make their own decisions, or get an adviser. Retail Investors are non-professional but still have enough to invest that the expenses don’t completely swallow the growth. Not having money is expensive. Scale makes things cheaper. One of the hardest problems to crack is making investing accessible. Two companies I follow with interest working on this problem are Franc (www.franc.app) which aims to make investing affordable and social, and Meerkat (www.meerkat.co.za) which focuses on those who are in a hole of debt. Charting a path off debt reliance and providing cover for the clear and present emergencies that can make long term capital building a pleasant unicorn frolicking in another reality.

Big and Fragile

The size of your work income doesn’t determine your financial security. You can earn £10,000 a month in London and be more fragile than someone spending R4,000 (about £175) a month in rural South Africa (an estimate of the living wage for an individual). Work Income is fragile. Ask 2020. Hand-to-mouth living doesn’t work if the hands are tied. A Pass-the-Parcel economy doesn’t work if the music stops playing. A work income is usually the initial source of financial security. But what you do with it matters. The key is what you spend. Price indicates scarcity, not value. So if you want to maximise value, be a Cultural Billionaire. Spend on things everyone can afford. Democratic goods. Build a Buffer/Emergency Fund that covers 3-6 months of expenses (for the unexpected). Invest in an Engine that earns an income independent of your hands. Invest in your Community. Be wary of committing to fixed expenses that keep knocking at the door when you are at home because the work has gone. Your financial security is determined by your ability to endure and capacity to cope. Strong and flexible provides the foundation for creativity, learning, and building a meaningful life. Autonomy matters, not size.

Osmar Schindler (1888)

Cash Transfer

People need Cash. Without a living wage, or a buffer, or Capital, or friends or family to assist, or time, it becomes the only problem that matters. What each individual needs the cash for differs. The best way for them to spend it differs. We live in a hand-to-mouth, pass-the-parcel economy where we have to be active to survive, and there have to be enough jobs (available and permissible) in a functional chain for the music to keep playing. We can’t pause to check everyone is okay. We can’t pause to breathe. Except. We can. There are buffers. There is Capital. We do have enough. The challenge is a very simple technological problem. Cash Transfers. One Bank account to another. One person to another. It is not that we can’t do it. It is that we don’t trust each other. Stay home doesn’t mean the same thing and we don’t live together. In a world where we can’t look someone in the eye, hold their hand in a greeting, learn to pronounce their name, and see their world… the immediate necessity is Emergency Trust.

Hand it Over

Handcuffed

Hand-to-mouth living stumbles when the hands get cuffed. The mouth stays hungry. The most widely accepted form of Engine building is Pensions. We get that one day we will have reduced capacity to earn, but we will still need to live. Many Pension Funds started as Pay-As-You-Go which meant working members paid the pensions for retired members. A legitimate Ponzi Scheme. As long as new workers joined, they could support new retirees without any Capital. There has been a big shift to self-funding. Building up your own Capital over your working life. In part because we are living longer, so there aren’t enough working age people (hands) to support more and longer retirements (mouths). “Work Culture” where you spend what you earn without building a Buffer or Engine is equally precarious. I believe in a world with underlying financial security (Universal Basic Income) and individual Buffers (Emergency funds for 3-6 months) and Engines (Capital to contribute your Earnings when you can’t work). Nothing happens the way we planned. We adapt, adjust, and accommodate. That requires planning for when you can’t do that thing you do.

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.

Still the Waves

Spending decisions always require trade-offs. Economics is the study of scarcity. It is a Social Science. Value is determined at an individual and community level and can’t be reduced to numbers. That doesn’t stop people trying, but all the quantifying and modeling are, are attempts to simplify incredibly fuzzy comparisons, moods, desires, beliefs and relationships. One of the biggest obstacles to building Capital is that there are always things that shout and scream for attention. Often unplanned expenses that insist they are more important NOW than building a theoretical Engine. We are natural-born consumers, and the idea of becoming custodians fights with clear and present dangers. That is why Capital building starts with a Buffer. Something to still the financial waves. An Emergency Fund that can be repaired when the unexpected bites at it, so that the Engine can be built unmolested. Start with a Buffer. Start with space to breathe.