Survival Models

From 2014 to 2021, the main source of my income was no longer a salary. I stripped back my spending dramatically, and was attempting to live off my Engine. Aiming to spend less on average, than my Capital made. Straight out of the Financial Independence, Retire Early” F.I.R.E. playbook. 

It meant giving up certain things (e.g. I had a room at Wimbledon Art Studios for four years) and reducing others (e.g. cheaper rent, less take-out, cheaper holidays). When stripping back your spending, you learn more from those with less. It is eye-opening to see what people, without options, get by on. 

Still, I exceeded on the spending side and my Capital was far noisier than a salary. Imagine pay day coming, and your boss asking for a deposit! 

In theory, I could have run my Engine down to zero. In reality, my “internal Engine” wouldn’t go to zero. I wouldn’t be starting from scratch. The thought experiment of if every *thing* was taken from you, what would you have? Relationships, skills, knowledge, social capital, and the opportunities presented by being part of the community you are a part of. You can also build the capacity to start again with more ease, if you need to. Even if the situation is very different. 

Like rewriting an essay you lose when your computer crashes. Second time, you may be more effective. The first course I repeated at university, was ironically called “Survival Models” (previously called Mortality). The second time I did it, I had the big picture, and suddenly things made sense. Helping people one page behind, is also a great way to take your next step. 

When I decided to go back to work, it was partly because I no longer had confidence that my Engine was sustainable. I could repair and rebuild it better with the stability of a salary as support. I could also repeat something I had done before (working!), and help people one page behind.

Surviving

Fleet of Foot

No longer needing to apply for leave, my first act of independence post-work was to head off to Australia and New Zealand for two and a half months. I had sold all my anchors. I had a flat in Cape Town that I bought in 2006, but then had to move to Johannesburg for work, before I got the chance to live in it. It felt like what you are supposed to do according to the textbook wealth-building script. “Getting on the property ladder” as soon as you have a secure income you can borrow against. 

Having studied investments and having some political (are low interest rates transferring wealth from savers to borrowers?) and ethical (do we fundamentally want housing to get more expensive?) issues with property as an asset class, I believed listed businesses made for a better Engine. Equities also allow you to sell little bits rather than the whole thing (although there are property funds). Owning a house is illiquid. Turning it into cash, especially if you are in a hurry, can be an expensive challenge. Equities are part shares, easily exchanged for cash, if the businesses are sufficiently large with enough shares in the market. I sold my house and gave away a lot of my stuff to the charity store 400 meters down the road. 

The manager of the charity shop was pleased he had first choice of the DVD and CD collection I built up over the years. I was pleased I was more fleet of foot.

Stupidity Tax

Conspicuous Consumption is a stupidity tax. As is hoarding. The image of Scrooge McDuck is not one of someone who is good with money. 

People who are good with money are constantly putting it back to work. Lazy assets get eaten away by inflation and fees. Lazy spending is firing money. Even though someone with capital is building reserves, those reserves are working. 

If you are a fundamental investor, that work is something tangible you can understand and explain. That capital is connected to other people and providing something we collectively want or need. It provides breathing capacity for the owner by working for others. 

We do need the layer of what is now called responsible investing, impact investing, or the inclusion of ESG (Environment, Social, Governance) issues in decision making. The importance of including qualitative issues in decisions that are normally driven by numbers. Recognising circles of competence with people who understand money, but may be less conscious of unintended consequences of broader societal impacts. Making sure that good business ideas are also good ideas that are consistent with our ethics and values. 

It is not just the conspicuous that matters when it comes to endurance. It is also behaviours, patterns, and things as basic as sleep. Understanding the processes and science behind sleep. Where the direct connection to “productivity” isn’t obvious. Understanding how unconscious learning gets processed and connections get made. Where what we are aware of and unaware of gets connected and pushed into our subconscious if we are sleeping, eating, relaxing, breathing, exercising, and looking after our mental health properly.

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

Paying for the Priceless

In times of plenty, when there are lots of good business ideas, there is often money available for good ideas that don’t generate their own money. There are muses for creativity. Golden ages. 

Something may be incredibly valuable and hard to quantify, but still have costs that are very real, very grounding, and very countable. There is magic that happens between the inputs (what something costs) and the outputs (that we value). Directly marrying inputs and outputs in a money dance is stifling. 

Some creative, exciting companies, will have at their core a very boring business that generates cash. That provides the money for the angels, moonshots, and unicorns. The money for research and development. Management could easily sell those businesses separately, but don’t... because they need the cash! 

Newspapers made money because they sold advertising. The ads paid for the investigative journalism. Adverts that make the advertisers money mean they are happy to spend $1 if they are confident that will make them $2. 

Is the journalism worth that same $1? Harder question. What do you find interesting? What do you want to read? Are we better off if we have intelligent people asking difficult questions? Search and social media muted Newspapers' cash engine. 

Theoretically, you can put a price on anything, but that requires a buyer and a seller to agree on that price. It is easier to price things you can count, compare, and control. 

Then pay the costs for the priceless.

Achievements in Golden Ages

Reliable and Sustainable

There is often a disturbing amount of truth in oversimplifications. One is that the path to wealth is shopkeeper-professional-entrepreneur-bust and repeat in four generations. 

To start building wealth you need to first find breathing space between what you are earning and what you spend. You need to snap the hand-to-mouth connection. Gradually you build capacity to think about risk differently as you have more faith in your own grounding. When you have sufficient capital for a deep sense of knowledge that you are going to fundamentally be okay. 

Then you can build that base up to be an engine. An engine earns more on average than you spend on average. At that point, particularly if the engine is earning comfortably more than you spend, it starts growing. Compounding kicks in. Growth on growth. Even without you earning. Then it is no longer just about you, your earning capacity, and your consumption. Decisions extend beyond you and even your lifetime. Impact scales. Work is no longer about financing your needs. 

If you have sufficient capital, it can become a muse. Not all ideas are good business ideas. If you have the capital, they don’t need to be. Good ideas, that are not good business ideas, can be funded by good ideas that are good business ideas. Good businesses reliably and sustainably generate a growing stream of cash.

Hesiod and the Muse

Increasingly Released

We will always be thinking of something. Although often pitched as emptying the mind, meditation is practicing letting distractions pass through. Enhancing the capacity for conscious focus. That is the connection between money and yoga. 

If you have or build buffers for financial noise, and an engine to support your immediate physical needs and future development, you gain the ability to choose your point of focus. You can care about things that are bigger than you. 

What are you worrying about? Is it what you want to be grappling with? Can you involve yourself in solving problems that revolve around more than just you, your survival, and your status? 

With community wealth, we become truly invested in the bigger vehicle that solves those problems. We build universal capacity to deal with noise. With a longer-term commitment, it is no longer about mercenaries and sellswords who are rewarded and go on their way. We become a part of something larger. 

Focus can expand when you have confidence that the basics are secure. Focus can expand beyond money, as the money distractions pass through. 

Where money gradually takes more of the burden of working for money, and we are increasingly released to focus on issues that get suffocated by the rules of money-making.

Sani Pass

Time and Effort

If you are living hand-to-mouth, you have no option but to solve the immediate problems in the way you are most confident works. 

Building space, to take knocks (Short Term - Resilience) and give you confidence that sufficient time is available (Long Term – Endurance), allows you to look at problems differently. You can afford to try something different. 

This is the capacity that allows firms, countries, and people to invest in research and development. To allocate money to potential. Most people are looking for quick fixes and easy solutions. The higher your required rate of return, the shorter the time frame that is considered. 

One of the strongest competitive advantages you can have is willingness and capacity to commit to obvious, but hard, challenges. Where everyone knows the answer, but it is too much effort. 

Like getting fit and eating healthily. The further down the road the payoff for effort is, the more support you need till that pay off arrives. 

Most of us know how to run, and have done since we were kids. Few of us have run marathons because of the hours of training and effort required. A lot of people just don’t want to run marathons. Some want to. Theoretically. Maybe. Probably not. 

A common skill many Olympians share is the capacity to not have to earn money during the time they are training. Time and effort are significant barriers.

Time and Effort

to overcome barriers

Spending and Earning

Sustainability is the key to compounding. Although what you do matters, what you are doing now matters less if you can’t carry on doing it. 

An engine is capital that earns (on average) more than you spend (on average). As soon as that balance of consumption and creativity changes, the clock starts ticking. 

If money can sustainably make money, and we can spend less than the money sustainably makes... there is no reason that can’t carry on forever. If the sustainability is cared for. 

For money to make money, you need to ask very pragmatic questions. 

How is money made? What is wanted? Where is the scarcity? What are the skills and knowledge needed for those specific requirements? Are too many people already working on those problems? How are decisions made? What are the containers those decisions are being made in? What are the barriers to entry? What are the barriers to exit? What frameworks of understanding and action are we using? How are we communicating? What agreements do we have? 

You can only be freed from the constraints of these questions if you have control of the balance between money coming in, and money going out.

hanging from the see saw

50-15-5-Rule

Money can make money. 

A path to freeing yourself from being a productive asset is the 50-15-5-Rule. If you have an income stream because YOU are a productive asset being paid for your work, and you have capacity to gain significant control over your expenses, you can apply this rule. 

It starts by not consuming everything you produce. 

If you can invest half (50%) every year, for 15 years, and your money makes 5% real return (paid $5 for each $100 that works, AFTER all expenses and inflation)… then your capital can grow to the point where your money makes as much money as you were spending. 

These are aggressive assumptions. Investing half is hard. 15 years is long. 5% is proper work for proper money. 

All that said... it is possible to get to the point where you have an engine. 

An engine is capital that (on average), earns more than you spend (on average). 

If you sustainably spend less than your money sustainably earns, then you are no longer bound by the constraints of money on how you spend your time and energy.

Half

Releasing Constraints

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. 

 

Long Term

Although investing is a long-term game, our working careers are short. 5 years is not a long time. Even 15 years is only just long enough for compounding to start hinting at its magic. In “The Psychology of Money”, Morgan Housel points out that Warren Buffetts' biggest weapon was that he started investing at age 10, and has kept at it without quitting for 80 years and counting. At the time of writing the book, Buffett’s net worth was $84.5 Billion, of which $81.5 Billion had been made since his 65th birthday. Housel’s rough estimate of the size of Buffett’s Engine if he had started at 30 (after enjoying his 20s/setting up home), and stopped at 60 to golf, is $11.9 million. That is a big Engine. But no one would know who he is. 80 years is the number that really matters... and all the small numbers that contributed to the foundation years are the only reason the glory years exist. Merit applied to nothing doesn’t get seen. Conspicuous Merit always builds on deep history. 

Time measured in Ice Ages

 

Surface Waves

Stilling the waves of money anxiety starts small. Like building relief from a storm when you have no shelter. The goal is simply to get dry and warm. If you can build a buffer of three to six months of what you normally spend, you start to create the capacity to make some path-altering decisions. You build a capacity to cope. You increase your control and focus. “You” increase it, but really it is the power of the buffer/capital. It is the same you. Just empowered. Similarly, yogis talk about Siddhis. Siddhis are seemingly supernatural, paranormal, or magical powers obtained through regular practice. In other words, mastery. But they are dangerous. Other people might elevate you and you might start believing that elevation. It is nice getting recognition. And that sets you up for the waves of anxiety to return. Real meritocracy is a call to see the value of people and their connection to each other through the waves. Building buffers and capital to power us without building barriers to divide us.

Stilling the Waves

 

Building an Engine

If you want to still the waves of money anxiety, you need to start with some fact finding. Where are you? For me that has changed in a pretty fundamental way. Quite often big life changes are a catalyst for relooking at your situation. I moved back to South Africa in December. That means thinking in Rands rather than Pounds. I spent the early part of my career getting my money jobs around the world. Building what I call an Engine. You don’t have to be the sole breadwinner. Your money can work too. Especially if you squeeze some space in between your hand and mouth. To create space, you need to have an idea of what you are spending. So for me, now... I have to wait for the dust to settle. As I adjust, the numbers are way bigger (thanks inflation!) than 13 years ago, and some of the basic ways things are done differ from up north. After a few months of paying attention, you can get an idea of the things you can expect. Then you can start to add space for the surprises. Then you can start building (or repairing) your Engine.

Mechanical Repair

 

Picking an Engine

Once you buy into the idea of building an Engine, the how remains. I think of investing as getting my money a job. As a person, you need to pick an advertised role that meets (or stretches) your qualification set. You need to have a CV that describes your education, experience, and fit. You then apply along with other hopeful candidates. Normally there are too many applicants for the job, and the interviewers don’t know you personally. When investing, the dynamics change. You still need to pick a container. A vehicle in which your money can work. There will still be application forms (checking your identity, the source of funds etc.) but now the shoe is on the other foot. There are more people who want to manage your money than there is enough money for them to manage. The vehicle you choose will depend on your investment philosophy, and your relationship with money and uncertainty. You need to pick something that you can commit to (through the noise), but the decision lies with you. 

Gas Engine

 

Source of Power

The reason I talk of “building an Engine” rather than saving/investing/capital is because I am a fundamental investor. I believe what you do matters. Wealth creation is not a win-lose tussle to prove how clever you are. It benefits you if others also succeed. I believe long term wealth is created by solving problems for the whole value delivery chain. “A species can only thrive when everything else around it thrives too” points out David Attenborough. It is not an accident that it is easier to make money in rich countries, or if you are randomly born into a rich community. An Engine powers things that don’t necessarily power themselves. Not all good ideas are good business ideas. Equally, some great ideas only happen if they find the money. If they have an Engine. To power good ideas, Engines need to work. Building Engines can set your good ideas free, beyond the narrow constraints of supply and demand that contain money making ideas.

Source of Power

 

Fear of Success

Money is made by solving problems in containers for people with money. The key is being able to communicate with the decision-maker-with-money, in language they understand. Know who is paying. Know what they want. Know what success looks like to them.

Neville Scott has spent a career helping business leaders design solutions to problems that can be implemented. He starts his process by understanding “the School Playground”. Problems have deep histories with complex origins. Solutions to single problems have unintended consequences and layers. One problem we are all trying to solve is that we need to eat. We have to get paid. If we permanently solve the problem we get paid to solve, that can be a problem. Creative destruction is a powerful fear-inducing force, without sustainably looking after the problem solvers. 

Protagion - Active Career Management is holding a virtual conference where I will be part of a free panel discussion exploring how building buffers (for resilience) and engines (for endurance) of Capital can help ignite your creativity. Free from the fear of success. 

Taste Test

Investing is a lot like cooking. You can do it just as well yourself if you are passionate about it. I am far from a foodie, but my understanding is that why the French are known for their love of food is they let the ingredients do the heavy lifting. Simple and delicious from source. A challenge is we all need to eat, so there are plenty of people willing to help (and charge). How can you trust, and what should you choose, if you haven’t grown up at the knee of an olive oil and salt-stained apron? Once you have bought into the idea that Capital changes the game. Once you have realised that hand-to-mouth living is not sustainable. Once you have found work that pays more than you need to spend to survive. Those are the fundamental keys to build space to breathe, and an engine to finance ideas that aren’t constrained by the box needed to make money. You don’t have to cook yourself. There are people willing to help. What you will need to do, is learn to ask the right questions. To taste test. Develop the ability to tell if something is off. 

Learning to Taste 

(as a young Trev when I last worked for Old Mutual)

 

Building Support

A good idea is not enough. If you are deciding to invest in a company, you do not just look at their product pitch. As important are solvency and liquidity. Solvency recognises the fact that what you see is not the full picture. Add up the value of everything the company has (Assets), and subtract everything they owe (Liabilities), and what is left is closer to the truth of what is supporting the idea (Owner’s Equity). Support is the unsung hero that makes potential sing. In a crisis situation, price and value can disconnect dramatically. Which means if most of what you see is liabilities, the price of what the company has can evaporate. A fundamental principle of wealth creation is not to be a forced buyer or a forced seller. If you put yourself in a corner, you are no longer a decision maker, and your “good idea” will get you nowhere. Liquidity is the same principle, but clear and present danger. No one sees long term potential if current expenses cannot be paid. What is true for companies is true for people. To see each other’s potential, we need to build capital and buffers. To lift our eyes from hand-to-mouth living and crisis-to-crisis survival. To empower good ideas, you need to support decision making.

Mini Me

You can think of capital as your Mini-Me. In a world that defines us by our earning ability, building capital is a path to telling those voices to get knotted. If you spend money, you are firing it. If you put it to work, you are feeding your Mini-Me. Gradually that Mini-Me can grow. If you reinvest (rather than consume) a combination of what you produce, and what your Mini-Me produces, one day your Mini-Me may earn enough to be your bread winner. So you can focus on ideas that are good ideas, but not good business ideas. You can only build capital if you are not servicing past consumption (debts), and you are earning more than you are spending. There cannot be growth while you are bleeding. There cannot be growth without breathing space. But if you can hold space for, and look after your Mini-Me, with time and care it can grow to hold space for you.