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

Beautiful or Thorny

It can be dangerous to try count things that can’t be counted. Sometimes the answer is “we don’t, and can’t, know”. Sometimes the answer is qualitative. 

You can wrestle with beautiful or thorny questions through first-hand, on-the-ground, stories that don’t scale. You can soak, chew, listen, and be influenced but you cannot weigh, measure, rank, and sort. 

Many people will impose frameworks that have worked for them in one area, in another. Like the investment analyst who thinks you can apply an investment process to everything. Then ESG (Environmental, Social, and Corporate Governance) or Philanthropy come along, and instead of using wholly different tools... the spreadsheets get whipped out. 

In investing, the decision ultimately boils down to buy or sell. With a lot of issues that matter... it is vastly more complicated than that. The rules of money simply don’t apply to many of the decisions we want to make. 

Yet they often still require financing. They still require capital to be allocated to them. The temptation that needs to be resisted is to force everything to become a business. Where how something needs to be financed is the key driver of the identity of what something is. 

Instead of having the wisdom to sort between things that can (and should) make money, and things that make a meaningful life.

Devil's Thorn

Eagles and Choices

Ironically, wealth also limits your career choices if your community believe they are self-made. As the Eagle’s Nest gets higher from the ground through compound growth, being pushed from the nest either requires hereditary financial support or cold hard reality. Price is not value. Skills and Knowledge are necessary, but not sufficient to make money. STEM (Science, Technology, Engineering and Mathematics) and Finance degrees focus on things you can count. You need to be able to count something to charge for it. You need supply barriers. You need a way to control demand. If a community keeps its spending low, then the entry ticket for that community remains low. You can choose a career that pays modestly, and focuses on value creation. The wealthier a community gets, the higher the entry ticket gets. Then, without hereditary support… you either need to go down the STEM/Finance route to make your self-made way… or the Eagles need to chip in. Not all good ideas are good business ideas. 

Pic: Murray Faubister

Lifemaker

I regularly talk about building Engines. I believe Capital and Labour are lovers, not fighters. Capital can set Labour free. Not all good ideas are good business ideas. Monetising is a process of creating supply and demand constraints. A lot of good ideas thrive without constraints... and are terrible business ideas. But we need money. 

If you break the trap of living hand-to-mouth, and start to focus on building Capital (i.e. building yourself an Engine), a world of good ideas are released along with you. Your money effectively becomes your breadwinner so that you can be a lifemaker. That doesn't mean you can't make money, it just means you don't have to let money be the primary driver.

Why are you driving?

Debt can support Engine building. Good Debt is like an employee that makes the company more than the company pays them. A business also has to be very cautious of committing to employ too many people. It has to meet Payroll. Businesses use Debt well if they realise they can put other people's idle Capital to work, and make more than they need to pay. Without putting the whole business at risk if they can't pay the salaries.

Debt can, and more normally is, the opposite of an Engine. It isn't an employee that is put to work doing something productive. Bad Debt is usually consumed with nothing to show. Eventually you still owe interest (the Debt's Salary) even though nothing productive is being done. It is like having to pay someone a salary even though they aren't doing anything.

I don't believe in using debt to buy stuff that doesn't work for me. Save for things you want to buy. 

Warren Buffett always multiplies the price of anything he buys by ten. A can of coke doesn't cost $1, it 'costs' him $10. This is because every dollar he spends is being fired. Put to work, that dollar could grow. Eventually, that dollar could be receiving a salary of a dollar. Spend that.

Apply the same rule to money you don't have, the picture gets ugly. Fire a dollar that isn't yours, and if you don't keep up the interest payments, eventually you could be paying that dollar for nothing. Again. And Again. And Again.

Build an Engine. Avoid a Debt Trap like the plague.

Plague Flea

Solvency and Endurance

Wealth and Income are only clues as to someone's financial strength. You have to look through the smoke (debt) and mirrors (signals of confidence). Solvency is the accounting measure for whether someone's assets are bigger than their debts. When the water flows back, are they nightswimming? Genuine Solvency allows Endurance. The ability to make it through droughts and tough patches where others would falter. To be the last one standing when new rains arrive. Solvency doesn't have a lot to do with activity. On the surface, the activity is not affected. To the world, nothing appears different. Our ability to endure is based on our internal reserves. Our inner strength. Our ability to look after ourselves when things go horribly wrong. What you can see isn't always what matters.

Time Value of Money

A key pillar in understanding Financial Mathematics is 'Time Value of Money'. It helps decision makers choose between very different courses of action. $1,000 today is worth more than $1,000 in one year's time, and much more than in 25 years' time. This is because of the opportunity cost of not having that money now. The money could be put to work, and the money the money makes could be reinvested. The difference between saving and investing, is whether the money is being stored or is working. The problem with only using this thinking is that the returns in the very distant future are worth very little now. This is where sustainability becomes essential. If we aren't good custodians, eventually the opportunities will run out, and the costs will catch up. The basic assumption of Time Value is that you can always come back to the things you neglect. Be careful what you assume. We don't own our opportunities, we look after them till it is our turn to pass them on.

Time Value

Community Wealth Fund

A Community Wealth Fund could finance an Unconditional Basic Income. A UBI is defined by the Basic Income Earth Network as "a periodic cash payment unconditionally delivered to all on an individual basis, without means-test or work requirement". Over time, labour is transformed into capital. Who notionally 'owns' this capital is defined by property rights. In practice, ownership is just a number and an agreement. Our labour is transformed into capital if it is productive, and reinvested. As time passes, this capital grows and we build on it. It is cumulative. Hawking gets the benefit of Einstein and Newton. Einstein gets the benefit of Newton. Newton gets the benefit of giants. A Community Wealth Fund could formally recognise our privilege, as a clumsy best effort to give it a number. It could be built up by voluntary contributions. It could pay an equal share of the fruits out as an 'average' of a group of people's privilege. It would be tough to figure out how to do this for 7.5 Billion people. I think we can each be part of doing it for 150 people. The beautiful question is how to construct that 150? How to construct it in a way that can spread to 7.5 Billion.

Give Later, Give Forever

Procrastination comes naturally. It is easy to set your alarm for the morning. It is difficult to actually get up when it goes off. Delegating to our future selves. This insight led to the 'save later' concept. It is easier to save a chunk of your future increases, than to cut back on your current expenses. The same concept could be used to fund a Community Wealth Fund. If people who can afford to fund their own Universal Basic Income donate it to the community when they no longer need it. So you are giving up nothing now. Money, well managed, can live forever. If instead of seeing yourself as the owner of your wealth, privilege and talents, you can be a custodian. Zero impact on your current lifestyle. Infinite impact on the empowerment of future generations.

Forever

Living Annuity

An Annuity is a fixed/known sum of money, paid out to someone over a known period, or for the rest of their lives. A Living Annuity is one in which the amount is not guaranteed, but is dependent on the performance of the underlying assets. The thing making the money. Guarantees cost money because someone is taking on the risk. A Guaranteed Annuity groups people, so those who live longer are 'cross-subsidised' by those who don't. The seller also has to guess, in advance, how much money it thinks it can make to make sure the payment is sustainable.

A Living Annuity means that if something goes wrong/right, the person receiving the money is affected. It will have to allow for the fact that it is much harder to guess how long one person is going to live, than to guess how long most people that age/gender etc. live (The law of large numbers). You don't want to 'run out of money', so the more uncertain you are, the bigger the buffer you need.

If a Universal Basic Income (UBI) was funded by Capital, it matters whether it is financing one person, or one of a group. A Community Wealth Fund like the Norwegian Sovereign Wealth Fund is big enough that it smooths out the risks you would have if you are dealing with just one person. One person can be (un)lucky. Two people can be (un)lucky. A billion people requires something to have changed structurally.

I like the idea of being Micro-ambitious. I would like to figure out how to finance 150 UBIs. It seems the simplest way to do that would be to start with financing one. Counter-intuitively, that is harder in some ways. 

If you go it alone, you need a much bigger buffer. A capital funded UBI for one person is similar to a living annuity in the risks it faces.

Going Alone

A Real Thing

If there was a mysterious flash, and suddenly there was no debt, and no money, all the actual physical stuff would still be here. The numbers are a way of counting, and a way of permitting activity. A coordination tool. If a group of people have no money, but they have skills, they can still help each other. This is why shadow economies work, but don't count. Gross Domestic Product (GDP) counts things you can count. So yes to paid childcare. No to stay at home parents. Yes to Zipcar. No to a friend giving you a lift. Money and Debt are trust tools. They help us do stuff without immediately getting compensated. They help us count things that can't really be counted by giving everything a price. Never forget that it is just a story to help us think. Money isn't a real thing.

Engine

The engine of Capitalism isn't profit. Profit can be competed away. The engine is reinvestment. Reinvestment is a sign that something is alive. Even if you are making no profit, but you can consistently make something well for exactly what it costs, and sell it, you will be able to create more and more. If you can then find someone to finance the growth, and consistency is the easiest way to do that, you can build a bigger engine. If you aren't making a profit, and you are doing something well - that is incredibly difficult to compete with. In a world with zero transaction costs and perfect transparency, if people can copy you, they will. If someone can see exactly what you are doing, but it is hard, you are pretty safe. Find something you love doing, do it well. Build something worth building. Reinvest.

Boulton and Watt Engine

(1788)

Steam gets the cycle started

Real Asset

Fiat money is currency established as money by law. It has value because the government says so. That matters because what the government says is backed up with tax (payable in that currency), prisons (where you go if you don't pay the tax) and law enforcement (the people who will make sure that happens). Hut Taxes were one of the first ways the British Government forced people to shift from rural subsistence. It led to many revolts. Money isn't a real asset. Ask Zimbabweans. Read about the Weimar Republic in between the two world wars. Money isn't actually a thing. It is a promise or a catalyst - meaningless if no one believes in it. Debt is much the same. Which is why inflation destroys both. If all the money and debt in the world disappeared, nothing would have actually disappeared. Real assets are tangible. They do stuff. They exist outside of the stories we tell ourselves. Money is a story. A powerful story, but a story nonetheless.

Yuan Dynasty Banknotes

The earliest known fiat currency

Emancipating Labour

Capitalism in the Adam Smith sense, is an emancipator of Labour. If you can separate from the cycle of labour, saving, and consumption, you can change the rules. Hand to mouth requires converting labour into money, saving for something, buying that thing, and repeating. Capitalism can free the hand. Instead of saving for something, you reinvest. The money then works, and gets paid for that work. Eventually Capital can work instead of Labour delivering a passive income stream for the owner. The income emancipates the owner to think of things that can't be monetised. Time and space to be creative in ways that can't be reduced to a number. Capital and Labour aren't enemies, they are lovers. Their relationship doesn't have to be a tragedy.

What satisfaction canst thou have tonight?

May I free your hand?

Reinvestment

One of the major innovations of Capitalism was reinvestment of profits. If you believe that wealth is something you have, then it is something you decide when to spend. If you think of wealth as something you manage, then it is like looking after a tree that produces fruit. You eat some of the fruit, you plant some of the fruit. Only part of the profit (fruits) are spent (eaten), but never the capital (tree). If you cut a trees down, the fruit supply ends. Modern Billionaires don't have big piles of cash or hoards of stuff. Most of their wealth will be working. They don't spend most of the money their wealth makes each year, they reinvest it. A true capitalist would be very scared of conspicuous consumption, and act as custodians. The first concern of a true capitalist is sustainability.

Doubling Up

The Rule of 70 is a simple way to figure out roughly how long some money will take to double in value. If you invest $1,000 and receive 5% return, it will double in roughly (70/5) 14 years. It actually would take just over 15 years, but if you are making a quick calculation, you don't have to be exactly right. (Another example at 10%, the Rule of 70 estimates 7 years.) 

In the first year you earn 5% on $1000.  $50. In the second you earn 5% on $1,050. $52.50. So earn money on the growth as well. This is compounding. In the 15th year, just before the 'doubling event', the amount being earned will also have doubled to $94.28.

Long periods of time are very powerful when it comes money. There is a story of a wise man who helped the Chinese Emperor. The Emperor said he could have anything he wanted in return. He asked for a chess board to be laid down. He wanted one grain of rice for the first square. Two grains for the second square. Four for the third. For each of the 64 squares of the chess board, he would like the process to be repeated. The Emperor agreed, bemused that he had requested such a small gift.

Source: McGeddon

On the 33rd square, there would have been over 4 billion (4,294,967,296) grains of rice. That is only the start of the second half the chess board. The Emperor had given the wise man his empire without knowing it.

Rice on Chessboard

That is the problem with Debt. It is cunning. The same compounding that works for investing, also works for borrowing. You pay interest on interest. This is where the Biblical seven year forgiveness on debt comes from. In a short period of time, there is some connection between what is being borrowed, and what is being paid. As the repayment period gets longer, what you are really borrowing is money to pay interest on the interest.

Besides the 'Rule of 70', another good rule of thumb is 'Save for what you want, don't borrow and spend'. Good Debt is when the money is put to work, so it makes more than the interest it needs (the money's salary). Bad Debt just digs holes. 

2 by 1 by 1

We think of deflation as a bad thing. From a business perspective it is. Business is about solving problems, but if you solve them too well, it isn't good business. An ideal business is one which generates a regular, growing, stream of cash. It is one you can reinvest in, so that it is doing more 5 years down the line than it is doing today. It is one which is attractive, but not so attractive that other people stop doing what they are doing and come and compete with you. If they do try and compete with you, there should be barriers to entry. Reasons they shouldn't or can't do what you are doing.

As a 'business', the reason housing has been a good investment is because of the barriers to entry. There has been massive urbanisation and massive population growth. Most times, businesses make money because they have solved a problem well. In the case of property, there has been loads of money made because we haven't handled a challenge very well. All that has happened is there haven't been enough homes to go around. So we have made it easier to borrow to buy. All that does is makes more money available to make the prices even higher.

 The Urban Population grew larger than the Rural Population in 2010

The truth is, no matter how wealthy you are, you sleep for about a third of your life. When you close your eyes, there is less than a 2m by 1m by 1m space in the world that matters to you. If you wake up, and crack on with life, that is all you need. Obviously there are all sorts of things we want. And will pay for. Tap Water is almost free in most developed countries. Tap Housing should be too. If you want to make your water bubble and throw some flavouring in, awesome. But over time, we should get better at solving standard problems. Housing is a standard problem. If you buy a single house, and it is worth more years down the line, that means we have collectively done a bad job.

That is not to say you won't make money 'investing' in your house. If we carry on doing a bad job of solving the housing problem, people will carry on making money by being on the right side of the equation. I prefer the idea of thinking of money as an employee. Asking not only whether it will make money, but why it will make money. What is it doing that is useful? Why will that be more useful tomorrow than today? If the only answer is supply and demand, I will politely move on. Plenty of people won't and will do very well. 

House deflation would be a good thing. Unless you are invested in houses.

Reality and Uselessness

A couple of my friends have pointed me in the direction of George Monbiot recently. I have mixed feelings about his article 'Amputating Life Close to Its Base'. He starts the article by talking of what he sees as the vision of what universities should be. They should be an opportunity to 'to seek enlightenment, intellectual or spiritual; to do good; to love and be loved; to create and to teach'. He then goes on to suggest that instead, because of Corporate forces, people end up in 'useless occupations that consume thousands of the brightest students'.

Since most of what I say in this blog is about those wonderful things he refers to, I will assume I can skip the 'Daniel Dennett steps' to being allowed to criticise. Clearly we agree on a lot. 

I have two primary challenges to what he says here, even though the article gets the 18 year old in me very excited. I was also surrounded by incredible people who thought we could change the world. Many, actually most, of the ones I ended up with as university friends ended up in the occupations he describes as useless. Including myself. The difference from the UK, is that South Africa is quite vocational in its approach to studies. We knew what we were going to 'be' in our first year of study. We studied engineering to become an Engineer; Medicine to become a Doctor; Accounting to become an Accountant. A few extra subjects were thrown in, but for the most part the focus was on getting a job - not on the opportunity for enlightenment/ good/ love/ creation.

Not that we wouldn't have if we had been given the choice! I put this down to 'First World Problems'. I would have loved to spend my day reading, painting, acting, writing, philosophising, and teaching. There are however the realities of life to consider. Some professions offer the potential for great satisfaction, but unfortunately just don't pay enough. That gnaws at their satisfaction. You can only start to focus on the good stuff when you have a solid base. A buffer to take whatever life throws at you. Maslow's hierarchy is a triangle. The base is the physiological stuff - food, water shelter. Then comes safety. If these things aren't sorted then you really can't start worrying about the other stuff yet.

I agree with Monbiot that it is hard to extract yourself once you have built that base. I am convinced that Enough is far less than we tell ourselves. Shakespeare and Hinduism both talk about the ages of man. Arguably western industrial life is also divided into stages. School. Work. Retire. Die. What I like about the Hindu stages is the explicit allowance for some of the good stuff once the 'duties' have been performed. There is an end to the Student and Householder stage. I have a strong feeling that much of the enlightenment that Monbiot is talking about needs a few grey hairs and wrinkles. It is part of why I am looking forward to being old. With a better understanding of enough, and less fear of free time, I think we are getting closer to being able to enable more people to pursue that enlightenment.

Besides the 'Get Real First' objection, my second complaint is that those jobs are not all useless. The categories he writes off are Finance, Management Consultancy, Advertising, Public Relations and Lobbying.  Those working in 'abstract jobs' that don't physically make stuff themselves do add value. Or rather they can add value. There are issues such as 'work for work's sake' amongst other problems. But incredible value has been unleashed by Finance (See Finance and the Good Society). I know less about Lobbying and agree that Arm's race style spending gets out of hand when we try to solve disagreement by forming tribes and outspending.

A lot of people genuinely enjoy working in those jobs. They find fulfilment in solving problems. The idea that they are 'slaves to the machine' misses how the workplace is evolving up the triangle too.

Perhaps rather than shooting down one particular choice, a better approach would be to help plan life stages better so we can have the best of all worlds. We don't have to super specialise. But you can't jump to the top of the triangle. Sometimes you have to do what you have to do. 

Mind The Gap

If you know a Doctor personally, you know not to ask them for advice when you are sick. Particularly if they are a parent, sibling or romantic interest. For the most part they will tell you it will pass or to go see your Doctor. The human body is ridiculously complicated, and while they may have been generalists to start, it can be roughly equivalent to the asking someone for help with calculating the weight of concrete required to build a skyscraper since they did maths and physics at school. I am an Actuary. When I go to an annual Actuarial Conference, the majority of the papers presented only loosely touch on areas of my expertise. Sometimes I understand. Sometimes I don't have a clue. That is as an 'insider'. The TED conferences have made a real go at helping to bridge the gap and give outsiders some insight into various specialities. They use presentation experts like Nancy Duarte and Garr Reynolds to help experts convey their stories in a short, punchy and memorable way.

Robert Shiller has made an attempt to help people understand the benefit Finance adds to society in a book called Finance and the Good Society. In it he goes through the different role-players and explains in as close to laymans terms as possible what they do and why it has helped moved the world forward. The Financial Crisis gave people inspiration to label basically anyone who wore a suit a 'Banker'. With little understanding of what they do or how they add value - they are assumed to be evil. This extends beyond Finance, to Law, Politics and even Alternative Health. If we don't understand what someone does, we need rules of thumb to class them and pass moral judgements. Giving someone the benefit of the doubt is tough with regular hyperbole and stories of tragedies in the media.

It would be great if we could have a habit of developing an elevator speech (30 seconds), a Pecha Kucha pitch (20 slides, 20 seconds each) and a TED style talk of what we do and how it adds value. Better yet, perhaps we could have a habit of spending some time 'interning' for other professions. We spend a lot of time trying to get better at what we do. We need to be careful not to blinker ourselves.

Robert Shiller - Nobel prize winning author of 'Finance and the Good Society'

Image Source: www.wikipedia.org

Creative Destruction & Infallible Ships

After reading Fen's comment on `Creative Destruction' I purposefully held back on responding until Stu did.

Fen:

If left to right itself a year ago ,the sub prime problem would have swallowed most financial institutions in the US. Lehmans!!

stu:

You talk about the peculiar belief that we could build something infallible, but in the next paragraph you imply that if we intervened we could stop these bad things from happening.

Of the two scenarios (intervention/non-intervention), intervention seems to me to be a much clearer example of us believing we can make something infallible.

I find the image of the Titanic a useful one. But for different reasons. If the titanic had been save by an intervention... say, a chance passing ship, perhaps another 20 titanics would have been built. Maybe... and this is not a nice thing to think of, the tragedy of the failure saved us. Unsafe ships sink, people re look at the model and build something that works. That is where I think Capitalism is at its best.

Perhaps the lesson here is that we shouldn't be building titanics.

As for the systemic risk of the Financial system, I can't comment. Despite 8 years of studying Finance and Economics, I can't claim to understand how the financial system works. Banks are opaque beasts at best.

This ogre of systemic risk I feel is perhaps an excuse used to justify intervention. Intervention that keeps the Titanic afloat.

Long enough for more titanics to be built and more people to die?

I don't think this crisis is an example of failed Capitalism. I do think it is an example that there isn't any obvious answer as to how to intervene when periods of destruction happen.