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.

Nothing Else Matters

It isn’t only the idea that matters. It isn’t only your merit that matters. Liquidity (enough to cover immediate needs) and Solvency (you have more than you owe) are cornerstones that carry anything with potential value through the chaos. 

Liquidity recognises that the short-term can swamp and swallow true value. If you think of true value as what would happen if everything went according to plan, and everyone saw the world as you do. 

Solvency is what lets you carry on carrying on, for a chunky period of time. 

If you aren’t being creative in the long-run... Liquidity and Solvency won’t save you. What they do do, is prevent you from being forced to make decisions. 

If “No” is not an option you have, the forces of supply and demand will eat you alive. Desperation is blood in the water to sharks. If you have to buy, at any price, the price will go up. If you have to sell, at any price, the price will go down. 

Value is almost meaningless in a pressure cooker. If one thing is so important, that nothing else matters... you won’t be able to see, hear, or feel anything else.

Shark's Eye

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.

Building Capacity

A business is a legal person. It is a container which has legal rights and is subject to obligations. A share is a slice of ownership of this container. In deciding whether to buy or sell a share, you don’t just look at the product. You don’t just look at what the business does and “is”. Beyond the product they are selling and its profitability, you have to look at the solvency and liquidity of the container. At its strength and flexibility. Solvency is a measure of endurance. Unlike people with reasonably stable salaries, a business can have much more volatile profits. Years it makes no money or loses money. It needs to survive. It needs Capital in excess of the money it has borrowed, to get through difficult periods. It needs self-reliance. Self-sufficiency. To make adjustments. Research & Development. New leaders. New management. New hires. New products. Mergers and Acquisitions. Restructuring. Liquidity is a measure of short-term resilience. Even if you have Capital, you need cash to meet clear and present dangers. To make sure immediate needs don’t drown long-term purpose. When investing in yourself, don’t just focus on what you do. Build endurance and resilience to have the capacity to keep doing, whatever comes in your way.

1914 Volume Measurements

Liquidity and Resilience

Never be a forced buyer or seller. Price (and salaries) are not a measure of worth. Price is a clearing mechanism. If you really have to sell something, the price is going to be much lower than if someone really wants to buy it from you. Value is deeply personal. Liquidity is the accounting measure for the 'availability of liquid assets', i.e. cash or things that are easy to sell quickly. Sometimes you have to pay bills when they come due. You don't have time to sell things for what they are worth. This is where Resilience comes in. The ability to deal with short-term knocks. The ability to respond to the things that are important now without putting at risk the things that are important always. This requires consciously building buffers. Not putting everything you have into every situation, so that when challenges or opportunities arise you are busy. So busy you put the things that matter at risk for the things that don't. So busy it kills you.