Working Out

It is tempting to judge decisions based on what did happen. If you accept that the world isn’t on a set path that just has to reveal itself, then what could have happened is just as important. 

A bad decision that worked out, is still a bad decision. Especially if that decision-making process gets used repeatedly. Act with what Warren Buffett, Benjamin Graham, Seth Klarman, and other decision-makers call a margin of safety. An acknowledgment that being wrong is a part of engaging with the world meaningfully. 

Don’t just assume what you think is going to happen will happen. What if something else happens? Get out of the mindset of thinking you are rewarded for prediction rather than tangible value creation. A track record of building rather than of being right or wrong. 

Uncertainty is a part of decision-making. Of course you want to plan, but in a way that realises you have limits and constraints. 

A margin of safety is like a buffer when you are streaming a show with slow download speeds. Enough of a buffer means it can be slow, but it doesn’t stop you from watching, because you started with patience. 

A margin of safety means your plans don’t get disrupted by whether you are right or wrong, because they allow for change. Where wrong is something you embrace as a part of the learning process, rather than something that ends your creativity.

Extended Challenges

When a country isn’t wealthy enough (e.g. South Africa), or even if a country is wealthy enough (e.g. the United Kingdom), to have a solid safety net, we start pushing responsibility to owners and managers saying, “they need to look after the employees and create jobs.” In some ways, I think that is fair. Firms can use team language when convenient and treat people (employees and clients) as disposable tools at other times. The danger with that is the condescending idea that there is a class of people responsible for looking after people, and an underclass of dependents doing their bidding for a hand-to-mouth living. Both decision-making and responsibility can be shared in a way consistent with autonomy and consent. If we build proper resilience and endurance. If we aren’t solely reliant on salaries or welfare. What happens when companies go bust? What happens when countries can’t tax more or borrow more? As we have seen during the Covid crisis, a large number of the institutions we rely on are not designed for extended periods of challenge. To be creative, you need the capacity to survive the winter. Wealth creation is at its heart, risk management. 

Ice Age Earth

Last Resort

The idea of a “Lender of Last Resort” (LOLR) brings harsh focus to the importance of liquidity. Price isn’t value. If you have stuff no one wants, the price is zero. It doesn’t matter what it is. It doesn’t matter how much you think it is worth in normal times. If you don’t have the capacity to reach normal times. The price may even be negative. You may have to pay someone to take something with long term value from you, because you simply have no option. There is nothing as dangerous as having no options. The role of LOLR is played by Governments or Central Banks. Selectively and inconsistently. Lending to institutions they don’t want to fail when no one else will. The Bank of Mom and Dad plays this role for many surface level risk takers. For the majority of people, there is no last resort. There is no one to step in. They are their own last line of defence. Risk is deeply personal.

Start with Space

We live in a hand-to-mouth, pass-the-parcel, kick-the-can, pay-as-you-go economy. That has underlying assumptions and puts you at the mercy of feast and famine cycles. Creative destruction is both powerful and useful. For survivors. To survive, you need to build in a “margin of safety”. Meaning you have to leave space. To build space. The only thing you can plan for is that things won’t go according to plan. Hand-to-mouth means spending everything you earn. Pass-the-parcel means if your customers don’t get paid, you don’t get paid. Kick-the-can means spending now because you assume future growth will be able to pay for current spending. Pay-as-you-go means one generation pays for the next. Think of Pensions as the predecessor idea to Basic Income. The big question then was also how do you pay for it? The answer then? Working people pay directly to retirees. Retirees die, working people retire, and children start working. Merry-go-round. Until people live longer and people have fewer children. The way to build, is first to build space. Then build engines.

NeverEnding Story

Bottom-up Stock Picking is equivalent to seeing people as individuals and communities rather than abstract prejudices. It’s easier to simplify people and businesses into races, nations, and asset classes. It’s lazy. A bottom-up stock picker has a universe of thousands of public businesses from around the world to choose from. For most, you can afford to put them in the “Too Hard Pile”. You don’t have to have an opinion on everything, and you can admit ignorance on the vast majority of hard questions. You can gradually build an opinion on the endurance, resilience, and creativity of enough businesses to allow a margin of error. The first question is always, “what if I am wrong?”. Fundamental Investing isn’t about predicting the future. It is about creating an environment for sustainable growth in a world that is complex, ambiguous, and random. The key is time. You buy yourself time through consistent investing in strength, flexibility, and control. The peaks and troughs become the inevitable and predictable chapters in a much longer story of staying alive, and making a contribution to the conversation.

Yeeeaaah!

Strength Matches Gravity

“Always On” is fragile. The most important factors in meaning and wealth creation, are time and compounding. Building incrementally on what was created before, over the very long term. That requires seasonality, redundancy, and excess capacity. Running hot focuses on creativity at the expense of endurance and resilience. Creativity gets the credit, but endurance and resilience have to be the priority. Sustainable Growth beats headline makers because of the reduced risk of ruin. Sustainable Growth means building the capacity to pause. To reflect. To unlearn. To relearn. You see it in those beautiful moments with dancers. Where their strength matches gravity, and they pause. Seeming to defy the laws of physics. That is true control. Real autonomy. Where complete acceptance of the way things are allows you to see deep enough for time and space to slow down. To go still. Then to emerge from the stillness renewed.

Poncianinho - Mojuba Capoeira London

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.

Smoothing

Insurance doesn't remove risk. It smooths it. You can accept, avoid, mitigate or transfer risk but you can't make it disappear. We are on a large rock hurtling through space around a fiery ball, buffeted by water, wind, lightening and each other. The problem with things seeming like they are 'risk free' is Moral Hazard. Nothing is risk free. We behave differently when we don't think anything will affect us badly. That is why a little bit of difficulty is a good thing. If you can afford to accept risk, that is the best way to look after it. Accept some bad stuff will happen, and allow for it. Be aware of it. Build a Buffer, so that the bad doesn't finish the game. A Buffer tops things up in bad times, and builds up in good times. It smooths the ride. Consciously.

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

Ins and Outs

Learning Curve

I have always looked for jobs where I was on a learning curve, and started to get itchy feet when I felt like I was at the 'just doing' stage. You could call this the 'Call Centre Problem'. You want bright, engaging, friendly, high IQ, high EQ people on the other end of the line when you need help. You just don't want to be that person. It really can be an awful job once you know everything really well. Initially it can be an awful job when people expect you to know everything really well. I am definitely the worst version of myself when I am on the phone to a call centre for more than an hour.

The problem lies in the fact that keeping awesome people in the job is really hard once they are really good. Most of the queries are probably the same. So much the same that you would think you could automate call centres. AAAAAAAAAAAgh. I hate automated call centres. Going through a number of imperfect options until we get the ones I want. Please can I speak to a real person who will listen, understand, and point me in the right direction. No, please don't redirect me. One person. One all knowing, all seeing person who can fix everything. Oh, the CEO is too busy to answer the phones. Shucks.

The irony is that the CEO is probably too busy not to answer phones. What they don't tell you when you are eyeing out job paths is that being a CEO is not dissimilar to being a call centre operator. You mostly spend your time meeting or on the phone with disappointed stakeholders who all disagree. While worrying insanely about all the things that could go wrong. I'll pass thanks.

Dream Job

I looked for how to get a job where I could be learning every day, I loved what I was doing, and I was focussing on people I cared about and who cared about me. Just over a year ago, I found that job. Ever since 9 August 2014, I have been thinking and writing about happiness and learning, and trying to figure out ways to spend more time and energy on people that matter to me. Despite the 'work' part of what I do taking less than 3 hours a day, I think I have had one of the most productive years of my life. Busy doesn't always mean productive. 

But... there is a problem easily noted. I only made £4.11 in the first year. It only gets paid out when I reach £10. Having recently told people this, the question becomes 'How long can you make this last?' or 'How do you monetize this?'. The answer to monetize this is easier. I stop daily blogging and get a real job. It is the same reason I haven't invested a lot of time into monetizing my art. I know what I would need to do. I would have to hustle. I would need to visit lots of dealers and build a network. I would have to enter lots of competitions. I would have to build an audience with a group of people (with money) who like my work. That is work. That is actually business. I have studied business, and it is not a business I would invest in.

One of money's key strengths is its ambivalence. It strips things of all their defining characteristics and subtle flavours and gives you a number. A number you can use to compare completely different things. This much of this is worth that much of that. Like saying being this tall is equivalent to being that clever. Tallness and Cleverness have nothing to do with each other. Much of the 'work' part of business is the same, no matter what you are doing. Once someone is sitting at a desk, in a cubicle, with a cup of coffee, they may be an accountant, engineer, writer, architect, mathematician, academic or whatever. They will have admin. They will have colleagues they like. They will have colleagues who annoy them. Good bosses who are interested in them. Bad bosses who have no time or energy to be interested. Politics. The work of an artist and the work of a banker can be mostly the same.

The truth is, in an ideal world, I don't want to monetise my blog. I would like to be able to dive into the qualitative world. The world that can't be reduced to a number. As a scientist (or in business) you look to understand things that can generalise. You want to be able to predict things, so you need to understand cause and effect. An experiment is only useful if it can be replicated. The magic in business comes when you can solve a problem that almost everyone has. In art, relationships, life and everything else you don't want to reduce to a number, you aren't looking to replicate, you are looking to appreciate. The goals are very different. The answer is never the same.

Ins and Outs

So the answer to how long this last depends on something else. Two things matter. 'Ins' and 'Outs'. If the Ins are winning in the long run, then something is infinitely sustainable. The Ins also need a buffer to survive any unexpected Outs. The lower the Outs, the less Ins required. The Ins and Outs matter much more than the number. Three examples will help explain that:

• The world runs on fossil fuels at the moment. The Ins come from things like the Sun and the Wind. Our store of fossil fuels that have been dug up or can be dug up are 'the number'. The Outs are how much we are using and the damage that is causing. If we don't figure out how to get the Ins more than the Outs, we are stuffed. The clock is ticking. 

• I once heard the story of a wildly successful, wealthy guy earning something like R20 million a year when that was still a hell of a lot of money. Aged around 65, he was thinking of winding down and asked a financial adviser what he needed to do to be able to stop working and sustain his lifestyle. He hadn't started saving yet. The adviser offered to buy him a beer. That was the only help he could offer.

• The third story would be someone pitching up with nothing at a Yoga Ashram. Their number is zero. They roll up their sleeves and chip in around the place as they would at home. A bit of cleaning, some cooking, some gardening. They spend the rest of the day in thought, exercising or just being still. No Outs, lots of Ins. This person with nothing has nothing to worry about.

Ins and Outs

Making it Work

The answer to the question 'how long will it last', is 'it depends'. I have saved aggressively but have no control over various things that are important factors. I can minimise the Outs by trying to think about what is important to me and those I care about, and spending on things that are valuable rather than rare. 

In terms of the Ins, most of my money is invested in a global equity fund run by the company I spent most of my time working at (Orbis). Some is invested with another company I later moved to (Stonehage). Some in businesses I have invested in myself. Then I have a buffer for little challenges life throws at me along the way. If these Marshmallows continue to multiply faster than I spend them, I get to carry on doing the things I love without worrying about monetising them.

What if things fall apart? I have some insurance in the form of relationships and education, but at the end of the day I can just get a job. Sometimes you just do what you have to do.

Margin of Safety

A margin of safety is a recognition that you may be wrong, and that the world is complicated. It is a recognition that even with perfect understanding, ever present randomness means you will never be fully in control. Never put the things that matter most at risk because of the things that matter least. A buffer provides the ability to look up from the task at hand. Enough to eat for the week means you can think about what to eat in a month. Relationships start with a buffer of things in common that earn you the right to develop.

Too Hard Pile

The more something can be reduced to a single number to explain, the easier it is to price. If you are selling cans of coke, you know all the inputs and outputs. You know how many people normally want what you sell, and you know how much is produced. Things are predictable. Things are clear. The more and more fuzzy things get, the more likely it is you are starting to wade into 'Too Hard' territory.

The Holy Book of value investing is 'Security Analysis' by Benjamin Graham. 'The Intelligent Investor' is a more accessible abbreviation. The businesses Graham liked investing in were ones with 'tangible value'. Stuff that made stuff. So if it couldn't make that stuff any more it could be sold at a predictable price. This 'fire-sale value' gave a baseline for working out what something was worth. At the time, people buying shares tended to speculate and guess what was going to happen in order to figure out what the value of the business was. Graham was more boring. He would just search for businesses where he could get a good understanding of a base value. If he could find ones that were selling below this, he would have a 'margin of safety' in case he was wrong. He tried to find enough 'cigarette butts' that had been discarded to get the last puff so that he could effectively extract value out of boring businesses that had been missed.

As soon as things were too hard to value, he moved on. His aim wasn't to value everything. He didn't have to. Warren Buffett, his most famous student, calls moving on putting something on the 'too hard pile'. As Industry has progressed, there are lots more businesses that are harder to value because the various forces affecting the business are less predictable. You can still find businesses that you can build confidence in.  Seth Klarman has said 'The real secret to investing is that there is no secret to investing. Every important aspect of value investing has been made available to the public many times over, beginning in 1934 with the first edition of Security Analysis.'

A big part of the success of value investing is that it doesn't cover all businesses. Some things are harder to value than others. Lots of businesses are too hard. That is fine. Investing doesn't require you to put a price on everything. Value is also a messy word. Warren Buffett says, 'Price is what you pay, value is what you get'. Sometimes you can get a good sense that people are paying far more than something is worth. But only when something is quantifiable. When the things that affect it are understandable. 

Michael Porter wrote another classic, 'Competitive Advantage' and has built a career around examining the various forces affecting business. The things that affect valuations include

• other products that can do the same things (substitutes),
• other businesses that can make the same thing (competitors), 
• the bargaining power of buyers (supply and demand), 
• the bargaining power of suppliers (supply and demand),
• the threat of new competitors coming in if you make too much money

All these factors mean a good idea is only half the equation. Something having 'worth' isn't the same thing as the forces involved being manageable enough to price it. To reduce it to a number. Some things are priceless. Water is the most obvious example. Clearly it is one of the most valuable resources we have. That doesn't mean we pay the most for it.

Many of the things that are most valuable can not be reduced to a number. You can't say: without it I have this much, with it I have this much. It is worth the difference. We try price things with the hack of how many people are prepared to pay for it, and how many people have it. This is the price. This is all the price is. There is zero moral value judgement. As soon as something is remotely interesting. As soon as it is hard to box. As soon as something is hard to put into words. It is hard to price.

When things are on the Too Hard pile, price is just a hack.

Retire Retirement, Build a Buffer

I found 'On the Road' by Jack Kerouac a tough read. While there were beautiful passages, it was tormenting. Sal, the main character, was living hand to mouth. Constantly searching for and then finding brief interludes of ... well, whatever happened. His best friend is a whirlwind. He seems close and gives the impression of caring but his presence is uncertain and his impact intoxicating.

It made me think of the value of a 'margin of safety'. I spoke yesterday of my concern with a focus on starting early to build a nest egg that will allow you to retire. The concept of retirement is for me an Industrial Revolution one. We had to roll our sleeves up and build a world that was safe and had enough food. At some point your back starts to hurt and you pass the shovel to the young guns. As we move to more creative, cerebral activities, you still have a lot left to do and give as you get wiser. Ideally you never 'retire', you just slowly do more of the stuff that makes you Flow. What you do need is a buffer. You can't spend your life living hand to mouth. As Jeffrey Cufaude (@jcufaude) put it in a reply to 'Wrinkles and Grey Hair Rock', ' Living beneath my means and always saving something...'.

The goal changes a little if you 'retire retirement'. If you can consistently earn 5% real annual return on your investments and plan on living forever, you need 20X your salary to retire, do nothing that earns you money, and still get 'paid'. Most people don't live forever, so the figure comes down to a suggested 12-14X. The figure gets lower the more you pretend you will earn a lot more than others and the more risk you are willing to take of outliving your money. Getting to 12-14X is a long way away. But if you aren't aiming for this magical 'Nest Egg', but are instead aiming for a 'Margin of Safety' or a Buffer, the figure is lower. Maybe you only need 5X salary to give it a go. To take a chance and try shift from the job that you are doing to something that allows you to have Flow and work without dreaming of retirement. Maybe you love your job, but just want to add some firepower - Buffer. Maybe you just want a year off every 7 years as Stefan Sagmeister suggests - Buffer. Nothing but rich generous parents, the lottery, or some luck removes the need for the hard work to build the buffer, but it is a much more realistic and achievable goal.

And if you want to hit the road like Sal - a buffer will let you do that too.

https://en.wikipedia.org/wiki/Jack_Kerouac