Through the Waves

Like a lot of South Africans, I am deep soaked in Righteous Indignation. I like that I have the capacity to get very angry, and am not willing to let that go. Yet, I also struggle with how ineffective and energy sapping regular rage can be. Overwrestling with how I think the world should be. A close friend, who had seen my anger, asked me how it was consistent with practicing to be a yogi. 

“Dharma” is partly understood as our purpose for being here. One of yoga’s key texts is the “Bhagavad Gita”. Ironically, for those who think yoga is just about bending and stretching, it is a story about war and a conversation between Arjuna and Krishna about “why should I fight?”. If everything is connected, an illusion, and it is so hard to make a difference as an individual... why bother? 

There is a point. Actions do matter, and have consequences. We do have responsibilities and obligations. We are building this world together. Part of that is learning about the reality of how we coordinate actions and consequences. That starts with a deep acceptance of the way the world is, because everything can only move from where it is. 

I am a very imperfect yogi. Full of aches and pains, and questions. Most of what I write is coaching myself to remember to come back to the basics within the complexity. Returning towards proper exercise, proper breathing, proper diet, proper relaxation and proper mental health. Practicing Tim Minchin style “micro-ambition”... small, achievable, goals that add up. There is a constant wrestle, and chipping away requires repetitive reminding that our actions matter. 

Waves, both positive and negative, keep coming. They are not malicious. They just are. The waves have nothing to do with who you are. Stillness comes from how we see these waves and whether they have the power to knock us off course. Stillness comes from finding a way to create meaning DESPITE the noise, through patience and time.

Waves of Interference

Start with Space

You can’t build capacity to absorb shocks and stress (to prevent losing sight of what matters), without finding space and time. 

Space is not “what is left”. Start with space. In financial terms, that means “paying yourself first”. 

First, put some money aside to build a buffer. Work towards having 3-6 months of spending as a cushion for the expected unexpected. To absorb months that cost extra. To absorb shocks that would have derailed you. Before you save to spend on a thingthing, put money aside to deal with anything life throws at you. 

 

The money is there, but not there. Protect the boundaries around your buffer. It is not there to spend, it is there to hold. Repair the buffer when noise shakes it. Pay yourself first. Then with whatever is left, decide consciously how to spend it. Don’t start with a list of things you have to spend on. Start with what you have, and choose how to spend that. Start where you are. 

Easier said than done... but we can’t focus on what matters, if we can’t focus.

Space is not what is left

It is where we begin

Noise and Ruin

You can’t simplify risk into a simple number to fully capture the “cost” of returns. There are various measures for risk, that ask interesting questions. All of them have problems. Volatility is the most commonly used, as a measure of noise. How different the average outcome is, from the average outcome. If volatility is zero, there is no movement from the average. If sometimes it is higher, and sometimes it is lower, you are measuring the absolute difference from the average (whether below or above is ignored). If results are “normal”, you can get an idea of what the chance of an outcome being in a given range is. Another measure of risk is the probability of ruin. What is the chance that you are not going to be able to play the game anymore? The most important thing in most games is staying alive. Value is created over the long term and compounds. Survival is essential. You always need to know that you are going to be at least 5% okay, so that you can rebuild. Always have the capacity to regenerate, even in a huge disaster. Hold something back. Something that allows you to have a deep sense of security. Volatility, based on the past, can be zero right up till a point of ruin. There is no such thing as risk-free. 

Volatility is easy to measure, Ruin less so

 

The Great Wave

There will be many lessons learnt when we reflect on 2020, and unfortunately probably most of 2021 too. When the dust settles. One of those will be the danger of predicting things we pretend to understand, but have not experienced. Another will be the peril of basing society on hand-to-mouth existence, because of (amongst other things) a belief in “work ethic”. Asking children as they grow up what they will be, and meaning how will they earn a living. Existence based on a willingness to work, requires the existence of work. The ability to create real value requires reinvestment and a long-time frame. It requires breaking the cycle of feast and famine. It requires being able to pause. Sometimes for longer than we like. It requires a safe place to retreat to. We have to snap our earning addiction by creating capital. Capital is not hoarding. Capital works. Capital can create space for when we realise how much of what we thought we knew is not true. Capital allows you to be wrong without it being the end. If you have the ability to work from home. Be grateful you have work. Be grateful you have a home. Then let us build back better.

The Great Wave off Kanagawa

Spin the Coin

Waves of randomness batter individuals the hardest. Our best efforts can be swamped by chance, and the lotteries of birth – geography, genetics, community, time. Take a big step back, and you lose and gain information. Spin a coin once, and you have no idea whether it will be heads or tails with confidence. Spin it a million times, and if the coin is fair, it will be a hair’s breadth from half a million of each. One way to control for unwanted noise is to pool the risk. Let your fate be decided by the million spins, rather than the one. Be part of a group. To accept that, you must accept the cross subsidies. A Cross Subsidy is where one group of consumers pay a higher price, so that another group pay an artificially lower price. It is like splitting the bill. The question is when you will care enough about the container to be okay with splitting. If you intentionally had salad and water, you are going to be bitter about paying for steak and champagne. Understandable. That is different from voluntarily acknowledging the coin of life has treated you well, and chipping into the container of 7.8 billion individual spins. Even though you already know the result, and can pretend it is merit.

Rules of the Game

Money is made by being able to clearly identify, articulate, and solve problems for decision makers with money. Solving problems requires skills and knowledge, and that is what we traditionally think of as meritocracy. That is not the whole story. Two key factors besides problem solving, are capital and containers. Capital is fungible. It can be allocated (by a decision maker) to any problem, and is not defined by skills and knowledge. Instead, it acts as a buffer and an engine. A buffer to reduce noise and increase the timeframe for planning (ends hand-to-mouth survival decision making). An engine to fund good ideas that are not good business ideas, and to generate more capital. A container is how you get paid. Once the ideas stop bouncing around, how does money move into your account? When? How much? A container is the reason you solve the problem, and not someone else. A container is the rules of the game. The world as it is now. The barriers to entry. The barriers to exit. Making money is not just about ideas, or skills and knowledge. Problems get solved with capital in containers.

Song Dynasty Football

The Power of Grayskull

Risk is not just the chance that something will go wrong. The study of risk goes wider than that. Looking at the complexity, ambiguity, and randomness of the world and asking whether within that, “is there anything that we can rely on?” When you look at an individual instance of something, it is a bit of a roll of the dice. At least with dice, while there is uncertainty, there can only be six clearly defined outcomes. With a coin, there can only be two outcomes. If it is a fair dice, and you roll it enough times there will be roughly the same number of ones, twos, threes, fours, fives, and sixes. If a coin is fair, toss it enough times they will be roughly half tails and half heads. It is not merit that drives victory. Actuarial Science is partly the study of, and attempt to weather the storms of, the underlying distribution rather than the specific result. The distribution is the variety of outcomes that are possible. Alternative histories. A form of “there, but for the grace of God, go I”. What happens if we pool risk, and stop taking full credit for everything that goes well or badly? What happens if we admit that we are not Masters of the Universe?

Dry Your Muffin Eyes

A standard question when talking about investments is “what return can I expect?”. Howard Marks warns us to never forget the 6-ft man who drowned in a river that was 5-ft deep, on average. When I stepped away from the corporate world to live off an Engine, I did it with open eyes and hope. A salary can secure the 5-ft, but an Engine invested in Equity feels every rock. One Equity Fund pot for my engine has ranged in calendar after-fee performance (since my Aug ’14 leap) from -20.9% to 28.8% with an average of 4.0%. Simply put, not enough and bumpy. In addition, my spending has overshot my ambitions, despite my self-proclaimed self-discipline. Like Climate Change, there comes a point where you realise things are not sustainable… even if you could delude yourself for a few more years. Reluctantly, I am having to re-engage with the constraints of money making. Very aware that I am doing this from a significantly more privileged position than most. As a good friend would say, “Dry your muffin eyes”.

Creating Calm

“Past performance is used as a guide only. It is no guarantee of future returns. Your investment can go up and down and you may not get back the full amount invested.” This is the standard disclaimer that all asset managers are obliged to make part of the conversation. Investments can, and do, double, triple, quadruple, or go to zero. There is so much noise, and difference between daily, monthly, and annual returns that it bears little resemblance to a salary. Even though your money is working. A salary is more analogous to a dividend. A dividend gets declared. Management aim to smoothly pay for the use of Capital. Aim to increase it each year. To pay it sustainably. They consider the strength of the capital to endure, and the ability of the business to adjust. The challenge is looking for the signal in the noise. Creating the ability to cope with the noise. Creating calm in a continuous storm.

Universal Basic Buffer

A Universal Basic Income doesn’t have to be funded through hand-to-mouth tax redistribution. It could be funded by Capital. Paid as a dividend to the owners of that Capital. The challenge is obviously time. Capital needs to be built. There are always competing priorities, and putting money to work rather than spending it on pressing needs can mess with the head. Building Capital isn’t a “rainy day fund”. Building Capital isn’t storing or hoarding. It is shifting from a consumption to a custodial mindset. Shifting from cutting down the trees to living off the fruit. Capital building starts as buffer building. Expenses are noisy, and do make loud demands. Sometimes cutting down the trees is the right thing to do. Eventually, with spending constraint, you can get the buffer to be big enough to handle unexpected needs. At that point, Capital can get a proper job with a long-term perspective. A baby step to a Capital funded UBI may be a Universal Basic Buffer. Aim for Capital that would only last for 6 months if constantly drawn on. Then 1 year. Then 5 years. Then, one day, a secure permanent financial base to everyone. A societal foundation for creativity.

Seeing through the noise

Find Shelter

First, find shelter. It is impossible to build if you don’t survive each day. Warmth, sustenance, and protection from the elements aren’t negotiable. To still financial waves, there is groundwork that needs doing first. If you are spending more than you are earning regularly, you are bleeding. Stem the flow. If you are being knocked back to the start irregularly but reliably, you need to find refuge. Living aggressively within your means may feel like a lack of ambition. It is the opposite. There is way more to learn from people with less than us, than from people with more. More is the distraction. We can only see the conspicuous. We can’t see other people’s storms. We can’t see other people’s foundations. Shelter is normally internal and subtle. The ability to breathe slowly, smoothly, and at length. Then with time, and constraint, you can build each day, on the day that came before, for the day that comes tomorrow. With strength, flexibility, and control.

Desert Storm

Different Lifeboats

I have been extraordinarily fortunate during the Covid Lockdown. I am very aware of the “same storm, different lifeboats” debate around the costs of shutting the hand-to-mouth economy down. I am a Soutie with one foot in the UK and one in SA, so am very aware of the different levels of government support available under Global Apartheid with single government monopolies, and barriers to entry and exit for luck-of-the-draw citizens. It is 6 years since I stepped away from the corporate world, feeling I had a big enough engine to finance my own (generous in relative terms) basic income. Most of my work since then has been unpaid. I started supplementing this by starting a small business 3.5 years ago, but have had no paying clients since March. My Buffer and Engine have kept me going.  My Engine will need repair, and I do feel an obligation to figure out a way to do some monetizable work. The Covid Crisis has been a strange exercise in alternative parallel realities. Different Governments. Different Engines. Different Buffers. Different Values. Yet, we somehow need to gradually improve our ability to cooperate constructively. Space for difference, but with a capacity to handle the noise. 

The Start of the Life-Boat (1906 Postcard)

Life Pulses

Life can be pitched as a story of progression. In a world with salaries that promise to go up, with time and experience. With one directional promotions, as we take a step up on the ladder. A gradual expansion of the standards to which we are accustomed. Till we retire. If we accept this, I can see why people confuse price and value. Why salary gets mixed up with worth. Roles and grades in big corporations try to standardise levels of success and seniority across the incomparable. Mirroring what markets do with price. An illusion of control and sense. Markets allow us to put a number on anything if two people agree. But don’t confuse this with value, permanence, or a ranking of souls. A buyer and seller have options, and constraints. They have preferences and choices. Those change. In both directions. The problem with the corporate world is it tries too hard to mirror our class and caste structures. Our prejudices. Our loyalties. Our egos. To over time turn people into a big deal. Price does no such thing. Today’s price makes no promises. It is today’s price. What you do with it is up to you.

Up and Down

Plan for Being Wrong

This Covid crisis was not a Black Swan. A Black Swan is something that has never been seen before, and all the evidence has been in the other direction. Every White Swan increases the conviction that all Swans are white. All the evidence confirms a belief that is fundamentally wrong. There have been pandemics before, and there were plenty of people talking about it before 2019. Hans Rosling’s book “Factfulness” (2018) listed Pandemic as one of the 5 big risks the world faces, along with Poverty, Financial Meltdown, Climate Change and World War. Financial Meltdown, Poverty, Climate Change and War are not Back Swans either. Read the book “The Black Swan” by Nassim Taleb. By definition, you can’t predict a Black Swan. You can predict that there will be Black Swans that upend our world view. You can build shock absorbers and plan for the fact that things will not go according to plan. A more important question than “Am I right?” is “what are the consequences if I am wrong?”. Plan for being wrong. Plan for adjusting the way you see the world as you engage with it.

Stilling the Waves

Yoga is stilling the waves of the mind. You could consider Financial Yoga, stilling the waves of the connection between what we earn and how we finance our lives. Ideally you pay yourself a sustainable dividend. This dividend is financed by a combination of (1) your earning ability, (2) your cash buffer, and (3) capital working on your behalf. The cash buffer reduces the noise of (1) and (3). Your earning ability can be interrupted by business cycles, changing consumer preferences, new competitors, changing regulations, redundancy, job loss, reskilling, family commitment, unpaid work, disability, illness, or a dysfunctional economy that doesn’t have enough jobs on offer. Your capital can be interrupted by times of panic when the price people are offering for your engine reflects their fear that bad times will last forever. The cash buffer recognises that “This too will pass”. Yoga is partly a practice in not identifying with the temporary. Finding a more solid point of focus, so that you can let the temporary float in, sit, and float out. We need money. We don’t have to be, the way we earn money.

Ask For Me Tomorrow

Terry Smith (founder of Fundsmith) explicitly doesn’t try guess the future. “The reality is that we don’t seek to predict who will win, but rather to bet on a company that has already won”. This may seem like it goes against the standard risk disclaimer… past performance is no guarantee of future results. I see the point more that winners keep on winning because they have breathing space. Success is path dependent. You need money to make money. Businesses (and people) with strong balance sheets (engines of capital) are able to have a longer-term time horizon. A fundamental rule of money is to never be a forced seller. If you have previously been successful, you can have a buffer of cash (1) for when future results are losses, and (2) that stops you being forced to sell bits of your engine when you know the price is awful. The reason winners keep winning isn’t necessarily because they are better, it is because they have the resources for when they aren’t. That allows them to focus on creating sustainable competitive advantages. One man’s mortal wound is another man’s scratch.

Normal has Muscles

“Reversion to Mean” is the idea that history matters. We tend to live in the now and focus our attention on things that are different from what we expect. Heroes and losers. Normal is boring. Except normal carries a lot of information. It is almost impossible to distinguish luck from skill for an individual, because our lives are too short, we change too much, and there is too much noise. Like spinning a coin. A fair coin that has landed on heads 10 times in a row, still has a 50/50 chance on the 11th spin. If a tall man has a son, it is likely that his son will be shorter than him. Likely doesn’t mean definitely. It means that “normal” has muscles. Price isn’t normal. Sometimes it has short man syndrome, and sometimes it has tall man syndrome. Price isn’t value. It is a date between supply and demand. How much there is of something. How much is wanted. Both of those change. Stretch the time frame over how you value things, and always keep an eye on normal. Study our history and still the noise.

Arnie 1974

Real Owner

Robert Vinall (www.rvcapital.ch) describes his approach as “investing like an owner in businesses run by an engaged and rational owner with the capital of investors who think like an owner”. I like that definition. Despite how difficult it is to count, ownership connects us to the future. It isn’t a participation in profits (or losses). It is custodianship. Beyond individual contribution. Beyond ego. Beyond benchmarks, competition, and relative performance. Not a sport, but a purpose. It is about taking capital and putting it to work productively. Creativity is noisy. We look for outputs. The three key ones in businesses are cash, earnings, and dividends. The cash a business generates is the easiest to count in the short term, but hides how well the long term is being cared for. Earnings add scope for the view of management and standardise numbers for an attempt at comparison. Dividends are declared. Meaning management’s goal can be to pay a steadily increasing stream, in spite of the noise. To detach the natural ups and downs from the point of the business (long term wealth creation). The longer your time frame, the more likely you are to add real value. A real sense of ownership is the key.

"Potato Planting" Van Gogh

Big Waves

It is almost impossible to build Capital if the noise of life and money, is bigger than your earning capacity. Starting from zero is the hardest part. Pooling big risks is how we historically managed this. Groups of risk takers joining together and splitting the costs in “Mutual Societies”. Accepting a smaller loss for certain instead of a big loss that wipes you out. The biggest component of wealth creation is time. To have time, you need to be able to withstand the things you can’t control. My rule of thumb is to self-insure for things that won’t wipe me out. For the rest, get cover if you can. The three basic “big waves” are Death, Disability, and Severe-Illness. If you have dependents, then Life Insurance is necessary to stop your death meaning severe hardship for your loved ones. This is the history of “Scottish Widows”. Severe Illness insurance does the same, but you are still alive and may still work again. Disability cover is for when an accident prevents you from earning. Insurance allows the fire to start.

Mavericks (2010)

Making Sense

Prejudice isn’t something you can just let go of, any more than you can suddenly decide to speak a foreign language. We only take in a small fraction of the information around us. The rest is incomprehensible, meaningless, noise if we are even aware of it. The reason we use categories is to gradually make sense of things. It is how we learn. Josh Waitzkin (author of “The Art of Learning”) describes this as “Numbers to leave Numbers, Form to leave Form”. In both chess and martial arts, he created a structure to add meaning, then embodied that knowledge to the point it wasn’t conscious anymore. Prejudice isn’t simply whether we like something or not. It is a way we soak in the chaos of the world till we feel we start to make sense of it. Free Will and Understanding is possible. It is just hard. It requires slowing everything right down and rewiring the way you see, hear, feel, and connect. We will always be prejudiced. The best we can do is build a feedback loop to unlearn and relearn.