Other People's Rules

Accepting the rules of money... in areas you make money, is a way to create space to completely ignore them in other areas where you want to create different rules. 

Accepting SOME control of money over you, allows you to not let money have COMPLETE control over you. 

To do that, you have to both desire and be in a position to develop a sense of ownership. Ownership of a buffer and an engine to handle the noise. You need a container for those tools, and you need ownership of that container. 

If you are solving problems, and making yourself redundant, there needs to be real commitment from those you are solving the problem for... beyond hand-to-mouth payment. Real commitment. 

Otherwise, the best strategy is just to extract as much as you can, while you can, or make yourself irreplaceable. Solving their problems, but in a way that forces them to keep coming back. 

Otherwise, they can simply say, “I paid you for a job. End of story.” In that case, you have to be realistic enough to realize you are just working FOR them. 

You need a separate container that represents your compounding ownership. You need long-term ownership of a vehicle you control to reinvest what you are paid, to lay foundations for future growth. 

That is the cornerstone of a sustainable engine. An engine that can empower you. That can let you make decisions beyond other people’s rules.

Long-Distance Growth

One Slice

A share is a slice of ownership in a real underlying business. If someone sells a house, it is quite often also their home. If someone offered an excessively cheeky price, the (still) owner would tell them (the wishful buyer) to get knotted. Unless they had no choice but to sell. You don’t sell slices of your home. You either sell the whole thing (and buy another one), or not at all. With shares, little bits of ownership swap hands, but unless the company is raising more money, it can often crack on with doing whatever it does (largely unaffected). A share price is not the price of the whole company changing hands. It is the last slice to swap hands. It is a quote as a guide for the next person who wants to buy or sell. That is part of why price is not value. If suddenly a whole lot of people are buying, the price will go up. If suddenly they sell, the price will fall. The only way you would see how much the whole company would sell for, and turn into cash… is if the whole business went on sale. And there was a buyer. And cash changed hands. Price is a rough stab value. Real value is what gets done. Sustainably, and into the future. 

The Whole "Cake"

Sellsword

A share is a slice of ownership in an underlying business. Ownership is not participation in profits based on your productive contribution. That is just an alternative form of salary. A share in the spoils (or losses) as your price. Ownership exists separately from personal contribution. I have worked at three companies, and only owned shares in one of them. Those were given to me in 2004 as part of a Broad-Based Economic Empowerment scheme. Everyone who worked at the company got a little. Those who did not work there, were welcome to buy them. At the other privately held firms, I was a sellsword. I took what I earned and built my engine of capital outside where I was working. The three base ingredients of money-making are (1) money, (2) problem-solving, and (3) a container. Do not just think about “big ideas” and merit to solve problems. Money makes money by scaling problem-solving, and providing strength and flexibility that exists beyond personal merit. Containers create the barriers to entry and vehicle to allow ownership. Ownership allows you to free your labour from the narrow constraints of supply and demand. Your container is not the place you work. Unless you are a real owner.

Nothing Pie

There are a few hard truths about investing. The market is both noisy and irrational, and making good decisions is not the only factor in success. It is not even the main factor. The father of Fundamental Investing (“Security Analysis” Benjamin Graham 1934) only outperformed passive investment by about 2% over his career. Making alpha (outperforming the benchmark) your goal is incredibly dangerous. It opens up an existential crisis where an entire career can factually (by your own definition) have added no value. You cannot eat alpha. Alpha on nothing is nothing. 100% ownership of a 10% alpha generating nothing pie is nothing. Often the conspicuous success of investors is based on (1) inherited wealth, (2) big salaries, (3) sales, and (4) fees. The main factor in wealth creation is saving and reinvestment. Getting money a job. Making sure that job adds value. Reinvesting the money money makes. It is not about you, how smart you are, or whether you see the matrix. I am not Neo. You are not Neo. No one is Neo. The world is complicated, ambiguous, and random. There are no heroes. We are all just doing our best.

Take as much as you like

Given Time

I am not that interested in the first five years, if that is all that is on offer. I believe in compounding and foundation building. If you are living hand-to-mouth, neither of those factors are relevant. If you are simply being paid for the work you do, and that gets consumed. Money is made in containers. If you help build a container, you want to have a stake in that container. Ownership. The kind that exists beyond you. Real wealth is created over the long term. Through owning the container. Through owning the barriers to entry. Even fifteen years is short. Compounding is just starting to kick in. We judge ourselves over short periods like months, quarters, and years. What is your 100-year plan? What is your 1,000-year plan? What is your plan that has nothing to do with you?

The Cango Caves

Win-Win at Scale

Before Amazon, Netflix, Google, and other big disruptors entered the world lived Sam Walton. The founder of Walmart realised that you aren’t trying to maximise profit on every item you sell. You aren’t trying to maximise price. You have to look at the big picture and give your customer a good deal.  By charging lower margins on the stuff he sold his clients, and really understanding both their needs and how to get them a good deal, he combined Win-Win economics with scale. When people speak of “Meritocracy” for companies, and principles of excellence they are still looking after themselves, their container, and their spot in that container. They will look for people to join them that improve the merit of their container, but not at their expense. Very few people are that self-less, and the goal isn’t that noble. Stepping aside for someone who is smarter and more effective than you is hardly philanthropy. You would only do that if you are an owner. Similarly, part of the challenge with transformation is hiring people that companies fear will leave. Loyalty trumps merit. People hire people like them who like them. Then knit their lives together. The only way things will transform is with bigger containers we trust, and feel a sense of ownership in. Win-win at scale.

Sam Walton

Holding the Knife

The market decides the price of pie. The one holding the knife decides the size of the slices. Price is not value. Not all good ideas are good business ideas. Value is deeply personal. To become a good business, something has to depersonalise and scale. To create a market, you need something strangers recognise and trust. Something that lots of people value, but that not lots of people provide. You need a product. You need the required capital. Then you need a container. A pie dish. The market will help find the price based on how many people want pie, and how many people sell pie. Based on what the alternative choices are to pie. Once sold, how the profit gets split depends on who holds the knife. There is no internal market. Only the ability for people to stay or go. The person with the knife has to (1) pay people enough to stay if they want them to, and (2) create an illusion of the pie pieces relating to their contribution. The person with a knife has to pretend in a way markets don’t have to. Markets simply reflect supply and demand.

All for Show

Golden Calf

The reason some industries struggle to transform is because they need to maintain the illusion of excellence through artificial barriers to entry. I, like everyone, obviously only have limited exposure to my own bubble. But, in my bubble, the reason I was surrounded by white men is because the bubble was built by white men. Investing is really not complicated. If you can’t take someone and teach them how to be a good investor, the fault lies with you, not them. If you can’t take someone and teach them to be a good investor, it is because you are protecting your privilege. You are protecting your club. You are worried you might train them and then they will leave. You are worried that your selection criteria will be shown up to be unnecessary. I do believe there are things not everyone can do. Like sprinting. Not everyone can run a sub 10 second 100 metres. Investing is not one of those things. There are no gods. Just false gods. If you are in a business that is not transformed, it is the people in charges fault. Fullstop.

False Idols

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

Fist to Mouth

Creative Destruction dismantles long standing ways of doing things in order to make way for innovation. It scales the idea of “making yourself redundant”. There is a punch you in the face obvious problem with making yourself redundant. It requires trust. Fool me once, shame on you style. When you realise that someone has the ability to cut you loose like a gangrenous limb, after solving their problem, one option is to make yourself irreplaceable. To stop trusting. To create artificial barriers to entry and negotiating power. Little secrets people don’t want known. Stuff they know you know they wouldn’t want in the newspaper. Dirt. The only way to truly want creative destruction is to be an owner. Then, and only then, do you have an incentive for the problem to be solved. Otherwise, the real incentive is to make sure you, personally, are a part of the problem solving. You want the problems to go on. To release the power of creative destruction, we have to detach our identities from problems. To build buffers of cash, and engines of capital, that support us beyond hand to mouth living. That make us celebrate a job no longer being necessary, because it means a problem has been sustainably solved.

Fighting over Scraps

The Corporate world is a game, best played as a game. I wasn’t good at it because I wasn’t willing to accept the veil of meritocracy. I took it too seriously and literally. I was too deep soaked in Righteous Indignation. It is more a club with increasing levels of loyalty when you prove yourself. Layer 1 is for cogs. Paid a salary and with a notice period. Your salary is the price it would cost to replace your skills and knowledge. Layer 2 is longer term incentives. Tying you in so breaking loyalty will cost you. Layer 3 is participation in profits (and losses). The club aims to reward you enough to stay, but not enough that you can afford to leave. Layer 4 is ownership. That private club isn’t open to everyone. Wealth creation gets institutionalised, so the first three layers are sufficient to create the value while closing the door to layer 4. Layer 4 is for immortality beyond individual contribution. Enough underconfident overachievers will do the work in the first three layers to make sure layer 4 is exclusive. Harsh reality? Layer 4 is available to those who start from scratch. The first three layers are attractive enough that people will fight over the scraps. Institutions change unwillingly. Pick your layer 4 and build new institutions.

Team of Owners

You can’t “think like an owner”. You either are an owner, or you have different incentives. The Agency Problem is the conflict of interest that exists when one party is expected to act on the behalf of others. Interest alignment only goes so far. The Managers of an Equity Fund may claim, for example, that they co-invest and fees are performance based. But interests are holistic. You can easily hedge your exposure on the side, only invest a small part of your assets, or just be so wealthy that losses matter less (maybe less easy without family wealth). Owner Managed firms get around this because getting a firm off the ground typically requires most of your capital. Participation in profits is not the same as ownership. Participation tails off when the individual stops working. Ownership is foundational and cross-generational. Real long-term wealth is created over a longer time frame than any one working life. Real long-term wealth creation is a team sport that requires a team of owners.

Agency Problem

Crystallising Creativity

Investing isn’t betting. It is true that you can trade anything with a number and a pulse. It doesn’t matter what thing is behind the number, as long as there is someone else you can play pass the parcel with. But that isn’t investing. When you invest you buy a slice of ownership in a company. You are a business owner. What the business does matters. You don’t have to find someone else to sell it to. The business has a product which it sells. It has the skills and knowledge to recognise a problem someone has, and to solve it. The problem may be someone wants Jam. The problem may be someone needs help making their own Jam. As long as there are problems, and as long as we are human and can’t know everything, there will be value to be created in cooperating. Investing isn’t playing the stock market. You become a part owner in a real company solving real problems. You get your money a real job. It has to work. If it does a good job, then it grows. If it doesn’t, it doesn’t. It grows by solving problem for money and reinvesting that money. There is no magic. It is simply the crystallising of creativity. Good businesses are built to last. Built to adapt, adjust, and accommodate a changing world. 

Foundational Space

The marriage between income and expenses is an unhappy one. Incentives matter. I can see the crude rationale behind a superficial meritocracy where spending more is a signal of success. A lack of breathing space is a fundamental flaw in this idea. If you spend everything that comes in, there is no capacity to pause. There is no space for seasonality. Periods of unlearning. Periods of re-engaging with the core of what is important to us. Periods of creation. Periods of appreciation. If we define ourselves by our labour, it becomes all about us. Us and a pay-check that almost lasts. Normally. Unless there are unexpected bumps. We have no vested interest in the complex relationship of stakeholders and institutions that empower wealth creation. We are not owners. We are work takers. There is a better way. If we all build Capital. Capital is connection to a world that works. If we all create interconnected breathing space. Inhaling and exhaling trial and error as we iterate towards a world with more endurance, resilience, and creativity. Together.

Creating Space for a Solid Foundation

Be an Owner

One of my pet peeves is the line, “Think like an Owner”. You can’t fake Ownership. Ownership gives you a vested interest in the distant future. It turns you from an extraction, to a foundation-building mindset. The most important wealth creation factors are time and compounding. Building something that exists beyond you. Building institutions. I have seen first-hand the difference in mindset of someone walking into, and out of, a meeting where they are given part ownership. Suddenly, they are interested in all areas of the business. Suddenly, their silo melts and they are able to see the importance of communication, cooperation, circles of competence, and institution building. Ownership isn’t a share of the profits. Ownership is a share of the future. A future that isn’t just about you. Don’t think like an Owner. Be an Owner.

Extraction isn't Ownership

Part Owner

If you love chocolate, and eat too much, it is easier to not have chocolate in the house. The danger as an investor in the Stock Market is that you can always sell. The price is a quote of what someone will pay you if you do. It’s the chocolate. It is not what the ownership is worth. As a Fundamental Investor, you are a Part Owner. Viewing yourself as an owner, who believes in the product, believes in the management, and believes in the business, changes the way you think about the dips in price. Unless something fundamental has changed, ownership gives you a vested interest in the venture and stakeholders surviving and thriving. Even if something has changed, if a genuine problem is being solved and the business has the capacity to continue solving it, you remain an owner in something of value. It makes bumps and dips part of the texture of life. Perhaps the biggest part of being an investor is self-awareness. Self-analysis. Self-correction. Even though your behaviour and the business are separate. If you have a fundamental belief in what it is you are building, it is easier to see through immediate noise. To keep your head even when instant gratification is always available.

Behaviour Penalty

If something is free, you are not the client. You are the product. The same is true with the Stock Market. You don’t “play” the Stock Market. It is not a game. It is true that Traders can trade anything with a pulse with no regard to what it refers to. The “fundamentals are free”, because the product is the other people who are trading. If you are “playing”, you are playing against some of the most sophisticated and resourced poker players alive. Investing is different. There, the fundamentals matter. You are buying a slice of ownership in an underlying business. You can’t get played if you have a long-term horizon. Then what matters is the quality of the offering, culture, management, and people in delivering their problem solving. What matters is the strength of the company to endure through difficult times. To emerge. In a dynamic world where they have to respond to a changing environment. You don’t have to respond. You can sit on your hands. The “Investor Behaviour Penalty” is a well-studied phenomenon where the average investor underperforms the thing they are invested in, by second guessing and buying in and selling out at the wrong times. Sometimes, the best thing to do is nothing.

Don't let the smile fool you

Building Redundancy

The foundations matter more than the fireworks. A key to Capitalism is the idea that you can make yourself redundant if you are an owner. Ownership is absolutely fundamental and not negotiable. Exponential Growth means what you see now isn’t comparable to the end number if you have skin in the game. Especially if the culture is one of “we hire smart people and leave them alone”. If there is no facetime monitoring, then it doesn’t matter how much of your own sweat went into getting a job done. It matters if the job is done. Plenty of managers gradually find people they trust, and do less of the work themselves. If they are buddies with the people cutting the pie up, and were there when the foundations were being built, they can put their running shoes on and head off to the park while the machine keeps moving. Get a corner office. Work on “strategic thinking”. Make sure the effort you are putting in is foundation building. If you are living hand-to-mouth, it is likely you are building someone else’s redundancy.

Redundant Power Supply

Alpha on Nothing

Wealth Building and Institution Building are closely connected. The biggest determinant of the “Bang for Buck” of your Merit is the country and community you are born in. Meritocracy rewards the marginal action… the last decision. How much value did you create based on what you did, and how much would there have been if you hadn’t done it? That is completely blind to the “Institution Value”. Alpha in the investment world is a way of leveling the playing field. “Time Weighted Rate of Return (TWRR)” allows comparison of individual performance. TWRR versus a Benchmark gives a sense of merit. But Alpha on Nothing is Nothing. At the end of the day, it is what we build together and over time that counts. It only makes sense to build something if you have real ownership that extends beyond your marginal actions. Far into the future. Compounding means what you do now matters far more to what happens long after you are gone, than what you can see now. Real ownership matters. Real institution-building matters. What you do, matters.

Laying Groundwork

One objection to Capital is that the owners aren’t doing the work. There is a moral feeling that the people involved should be the people being rewarded. It’s complicated. Reward and input don’t go hand-in-hand. The feedback isn’t instant or clear. Often there is a substantial delay. If you look at an ultra-long-term growth chart of GDP in the UK, you will see that a lot of the value “has been added recently”. Rubbish. The majority of value gets added in laying the foundations. The dirty, unglamorous, upfront work. Like in Rugby. The match is won by the forwards, and the backs determine the scoreline. “Meritocracy” tends to financially reward the last decision maker in a binary, “what would it have looked like without this decision” way. That is lazy attribution. Capital allows owners to do the dirty work knowing they will benefit even if they walk away when different skills are required. Or they get tired and lose sufficient inspiration to overcome the attached nonsense. The challenge is hereditary entitlement. The balance between passing on unearned wealth, and recognising that most of the groundwork for today’s Merit has been layed over the 50,000 to 2 million years since we started speaking to each other. Community Wealth.