It's Okay

Much of the anxiety I have experienced comes from expectations. Stated and unstated. Known and unknown. Managing both the conversations in my head, and the clash of projections when I am bumping into other complicated conversations in other heads and hearts. 

I don’t completely buy the Stoic approach of having periods of nothing and realising you are completely okay. If *nothing* is acceptable, then you know you can handle *anything*, because having nothing, can't destroy you. I like building. I am worried about unintended consequences, and loss from pressing the reset button. 

For me, the idea of constantly being negative, so that when horrible things happen you were expecting them, is dangerous. For the simple reason that being constantly negative is unpleasant. 

Managing expectations has to be a tool, rather than a purpose. I do think you need to be aware of what your default setting is. My preference is to be optimistic. I think if you can get through the noise, the confidence you need isn’t knowing what will happen, but feeling like you can handle what life throws at you. 

I want to find joy in life. I want to enjoy the process. Manage expectations, but not be constantly bitter and twisted. 

In Wu Wei philosophy, they talk about De (德) (like 'Duh' in American) which is something like charisma and confidence... but deeper soaked and with less to prove. 

Less that waves of anxiety are not there, but exuding the sense that, fundamentally you are alright. Fundamentally, you will be okay.

Spinning Wheel - Right and Wrong whirl around like spokes

Containers for Exploration

Part of risk management is creating limits. Self-imposed limits. Investment managers will disclose their investment restrictions. The things they do, and the things they don’t do. Warren Buffett calls this the “Circle of Competence”. We have a nasty societal habit of thinking that a smart person can do anything. That when someone has proved themself in one area, we should take their opinion seriously in areas far removed from that because of the Halo effect. 

Creating limits helps you form little containers for your exploration. I am a creature of habit. I am at my most productive when I have made up some rules. Often very arbitrary rules.

When I was studying, I would take a very structured approach to learning. I would do 50-minute study sessions, then 10-minute breaks. I would have budgeted total time required, time available, and allocated by priority to the various subjects. I would record my actual learning, relative to the plan. Allowing for disruption, and breaks. 

These rules were self-imposed. I could, and did, break them. No one else was making me do it. The rules provided a structure that worked for me. I was also glad to eventually put that kind of structure behind me. It worked for a period, and then that period ended. “Everything in moderation, including moderation.”

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

 

Twenty Twenty

A lot of maths used for the management of risk is problematic. There is a desire to make it look pretty, and come up with models and numbers to give the illusion of understanding. If you can measure it, you can manage it, the theory goes. The real value in models is simply a device for thinking through something. A tool to help us compare and communicate. The danger is that when things are complicated, you often see whatever it is you are looking for. If a bunch of investors are looking for the best companies, and they define that as something that gives a return of 15-20%, you can be sure most of their models will spit out 15-20%. You don’t really understand risk if you then use that to rank various different analysts’ work. Your 20% is not my 20%. My 20% is not even my 20%. Add a couple of decimal places, and you realise that 36.79% of numbers are made up. Having a summary number doesn’t give you a full understanding of risk. Doing the work gives you a clue. Getting things wrong gives you a clue. 

your Twenty my Twenty

 

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

Repeated Choices

Life is a series of choices based on the options we are given. Where we end up depends in part on luck, in part on where we started, and in part on how consciously we play our part. A physical demonstration of this is the Galton Board. It illustrates the idea of the normal distribution. Even though there is a lot of randomness in the world, a step or two back often reveals a pattern. A wide variation for the individual, but a lot more predictability around central points. You get distributions of results. You get extremes. Our news and stories tend to focus on the extremes, and pay less attention to long-term averages and normal people. With a Galton Board, a ball will fall down, and it will go left or right, left or right, left or right. Facing repeated decisions. The situations we are in and the choices we make carry Karma. Choices have consequences. There are sometimes opportunities to correct mistakes but you have to work through historic consequences. What we do matters. History matters. We don’t all have (or want) the same choices, but we can increase the set of tools we have to have a degree of autonomy over what lies in front of us. 

Galton Board

Other People's Numbers

Not all good ideas are good business ideas. Good business ideas require the ability to control supply and demand. To create shape and form around an idea through barriers to entry. Demand is not good enough if supply is a free for all. It is easier to control things when you can reduce them to numbers. Which is why STEM areas (Science, Technology, Engineering, and Maths) typically make better business ideas. They focus on areas that are easier to box into products that can be paid for. A clear ask. A clear offer. Not everything can be boxed. Even good business ideas will be exposed to qualitative questions that cannot be reduced to numbers for comparison. You can force anything into a 1-5 ranking or a Yes/No binary. That is often useful just to force you to think about something, but then you have to avoid being seduced by the numbers. Falling in love with the illusion of control so much that you forget that numbers make better questions than answers. Especially when they are other people’s numbers, and you did not do the work yourself.

Not all Ones and Zeros

Creating Platforms

How we see the world is path-dependent and cumulative. We are partly conscious of how the incoming waves of information get processed. Other things have soaked so deep they are just a part of who we are till we return to the dust. My own path started in a place where I believed in wrestling with the truth until I got it. One path that I just had to understand. Then my path crossed that of Yoga, where there is a belief that no one can understand, and we all have our own chosen Ishvara (the closest we can get to understanding). A path of tolerance. The paradox is how much do you tolerate intolerance? Put differently, how do you balance creating space for many paths with boundaries and red flags? Raising alarm when you see danger? Saying no firmly. Popping dangerous illusions. Allowing and empowering people to make their own decisions, and their own mistakes, while recognising that we all affect each other? Being agnostic about other views, but still supporting the viewer and learning from them. Creating and being a part of platforms for empowerment.

Basement of metamorphic rock

 

Decision Maker with Money

My first job after university was in Risk Product Development. My focus area was Earning Ability. Money is made by solving problems for decision-makers with money. In a hand-to-mouth economy, without capital-backed decision-making, you only get to make decisions on how to spend money if you have earned it from another decision-maker. First, you have to find a job. Then you have to do a job. Then you gradually get breathing space if you get paid more than you need to spend. When you venture into the land of discretionary (by choice) spending. Then you can either consume that money or put it to work. To start, you are at risk. Unless you have someone to turn to, there is the danger that something goes wrong, and you cannot work. Something goes wrong, and you cannot do your daily tasks. Something goes wrong, and you cannot do the work you were trained to do. Or you cannot do any work. The question “How much capital would I need if I couldn’t work?” is the starting point for the target size of the Engine you need to make your own decisions. Until then, something might go wrong.

Three-Horsepower Engine

Risk Tolerance

Financial Planning starts with a conversation about you and your relationship with money. The goal being to understand your risk tolerance. If you want to still the waves of money anxiety, you are building your capacity to deal with complexity, randomness, and ambiguity. We do not, and cannot, have a complete understanding of cause and effect. We cannot know in advance what the result will be for each path we pick. If we did, we would all just pick the one that took us to our intended destination. The rules are always changing. You cannot just do exactly what has been done in the past, and expect the same result. A good conversation about financial planning starts with understanding you as a person, how you see money, what your goals are, and what you value. You do not get paid for taking risk. You get paid for adding value in monetizable areas others have signaled is in short supply. Risk tolerance is mainly your ability to adapt, adjust, and accommodate. Like physical strength and flexibility, risk tolerance is something you can build through exercise. Then you make money, or your money makes money, by solving problems for decision makers with money.

Polis Smous

I started my career in Finance in South Africa and the United Kingdom during two watershed moments. Just after the bursting of the Internet Bubble, and during the cracking of the walls around endowment policies and remuneration of Insurance Sales. Endowment Policies pay a lump sum after a specific term or on death. They combine investment and risk cover. The sales people often were not professional financial advisors giving appropriate advice. They were remunerated up front, in commission. If the client stopped paying their premiums, or another “Polis Smous” (Policy Hawker) convinced them to churn/swap, there were big, indefensible, clawback penalties. The scandal made the environment ripe pickings for “Pure” investment or risk products, and saw a massive professionalisation of the advice industry. Allow time to pass, and even the pure grow and get legacy skeletons in their closet. The constant trade off between starting from scratch, and keeping the good bits of the old way of doing things. As the environment changes, we need to change. The question is whether we are brave enough to be transparent and honest.

Mytikas

One of the eternal questions in Investment is “Active vs Passive”. Should you just invest in a diversified index or is it worth paying a manager to pick the stocks for you? Should you invest in an Equity Fund, and are the associated fees “worth it”? Alpha is the measure of the value (defined as outperformance) added by a manager. The Existential Crisis managers face is that this can go to zero (or negative). The facts can unambiguously show you have added no value (as you define it) over the entire course of your career. Often when you are managing the most money you ever have. And after claiming fees and paying yourself a salary. I still believe in active management from a risk management perspective, but I have seen too many fallen Gods to read too much into the tea leaves about individuals. Like Natural Bee Keeping, and Rewilding, I suspect investment is more about being good custodians than claiming a well-rewarded seat on Olympus.

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”.

The Space Between

Earning £100,000 a year can still be filled with anxiety if you are spending £120,000 a year. If you are living on the edge of your capacity to borrow and pay interest. If you are pushing forward and up as hard and as fast as you can. Earning R100,000 a year can be Zen-like if you have the self-discipline of a Langa Gogo, spending R80,000 a year a putting some to work. Those are extremes, but the point is the only comparison necessary is spending and income, and the space between. Not other people. Vrittis, are the thought waves of the mind. Yoga creates a system to control these waves. A path of self-restraint that brings focus to the things that are most important. Creating the ability to move with intention, rather than being moved by what the world throws at us.

Beyond Good Ideas

I am not a successful entrepreneur. I have a small business, but that is not what pays my bills, and I am the sole employee. At the moment I have no clients, and I have only had a few small projects. Most of my work is unpaid musing and study. I started the business to do Engine repairs, and to use my monetizable skills in a stomachable way. I live off my Engine which I built using money I was paid for professional work. I had a few public shares in the first company I worked at, that were given to us as part of a Broad-Based Share Scheme. I had no shares in the other two, which are privately held. My Engine is invested in two Equity Funds (from the firms I worked at) and a portfolio (that I selected) of large publicly held global businesses. My thoughts on business are therefore academic. Small business is hard. The odds are steep. With plenty of musing, I see few easy paths. It’s not just about good ideas. It is also about building Capital, overcoming barriers to entry, managing risk, and navigating complexity.

Melilla Border Fence

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

Allow for the Weather

To sustainably make money, you need Capital (outflows come before inflows), a Product (offer that matches an ask), and a Container (to get paid). The smoothest way to get money is to get a job. Employers use their capital to pay for upfront expenses. The work taker pays for the cost of working (clothes, commute, living close to work, food, entertainment to maintain mojo). If work takers live hand to mouth and don’t build up some Capital, then they are relying on (1) the business/institution that pays their salary to survive, and (2) their job to remain an offer someone is looking for. They are focused on the product, the business is their container, and their earning ability is their Capital. That is brave/dangerous. The business may be a container within a bigger container. You may live in a rich country like the UK where the government can provide support. You may live in a country like South Africa, where the container is leaking and fragile. When thinking of how to make money, we tend to focus on the product. More fundamental is risk management. The products needed change. Invest in the strength of capital and containers to create a consistent foundation to allow that dynamism. Invest in the ability to adapt, adjust, and accommodate.