Reserves and Containers

There is a long list of stupid things I have done. In 2014, it could seem like a very risky thing to be doing for me to have stepped away from the corporate world. No longer having the certainty of a salary. No longer wanting to work for money. But you need to unpack conspicuous risk. When you look at a salary, it is not as safe as you think. The idea of a job for life is not there anymore. You are dependent on the financial well-being of the company you work for. Part of stilling your own waves of money anxiety is being able to understand business in general. How do you know whether a (your employer’s) business is in a position to survive? Businesses are more fragile than we think. It isn’t just about how good their product/idea is. The strength of their reserves (capital) and container (barriers to entry) matter even more. Pushing responsibility to owners/managers to still our financial anxiety when creative destruction constantly attacks the forces of supply and demand, is structural risk. Structural stupidity. I got to have a stab at another way of approaching life, because I had built reserves and a container separate from my job or the companies I was working at.

Smuts Trolley Races Teams

Price is not Value

Do not get too obsessed with the specific skills and knowledge which you think will provide the reward you are looking for. Price is not value. What determines how much you get paid for something is supply and demand. Price and value can disconnect for long periods and to extreme levels. The key is to disconnect your value creation from having to care excessively about price. To do that, you need to pay attention to capital and containers. Capital creates space. Containers get you paid. Space snaps the hand to mouth connection that forces you to dip into markets to care about supply and demand. A salary is just the price of your labour. The price of your skills and knowledge. Those are affected by how many other people can do what you do, and whether those paying you need/want you specifically to do the work. You do need to listen to the market to see what skills and knowledge are being rewarded now. You do need to build the capacity to adjust as supply and demand changes. The more you are able to convert your earning ability into capital, the less you will need to care about what other people think things are worth. Particularly, what they think you are worth. 

Pay for Work

Money “should” cost something. Interest is the salary of money. A low interest rate environment is a way of artificially providing cheap labourers (cash to invest). It is the same as you get cheap labour in countries where there isn’t enough work (e.g., South Africa now), and have to force people to go to work with hut taxes when there is too much work and not enough labourers (e.g., South Africa during the Bhambatha rebellion of 1906, or Sierra Leone in the Hut Tax War of 1898). The flip side of cheap labour is that those getting paid struggle to survive (actual workers or Gran living off her pension). Cash is low pay work, so the labourer can decide when and where to work or sleep. A bond is lending your labourers for a higher fixed salary. Like getting your money a job. Equity/Stocks are slices of ownership in a real underlying business. Businesses are where the work gets done… with cash, borrowing, salaried workers and the resources from owners. No salary is paid for equity (dividends are the closest they come). If long term value is added, the capital will grow. If long term value is destroyed, the capital will shrink. There is lots of noise, smoke, and mirrors… but in the end, it’s what you do that matters.

"Bauer beim umgraben" Van Gogh

Holding the Knife

Price is not value. Salary is not worth. The best way to see this is to speak to someone who has moved from a big company to a small company. Especially if that small company is a start-up. The layer of story-telling that gets added onto a business to do salary negotiations is simply that. A story. The magic of markets are they let us quantify things that cannot be quantified. If you have someone who wants something (because they think it is worth more than the price) and someone who has that thing to offer (because they can supply it at sufficiently less than the price). Price is just an agreement. In most businesses price determines the size of the pie. Then story gets added and sliced by the person with the knife. If the company has a stable cash flow that allows the illusion of sticky wages (annual increases in only one direction), then people can live in the false security of salaries that reward seniority and perceived merit. Key performance indicators are a tool for those who hold the knife. They are not a market price.

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

Doing the Work

Think of money as a worker. Or yourself as the worker. Pick one. Bad debt is when you spend money you don’t have, and aren’t about to get. So you now have to work for someone to pay for something that doesn’t exist anymore. Slightly better is when you know money is coming, but you spend in advance. So as new workers arrive, you redirect them to someone else. Still, the workers never work for you. Leverage (borrowing lots) is when there is horrible work to do, but you can get lots of other people’s workers (easy borrowing) to work for you. And you hope it works out (i.e. Gambling). Good debt is when you have a good project, with acceptable risk, that creates something of value. You can pay a reasonable salary (interest) to workers, with some certainty, and build. Only borrow when you have a clear plan to create value and have the strength of endurance (Capital repayment) and flexibility of resilience (interest payment) to make that value creation sustainable. The first step to financial freedom is not having to borrow to spend. Finding space to breathe. Borrowing for consumption is the key difference between working for money, or money working for you.

"Bauer beim Umgraben" Van Gogh (1882)