Building Capacity

Building the capacity for long-term thinking, is a form of exercise. Running a marathon is not a one-day event. It starts on the first training run. 

Developing a movement culture to gradually increase your strength. Putting yourself under controlled stress to learn about yourself. To build your skills and knowledge in a way that you believe you are capable in difficult situations. Reflecting on how you react. Seeing what kind of support you need. 

The body has a use it or lose it efficiency that comes standard. Once confident in similar situations, auto-pilot gets turned on, but where you don’t use something regularly it disappears. 

Which means you need to build up capacity to stay involved and stay conscious. Part of endurance is reserves. The ability to pull on extra when you need to go deep. Very physical requirements that come from eating properly, cooking properly, and recognising what your body needs beyond what it craves. 

A very sad legacy of Apartheid was promising sports stars coming through where despite “picked from nowhere” support, the gap of early childhood nutrition meant their body didn’t have the structural back-up for sustained performance without injury. Grounding matters. Consistency matters. Back-up and reserves, matter. 

When running a marathon, you need to take on nutrition and water regularly even before you need it. Otherwise, if you only respond when you do need it... it is already too late.

Reliable and Sustainable

There is often a disturbing amount of truth in oversimplifications. One is that the path to wealth is shopkeeper-professional-entrepreneur-bust and repeat in four generations. 

To start building wealth you need to first find breathing space between what you are earning and what you spend. You need to snap the hand-to-mouth connection. Gradually you build capacity to think about risk differently as you have more faith in your own grounding. When you have sufficient capital for a deep sense of knowledge that you are going to fundamentally be okay. 

Then you can build that base up to be an engine. An engine earns more on average than you spend on average. At that point, particularly if the engine is earning comfortably more than you spend, it starts growing. Compounding kicks in. Growth on growth. Even without you earning. Then it is no longer just about you, your earning capacity, and your consumption. Decisions extend beyond you and even your lifetime. Impact scales. Work is no longer about financing your needs. 

If you have sufficient capital, it can become a muse. Not all ideas are good business ideas. If you have the capital, they don’t need to be. Good ideas, that are not good business ideas, can be funded by good ideas that are good business ideas. Good businesses reliably and sustainably generate a growing stream of cash.

Hesiod and the Muse

Linked Moments

Fundamental investing and a focus on value creation are concerned with long-term compounding. How moments are linked to each other. Sustainable actions with intentional consequences. 

Price exists here and now. It moves in rapid response to supply and demand. A higher price attracts more people and resources to meet that demand. A higher price makes people who want that problem solved consider alternatives. Our decisions are all relative. 

We have a limited basket to fill, and very different decisions to make. Price averages out our immediate decision making. We do not all pay what something is worth to us. We pay the same. Some get a good deal. Some think it is fair. Some will feel they need to explore options, or uncomfortable but still pay. Others will walk away. 

That process communicates information about where resources “need” to go. A surface level information flow that does not have knowledge of all the behind-the-scenes complexity. Adam Smith’s invisible hand pulling on our tacit knowledge. The stuff we understand, or don’t understand, about our own worlds. That gets expressed through how we engage and what decisions we make. Revealed preference.

How are things connected?

Small Sustainable Adjustments

“Stubborn Attachments” by Tyler Cowen talks about some of the problems of financial decision-making across time. How do we balance actions and long-term consequences in guiding our choices? 

Discounting cashflows is one way to take into account the “Time Value” of money. A Dollar today is worth more than a Dollar in 5 years' time. Making decisions based on discounted cash flows ends up almost ignoring 15–20-year time frames. The underlying assumption is you can reinvest at the end of the period. 

I take the essence of his argument as a focus on Maximum Sustainable Return. Sustainability is key. You need endurance to make sure you are in it for the long run. To extend what you are doing to the next generation, and the generation after that. To adapt your thinking from 5-year plans to 1,000-year plans. Consequences beyond "you". Where BIG interventions fizzle, but small sustainable actions have big long-term effects. 

Epiphanies, vanity projects, and conspicuous victories are much less impactful than small sustainable adjustments. “Most people overestimate what they can achieve in a year and underestimate what they can achieve in ten years.” (Amara’s Law). 

Time is the most powerful investment force.

Le Temps

Trees and Fruit

If you are able to build Capital, you have to internalise discipline. Because you *can* spend Capital. If you stop it working. If you turn it into cash. Then consume it. It depends on the story you tell yourself. You can look at money as trees and fruit. You can live off the fruit, but if you start cutting down trees, there is going to come a tipping point where sustainability comes into question. “No Money” will again be the enforcer of discipline. It is analogous to the planet and our natural resources. While we were growing, and while we were living hand-to-mouth, we have not adequately considered the sustainability of our environment. You have to think in a long-term fashion. Normal panic is, “I am not going to be okay at the end of the month.” It is a different type of worry you have when you change the way you look at money. You have to realise when “this is not sustainable”. You might have to change your habits even if you are okay for the next three to five years. Because you are not okay... for ever. And that worries you. That is an important worry to have. One that requires a change in the way you act. 

 

Thriving Too

I view investing as getting my money a job. When things are complicated, we simplify them into stories (based on what we already understand) to make sense of it all. To provide a way to make decisions. I started by investing in the funds that I was studying. Which, unsurprisingly, were the funds of the companies I worked at. Which, unsurprisingly, were companies that recognised the qualifications and studies I had done. Then I got an Interactive Brokers account, and started by getting my money four jobs. Gradually over a couple of years, I got my money more jobs until I had a portfolio of 20. Unlike my current personal job hunt, my money did not get interviewed. It did not have to find vacancies in roles that fit my profile. Money does not specialise. Money does not make decisions that limit its world view. Money does not have confirmation bias that looks to explain away its inadequacies in comfortable, but false, fairy tales. Money does not define itself by the work it does. It works, and either it grows or shrinks. The secret of nature, David Attenborough says, is that “a species can only thrive when everything around it thrives too”. Making money is not a win-lose ego competition. It is win-win capital allocation.

Rain Forest

Full of  Sustainable Growth

In Between

Actions have consequences. Both intended and unintended. The desire to count and maximise has the unintended consequence of undervaluing the future. If you make your decisions by simplifying complexity down to two simple numbers (Return and Risk), the result is a just-watching-your-feet time horizon. The underlying assumption is you will have the opportunity to make a different decision for the next time frame that does consider the future when its turn comes. Aiming for returns of 15-20% would mean anything beyond a 5 to 10-year time horizon almost does not enter your consideration. The most powerful investment forces are space and time. Space between production and consumption. Time between contribution and extraction. Rather than short sprints, thinking with a long timeframe in mind allows you to focus on sustainability and consistency. A long timeframe forces you to think of things that cannot be simplified into numbers.

Observable Universe Logarithmic Map

Sparkling Inequality

Most people I know plan their finances in a bubble. Bryan Caplan points out that “normal people say what other people do, but do what other people do”. This is where the concept of Champagne Socialism comes in. When there is a stark disconnect between spoken politics and lifestyle. Consistency is ridiculously challenging. It can be paralysing because the task is tall. If you believe the world needs to consume less (climate change), the median GDP is roughly $10,000. I am not saying that number is a perfect measure, but if you believe we should consume less, do you believe you should not consume (personally) more than USD 10,000 a year? My friend Galeo talks of being a Half-Hearted Fanatic. Martyr’s do not survive. The median adult income in the UK is roughly $24,000 (adjusting for prices), and in South Africa it is about $4,750. If we are all aiming to consume sustainably, how do we nudge towards that goal? Our bubbles bump each other in our bigger bubble.

Home for Bees

Two concepts I am progressively incorporating into my investment philosophy are Rewilding and Biodiversity. My Father-in-Law is a Natural Beekeeper and I like the idea of Natural Stockkeeping. Recognising that it is the bee that does the work. Where the goal is to do as little as possible, but not less. You have a roll, but it is more custodial. As we are grappling with a world that consumes too much already, yet is still struggling with mass poverty and hand-to-mouth living, we have to come up with new stories. In “Stubborn Attachments”, Tyler Cowen talks about twisting the maths of finance to not excessively discount (ignore) the future, and to focus on Maximum Sustainable Growth. David Attenborough reminds us of the seemingly obvious observation that something is only sustainable if you can do it forever. One measure of growth that is dangerous is activity. Doing more is not always doing better. Controlling more is not always doing better. Sometimes we can do better, without doing, and releasing the potential outcomes.

Wildly Constrained

“Rewilding is about letting nature take care of itself, enabling natural processes to shape land and sea, repair damaged ecosystems and restore degraded landscapes. Through rewilding, wildlife’s natural rhythms create wilder, more biodiverse habits” (rewildingeurope.com). Rewilding is David Attenborough’s call to arms in his witness statement, “A Life on our Planet”. He points out that “a species can only thrive when everything around it thrives too.” I don’t buy into Abundance culture. I can’t, having been born in Apartheid South Africa. The world has constraints. We have to solve the dual problem that we are consuming too much, and yet masses of us are living in poverty. In “Stubborn Attachments”, Tyler Cowen talks about Maximum Sustainable Growth. We need to grow our way out of poverty, while rethinking growth. Rethinking consumption. Rethinking how we impose ourselves on the world. And getting wilder.

Finding Clean Energy

From a standing start, a big enough Capital Engine to give you complete financial independence is an incredibly ambitious project. Even if you have plenty of non-explicit (inheritance that isn’t capital) hereditary privilege like wealthy friends, door-opening education, the right profile, and the right passport. Ideally, you would be spending less than the dividend yield of your money’s portfolio of jobs. Ideally, for that dividend yield to be sustainable and grow a bit each year, it would be lower than 3.5% (the rule of thumb sustainable drawdown rate). That means you would need more than 28 times your annual spending. If you are in the circles that can afford to build that kind of breathing space, your entry ticket to those circles (spending) is probably high, making the required Engine size bigger. Reality is probably closer to reducing the control of monetary constraints. A little stronger. A little more flexible. A little more control.

Solar Settlement at Schlierberg

Produces more Energy than they Consume

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 Battlefield

 “Tatra sthitau yatno bhyasah” Yoga Sutras

Abhyasa is the continuous effort towards firmly establishing the restraint of thought waves.

Stilling the waves of money anxiety requires developing a sustainable practice over a long period of time. It isn’t about “get rich quick” schemes and easy solutions. One of the main texts in Yoga is the Bhagavad Gita, which tells the story of Arjuna on the Battlefield. The chaos is going nowhere. The practice you develop is to find that point of calm within the struggle. To cope. It isn’t just moments of silence found in practicing meditation, outside of life. The aim is to develop new scripts, habits, actions and reflections that combine to deal with whatever life throws. To have the endurance and resilience to draw from and see through the chaos. Each day. For the long term. With commitment and focus.

Arjuna

Much to Well

My path to financial security involved very little out the box thinking. The cold hard reality of London visits while I was working as a Gap Student (teacher’s assistant) made me think 100% pragmatically. I wasn’t starting from nothing. I had already had a great education that gave me options. Networks and education are a form of capital. I studied full time for 4 years, and part time for 4 more. My formal earning period was the decade from 2004 to 2014. I had few enough external obligations to build an Engine. Capital that could earn income. I could decide I had enough. That is the out the box thinking. “How much is enough?” usually comes before "more". To attempt stepping away from filtering my productive hours through the rules of money, constraint had to be self-imposed. I still work. Mostly unpaid. I still tend the Engine, and if I spend consistently more than it makes, it will go bang. A different kind of stress. If the unexpected pops its head, I have to do repairs. In a world addicted to growth, this is a question we are all going to have to answer collectively. When does measuring growth shift from how much we consume? From how much to how well? And obviously, I am able to ask these questions from a very privileged position. The box that matters is shared.

Abundance in Constraint

The median (half have less) disposable income for UK households (2.4 people) is £29,400. After reading William MacAskill and Peter Singer who study Effective Altruism, I decided it was worth aiming to live off an income of less than £2,000 a month. Aiming for less seems very counterintuitive in a bigger-better-more world. If you believe in abundance, then it also seems unnecessary. Why self-impose constraint? I don’t believe resources are abundant, and grapple with conspicuous consumption in a world with structural apartheid. Poverty is still very real, and mostly apportioned by our compounded historic prejudices. Sustainability is also clearly a pressing issue. I am all for Maximum Sustainable Growth, but how we co-ordinate means we can’t think in isolation. 1s and 0s (digital pleasures) and walks are abundant. Big houses, cars, and plane trips clearly aren’t. I do believe in win-win growth. Someone rising up doesn’t have to be a threat, but how we count, what we count, and where/if we grow does need reflection. You can still lean into true abundance within empowering constraints.

Disaster Management

Business Continuity Planning (BCP) is part of the risk management of companies built for endurance and resilience. It involves brainstorming and preparing for any threats, and setting up plans for before, during, and after disasters. You often get accountants who get their own finances in a mess. Actuaries who don’t have adequate insurance. Handymen whose own house is falling apart. Therapists who don’t look after their own mental health. The problem with 5 days a week of work, and only 28 days of leave a year, is getting your own house in order. A key part of BCP is key man risk. A good company shouldn’t be dependent on any individual. Unfortunately, lots of individuals are very dependent on the companies they work for. And more energy goes into thinking about the threats to the business than the threats of depending on that business. No sustainably good business would have just one client, or just one employee. Yet we structure society on individuals depending on a single stream of income.

When Disaster Strikes

Sustainable Growth

A focus on short term profits is doomed to fail. The energy is in the wrong place. Profit isn’t the driving force of wealth creation. Reinvestment is. The Business Graveyard is full of stars that shone bright. Sustainability is the real driver of wealth creation, because the magic comes from compounding. Taking profits, yes, but putting them back. Putting them to work. Again, and again, and again. Which is why sustainable profits aren’t sneaky. Both parties need to get a genuinely good deal, with full transparency. Sustainable Growth is about building systems, institutions, communities, relationships and value that endure. Sustainable Growth is about building the resilience to look at both short term losses and short term gains with the same Poker Face. To see the fundamental long-term value creation through the noise. Sustainable Growth is about connecting the past, to the present, to the future.

The Future Matters

We see based on what we have seen, and what we want to see. Businesses don’t give a pre-set return or guarantee the Capital will survive. Over the long term, return is based on adding demonstrable and recognised value. What you do matters. Over the short term, price is based on what investors have seen, what they worry about, and what they want to see. Over the very long term, the US Stock Market (e.g. S&P500) has generated nominal returns of roughly 7% (with several dramatic falls). Stock pickers normally would want more. How much more? The more aggressive the model, the less the distant future appears to matter. If you want stocks that will return 20%, you’ll see stocks that will return 20%. Financial Modelling raises more questions than answers. Still worth doing, but with a pinch of salt. At 20%, the maths means anything 5-10 years out becomes a significantly smaller, almost negligible, part of the decision-making process. That is dangerous. It’s no surprise prices are all over the place when our eyes are only on the next 5 years. This too will pass. Ensuring a Future matters.

Stock Market Crashes

e.g. Tulip Mania

Real Creativity

A fundamentally bad investment can still deliver good returns with leverage or subsidies. If the return is higher than the rate of borrowing, leverage magnifies it (in both directions). If money costs nothing (interest rates are zero), all an investment needs is a pulse and someone willing to give you their money for free. A subsidy means the investment is wanted for non-financial reasons (or the subsidy can eventually be removed). I don’t like investments like that. I also believe that Endurance and Resilience are fundamental. Endurance provides stability. Resilience provides liquidity. They can’t be directly focused on maximising sustainable growth. Some focus has to be given to strength in solid foundations and the flexibility to adapt. But the intention there is to release the potential of fundamentally good investments. Real creativity. Not to give precious soil and water to things we don’t really want to grow.

Larger Appearance, Same Reality

No Pollyanna

I have never seen a long-term track record showing sufficiently compelling evidence of any investor’s ability to time the market. Swapping in (equity) and out (cash/bonds) to predict the ups and downs. Instead, my belief in equity comes from something more fundamental. Equity is a slice of ownership in a business that is doing something creative. With management and staff who can respond dynamically to the challenges presented. Who can make the most of any situation. Solving real problems. Adapt, adjust, accommodate. The growth makes sense to me. The risk management makes sense to me. It’s not a game or crystal ball. I am close to a perma-bull. An optimist who believes it is “time in the market, not timing the market” that makes the difference. But I am not a Pollyanna. You only have to read “When Genius Failed” and “Black Swan” to understand the danger of Tails. Unpredictable, extremes that change everything. 1000 years of mediocre returns will beat several extraordinary lives, with intermittent calamity. Spectacular is over-rated. Sustainability matters. Time matters. Compounding matters.

Pollyanna - Unfailingly Optimistic Outlook