 |
Winners, Personal Finances and Inflation
One of the effects of looking for the perfect 'next year' is a distraction from enjoying 'this year'. As an athlete, I would focus on today's training and would spend a lot of time thinking about 'what's next'. This is a trap because constant forward thinking takes away from today's experience. While I still think about the future (more than most), the questions I ask myself have changed:
When those questions are in harmony, I find my productivity, happiness and personal satisfaction are high. I was down in Austin this past weekend and, before I arrived, I had written an outline of this piece. Spending a weekend at a HUGE triathlon race (Longhorn 70.3) helped drive home the observations that follow. My peer group is, for the most part, triathletes and cyclists. While it might not always feel like it, we are a sub-group of the winners in Western Society. This isn't a value statement. I don't mean that we are better than anyone. Rather I mean that society functions for the benefit of the sorts of people that are able to do LiveStrong rides and Longhorn Triathlons. Long ago, my fraternity brothers noted, "we are the people society is not out to get". Racking my bike in T1 on Saturday I was intimidated (yes, I was scared) by all the $10,000 machines racked in my row. I saw those bikes as an expression of my own values - if I was going to spend ten grand of my own money then performance would have to REALLY matter to me. 24 hours later, I had a clearer view of what those bikes may have actually been saying. More than a need for speed, I think the $3 million worth of equipment reflects a love of spending within my demographic. The ability to drop $10,000 on a bike isn't what defines us as demographic winners. In my view, it happens long before that. The ability to take a weekend off work and pay $175-550 for a day's entertainment is the defining characteristic. To create long-term financial security in my life, I have a lot of work to do. When I drop $750 for a race weekend, there is the nominal cost of the weekend ($750) but there is a hidden cost in terms of not being able to complete an item on my list-of-things-to-do-to-balance-my-net-profit-situation list. I can't measure the opportunity cost but it is real. For this reason, I build empty months (and weekends) into my life to help me balance what I want do, what is important to do and what I am actually doing. I have also been known to manufacture a personal crisis before I have a personal crisis. The book, Ubiquity, explains quite clearly why a lot of small shocks can be better than holding off for The Big One. Ubiquity and Personal Investing
There are three main reasons that I don't 'play' the stock market. The first is 'play'. I am not a professional or full-time investor these days. While I know how to evaluate a single company, I don't have the time to apply my knowledge across a vast universe of potential investments. So if I made an investment, I would be speculating while fooling myself that I had researched the overall situation. The people that tell me this doesn't matter either; are trying to sell me something; or have pay checks that depend on believing that this doesn't matter. The second reason is a feeling that the game is rigged for the benefit of the major participants. Rigged may not be the right word. More accurately, there are entire organizations with much better information than I will ever have. When you break down financial returns they are a function of luck, leverage and information. My access to information is low and I'm scared of leverage. So that leaves luck -- not a great investment strategy! The final reason is outcome. Being right will not change my life. In my case, even if I could overcome my information deficit (or get lucky), it wouldn't matter. Given that being wrong is painful, my best investment of time, and money, is likely elsewhere. So where to invest? Go back to first principles, I invest in things that will change my life if they happen, or not.
That said, I would like to stick a quarter of my net worth into the Boulder, or Hong Kong, prime property market. The reason for that unique geographical preference is: local infrastructure (knowledge/management); unlikely for natural disasters, political risk, and WMD (that's why I don't like Manhattan). As well these markets are long term attractive for either: global productivity (Hong Kong); or global recreation (Boulder). I have written before that I'm looking for a 5% net yield -- haven't come any closer in the last six months than I did this spring (when I was outbid here in Boulder). The US Dollar and Inflation In investment circles, three themes that have been repeating in the news cycle are: The US Dollar crashing; inflation and deflation. While it is worthwhile to understand the basics of each of these risks, have you considered what the actual implication of each for your life? ++ The US Dollar crashing -- my main source of income is a US services business that focuses on remote coaching, pre-built training plans (now available on TrainingPeaks) and cycling-focused training camps. The US Dollar crashing could help this business. Strategically, I could hedge my business exposure if I found the right European partner to act as a funnel for my camps business. I know that our camps must look cheap if you are buying in Euro. Even with the air ticket, a week with us would be substantially less than a similar week in Europe. Do you have smart German-speaking partners in your business? If you are scared about the dollar then this is a simple strategic defense. So the practical implication of the US Dollar crashing would be less foreign travel for me -- and more foreign clients for my business. Hardly life threatening. I have buddies, and clients, throughout the Southern US -- it could turn out to be a good thing to replace Noosa with Texas, Florida, Nevada, Arizona and Mississippi! ++ What about inflation? First consider if we are talking asset, or goods, inflation. Across the last 20 years, we were told that inflation was low. I always felt that was incorrect in my peer group -- while the price of milk may have been stable... our lifestyle aspirations were inflating rapidly along with the income/yield multiples of our portfolio targets (companies, houses, second houses). Seeing the HUGE inefficiencies that resulted in my own life, I can easily deflate my expectations, and cost of living, at a rate of 5% per annum for the next five years. I deflated my personal expenditure by over 50% in a year and my quality of life went UP. For the winners in society, inflation is driven by personal aspirations. Living simply could be our best inflation hedge. So I don't see inflation as a current threat and, if I can get a further 25% of my net worth into real assets, then I'll be hedged sufficiently for the long term (based on current information). As for deflation, I think that would be highly unpleasant for our society but I would be, relatively, OK. I gain some protection from being mainly in cash and having a value-focused segment of my business (training plans and coaching). If you are scared by deflation then your best investment is reducing all forms of indebtedness in your life. In the current market, I believe that paying down debt remains your best investment. So my current strategy - sit in assets, sell services. I didn't expect Boulder to end up being such a globally competitive location. Non-US Markets Asia
Europe
Both these regions are fantastic places with great people. However, my life is unlikely to be fundamentally changed by speculating in their economies. Given the wealth in both regions, my best course of action would be to capitalize on my local strengths (clean air, scenery, affordability) and sell services to Asians and Europeans. Dodging the Bullet With 20% effective unemployment, obviously everyone isn't spending freely. However, many people only see those people when our bike routes run through their neighborhood. That is going to change. If we end up with long term structural unemployment, the under-class are going to become far more visible. Think about the annual summer riots in the Europeans countries with a structural underclass. Just because many of us are feeling better does not mean that things are actually better. Human psychology means that we will feel better once things stop getting worse. They need not improve, we will perk up when the rate of decline slows. What were the causes of the crisis we experienced over the last two years? Here is what I see: A - the creation of a general expectation that government will step in save us from our own poor decisions. This will have unintended consequences -- not really sure what they will be but the government has, so far, been able to prevent the market from cleaning out the living dead in the financial world. B - there has been no material shift in the overall indebtedness of society. We reamin overleveraged. Much of the financial sector's profitability is accounting entries being the result of easy money being provided by the US Fed. Any deleveraging that we see in the productive sector of the economy has been replaced (and then some) by a massive increase in public indebtedness. C - we have a tiered society. The unemployed, and underemployed, class have reduced spending by necessity. I expect increasing friction within our society with resentment coming towards the most visible Winners. Politicians and the media are tapping into real frustration for their own ends. The elites, and Winners, note the disharmony that results but continue to act in their own self-interest to preserve the rules of the game for their own benefit. If you are reader of this blog then you should think careful about whether you really want the rules of the game to change. You probably don't and that's likely your best decision. However, we don't always get a choice and if the rules are changed on us... then you might want a plan to maintain your quality of life. Against this background - of potential fault lines within our societies - I have decided to be cautious and conservative with decisions within my own life. If you are overweight in any segment of your portfolio, or life, then the recent rally in financial markets, and public mood, provides you with an opportunity to re-weight in favor of safety. The seeds of a major crisis have not been removed, merely papered over - literally. gordo
|
|
|
|
|
Before my recent "change of circumstance", I spent quite a bit of time searching for the perfect combination of weather, 50-meter swimming pools and cycling routes. It was a fun game and I sure covered some ground!