Family Plot

Photo courtesy of Peter

For some time money managers have been rubbing their plump pink hands together at idea of a one-trillion-dollar tsunami. As baby boomers begin to shuffle off their mortal coils, their lucky spawn are expected to inherit a cash bonanza, the result of years of compounding equity bull markets, real estate bubbles, and low interest rates.

But not all the world’s millionaires and billionaires are inclined to dole out a lifetime’s worth of food stamps to their offspring. This week, pop star Sting, (net worth approximately £180M), has publicly announced that his six kids shouldn’t expect much of a boon when the old man finally merges with the astral plane.

Admitting to spending it as fast as it comes in, with over 100 people on his payroll, Sting says he won’t burden his kids with “albatrosses round their necks.”

(“Please Daddy, burden us!”)

Sting joins a growing list of mega-rich, like Warren Buffett, Ted Turner, Bill Gates, and George Lucas who plan to disperse the bulk of their estates during or soon after their deaths leaving their kids with modest sums of cash and, possibly, outsize resentments.

We make a lot of assumptions about affluent families. For starters we believe that all family members have access to the wealth. This is rarely the case.

For example, in the Buffett household, rather than giving a spousal cash allowance, Buffett would take his wife to a fancy department store and tell her she could buy anything she wanted. The catch: A one-hour time limit. Susie (“Big Sooz”) would run around like a maniac grabbing whatever she could. (This infantilizing nonsense eventually stopped when Suzie’s personal holdings of Berkshire Hathaway stock made her wealthy in her own right. To discourage her from selling the company shares to raise cash to cover her expenses, he finally opened up his own wallet.)

Another false assumption is that all family members understand how to manage money. Again, Buffett loved educating college students, shareholders, employees and just about anyone about the rules of successful investing. Anyone, that is, except his own family. Hence his kids made scores of rookie mistakes like cashing out their Berkshire Hathaway shares to buy cars and trips that left them in straitened circumstances later on. Hey-ho.

Despite its obvious appeal to the beneficiary and her close friends, passing on great gobs of wealth is generally a bad idea. Since money is an amplifier of sorts, if you’re already a bit dotty, money can let you off-the-hook since you have no ordinary incentive, like paying the rent and eating food, that forces you to get sorted. (Exhibits A, B, C, D… Barbara Hutton, Brandt Bros., Stephen Tennant, Huguette Clark.)

For society, inherited wealth calcifies economic inequality and ultimately results in a law of diminishing returns as “food-stamp heirs” gobble the lion’s share of wealth, instead of economic rewards tilting toward the best-and-brightest, as they would in a meritocracy.

Still, if I were Sting’s daughter, I’d feel a bit stung to read about my disinheritance in The Daily Mail. With his sky-high burn rates, if she wants to cash in, her best bet might be to become a member of his staff.

The Narrow Road

Photo Courtesy of Dylan Passmore

Most of us want to be rich, or at least comfortably well-off. We daydream about bucketfuls of cash coming from a lottery win, an unexpected inheritance or some other sudden boon that’s making a bee-line just for us.

We also want to be slim, fit, popular and eternally youthful, yet most of us do nothing to acquire these traits. It’s more like, “Pass the kettle chips and keep your hands off my remote.”

Amidst all the daft books on building wealth, only a few stand out for their honesty and pragmatism. One such book is The Narrow Road by Felix Dennis. Dennis passed away this week at the age of 67. He was the publishing mastermind behind the lad-mag Maxim, as well as other media brands.

Dennis grew up in poverty in Surrey, England, (“no electricity, no indoor lavatory…no electric light…”) but amassed a £500 million fortune, of which a fifth was spent on French wine, women (French and non-French), and crack cocaine (origin unknown). After a bout with a severe illness he dropped out of the business world and became a poet.

In The Narrow Road, a slim volume of his business wisdom Dennis cut to the chase. If you want to be rich, he argued, you’ve got to be like a “wild pig rooting for truffles…or a weasel about to rip the throat out of a rabbit.” In other words, you’ve got to want to be rich more than anything else.

Dennis got it right, to be successful in any large venture requires a degree of arrogance and selfishness that most people might find difficult to summon. You’ve got to say ‘no’ a lot so you can say ‘yes’ to the thing you’re pursuing. Friends will fall by the wayside and intimate relationships are unlikely to thrive, or even survive during your quest. On the other hand, once you’re really loaded, you can buy a bunch of shiny new friends and lovers to keep you company before you keel over.

Another example of someone who has spent his life in hot pursuit of money is Warren Buffett. Despite his avuncular appearance and sage announcements as the “Oracle of Omaha”, Buffett, too, has chosen the narrow road.

In Snowball, the excellent biography on Buffett by Alice Schroeder, we see someone who from a young age chased one thing, cash, to the exclusion of everything else. In a childhood photo of Buffett with his two sisters, each sister holds a doll or stuffed animal. Buffett holds a coin-dispensing machine.

As we learn in the book, Buffett did nothing but think about making money, starting with his newspaper route as a young boy. Marriage and fatherhood did nothing to keep him from spending his time parsing annual reports in search of struggling companies he could buy for a fraction of their intrinsic value.

Of course his marriage faltered. (When his wife was ill and couldn’t get out of bed to vomit, she asked Warren to bring her a bowl from the kitchen. He returned with a colander.) His kids never dreamed of asking him to throw a ball with them or hang out together. He was a million miles away, hunting rabbits.

In memory of Felix Dennis (R.I.P.), let us take a moment and reflect on this: What are we willing to do to become rich? What will we consciously make less important than making money?  And, in the end, if we decide there’s more to life than just the pursuit of cash, let’s take a look around. Pots of gold everywhere— just not the yacht-bearing kind.

Sweet Apple

Photo Courtesy of Tiger Pixel

Think Different. This was Apple’s brilliant 1997 ad campaign featuring images of Mahatma Gandhi, Pablo Picasso, John Lennon and Yoko Ono, Maria Callas and many other creative leaders.

Apple’s new-ish leader, Tim Cook, thinks different too. Though lacking Steve Jobs’ star quality and possibly his sociopathic tendencies as well, Cook is a different type of leader: a kind one.

At a recent shareholders’ meeting, when asked about Apple’s new dedication to environmental causes and whether these would hamper profits, Cook replied, “We do things because they are just and right.” 

This is not something one often hears from the pursed mouths of CEOs.

Cook’s statement echoes one made by Warren Buffett in his 1969 letter to his partners. Several years back he had purchased Berkshire Hathaway, a struggling textile mill and some partners were itching to bail on it. Buffett stood firm: “I have no desire to trade severe human dislocation for a few percentage points additional return per annum,” he wrote. Berkshire Hathaway was an illiquid stock that traded ‘by appointment only’. Buffett happily bought up his partners’ unwanted shares for around $45 per share and today, well, a single Berkshire Hathaway shares trades for $189,000 USD.

Which begs the question: Exactly how many more percentage points per annum does an investor need to chase and at what cost?

When our scorecard only measures finance, it misses all the other facets of value, like sustainability, fairness, and good governance. Contrary to reducing gains, these pillars are the foundation for long-term gains.

The mindset that views companies as being worth more dead (intrinsic value), than alive (PEG:price earnings growth), is similar to the belief that Nature, too, is worth more dead than alive.

I suppose it works. Until it doesn’t. (Read The Giving Tree by Shel Silverstein for a lesson in the real cost of greed.)

Apple’s meteoric  profits—it is sitting on a cash pile of $150.6 billion USD— have some investors chanting, “Gimme, gimme, gimme”. Apple is the Giving Tree. Wisely, Cook is re-writing the book.

Far from hurting business, his commitment to environmental conservation, (Al Gore is on the company’s board) ,and gender rights has attracted more investors than ever. 

I bought Apple in the early 90s and then sold it for $23 during the company’s ‘troubles’ between CEOs. Typical rookie mistake. Hey ho.

I love the brand. I love that Cook has hired smart fashion-industry folk from Yves Saint Laurent and Burberry. And I love that Apple makes pots of money. I’m ready to take another bite.

Real Smart Money

Photo Courtesy of Christoph

Like Rodney Dangerfield retail investors get no respect. Often referred to by investment professionals as ‘punters’, ‘weak hands’, and ‘dumb money’, it turns out that retail investors are not so dumb, weak or punty. In fact, a new study shows we’re actually pretty smart, or at least smarter than Wall Street gives us credit for.

Investment strategists believe that retail investors, (that’s you and me Jack), are prone to a buffet of behavioural and cognitive biases that make us poor investors. We suffer from endowment bias, believing that what we own is more valuable than it actually is; and regret aversion bias, where we don’t make a trade because we’re afraid to make a bad choice, and a baker’s dozen more big, bad biases.

Thing is, portfolio managers are people too and they fall prey to the same biases.

But we’re not exactly running head-to-head. The study from the Federal Reserve shows that retail investors are better at spotting the onset of recessions compared to professionals, who only twig on at the tail end. This makes sense when you think that, for an average person, having an accurate read on economic trends can make the difference between a comfortable retirement of charity and golf, or working as a Wal-Mart greeter into your 80s.

By convincing regular folk that they don’t have the skills to successfully invest their own money, the investment industry can charge hefty management fees and shroud their work in tangle of jargon and metrics of questionable relevance. Over time, those fees really add up. Just think, if you have a million-dollar portfolio and you pay 2% a year to have it professionally managed, over the course of a 25-year period you’ve just given away over a million dollars in fees, assuming a 5% return. That’s some big ass opportunity cost.

Even a superstar investor like Warren Buffett has said that when the time comes to toss his mortal coil he wants his wife to invest the residue of his estate in low-cost index and money market funds. If anyone does, Buffett knows how hard it is to beat the market, particularly today when so much investment information is readily available thus making hidden gems that much harder to find.

This isn’t a tirade against those portfolio managers who work hard to add alpha (jargon alert!) to their clients’ portfolios. It’s a reminder that we’re not as dumb as all that.

Or, at least we’re just as dumb as everyone else.

Rich: Three Ways

Photo Courtesy of Alice Popkorn

Oh to be a winner in the ovarian lottery. (It’s a term coined by Warren Buffett. And, yes, I’ll be referring to him a lot in this blog. Get used to it.)

Being born into wealth brings many obvious benefits. But there are also equally powerful, though less obvious boons, like greater time and cognitive bandwidth which lead to better decision-making. In contrast, the poor suffer from a deficit of all three: Cash, Time, Bandwidth. And, like high-interest loans, these compound in negative and painful ways.

Ah, compounding, it’s also known as “Time Value of Money”. Say you covet one of those Waiting-List Only Hermes Kelly bags and decide to splurge on it. Paying $10,000, that entry-level bag is actually costing you more than $43,000, assuming a 5% return on the original sum compounded over 30 years. (Admittedly 30 years is a long time to wait, better get the bag now. There won’t be any room in the walker.)

But what about the “Time Value of Time“? In the book “Scarcity: Why Having Too Little Means So Much”, the authors, a Harvard economist and Princeton psychologist,  argue that time poverty can be equally debilitating.

True, the wealthy may also feel time-poor but they can readjust their work-life balance by going on vacation or being more flexible in when and where they work. The real poor, say the co-authors, cannot take a vacation from their poverty. In other words, they are always drawing down their cognitive and physical resources to stay afloat. They’re spending their energy and racking up debts all the time.

This leads to the third deficit: bandwidth poverty. Having time to reflect leads to better decision-making. The rich can make extra time for themselves by hiring people to clean, cook, babysit, lawyer, etc. By contrast, the poor are constantly multi-tasking and the physical and mental exhaustion creates a maxed-out nervous system that looks for cognitive shortcuts to problem-solving. Hence, instead of comparison shopping for loans or services, the poor grab the closest thing, even when it’s more costly or of poorer quality.

How can these deficits be turned into assets? First, the growing disparity between the rich and poor must be arrested. (No room to get into that here. Later.) Second, rich and poor alike, but especially the poor, must become more conscious about how they invest their time. The rich can afford to be disorganized procrastinating dilettantes, the poor cannot. Third, to increase cognitive bandwidth we must find ways to rejuvenate ourselves. This can be done through a daily meditation practice, gentle stretching or periods of silence, as well as taking mini-breaks from the electronic leash of social media.

Cash is only one face of wealth—though it’s the one that gets the most air-time. Breathing space. Thinking space. Non-thinking space. These bring benefits that compound too. And the dividend payout is immediate.

 

 

 

 

The Hour of the Wolf

Photo Courtesy of Amad Nawawi

Often we think of serious investors as being hyper rational. Numbers are crunched. Charts are studied and then, “Bam!” let the trading begin. Sometimes a flurry of trades, based on pending or current news, spikes activity causing volatility and prices vastly over-or-undershoot.

Average investors (aka ‘regular Joes and Janes) fear volatility—or, at least have been coached by the investment industry to fear it. And, yes, those spikes and swoops are stomach-turning but can also result in out-sized profits.

According to an on-going study on the biology of risk by John Coates, a former derivatives trader turned neuroscientist, volatility or the anticipation of it jacks up our hormones, particularly testosterone. Increased profits appear to elevate testosterone levels which leads to excessive exuberance and increased risk-taking. Rational decision-making unravels and, when enough of those bad decisions accumulate, markets crash, causing havoc far-and-wide. Did someone say, ‘Bubble?’

Young men have naturally higher levels of testosterone than women and than older men. It’s no surprise then that women portfolio managers, being less vulnerable to testosterone-induced hysteria, have better performance in both good markets and bad ones. (This runs counter to conventional thinking that women are less rational than men. Alas, portfolio returns don’t lie.)

Wall Street/Bay Street machismo is alive-and-well. We love the snappy suits and fierce attitude boys but it comes with a big cost. Making the investment industry more women- and oldster-friendly would blend out the testosterone spikes that distort valuations and it just might make markets and investors a whole lot safer. (Either that, or its desk side testosterone spot checks during trading hours. Ouch!)

Homo Economicus is a fallacy. We are not purely rational beings. So it’s no surprise that the markets, as one of our own inventions, isn’t either.

Welcome to Luck & Gravity

Photo Courtesy of Eko

Welcome to my Luck&Gravity Blog. This blog is about the Magic of Money—everything from how to attract it (possibly), to how to invest it wisely (definitely), and how to spend it (joyously).

My mother—a devout optimist—finds ‘lucky’ signs everywhere. As a child, I remember shopping with her in the grocery store. Picking up a bunch of bananas, if there was one that was less curved than the others, she would point it out and say, “Now that’s a lucky banana. Something good is going to happen today.” Cloud shapes, birds’ nests, numbers, colours, found coins, and various other happy omens populate her world. According to my mother, luck is everywhere. You just have to pay attention.

As I grew up, enchanted as I was with her brand of magical thinking, life experiences began to tilt the other side of the see-saw, pulling down some of that early unbridled optimism.

Because, beguiling as it is, bona fortuna is only half the story. Fortune comes and goes. Things go up and they go down. But gravity, gravity is always there.

There’s no better place to see this dynamic play out than in the stock markets. Here we find, on a daily basis, the bipolar dance between luck and gravity. Periods of expansion and good fortune, where seemingly no price is too high to pay for stock market darlings, turn on a dime into sombre periods of low-to-no-growth when everyone goes back-to-basics.

As a keen observer and participant in the markets for the past 20 years, I’ve come to see them as one of my life’s great teachers. Though they don’t care a fig about me, the markets have taught me to think critically, to read widely, to find interconnections, to trust myself, to take the long view, to take the short view, to be patient, to be disciplined, to take risks, to hedge risks, to not take everything personally, and much more.

As the late actor/comedian Jackie Gleason said:

If you have it and you know you have it, then you have it.
If you have it but you don’t know you have it, you don’t have it.
If you don’t have it but you think you have it, then you have it.

As the world’s best stock investor Warren Buffett said:

Trees do not grow to the sky.

In other words, you’ve got to believe you have it (even if you don’t) and you’ve got to get real (learn the rules of investing). That’s the sweet spot where luck and gravity, (and magic and money), intercept each other. And, when they do, how sweet it is.