20 September 2008

Financial Security and Capital Allocation

Financial security and capital allocation are the topics for this week's letter. I have been wanting to write about these for some time. What a background in the capital markets -- a very rough week for people.

I am extremely busy on the business front.  As you can imagine, we face a very challenging time in UK Property.  If you are waiting for an email reply then I will get to you, just need some more time. Each day, I have had to parcel my energy, prioritize tasks and schedule recovery.

OK -- a couple of announcements...

***I turned on comments so that so we can interact. Take it easy on me. You'll find that moderation is 'on' so I need to review before they go live.

Endurance Corner Radio has podcasts from Joe Friel and Chris McDonald. Send feedback to D.J. J.D., who is leading our effort.  Joe is talking about his background (very interesting) and training. Chris explains how we can break Chris Lieto's course record at IM-Moo by using IM-Loo as part of our taper -- its easy if you just follow his point-by-point instruction for race week...

***Joe is going to be speaking at our Boulder Triathlon Camp next July. The camp is open to all levels/distances and will have a mix of hands-on instruction, training and discussions. Cost is $1,250 -- drop me a line for more details.  We've got some great speakers lined up.


Who knew the markets would melt down? Personally, I don't blame the short sellers. They are only acting on what insiders and smart researchers have been telling us for months... our financial system needs to be recapitalized. Massive global deleverage is tough. In my own ventures, it is the main cause of the difficult situation faced by friends and clients. 

What lessons can we learn?


Acquisition of capital is different than borrowing debt. Because debt comes from third party sources, we need to be wary of the tendency to view it as 'free' money. When I work with individuals, or companies, that run into trouble, it is often a crisis created by borrowing to the maximum extent permitted. Permitted under law, permitted under debt agreements, permitted by running X creditcards. An appropriate amount of leverage is well, well below the maximum that can be borrowed.

To me, capital in its most simple form is cash and liquid assets. Before we talk about how to allocate, let's consider how to acquire:

1 -- spend less than you make
2 -- pay yourself first

Physically, I have been overweight before. When I was heavy, I would often wish that I could wave a wand and "be thin". If I could just get a chance to start all over then everything would be alright. I would tell myself that I wouldn't make the same mistakes again.

Finances are a lot like that. When we have no capital, we can spend a lot of time wishing that we had capital.

Physical fitness is just like financial health. Until we take actions, and create habits, that change the direction we are heading... we will keep heading the same direction. We have to make the change.

The two tips that I shared above come from
The Richest Man in Babylon -- a good read on the topic of personal finances. I like that book because it doesn't make things too complicated.

3 -- Protect core capital.

What is core capital?  Put simply, it is capital that you cannot afford to lose.  Having no assets at 65 years old is a far different situation than being wiped out in your 20s.

At 40 years old, my view on core capital is ten years living expenses.  While the income from that capital doesn't come close to covering my living expenses, it does give me years to adjust when faced with an unexpected setback.  Across a full career in business, we can be certain that we will face multiple setbacks.  After the past 14 days, the importance of core capital has become very apparent. 

How do I protect core capital?

4 -- Be wary of leverage.

My core capital is completely unleveraged.  While this reduces my return, it greatly reduces the risk profile on my portfolio.

I go even further in that I don't care about my investment return on core capital, I care about safety.

Within my business projects, I am willing to use leverage but, these days, only with capital that is above my core capital.  Why am I so conservative?

5 -- You only need to achieve financial security once.

By following the basic principles in my book recommendation you can give yourself an excellent chance to achieve financial security over your lifetime.

Sure we are exposed to Black Swans but you can stack the deck in your favor if you educate yourself and stick to the basics.

It is surprisingly difficult to stick to the basics.  We let our guard down, we cut corners, we are less careful.  We need to be constantly vigilant!


For capital allocation, my first consideration is
where I will be living in the future.

This is important to make sure that I have assets (and currencies) that will balance my future liabilities.  While I don't trade currencies, I consider purchasing power parity when deciding about large investments which match, or don't match, future plans.

I don't have a lot of sophistication in my review -- I look at things such as daily living costs, relative prices of accommodation, interest rates.

When I think about property purchases, I am very specific -- seeking good value, in a specific neighborhood, of an appealing city.  I define value back to my long term currency.  For me, that means converting back to USD, the US is my likely home.

The cities that I really like are: Edinburgh (GBP); Paris (EUR); San Francisco (USD); Hong Kong (quasi-USD).  I don't have any exposure to those markets presently but I keep an eye on them.

Currencies that I like are USD (matched to long term liabilities); CHF/EUR (long term stability).  Some people like Singapore dollars but you only need to look at a map to see that there is real political risk in the neighborhood.  In terms of Asian exposure, my preference would be a moderate yielding real property investment in Hong Kong.


When I was starting out, I thought that it would be nice to "be rich" -- whatever that means.  Along my journey, I have realized that wealth is neither the goal, not the benefit of financial security.

The two main benefits are ethical reinforcement and personal freedom.  If the pursuit of wealth forces you to compromise your values, or ties you to unpleasant situations... then one really needs to consider if that is a benefit at all.

Following the events of this past week, a very relevant consideration.


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At 9:30 AM, Blogger Alan Couzens said...

Hey G,

Interesting post.

Just watched the movie "into the wild". It reminded me that personal freedom and security is a function of the quotient of personal wealth vs. personal needs.

The former can take years to change. Most folks can change the latter in one second. One decision.

Best regards,


At 8:58 AM, Blogger Brett said...

Thanks for opening up comments. I look forward to it, and I appreciate your willingness to share your ideas with people. I look forward to your next book. :)

At 1:02 PM, Blogger Adrian Hull said...

What do you think is the long-term (6mths, 2 years, 5 years) outlook for the USA economy? It always amazes me how the US can print money to get themselves out of trouble but I wonder what the long term effects are for this approach. I suppose as long as the world market is tied to the US dollar (i.e. cost per barrel of oil, currency conversion etc) that will be their saving grace. Interested in how you see it?

At 8:07 AM, Blogger Gordo Byrn said...

AC -- I think your points are well made. Looking around my pals (international as well as you guys locally), one can also make the case for the flip side. In other words, one can instantly change habits to build wealth but managing needs takes a long time. We each tend to have skills more suited to the numerator or the denominator. Not many people dial down the denominator as tightly as you. The only one that comes close is V-dawg, and he is a big fan of yours.



With economic predictions, the only thing that I know for sure is that I don't know for sure. If you know what I mean.

That said, the places in the world where people like to work, should be fine in the long run. The US has a huge amount of intellectual capital, natural resources and (mostly) stable geography.

If the country, as a whole, unwinds in a liquidity sense then there is a lot of consumption that will be replaced with debt paydown. That is going to be a painful adjustment.

One area where I don't have a clear view is whether we're looking at inflation, or deflation. The liquidity shock is deflationary but the high level of debt points to a potential inflationary push. Not sure how that will play out (not that there is much I can do about it).

Two things that I see:

US Marginal Consumption -- prices move at the margin, in terms of marginal consumption, the US is a big market in global terms. I see the impact more in terms of marginal consumption, than the world being tied to the US through currency denomination.

Room to maneuver -- the high level of government spending in the last, say, five years has left the country with a fairly narrow range of options. Not sure how many more $700B programs will be possible. The concern over whether the financial plan is the right way to spend the cash is a good one. I don't have the answer but we should all realize that it's probably the last $700B plan for a long time. The fact that some folks said that it is 'only the same as the Iraq war' really made me thing. $1,400B, combined, is a lot of money that could have been invested in health, education, infrastructure. The case for the return on investment hasn't been made so far.

Anyhow, more thoughts than answers.


At 9:34 AM, Blogger Bruce Stewart (施樸樂) (ブルース・スチュワート) said...

The hyperlink to the Richest Man in Babylon led me to the Wikipedia posting and the reviews therein - truly informative and inspiring. I had for a long time just assumed that being relatively poor was more virtuous and the way of life for me. However, the last couple of years my mindset has shifted to planning and preparing for the future for both myself and the family. I am gradually seeing progress with the "numerator" (wealth) increasing and the "denominator" (needs) decreasing. Like swimming, the gains on any given day are small, but over time they add up. So thanks for the "links".

At 2:24 PM, Blogger Gordo Byrn said...


The Artists Way (J Cameron) has an interesting section on how attitudes to wealth can impact our financial situation. I see a lot of her observations in my life situation and attitudes.

The healthiest view that I have read about financial stability/security is seeing it as a store of energy. If we take the time to build that store, then we have the freedom to direct energy towards other directions.

As AC notes, one can also derive freedom from living in a very simple fashion. But our capacity to help others, can be limited. Of course, we often help other the most when we empower them to help themselves.

Lao Tzu -- Need Little, Want Less
A great saying from the Tao Te Ching.


At 12:25 PM, Blogger Missy said...

Thank you for sharing your perspective.

Here in the US, replacing consumption with a decrease in debt sounds like a great idea to me. I'm just not sure if that is how this situation will play.

Unlike the previous generation, this one seems to have no problem with defaulting and leaving debtors holding the bag.

Of course in the current mortgage crisis, many have no choice.


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