14 November 2008

Reflections on Savings and Investment

This week we return to a more financial-oriented letter. Now that the US election is out of the way, it seems like the bad news has started rolling again. The bad news can seem relentless at times and, following my trip around the world, appears to be happening in the US, Europe as well as Asia.

With the mood (near universally) negative, I've been trying to figure out my long term strategy for savings and investment. As I mentioned a few weeks back, I'm currently projecting a cash flow deficit for 2009. I suspect that I'm not alone in being in that position! Frankly, being able to absorb an unexpected set back is why I've been conservative over the last twenty years. I have been reminding myself that the world isn't ending but human psychology can be tough to counter.

I have also been reminded myself of a few other aspects of investing (at least in my, rather unsophisticated, world).

Ability to forecast -- I have ZERO confidence in my ability to make accurate short-, or medium-, term forecasts and I don't trust my memory about historical forecasting. When it comes to past predictions, I suspect that I tend to forget my errors and remember my successes. Incidentally, this is a large part of the value that an investor/athlete can get from reviewing written logs of past decisions/training.

Timing -- Something about my nature makes me so conservative that I miss a lot of opportunities (not necessarily a bad thing). A friend once made the comment to me that if he'd listened to me then he never would have started his business -- perhaps an exaggeration, but a fair point that I have spent a lot of my life pointing out potential pitfalls to people. Interestingly, the triathlon equivalent of this is that an athlete never really knows when they are going to be in top condition -- so, if you're trying to make a living, then when conditions are right, you need to be willing to go for it. In other words, it's pretty tough to predict opportunity 1, 2 or 4 years out.

So what I have been researching is:
  • What assets do I want to buy, and hold, for the long term.
  • Separate from their current price, what is a reasonable assessment of their long term value.
Once I figure out #1 and #2, I plan on buying every time price gets below value. It sounds simple but is surprisingly difficult -- right now I am struggling to find an asset where I have 25-year confidence on existence, let alone value.

As the above chart shows, I don't think that there is a large rush. You can find the article about the chart HERE. When one is in cash, reading about capitulation is strangely entertaining, another aspect of human nature.


Global Property Outlook
I had some questions about my views on global property, not just the US. Unfortunately, my research over the last three months doesn't point to any good news. This spring, prices were holding in the prime sector throughout the world. As we near the end of the year, my estimate is that prime properties (UK/HK) have fallen 20-25% in local current terms (in FIVE months). Market participants are not prepared to admit that publicly at this stage but if you actually want to realize cash then market clearing prices are 20-35% off the peak.

The vultures ARE the market. Owner occupiers have, largely, stopped buying.

So my entry pricing advice for non-US buyers would be similar to what I laid out to US readers. Make sure that you have a margin of safety in your entry price and remember that there is very little opportunity cost to renting, versus buying (these days there is an implied option value in waiting).

Take your time and remember that returns from property investment are always overstated because people fail to accurately reflect their holding costs.

That said, a leveraged property investment (where a high quality yield covers a fixed interest expense) can be a good inflation hedge. Still, like most, my recent property investments are impairing my appetite for further exposure. My aversion is why I continue to investigate opportunities.


The Cost of Time
How does an investor, parent or employer, quantify the true cost of a poor decision?

While a bad investment costs you money. The most costly losses stem from the aspect that never hits your bank account.

What do I mean?

The #1 cost of a poor decision is the time lost sorting out the situation.

Specifically, not having the time to focus on the highest return areas of your portfolio, or life. We make a far greater return from backing our stars, and investing in our strengths, than getting bogged down with losers and weaknesses. High performers have an innate ability to combine passion with inherent ability.

I have recommended this Drucker article before but it is even more important in the current climate -- when we share a tendency to obsess on negative news, sunk costs and weak investment positions.

In challenging times:
  1. consider each dollar (and minute of your time) to be a new investment;
  2. move to limit liabilities and cut-off drains on finite resources (time, energy, capital);
  3. ensure full disclosure to, and honest communication with, all parties; and
  4. make time to identify your highest yielding opportunities.
The four points above are REALLY hard to implement consistently. Why?
  • We tend to overvalue existing positions
  • We tend to overestimate the impact that we can have on a situation
  • We are VERY likely to be part of the problem, rather than the solution
  • Problems rarely turn themselves around in a global recession, with massive liquidity headwinds
So I have started an internal review considering my personal return on how I am using my time and how I have budgeted to use my cash flow over the next year. Looking even further out, I want to figure out my desired life/portfolio 15-25 years out.

Monica loves it when we talk 2033 strategic goals, our lead photo this week shows her coping with more pressing concerns...

To wrap up, I will share the best question I have been asked over the last two weeks...
How much is enough and how will you know?

Back next week,

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06 November 2008

Marathon Training In The Real World

This is going to be a two-part series on marathon training. Part One will share some concepts which I believe impact all endurance sports, but especially, marathon training (stand alone and Ironman). Part Two will pick up the questions from last week, as well as, any from this week.


It has been a hectic week for me in Europe and I am now in Asia for a few days before returning to the US. Sorry that I missed the Friday deadline but I was busy growing grey hairs! No announcements this week, we will roll straight into Part One.


I had a look at average results for all marathons in the US in 2005 -- the results didn't surprise me, but they might surprise you. Average male finish time was about 4.5 hours, with the ladies just over 5.0 hours. That is for stand-alone marathons -- not running after 2.4 miles of swimming and 112 miles of running.

One of the interesting aspects about watching the US Election was that it reminded me that Americans are aspirational in their politics. What I mean is that some Americans will vote against their likely long-term financial interest to protect themselves for when they make-it-big. In America, people believe that everyone has a shot at making it big. In many other countries, people believe that the system is stacked against them (the only way to make it big in many places is to leave!) -- in those situations, soft socialialism (Cdn Style) can make sense. For all you Republicans out there, you have to see the irony about the Democrats co-opting the hope message.

In many ways, I see similar psychological attitudes towards endurance training. Athletes wanting to learn everything possible about elite and high-end run training -- many years before these techniques are appropriate for them.

Thinking about those average marathon finishers... they are racing at between 10-minutes and 11.5-minutes per mile. What are the factors that will impact their finish time?

Nutrition -- the single greatest performance enhancer for the bulk of the field is improved nutrition. This flows through in three main ways: improved body composition; increased energy; and increased training consistency (through reduced illness).

Nutrition is NOT the same as weight loss. A weight-loss focus with poor nutrition is a short-term strategy that will result in PERMANENT endurance performance impairment via impaired metabolic function. That said, the main benefit to the average runner's performance flows through reduced body weight.

Now, when you read the science, it will tell you that losing weight is an effective way to improve your VO2max (and I agree with that). However, is our average competitor (4.5 hours +/- 1 hour) really limited by VO2max? Is the average runner limited by their central capacity? I would say that average runner is peripherally limited. In other words, their capacity to put strain on their central aerobic system is what limits them.

Why is this the case? Put plainly, most runners lack the necessary mileage to make marathoning an aerobic endurance event. For most, it is a strength endurance event.

The media, and popular press, feed what our psychology desires, not what our lives need. So we need to recognize a cognitive bias that we share when it comes to performance in all fields. Consistently plugging away for years (saving, eating right, moderate training, getting out of bed...) these success factors are much more habitual than enjoyable. What is deeply satisfying is the life-situation that arises from an early-to-bed-early-to-rise approach to living.

Back to running! So if your main goal for athletics is consistent training with outstanding nutrition... how should you approach your training?

Long Term Consistent Mileage -- your optimal training approach is the strategy (today) that will MAXIMIZE your ten-year mileage. Unfortunately, humans are particularly poor at long term pay-offs. That's why only 1.6% of American Marathon finishers were able to get under 3-hours in 2005.

What is mileage? As my friend, and coach, Bobby McGee says... EVERYTHING is mileage! Hiking, walking, jogging, running and, as a triathlete, I would add swimming, biking, crosstraining. For the mileage limited (and nearly all of us fall into that category), we need to use every means possible to sneak in bonus training.

What are the items that most risk mileage? Here are mine:
  • Not training first thing in the morning
  • Getting off a routine sleep pattern
  • Excessive training stress (session duration or intensity) resulting in injury
  • Driving everywhere (a mile driven is one that you never get back into your log!)
  • Excessive training stress (weekly or monthly volume) resulting in deep fatigue
  • Lack of discipline with evening commitments (letting things run late, missing sleep)
Note I still haven't mentioned a single thing about training protocol. I haven't because it doesn't matter to that average finisher. As student, we must demonstrate an ability "to do" (for years) before we are constrained by "what we do".

Here's the basic week that I use to maintain my endurance options when I want to do a lot of work. The nice thing about running is that you get a large fitness return per minute invested.

  • Five days per week -- at least one hour of running

  • One day per week -- 2-4 hours of crosstraining, running, or mixed bike/hike

  • One day per week -- an hour of walking or crosstraining

6 days per week are easy/steady and one day per week will include some mod-hard/tempo. Long time readers will know how I define intensity but an easy way would be to use Mark Allen's article on max aerobic heart rate. Easy is 20 under, Steady is 10 under, Mod-hard is just under... Mark's heart rate. The system isn't perfect but it is simple/effective and won't distract us from sorting out our nutrition/mileage (daily, for the next decade).

Now, you'll see above that I listed 8-10 hours of exercise per week. That's far too much if you aren't used to it. So you will need to taper into the volume.

Here's how:
  1. Until you can run for 10 minutes (any speed) and keep your heart rate under Mark's max aerobic, just walk. You should be able to walk fast and get your heart rate within 20 beats of your max aerobic zone -- and that is enough. Aim for 20 minutes of aerobic walking per day. Prove that you can do that daily, for a month, before progressing.
  2. Once your walking habit is well-established then try this workout. Walk ten minutes; (3x) 5 minutes easy running (with short steps) alternating with 1 minute brisk walking; walk ten minutes. At first, do this workout 1-2x per week. When you can manage it 4x per week, for 4 weeks, then consider adding a long hike on the weekend.
  3. Remember that your goal is high-quality nutrition and mileage by any means necessary. Speed is meaningless, while you will see rapid progress with this approach, it will be years before you learn your full potential.
Enjoy the journey, it is a lot of fun.


PS -- In the early 90s, I was unable to complete a 5K run. In 2004, I ran a 2:46 marathon at the end of an Ironman Triathlon. You'll never know if you don't try and the rewards are much greater than athletic performance alone.

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