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It’s all in your jeans

Legend has it that a great American by the name of Levi Strauss invented blue jeans in 1873.

Like a great many popular myths, the truth is a different story.

A Latvian tailor by the name of Jākobs Jufess emigrated to the United States in 1854. The New York immigration authorities couldn’t spell his name, so he became Jacob Davis.

18 years later a customer complained that her husband was too tough on his trousers. In an effort to help her out Davis invented some tough working pants, the now ubiquitous denim jeans.

The husband’s friends and colleagues liked the look of his new threads, and before long denim jeans were in great demand. Almost as quickly, Davis’ competitors began copying his design.

Execution is far more important than originality

Davis lacked the means to protect his invention, so he sought financial assistance from his raw materials supplier, a Bavarian-born dry goods wholesaler called Levi Strauss. Together they successfully applied for a patent in 1873.

The popularity of denim jeans grew, and Davis couldn’t keep up. Levi Strauss stepped in, establishing a garment factory to meet the ever-growing demand for Davis’ denim jeans. Davis closed his tailor shop and became an employee of Strauss, managing the factory for over 30 years.

The rest is history. While denim jeans reside in the majority of our wardrobes, few people have ever heard of Jacob Davis. The Levi Strauss & Co company turned over nearly USD$5 billion in 2017.

Owning a successful business is better than working for one

There are a couple of valuable lessons to be learned from Jacob Davis’ story:

“Execution is far more important than originality.”

For every Levi Strauss, Ray Kroc or Steve Jobs there is a long forgotten Jacob Davis, Jim Delligatti or Kane Kramer.

“Owning a successful business will make you far wealthier than working for one.”

Make money for yourself, or make money for somebody else.

Denim jeans: The uniform of the masses

The first item of clothing I ever purchased with my own money was a pair of Levi’s. In another first, to make the purchase I caught the bus across the city, unsupervised. I must have been around 10 years old, back in the days of free range kids.

It wasn’t until I was at university that I first became aware of the cultural phenomenon that is people obsessing about their weight. Some of the older guys had reached that fateful age where they had started to wear their beer. Many of the girls seemed to be forever on one fad diet or another.

Happy joggers and happy dieters are the stuff of myth and legend

I quickly realised that much as you never see a happy looking jogger, you rarely meet a happy person who is currently on a diet (and if they are, they are almost certainly cheating!).

That said, I didn’t fancy becoming a fat bastard either. At the time I had an occasional six-pack, the result of spending far too much of my free time swimming, playing rugby, and chasing pretty girls.

Possessed by the arrogance of youth, I devised a diabolically simple approach to monitoring whether I was leading a healthy lifestyle.

I chose my favourite pair of jeans, an old pair of 501s. While ever they comfortably fit I was golden. Should they get a bit tight then it was time to adopt the “eat a little less, and exercise a little more” approach to healthy living.

This philosophy served me well over the years, allowing me to be blissfully ignorant about things like calories, weight, and the inevitable changes of age.

Everybody has a plan until they are punched in the face

Imagine my dismay last summer when I was scrolling through the day’s beach holiday photos, to be stopped in my tracks by a perfectly focused full-colour image of the classic “Dad bod” that I was sporting in my current incarnation.

How could this be? My 501s still fit just fine!

My lady wife, who is far smarter than I am, saw my aghast expression and asked what was wrong. I explained my jeans philosophy to her then showed her the photo (that she had taken).

People are such savages

She burst out laughing.

Laughing so hard she nearly wet herself.

Laughing so hard that she actually fell out of her train seat as we returned from the beach.

[Sigh]. People can be so unkind!

Eventually she calmed down enough to return to her seat and point out a fatal flaw in my philosophy: I hadn’t actually been using the same pair of 501s to keep score.

Being paranoid does not mean they aren’t out to get you

Over the years a mysterious pattern had emerged. Each birthday or Father’s Day I would generously be given gifts containing near-identical copies of my favourite clothes.

I would gratefully thank my family, fold the gifts up and shove them in the back of my wardrobe for that distant day when the clothes in my current rotation wore out sufficiently to need replacing. I  can’t recall a time when that has ever actually happened, but I’m pretty sure it will be inevitable at some point.

It had never occurred to me that my wardrobe must possess a magical Tardis-like capacity, as despite having more clothes shoved in each year it never overflowed.

Shortly after receiving these gifts, my favourite clothes would often mysteriously vanish. I would unsuccessfully hunt around for them until I had exceeded my attention span, before giving up and grabbing the next item of clothing off the pile.

Turns out there had been a long-running conspiracy at play, and my whole family were collaborators! It also explained how I had been able to go for years between visits to a clothes shop.

Despite many years evidence to the contrary, I was convinced that this time my wife couldn’t possibly be correct. So what if my jeans weren’t the same pair, they were the same size and style, so it shouldn’t matter.

Right?

I Do Not Think It Means What You Think It Means

Wrong!

That night I did some research into the history of Levis 501s. I had, mistakenly as it turns out, figured were the same now as those first produced under the supervision of Jacob Davis back in the 1890s.

The same as those worn by John Wayne, Marlon Brando, James Dean, Steve McQueen, Clint Eastwood… the iconic Bruce SpringsteenBorn In the USA” album cover… even Steve Jobs wore them with his black turtlenecks.

It turns out over the years there have been all sorts of subtle changes to these jeans.

They are now made from stretch denim.

They copied most of the clothing brands by adopting vanity sizing to increase sales, meaning the “marked size of your jeans today is actually smaller than your true waist size”.

Fashions changed, with the waist gradually moving from the old school “Grandpa jeans” belly button position down to the hips where people generally wear them today. Hopefully the don’t keep chasing trends, nobody wants to see my ass hanging out of the top of my jeans the way gormless teenagers seem to like wearing them!

When combined these changes create a huge scope for unnoticed expansion… or perhaps that should read scope for a huge expansion?

Fortunately all was not lost with my philosophy. My belt had remained constant throughout my adult years, and I have not (yet) capitulated by loosening it.

Suddenly I got old

So how did this happen?

On the inside nothing has changed.

Like most middle-aged men I still think of myself as being that arrogant 21 year old with the six pack, looking just the same in a pair of jeans.

As a 21 year old I loved listening to a whole bunch of bands. I still enjoy most of those same bands today. Though I have observed the energetic long-haired band members I used to watch in concerts have mysteriously morphed into the pot-bellied balding old guys I observe on stage today!

As a 21 year old I admit to surreptitiously ogling pretty 20-something-year-old girls. Some things don’t change.

As a 21 year old I ate and drank as much as I wanted of whatever I wanted and… outwardly much has changed!

Discipline and process for the win

I decided to treat this tricky puzzle like I would any business problem.

I wanted to ask the right questions.

I wanted to analyse real-world data.

I wanted to correctly interpret what it had to tell me.

Most of all I wanted to make well-informed data-driven decisions.

300 days ago I decided to start recording everything I ate or drank, to validate whether my impression of leading a generally healthy lifestyle was supported by the data. Always “trust, but verify!”.

After a bit of internet research, I stumbled upon a free app called Lose It, which provides a capability to easily log whatever the user consumes. The app looks up a huge database of nutritional information about that food, then brings the information to life via some easy to comprehend charts.

First, let me observe that keeping score of everything I shoved in my mouth was no fun at all.

Second, this proved to be a valuable exercise as it made me aware of some behaviour patterns I exhibited that I hadn’t been conscious of.

Third, it made me start thinking about whether I really needed to consume whatever it was I about to eat. Was I eating because I was hungry, out of habit, or just bored?

So what did I discover?

What does the data tell us?

  • I did not eat large quantities of “not everyday food”.
  • I did eat “not everyday food” often. A sneaky cookie yesterday, some crisps with lunch today, some birthday cake tomorrow, etc.
  • Portion size is treacherous, yet so very important. Eating too much of a good thing is still eating too much. Eating too little at meal times leads to snacking.
  • I frequently fell into the “trigger foods” trap, where eating one salty food like crisps or peanuts leads to eating more salty food. There is a lot of truth behind the old Pringles slogan of “once you pop, you can’t stop”.
  • I drink a lot more alcohol, a lot more often, than I had thought.

Measure wealth in time. Measure calories the same way.

Long ago I attached a premium to my time. I choose to invest my time in activities that either provide enjoyment or generate more value than this premium.

I started to evaluate the cost of the food and drink I consumed in a similar way.

From a consumption perspective, the calories I consume are similar to the time investment decisions I described above.

In a given day I have a finite number of hours available to invest.

In a given day I have a limited number of calories I should consume. Regularly exceeding this amount results in the “Dad bod” phenomenon I observed on the photo.

When viewed through this lens consumption choices became opportunity cost decisions.

Opportunity cost

A fully loaded Five Guys cheeseburger tastes amazing, but contains more calories than a nice bottle of wine.

A peanut butter sandwich on fresh sourdough bread is the food of the gods, but ships with more calories than two bowls of Cheerios with skim milk.

Roughly speaking from a calorie perspective 1/2 a Big Mac = 1 Mars Bar = 3 bananas = 1 pint of Guinness = 1 steak sandwich. Turns out there is some science behind the cliché my old colleague Morton Sausagefingers used to espouse: “there is a steak sandwich in every Guinness”!

You get the idea.

Choose your poison

Once I became consciously aware of the consumption choices I was making, I started investing my available calories more wisely. I steer clear of the biscuits and crisps, preferring to allocate the calories to a nice glass of wine instead. It is worth noting that alcohol is also a “trigger food”. I came to understand how a couple of functional alcoholics I know were able to remain so thin… they just didn’t eat!

Exercise provides a limited means of offsetting those calories, but the approach doesn’t scale.

A Guinness can be run off with a 20-minute jog. That delicious fully loaded Five Guys cheeseburger would require a running for more than an hour. Add some fries and a milkshake to that and now you need to complete a marathon.

Time remains the most precious of commodities, which means attempting to outrun a crap diet just isn’t realistic. Usain Bolt once ate 1000 chicken nuggets in a week, while Michael Phelps is almost as famous for swimming as he is for consuming 12,000 calories a day… but each was a full-time professional athlete at the time, winning more gold medals than they have fingers.

I applied the dietary lessons I learned, and within a couple of months had returned to my university weight.

I briefly considered venturing to Portobello Road market to try on a “vintage” pair of 501s circa my university days, but then realised that would involve visiting an actual shop… to try on clothes… that somebody else had already owned and discarded… happiness does not reside in that direction!

Instead that night I raised a glass to the memory Jacob Davis, but only after I swapped my lunchtime peanut butter toastie for a salad to free up  the calories!

Next Steps

  • Like finance, healthy living is a journey rather than a destination.
  • You pay for calorie debts just like financial ones!
  • If you liked this post then please share it with your friends.
Disclaimer: I may receive a (very) small commission from any purchase you make via links on this website.
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Life tokens

Everyone alive has the exact same number of hours in their day.

If we’re brutally honest, how many of those days we each get is largely down to luck of the draw.

  • Luck of the draw in terms of educational opportunities.
  • Luck of the draw in terms of genetics.
  • Luck of the draw in terms of geography.
  • Luck of the draw in terms of demographics.
  • Luck of the draw in terms of socio-economic status.

To a limited degree we can influence the hand we are dealt, via the dietary, exercise and lifestyle choices we make. That said, where we start has a huge impact on where when we finish.

Life tokens

Each hour represents a life token, that we can invest in whatever activities we choose to undertake.

Eating. Sleeping. Walking the dog. Writing. Working. Lego. Whatever… all activities require an investment of life tokens.

Use it or lose it

Life tokens: use them or lose them. Image credit: Custom Minifig.

Scarce commodity

Life tokens cannot be hoarded or saved.

Once spent they cannot be recovered.

Given their scarce nature, life tokens are our most precious commodity.

Hitting a moving target

This presents us with a tricky puzzle.

We each need to generate sufficient income to cover our individual cost of living. Most of us earn that income by selling our life tokens to an employer.

However most of us derive more pleasure from activities outside of work, such as spending time with loved ones, pursuing hobbies, holidays, and leisure activities.

This creates a constantly moving optimisation point. Selling just enough life tokens to fund our desired lifestyle, while leaving enough remaining to actually enjoy it.

Selling off life, one token at a time

Historically people used to work far more than they do today.

Average annual hours worked at the tail end of the Industrial Revolution (roughly 200 years ago) were nearly 50% higher than they are today!

750+ Years of United Kingdom Average Annual Hours Worked

750+ Years of United Kingdom Average Annual Hours Worked

That required workers to invest more than double the number of life tokens each week as the average worker today.

750+ Years of United Kingdom Average Weekly Hours Worked

750+ Years of United Kingdom Average Weekly Hours Worked

Maximising value

When people are young they typically have much energy and enthusiasm. This is a great thing, because without marketable skills and expertise their life tokens are not worth all that much to others. They must sell a larger quantity of life tokens to offset that shortcoming, in order to generate sufficient income to cover their desired lifestyle costs.

Over time people gain experience, which should increase the market value of their life tokens.

The median average weekly hours worked by age suggests the number of hours worked peak in a person’s 20s, gradually taper off through to their late 50s, then fall away in their 60s and beyond.

United Kingdom median weekly hours worked by age (2017)

United Kingdom median weekly hours worked by age (2017)

The chart also highlights the degree to which the average worker sells yet more of their life tokens in pursuit of overtime and additional jobs. This suggests their day job alone is inadequate to fund their desired lifestyle costs.

Not all life tokens are created equal

It is worth noting that not all life tokens are created equal.

When people are young they believe they have all the time in the world, often failing to maximise the value derived from investing each life token. This is unfortunate, as many of us were fitter and healthier in our teens and 20s than we will be at any subsequent point in our lives. Adventure travelling, drinking, and playing sports are all much more enjoyable at 25 than at 55!

As people progress towards old age their health and mobility tend to suffer. Regardless of how many life tokens they may be available to invest, some previously pleasurable activities may no longer be physically possible.

Frailty and age discrimination can make selling life tokens for wages more challenging at either end of life, with employers generally reluctant to hire inexperienced kids or “past their prime” pensioners.

This is a key reason why investing in themselves is one of the best uses of life tokens.

The more valuable their skills and experience become, the greater the premium they can demand for investing their life tokens.

Work smarter, not harder

Working smarter, not harder” minimises the quantity of life tokens required for lifestyle funding, while maximising the quantity available for lifestyle enjoyment.

The next chart displays gross income by age, overlaid with projected life expectancy. It is unlikely to be a coincidence that the earnings cross the life expectancy lines around that same point that average weekly working hours peaked on the previous chart.

United Kingdom gross income and projected life expectancy by age

United Kingdom gross income and projected life expectancy by age

The amount by which a person’s earnings exceeds this life expectancy line represents the relative size of the premium they should demand for investing each additional life token. The older a person gets, the fewer life tokens they have remaining to invest, so scarcity makes those remaining ever more precious to the individual.

A person who has maximised the market value of their life tokens will cross that threshold at a much younger age than someone who has not.

Once their lifestyle costs are funded, the person enjoys the luxury of choice regarding how they will invest each additional life token.

  • Sell fewer life tokens to an employer, and invest the remainder in more pleasurable activities.

Or

  • Capitalise on the premium life token price that their accumulated skills and experience command now, to move closer to buying financial freedom later.

Or

  • Some combination of the two approaches.

Life tokens versus net worth

The final chart displays average net worth by age, again overlaid with the projected life expectancy from that age onwards. Note that net worth crosses the life expectancy lines at a much later age than the earnings line did on the previous chart.

United Kingdom net worth and projected life expectancy by age

United Kingdom net worth and projected life expectancy by age

The point at which net worth exceeds life expectancy represents when a person has accumulated “enough”.  Once that threshold has been breached the person enjoys the luxury of choosing how they will invest all their remaining life tokens. The size of that figure varies from person to person, determined by the cost of their desired lifestyle.

A person who maximised the market value of their life tokens by investing in themselves will reach this point at a much younger age than somebody who diligently sells their life tokens off at a bargain price.

What the individual does with that opportunity is entirely up to them, the luxury of choice!

Next Steps

  • Evaluate how you are investing your own life tokens. Are they yielding the level of returns you require?
  • If you liked this post then please share it with your friends.
Disclaimer: I may receive a (very) small commission from any purchase you make via links on this website.
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Sheep herding and cattle rustling

I have watched with interest recently as one by one the majority of large Australian financial services companies have had their pants pulled down in public over their financial planning activities.

The media is suddenly up in arms. Politicians are feigning outrage. Class action vultures are circling. Retail banks are divesting their now toxic financial planning and life insurance businesses.

Breaking news: “Commission based sales create a conflict of interest for financial planners.

Shock! Horror! Gasp!

Who knew?!?

This is a story as old as time, the cliché about never asking a barber if you need a haircut.

Buyer beware

Why anybody is at all surprised that products that most enrich the seller are being recommended to the buyer?

Isn’t that exactly the way that capitalism is supposed to work?

  1. The customer perceives a gap in their lives.
  2. Whether real or imagined, the customer sets out on the path to fill that gap.
  3. They educate themselves, possibly by seeking advice, to identify the required product or service.
  4. Always adopting a “trust, but verify” approach they validate their research.
  5. They expend as much (or as little) effort shopping around as their level of interest supports.
  6. Finally, the customer makes an informed purchasing decision, having identified the right tool for the job and sourced it at the best price.

Caveat emptor in a nutshell. Or so the theory goes.

Buyer beware

Buyer beware

Ostrich approach, or is ignorance really bliss?

Does that mean that the consumer masses who load up on cheap nasty disposable crap from the High Street favourites like Poundland or the Reject Shop deserve to be ripped off, simply because they chose cheap over (the potential for) quality?

Had they diligently done their research? Quantified that replacing something cheap every 6 months is more cost effective than buying a better quality substitute that might last for 5 years?

Or, more likely, did they just see some arbitrarily low price tag and think “Bargain!” like the lemmings who get conned into buying more than they need by a “3 for 2” promotion at the supermarket?

How about at the other end of the market, the world of luxury goods?

Does somebody who is willing to drop £1,000 on a mobile phone handset, £10,000 on a first-class plane seat, or £300,000 on a shiny red Ferrari deserve to be ripped off?

Was their purchasing decision carefully researched to identify the equilibrium point at which the quality and cost spectrums intersect in an efficient market?

Or, more likely, were they just conspicuously consuming to impress the Joneses?

In all these examples nobody made the consumer purchase those goods. They had the ability to shop around, to take their business elsewhere, or to not make the purchase at all.

The same is true in most cases of financial services.

Ask an expert

Yet here is the thing.

The main reason mere mortals turn to professionals is to seek advice from somebody who has already done the homework.

Someone with an ongoing obligation to (in theory) remain current in their niche of expertise.

Someone with enough Professional Negligence insurance to cover their clients for any losses incurred as a result of their bad advice.

  • If you want to buy a house you get a conveyancing solicitor to do the legals for you.
  • If you want to get your appendix removed you get a doctor to take it out for you.
  • If you want your taxes done properly you ask a tax accountant to do the job.

All these professionals are supposed to be suitably knowledgeable and competent to perform their respective functions. Unfortunately they are also only human, and if my own experiences over the last 40 years are anything to go by then a large proportion of them will be careless, incompetent and/or lazy.

But that is what there is.

The alternative is to watch a couple of youtube videos then try and remove your own appendix, applying “just in time” learning to become just competent enough to get by. Please don’t try this at home!

Sheep herding…

In the financial services world however the “advisors” are really (for the most part) salespeople. Their job is the herd the sheep into the most lucrative (for them) selection of products from the limited menu of options they have available.

Isn’t a salesperson’s job to spruik whatever product they have been given to sell?

What if the product doesn’t work, or is no good, or ridiculously expensive?

Again capitalism says this is fine.

All things being equal the expensive sellers will be put out of business by their better value competitors.

The incompetent advisors will be found out, and the ensuing reputational harm will cruel their propensity to attract new clients. This is why it is, as it should be, tough to break into a new profession. The absence of that proven track record makes purchasing your services riskier than your better-known competitors.

For mine, if a customer is too cheap, lazy or stupid to do their own homework and subsequently purchase the wrong item and/or at too high a price then that is on them. Darwinism at work.

There is a big exception to this however, and that comes in the form of workplace pensions.

Many employers still restrict the choice of platforms and funds into which an employee can invest. In those cases the employee has only bad choices: don’t invest, invest in the limited range of often expensive funds on offer, or leave the job.

In some cases things can get worse, where an employer restricts the choice to funds they themselves operate. This is pretty common in the financial services world unfortunately. In some cases those funds then purchase shares in the same company that the employee works for. Talk about concentration of risk!

…. and cattle rustling

However if a customer had sought out expert guidance, as appears to be the case in many of the case studies being reported at the financial services inquiry, and still ended up with the wrong item and/or at too high a price then that is a failing of the advisor.

If an “advisor” is a salesperson then they shouldn’t be allowed to offer advice.

Instead they should be allowed to provide an appropriately caveated sales pitch, just like somebody spruiking timeshare vacation accommodation or dubious late-night television exercise equipment.

On the other hand if they really are an “advisor” then they should be paid on a transparent time and materials basis, and not be allowed to receive any form of commission or retention or referral incentives.

Cattle rustling

Sheep herding and cattle rustling. Image credit: Adam Kenny

Conflict of interest

The problem is the conflict of interest created where the relationship between the advisor and the salesperson becomes a commercial one. In those situations, the interests of “mere mortal” consumers are compromised, which isn’t fair to them.

Nor is it fair to the salesperson, who will have been set sales targets and KPIs. Asking anyone to forgo the potential to earn money because it isn’t in the other party’s best interests is a big ask. Asking somebody to waive off a potential sale when their very livelihood depends on making those sales is unrealistic.

Next steps

  • If you liked this post then please share it with your friends.
Disclaimer: I may receive a (very) small commission from any purchase you make via links on this website.
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Reputational harm

I have been running a business for nearly 20 years.

In the early days there was a lot of friction and hard graft involved in landing clients. We were an unknown entity, full of confidence but without much of track record to support that confidence.

Our first couple of engagements were down to opportunism and desperation on the part of the client. When a pitch meeting begins with “can you start now?” you know you are in a pretty strong negotiating position!

My approach to successfully running a business is pretty simple: Never promise more than we can deliver. And we deliver what we promise. Always.

Before long we no longer had to compete for work. Most engagements came via word of mouth recommendations, either from past clients or people we had worked with on previous projects.

Have skills, will travel

During the first few years, we took on whatever projects we thought we could successfully deliver, including:

  • A telecom billing system in Stockholm.
  • A fraud detection solution in Copenhagen.
  • Real-time vote counting for reality television programs in London.
  • Investment research content and interest matching capability in Tokyo.
  • Rescuing a failed 9/11 disaster recovery effort in New York, ensuring business continuity.
  • Behavioural economics remuneration incentive monitoring study in Melbourne.

The work was varied and interesting.

The more we delivered, the broader our network of people wanting to work with us again became.

Our reputation grew.

Opportunities snowballed, there was more work than we could do.

Build reputation

Opportunities presented themselves as our reputation grew.

Go big, go home, or become choosey

This forced a strategic decision:

  • Expand to meet the demand?
  • Sell out, accepting one of the unsolicited acquisition offers we had started receiving from larger firms?
  • Keep doing what we had been successfully doing?

It was our hard-won reputation that provided these opportunities. Clients engaged us because they knew they could rely on us to make their problem go away. At a fair price.

Create value

Creating value for our clients built our reputation. Image credit: CafeMom.

Not too hot, not too cold, just right

The business had reached a happy medium in terms of size.

Large enough that I had good people reliably doing great work.

Small enough that I still knew what was going on day to day. This meant I could our clients got what they needed (which is not always the same thing as what they thought they wanted!) without any nasty surprises.

I could even lend a hand doing the fun stuff occasionally. That said, I suspect everyone was happier when I concentrated on my job running the business and left those far smarter than me to do the doing!

Decisions, decisions…

I could have scaled out, becoming one of those horrible soulless big consultancies that promise the world, yet underdelivers. Overbudget. And late.

Or sold out to the same.

However the reason we had been successful was we had built a reputation of providing clients with an alternative to the big consultancy experience that inevitably left them feeling like they had been screwed with their pants on.

Reputation is hard to build.

Reputation is easy to lose.

I chose the third option.

This allowed me to pick the most interesting projects from the menu of available opportunities, a pattern that I continue to apply to this day.

Reputation is like a magnet

Another area where the business benefited greatly from having a good reputation was recruitment and retention. We actively sought out great workers who wanted to do interesting work, needed bespoke working arrangements, yet wanted to be paid fairly.

The guy who loved hiking. He would work six months of the year for us, then head off trekking to far-flung places like the Himalayas, New Zealand or Patagonia for the remainder of the year.

The young mother with a new baby (and subsequently several more), who sought a rapid return to the workforce, but needed a job forgiving of the endless series of nursery sniffles and tummy bugs that babies and toddlers seem to attract.

The functional alcoholic with amazing technical skills, but a self-destructive tendency to enter poker tournaments, win big before eventually losing, then disappearing for days at a time on a bender to drown his sorrows.

A good reputation will attract opportunities like a magnet. A bad reputation will see people avoiding you like the plague.

Reputational harm

Despite the “right to be forgotten”, for the most part memories are long and the internet is forever.

Don’t believe me?

What is the first thing you think about when you hear the name Monica Lewinsky? I’m betting it isn’t the great work she does raising awareness about cyberbullying?

How about Lance Armstrong? It probably isn’t that he raised $300 million to support cancer victims.

Chappaquiddick? How many people thought of a sleepy island off Martha’s Vineyard, rather than the scandal more than 50 years ago involving a Kennedy?

Audience participation

Now do an ego search on Google using your own name.

Are you satisfied with what is returned?

Stand behind all the things you have said or are associated with?

The Google cache and Wayback Machine ensure every public utterance we have ever written down is recorded for posterity. If there is anything you wouldn’t be content seeing printed in poster-sized writing on the side of the number 23 bus, don’t write it down!

Australia has a national pastime called the “Tall Poppy Syndrome”. The easily led masses (the tabloid newspaper and gossip magazine readers, the talkback radio listeners, the social media followers) love nothing more than when a successful person who has risen above their peers comes crashing back down to Earth with an ego-bruising reputational harm inducing thud.

Don’t be a dickhead

How many people would be sympathetic when the subject of an article titled something like “I’m an [obnoxious bellend] millionaire. Here’s how I got so rich” or “How I retired at [some implausible age] with three young kids while earning minimum wage” slips up and gets caught in a lie, or a scandal, or goes bankrupt?

How many will cheer?

Shame

Who will cheer when they slip up, are caught in a lie, or go bankrupt? Image credit: Citizen Brick.

Reputation is a double-edged sword. It is capable of providing marvellous opportunities to those who treat people fairly, and do what they say they will do.

Reputational harm will certainly hold back those who troll, gloat, boast or generally treat people shabbily.

Remember that it doesn’t cost anything to be nice, and nobody likes a dickhead.

Next Steps

  • Perform an ego search on your name, then make your peace with what comes back.
  • If you liked this post then please share it with your friends.
Disclaimer: I may receive a (very) small commission from any purchase you make via links on this website.
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Debt Recycling

Robert Kiyosaki (author of Rich Dad, Poor Dad) espouses a school of thought that owner occupied property should not be considered an asset because it fails to generate an income for the owner.

Personally I’m not convinced by this argument.

I am a big believer in creating a collection of diversified cash flow positive investments, financial freedom being achieved when those investments reliably cover the owner’s living costs. So from a simple cash flow perspective Kiyosaki makes sense.

However those living costs are likely to be significant lower if, instead of having to pay market rents every month, the owner lives in a property they own outright.

Ultimately this becomes a quantifiable opportunity cost argument, with the correct buy versus rent outcome for each individual being determined by the numbers.

What if you are already an owner occupier?

There are a few options available to an existing owner occupier who wishes to redeploy accumulated equity in their home towards a higher performing cash flow positive investment.

The most obvious option is selling. However given the huge transaction costs involved this is often a suboptimal choice.

Releasing trapped equity

Owner occupiers can turn “bad” debt into good debt by recycling their mortgage. Trapped equity can be more productively redeployed to purchase cash flow positive investments.

In a recent post I discussed the concept of “rentvesting”: renting where you live, while owning cash flow positive investment properties that generate a passive income stream and benefit from capital growth.

There are two main approaches an existing owner occupier could adopt to pursue a similar strategy.

Cashflow play: Rent out, then rent cheaper

As a pure cashflow play, an owner occupier could investigate letting out the property they own then renting somewhere cheaper for themselves.

This decision requires some careful research, as a “dream house” seldom transitions well into a cash flow positive investment property.

The property choices of owner occupiers are often constrained by what they can initially afford. Compromises are made, trading off property prices against desirable locations, commuting times, school catchments, and so on.

Tenants enjoy the luxury of choice. The more compromised the location, the lower the tenant demand will be. This results in lower achievable rents in less desirable areas, putting a significant dent in the potential investment yield.

Renting out your home may be a viable strategy if the numbers make sense. Check with your lender first, you may need their “consent to let” the property if it is mortgaged.

This option only makes sense where:

(Tenant's Rent - Owner's Rent) > Property Financing Costs

Equity release: debt recycling

Releasing trapped equity involves borrowing against a property you already own. This may involved refinancing or redrawing on your existing mortgage.

The extracted equity is deployed towards acquiring cash flow positive investments.

The mortgage remains secured over your home, and you must continue to make mortgage payments as before.

The income streams earned from your newly acquired investments contribute towards those mortgage payments.

This option makes sense where:

Investment cash flow > Additional Property Financing Costs

The table below illustrates a real world example of debt recycling in action.

Debt Recycling

Debt Recycling in action.

By investing a total of $55,097.13 I was able to purchase 3 properties over a 5 year period, with a combined value of just over $1,000,000.

Two years later I sold one of the properties, using the proceeds to reduce the leverage of the remaining portfolio.

I was able to recover my $55,000 of cash contributions, and still be left with equity worth over $473,000.

At that point I could have sold a second property and used to proceeds to fully pay off the mortgage on the remaining property.

This could have provided me with rent/mortgage free accommodation for the rest of my life, or alternatively contributed $26,000 in annual free cash flow towards covering my own lifestyle costs. As they say in Finland, that is better than a hat full of rabbits!

Other considerations

In some jurisdictions the borrowing costs associated with investment purchases may be tax deductible.

The general principle is guided by what the purchase was for, rather than what it was secured against. Do your own homework, and if in doubt consult a qualified accountant.

Note debt recycling is not without risk, invest unwisely and you may jeopardise your home.

Next Steps

  • Run the numbers to work out if renting out your home is financially beneficial.
  • If you liked this post then please share it with your friends.
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