m=1/n=1 Meta-Rules for Low-Leverage Living

Fun Note: I enjoyed an awesome dinner tonight with Dr. BG, Richard Nikoley, and Patrik. We enjoyed one of my favorite feasts: Korean BBQ! Of course, as seems to always be the case with Ancestral Health MeetUps, good food, good conversation, and good friendship won the day. When I think of epistemocracy, I think of these types of gatherings.

Now, on to my essay ...

m=1/n=1 Meta-Rules for Low-Leverage Living

Low-leverage living is freeing.

Leverage restricts the degrees of freedom in our lifestyles. Debts are obligations that must be serviced into the future under some regular repayment scheme, so the process of paying off debt ends up reducing our abilities to act on novel options as they manifest in our lives because we cannot deviate from our repayment plans to pursue new things: in effect, we reduce our 'wiggle room' for thinkering.

Once our debts are repaid, though, the next steps are saving and investing. Typically, these two activities make people think about financial instruments like stocks, bonds, mutual funds, etc. For instance, when people attempt to operationalize Nassim Taleb's Barbell portfolio concept financially, placing 80-95% of their money in the safest places possible (cash, money market accounts, etc. = hyper-conservative) and then diversifying widely by sprinkling the remaining 5-20% in more speculative investments (hyper-aggressive), they tend to think narrowly about the riskier options out there by tunneling on buying and selling financial options (puts, calls, derivatives, et al.) or some other esoteric vehicles where the potential payoffs are scalable. However, investing to gain exposure to the envelope of serendipity, that (+) Black Swan generating source of uncertainty, means much more than the limited scope that sterile financial tools provide. For most of us, we simply have not built up large enough "war chests" or platform bases from which we can withstand speculative trading without 'bleeding to death' (losing lots of small sums of money in the short-term in hopes of striking it rich when the 'out-of-the-money' bet against the market finally pays off one day). Thus, in pursuing the theme of low-leverage living, I suspect that we should focus our efforts first (especially right now, given the fragility of the economy globally) on securing our financial foundations more securely before even considering speculative financial options. Simultaneously, though, we can thinker more speculatively about potential (+) Black Swan options that we have more control over, such as starting our own businesses or investing in blossoming personal projects that are already underway.

Because the problem with blind faith in financial investment products is simple: hidden risks.

The fix: Meta-Rule away!

m=1 personal (finance) my-thology: Moral hazard is an agency problem that I take seriously when considering where to invest and save my money, my resources for future living. I trust myself and my business partners more than I trust foreign third-parties, especially enormous corporations where human-level accountability gets lost in the shuffle far too often it seems.

From this simple thought-experiment, I could construct the following Meta-Rule:

Don't invest in third-parties, such as firms listed on stock exchanges, blindly.

Here, the term "third-party" implies an inherent agency barrier, a case where you cannot intervene and run the investment firm as if it were your own business. Buying some shares of General Electric (GE) stock qualifies as a "third-party" investment.

From this Meta-Rule, I could deduce the following Rule:

Don't invest money and resources outside of your own business, own home, own ___ until you have built up enough equity to live off of for at least one year.

Again, in the spirit of negative empiricism, I state this deduced rule in negative terms. From this basic tenet, I could conduct the following n=1 self-experiment:

Reinvest residual earnings in my own businesses for eighteen months straight and then re-evaluate the strength of the Barbell-base in my personal wealth portfolio.

Given the risk of moral hazard eliciting negative Black Swans in third-party entities, I'd much rather invest in something tangible, something right in front of me where things run more transparently. Though it's debatable in terms of hidden risks, another rule could be to only invest in an entity if you can talk to the owners, in person, almost any day of the week, as is the case with a local restaurant or cafe. This type of hyper-localism may clip some of the moral hazard dilemmas because face-to-face accountability is at play, minimally.

But what if you don't have your own business, your own land/home/property, etc. to invest in directly. Well, either way, you could always try implementing Nassim's dentist-writing-novels-on-the-weekend model and continue working your non-scalable day-to-day job while turning one of your favorite activities into a small-scale hobbyist business venture. Pursuing side projects in this manner hedges against financial catastrophe (you'll have your non-scalable 'dentistry' job at the end of the day to pay the way) while exposing you to the scalability of the envelope of serendipity (your 'novel' could sell thousands of copies). And, by operating this way, you avert many of the unknowns associated with third-parties because you are investing in yourself with your speculative endeavors.

Like self-experimenters listening to their bodies, trust yourself with your investment ventures.

With that said, what are your Personal Finance Meta-Rules for low-leverage living that clip downside risk while positioning you to seize the day (Carpe Diem) when opportunities present unexpectedly?

To good (physiological & financial) health,

Brent