Complexity costs

A recent piece in the FT by Jason Butler mentioned some advice the author received from Peter Hargreaves, one of the UK’s richest men, a few years ago:

I asked Peter if he could share some of his money wisdom. He thought for a moment and then replied: “As you know I’ve got a few quid and I can pretty much have anything I want in life. I’ve got one car, one house and one wife, and that’s the way it’s staying. No matter how much you own or earn, keep your life as simple as possible.

Now, (both) long time readers of this blog will know that I am not a fan of the firm Hargreaves Lansdown (though I have professional respect for it as a very effective way to part wealthy fools folks from their money). Nor, for various reasons I won’t cover here, am I generally an admirer of its founder Peter Hargreaves, notwithstanding that he is clearly a very talented entrepreneur/businessman.

However, this blog believes in playing the ball not the man.

I can recognise wisdom when I see it.  And I think Mr Hargreaves’ advice to keep life as simple as possible is profoundly good advice.

How financial progress breeds complexity

For those of us who manage to grow our net worth, saving money, simplicity is an uphill battle.

That first thrill of making more money than you need to live will invariably result in some temptations.  Time to ‘treat yourself’ with a new holiday?  What about new clothes?  Or some art?  Or some furniture?  Maybe even a new car?   Carry on this way and pretty soon you’ll need more space, parking, garage, a yard, who knows.

But, once you’re making decent money regularly you will start wondering how/where to save it.  Now, don’t misunderstand me, there are definitely simple ways to save/invest.  But if you are tempted by property, EIS/angel investing, or extreme diversification, then care is certainly required.  All of this increases your financial complexity pretty quickly.  Carry on this way and pretty soon you’ll need an accountant to help with your tax return, and you will probably seriously consider talking to a financial adviser.

Once you start investing, time can be a surprising enemy.  Most of us investors learn about ‘buy and hold’ as a strategy pretty early on.  And twenty years in, I would say that ‘buy and hold’ works pretty well.  But buying and holding can nonetheless result in an increasingly sprawling portfolio – as my recent ‘overdiversification‘ blog highlighted.

Property is particularly beguiling.  As a reader of this blog, you probably don’t consider property to be the only way to invest. You might even, like me, consider that property has a place in a diversified portfolio, either via REITs or via buy to let. But have you considered / aspired to owning a weekend place? A holiday home?  A ski chalet? Carry on that way and you’ll probably need a gardener, a handyman, maybe a builder.  That’s one thing if it’s local but it’s another prospect if it’s in another country. Carry on further and you’ll be tempted by a second car, you’ll want access to the business lounge every trip or, worse, you’ll start seeing private jet ads follow you round the web.

Or perhaps, like me, you have become an ‘accidental landlord’.  That ‘accident’ – your first place – is, in London, more likely to be leasehold than freehold, so maybe the maintenance/etc is not your responsibility.  But if it’s leasehold you will have some form of service charge/sinking charge to budget for, and it’s freehold you’ll know all about every roof repair, damp patch, and boiler problem.  Repairs and maintenance are all tax deductible, but make sure you keep those receipts.  Carry on this way and even your accountant will start complaining.

Have I got a complexity problem?

Read the rest of this entry »

Advertisements

Recalibrating my portfolio

Finally my delayed liquidity arrived. I have sold two large assets, leaving me with a lot of cash to redeploy.

As with an earlier angel investing windfall, when I have unexpected liquidity I follow a process.  First of all I set aside taxes due, then charity donations, then other ‘IOUs’.  Then I move the funds into appropriate portfolio accounts and start investing cash against my investment allocation.

However the size of the cash this time around has left me making a few tweaks to my setup.

At last, sleeping soundly at night with an equity portfolio loan

First of all I am taking the opportunity of this liquidity to pay down a significant chunk of my margin loan.

2018 08 FvL margin loans over timeI am surprised what a positive psychological impact my loan reduction has had on me.  I feel like the episode that began in December 2015, on a whim, when Mrs FvL and I decided to buy our Dream Home, is now over.  Not because my assets have recovered to the pre-Dream Home level, which they haven’t.  Nor because the loan is now fully repaid, which it isn’t.  But the risk I took by taking out a £2m+ portfolio loan is now, for all practical purposes, gone.

Read the rest of this entry »


How a tech billionaire invests

I met a billionaire recently.  I say billionaire, but I don’t know for sure.  He was definitely a paper billionaire at one point before the dot com crash – whether he still is I’m not sure, but it seems like a fair bet. He is a serial entrepreneur who made his money by selling his tech business for >>$1bn (in an all-stock deal), a long time ago.   He is now a Euro-elite type, being based on the continent and travelling frequently around Europe.

As it happens, I got into a brief conversation with this chap about how he manages his money.  I found it quite interesting.  Here are a few snippets as I remember them. Let’s call him David.

David has set up a Family Office which is where the money is managed from. He doesn’t have a ‘day job’ any more, but is clearly a busy guy.

Image result for three pots of money

Are these three pots all equivalent?

David thinks of his investments in three pots, and takes a specific approach for each:

  1. Public equities. While David is well aware of the ‘textbook’ investing approach (low fees, diversified assets, don’t try to beat the market, rebalance regularly) he doesn’t directly follow this; he employs some investment professionals to manage the money.  I believe he diversifies widely, taking in commodities, hedge funds et al.
  2. Private equities. David specialises in ‘value-added’ angel investing, mostly (or possibly exclusively) in the tech sector.  His investments vary in size from $500k to €10m+.  He has 30+ such investments and is reasonably hands-on with several.  My impression is he is looking for visionary, ambitious businesses based in Europe, where he can put some serious money to work – and he is not afraid of being the biggest shareholder.
  3. Real estate.  He looks for real estate to ‘double or triple’.  I asked ‘so, IRRs of 5-7%?’ and was firmly put in my place – “no; 5% would take 14 years to double; I am talking doubling in 1-2 years”.  He is prepared to put in a bit of development/planning / etc effort to create value.  He owns at least one large (100+ unit) residential block.  Interestingly, he said “if I was simply trying to maximise net worth for least effort/risk, I would invest 100% in real estate”.  He doesn’t appear to consider his c.£10m primary residence part of his investment portfolio.

    Image result for €12m mansion

    Not David’s actual mansion, but you get the idea

Read the rest of this entry »