I have a somewhat unusual method of thinking about and managing money, which has worked out very well for me. Because money, saving, and spending is such an emotional issue, I believe that there is not a universal correct method for everyone. For example, a strategy that increases someone's earnings by 5% but also increases their stress by 50% probably isn't a good one.
So I present my ideas on finance not as empirical examples of perfect management, but rather something that works great for me and may work for people of similar mindsets.
The goals of my system are to minimize variance outside my control (e.g. stock market performance), maximize long term utility on assets, and minimize the chance I will ever have to do anything I don't want to do. The end goal is not to have the most money possible or to earn the most possible, though both of those things can support my goals.
I don't want outside variance because it inhibits my ability to plan. Accepting variance often increases long term rewards, so I am happy to accept some of it, but I never invest in the stock market because I believe that earning an average 7% per year is not worth putting my whole nest egg at stake.
Having a lot of money in the bank is fun, but eventually it will be spent. I find that there are a lot of ways to combine a little ingenuity and $100 to create a $1000 impact on my life. For example, buying my share of our private island was under $10,000, but the value I get annually out of owning an island is huge (and hard to quantify). So while I like to invest money in ways that will provide large returns, I'm also very happy to invest it in something that will make no financial return but will provide me with a lot of durable utility.
Last, the value of having my time available to me is priceless. I'd rather have all of my time free and no luxuries than have a private jet and a 60 hour a week job. So one of my primary concerns is keeping enough money away from risk that my runway is very long and hopefully infinite (due to returns on that money).
In practice, this means that I'm not very concerned with income over the short term. I believe that if I work on things that interest me with diligence and just a little bit of business savvy, I'll make enough money over the long term. I could easily do things to make a lot more money but they wouldn't be things I want to spend time on, so they would violate a core principle.
Instead I try to work on what I want to work on, and to monetize it as best I can without taking time away from the creative process.
I save the majority of the money I earn. That hasn't always been the case, but even when I made much less money, I would usually save money every month. Sometimes there would be a few months in a row where I was slightly negative on savings, but I don't worry too much about that.
Once I have that money, I am very protective of it. There are essentially three ways I'll allocate it:
1. Cryptocurrency. I personally believe that cryptocurrency will yield a huge return long term and that the risk is relatively small (for Ethereum and Bitcoin). That's my own opinion and not investment advice. I feel much safer having money in ETH and BTC than I would investing in an ETF. This allocation used to be used for stuff like playing poker or investing in Berkshire Hathaway (which I don't do anymore).
2. Low/no risk investments. I have several opportunities where I can get 10-20% with no risk or slightly more with some risk but almost no chance of total loss. My current investments are providing working capital to friends' businesses which have sterling track records, but in the past I put this money into Lending Club (which provided a great return before it became popular).
3. High utility assets. A significant portion of my money is in things like our island, the Budapest house, art, my primary residence in Las Vegas, a great watch, etc. The goal of all of these is to permanently increase my quality of life for a one time fee. I paid under $50k for my apartment, but it saves me $10k per year conservatively. That's an easily quantifiable 20% return per year.
I would never go into debt for any reason. I just don't want that liability hanging over my head, even if I can easily service the debt. I wouldn't buy a house with a mortgage ever. I wouldn't buy a house that wasn't worth its price in utility to me. I think people buying $1M+ houses in SF are crazy. Maybe those values will go up, or maybe you'll owe hundreds of thousands more than your house is worth. If my Vegas house drops to $0, I don't care at all because it's still valuable to me in utility.
I don't currently invest in retirement accounts. I have a Roth IRA with a little money in it, but I find that the tax benefits are negated by the lack of flexibility. I think that might change and I continue to research it.
Last, I think of my income as a faucet that drains into my savings, not into my spending. If I have some windfall profit, it doesn't even occur to me to spend it. I separate spending and saving as if they are two different things entirely. In my next post I'll talk about how I spend money.
Photo is a cool waterfall in the Azores. Expect a lot of photos from the Azores since it's so beautiful and I took a ton.
LAST CHANCE FOR THE SUPERHUMAN 2 EVENT IN JUNE! More people wrote last week so we almost have enough to do it (if you wrote me and I haven't written you back, it's because I'm waiting to make sure the event happens). The event will be amazing and you can have your money back if it wasn't great! If I don't have enough people by next week I will cancel and try to do it later in the year.
The thing about investing money is that it's pretty hard for an individual to do much better than 5-15% per year consistently, depending on your risk tolerance and connections (my best investments have been putting money to work with friends' businesses). Five to fifteen percent is pretty good, but it's inside-the-box thinking to stop there. What else can we do with our money?
As a disclaimer, I have a good portion of my money in investments that make a return like that. It's good to grow your cash and I'm not saying you shouldn't. But what if you diversify your portfolio beyond earning a financial return?
After all, the point of money is utility, so why aren't we thinking one step further and thinking about how we can earn the most utility on money?
I love to find situations where my capital is preserved, grows a little, or is consumed very slowly, but which yields me a lot of utility as a result. For example, I bought my RV for $18k, plus probably $15k over its life in repairs, and maybe another $6k in improvements. I sold it last week for $30k, so I lost $9k over the eight years I owned it.
The nature of a lot of professional gambling is it's short-term uncertainty. As I already covered here, long term returns must be positive, otherwise we're on a road to poverty not riches. However in the short-term our return is highly volatile. This volatility is a result of the variance and standard deviation of events occurring from their probable occurrence. I'm going to be writing a lot about variance, as it's an important aspect psychologically, and mathematically as a professional gambler. Today I'd like to look at it's impact on working hours and incentives.
Due to the volatile short term nature of a lot of advantage gambling, on some days I may make large 4 figure sums, and on other days 4 figure losses. Yesterday was a great example of this. Before the day had really got started, I was already a comfortable £5k in profit. The expected value of my actions that morning however, had been nothing more than a few hundred pounds. Variance was in my favour, and I'd already surpassed my daily target.This contrasts with the beginning of the month, where a week into April and my balance sheet showed a fairly deep £5,000 loss.
The impact of these swings on my work-load is noticeable. Naturally, when I'm down I will work harder, longer hours chasing increasingly diminishing value, just to try to swing it back the other way. This is not dis-similar to a gambler going on a 'tilt', and chasing their losses. Only when I tilt, I chase my losses with a positive expected return: Eventually I'm 99.9% guaranteed to end up on top again. In terms of working hours, efficiency and 'value-per-hour', I'm more profitable when I'm making losses. It forces me to work harder.
As my risk tolerance adjusts, and I become less affected by the variance, I expect to see my work attitude change. I should be working to an expected value target, rather than net-profit. This would see my daily earnings become more volatile, whilst my work load become roughly constant. It's something I'm working on, and for the mean-time I find the incentive of loosing periods beneficial to finding new avenues, value and a 'fixer' mentality.There's nothing better than digging yourself out of a hole, and it's when I have my back to the wall that I innovate and push myself harder.