Of Good And Awful Graphs

This isn’t the worst graph I have ever seen, but it is far enough up there in the pantheon of cringeworthy examples of bad graphics to serve as an illustration of the dangers of letting lazy or even malicious thinking mate with graphical competence.

Source: EU and countless posts on Twitter

After all, it is a well-executed graphic. The titles are clear, the axes are well defined, the colours are primary for the important data points and muted for the less important ones. I am guessing that the relative size weighting of the bubbles is also correct and that a bubble 10 times the size of another really does indicate ten times more of whatever is being represented (in this case trade volumes with the EU). So, well done EU HQ visual display bods for showing us what a well-executed graph looks like. A job at the BIS or McKinsey (the current high temples of professional graphics standards) is surely yours for the asking.

No, it is not the execution that makes this graph so subversive. It’s the content or rather, the implied conclusion that the graphs originators would have us draw from the interplay of two data aggregations that they have deviously combined for a particular purpose that makes this invidious.

This graph has been tweeted and reposted around the digital chatter chambers over the past 24 hours and has inspired much commentary about the state of play of the current negotiations between M. Barbier (of the EU, in the blue corner) and Mr. Frost (of the UK in the red corner) in respect of the trade agreement (or disagreement), currently being thrashed out. The commentary is entirely consistent with the respective remoan or leave perspectives of the chatterers concerned, as you would expect. As a consequence of its mass reproduction one might think that there was some message of great import that a mere scanning of the base data would obscure from the interested analyst, some significant insight that only the synthesis of the data in a graphic form renders comprehensible. This, after all, is the whole point of the effort of translating quantitative data into a visual display, a point made at length, beautifully illustrated and far more competently than I could by Prof. Edward Tufte of Yale University some 30 years ago in his marvellous self-published series of books on the subject. Graphs have to tell you something important, lead you to some conclusion that a mere study of the numbers would not allow. Which is one reason why three-dimensional pie-charts are the height of graphic idiocy: who needs to know what 25% looks like compared to 18%, 52%, 3% and 2%? And then in 3D? What extra information is gifted the reader by graphically comparing a quarter, a half and some lesser numbers that total 100% that was unavailable from the column of numbers? And then in 3D? Or in colour? Or both?

The EU trade graphic is almost as bad as a 3D pie chart but with an extra dash of pernicious sophistry, for which the EU bureaucracy is rightly famed. The graph makes the following point:

  1. Some countries do a lot of trade with the EU, some don’t do as much. And
  2. Some countries are located close to the EU and some aren’t.

The sophistry lies in combining these two probably at some understandable level not wholly uncorrelated data sets and then presenting the resultant coordinates as conveying some deep truth that would not otherwise be available to us.

The real point – for which the visual display bods probably had to put in a night shift -is to ensure that the UK appears as the biggest blob in a sea of blobs as far down in the left-hand corner as possible, so as to make the supremely relevant point that the UK DOES A LOT OF TRADE with the EU and is REALLY CLOSE. Information that of course would not have been available to anyone studying both columns of data independently.

Unfortunately, when you start manipulating data for political purposes, it starts behaving in ways that require you to keep manipulating it even more just to keep it “on message”. Central Bankers and their political masters are learning this the hard way at the moment, but have become wonderfully proficient at the art. In this instance, the only way that the dramatic political message could be transported was by inverting the Y-axis so that the trade numbers expressed in % scaled from largest to smallest. If you were to invert the inversion the graph would lose almost all of its dramatic impact and just look silly.

Not that the actual result is devoid of silliness. When it comes to representing geographical proximity on an XY chart, you are pushing the bounds of what the genre will comfortably bear, much as when I try to drive my daughter’s second hand 2002 Ford Fiesta up Red Lane with its 25% incline: it will do it, but it is highly stressful and the outcome uncertain. A trained observer will note that Switzerland is portrayed in the middle of the first zone of the x-axis, somehow suggesting that Switzerland, with its four eurozone country borders is somehow a distance further away from the EU than the UK which whilst separated by a stretch of ocean appears to have ceded a portion of its landmass about the size of Cornwall to the EU itself as, by logical extension the portion on the left-hand side of the y-axis must be in the EU. Last time I tried to cross the border, Switzerland was exactly 0 inches (sorry, 0 cms) from the EU whereas if I attempted a similar crossing from the UK, I would drown.

Clever graph designers will surely cry foul as that is not at all what is meant. The distance mus be measured from the middle of the country (Bern? Derby?) to the centre of the EU (somewhere just east of Bratislava on my reckoning but the EU is such an odd shape) . Anyway, even on that metric, Cornwall still doesn’t end up as part of Normandy and the graph collapses under the weight of its own silliness.

What we can deduce from all of this is that our partners and friends in Brussels are getting woefully short of arguments and like Stanley Baxter in the last phase of the Battle of Rourke’s Drift, deuced close to running out of ammo altogether (not sure I like casting the EU in the role of that heroic beleaguered garrison, but you get my drift, no pun intended). If the only argument left is that the “ UK DOES A LOT OF TRADE with the EU and is REALLY CLOSE to us” so we have to impose our conditions on you, then it may not be long before that the only negotiating tactic left will be to burst into tears, stomp their feet and take their toys away.

Alternatively, they could look at their own chart and come to the realisation that the UK DOES A LOT OF TRADE with the EU and is REALLY CLOSE, so it might be a REALLY GOOD IDEA to come to the best possible arrangement with them. Until then, expect more hilarious graphs from Brussels.

Memo: Communicating business numbers

March 2019

To: Management Team, X GmbH

Having just received and reviewed your documents in advance of Thursday’s board meeting, I have a particular bugbear that I am now going to ventilate in the hope that it will be helpful in designing the way in which we communicate with each in numbers. The following aspects inform my thinking:

  1. Data is only ever useful when it allows us to extract pertinent information;
  2. In order to extract information from data it must necesarily be prepared in such a way as to facilitate not hinder comprehension;
  3. Responsibility for organising the data is always with the person who has collected the raw data, unless he or she specifically states that they are not. In other words the moment you decide to collect and share data, you are responsible for the quality of the presentation and the ensuing information mining activities:
  4. Intelligent discussion can only be based on uniform data – if everyone is working with different data or data formats then the energy of the discussion will be on the differences and not on the substance and subsequently a waste of everybody’s time;
  5. The quality of an organisation is reflected in the quality of the data and its dissemination because only when everyone has access to the same quality and integrity of data can correct, speedy and substantiated decisions be made.
  6. Learning organisations can use well-prepared data to reference decision-making quality and constantly to improve. Bad, messy and disorganised data is both inaccessible for future learning and – being available in different and sometime contradictory formats – useless for the purpose of intelligent back-referencing and post-mortem analysis.
  7. Ask yourself always how you would respond to a presentation of your data if you were on the receiving end. Would you be able to tell after a short study what story the data is telling you and is that the story you want to tell?

Using the data I have received from various sources this morning there is very little uniformity or conscious presentation design from any of the participants. Everyone has shared bits of data (different time frames, different data types, different extrapolations, different formats and presentations) so that after numerous mails there is

  • no uniformity
  • no structured design to capture the information
  • probable duplication of effort in collating the data (with commensurate waste of management time) and
  • very little focused information extraction.

Your last spreadsheet is a case in point. It contains all the data – so thank you for that – but the data is organised in a way that actively hinders the extraction of insight, as the reader has to jump from month and year up and down the spreadsheet, when a different ordering of the data would have made the analysis much easier.

The key question to ask is „What is the purpose of the exercise?“ In this case it has to be to achieve the highest possible degree of accuracy in forecasting the expected demand for our product from one of key customers over the rest of the year. In order to do this we need to be able to compare the months individually and cumulatively over the years and to create a rolling 12 month revenue curve. Presenting numbers horizontally instead of vertically is not helpful in the best of cases and in this case definitely so.

I would ask you to rework the data orientating your presentation on the above guiding principles. We can then use that presentation to draw management conclusions.

I have no wish to appear schoolmasterly, but in my experience and from my background, data integrity is crucial in arriving at intelligent decisions whether individually or (especially) in a group. If it is any consolation, most people and businesses are bad to awful at this.

Best wishes


PS For inspirational reading around this subject please refer to Edward Tufte’s outstanding book “The Visual Display of Quantitative Data” especially the chapter on the Challenger 13 shuttle disaster and how it might have been prevented if the data had been displayed more intelligently

Reflections on building my course (Part I)

Given that I have been griping for what now seems like years (and is in fact years) about not finding the time to write, not committing properly to a writing regime, not publishing, the new decade has provided me with a “clean sheet” moment to start afresh and to do what I have been promising myself to do for longer than I can remember. Writing to a prospective audience that does not yet exist, is strangely liberating. I do not have to worry about anything other than the question of whether I think I am going to be not overly uncomfortable with having whatever I write on any particular day out there for posterity, but free from the cold blast of immediate reaction. You know, just in case one day somebody actually stumbles across this digital collection of musings and reads it. So for the record I have tasked myself with writing and publishing something every working day of 2020, inspired by the wonderful David Perell and this quote that he used in a recent tweet:

Today I am thinking about courses and knowledge sharing. Specifically about building an offering around some specialist area of knowledge that I have in the hope of finding an audience who will appreciate what I have to share. I also hope that finding and engaging with that audience will allow me to improve my thinking around my subject, of which I am a constant and life-long student and to achieve my ambition of building a digital platform business, something radically different to anything I have attempted before in my business career.

My topic – which happens to be financial literacy primarily in a business context for business owners and entrepreneurs, but could be anything – has been clear for some time, indeed I have been informally talking about my subject for years, always informally or occasionally formally as an invited speaker to some event. I read avidly around my subject: the map of reading looking a little like a drop of ink on a piece of blotting paper, highly relevant in the centre and with changing degrees of direct relevance as the ink stain of my interest diffuses from the central subject. I can find a link to finance, capital and money in the strangest of literary rabbit holes.

So last year I took the plunge and created a 10-part course developed from a 7 point plan that I had jotted down on a piece of paper whilst attending a breakout session at an entrepreneurial forum in Hamburg in 2014. I had transcribed that scrap of paper to an Evernote note – which functions as my digital brain – tagged it and promptly forgotten about it, until late 2017 when I started thinking more specifically about creating a course and a digital business. My thinking, which slowly evolved into an ambition to do just that was occasioned by a desire to establish a business from my new-ish home in Ireland after 30 years of living and working in Germany. The idea was to find something which would not limit me to Ireland as a market – one I neither knew well or had any form of business network. I wanted, if you will, to be in, but not of Ireland. Creating a digital business with a potentially global customer base, tapping into the wealth of resources in local digital expertise, whilst creating a virtual team to deliver sounded (and still sounds) like an enticing proposition.

Creating the content was a doddle for me. I love every second of the thinking, planning, writing, researching and creation of the knowledge that I wished to share with my audience. However I soon found the hurdle in creating this sort of business from scratch is invisible but huge. Almost all businesses that appear to have very low barriers to entry (i.e.: you can set them up with minimum capital or infrastructure and that can theoretically be productive and profitable from the first moment) – usually knowledge-based businesses that require little to no official qualification, certification or regulation – have significant competition, are hugely inefficient in terms of matching supply and demand and have hidden barriers to entry. These barriers are practical rather than institutional or capital-based. The key is always to find an entry point and understand the norms, both technological and cultural, that enable the seasoned practitioners to thrive. Just because there isn’t a visible gatekeeper at the entrance to the market, doesn’t mean there are no barriers to trading.

The barriers in this case are a) technological and b) marketing. The world is awash with individuals attempting to set up an apparently low or no-cost digital market stall to hawk their expert wares to a hungry public. The ability to create a low-cost stall through providers like WordPress or Vix to name just two that I know of or to hire a freelancer through Upwork or 99-Designs is constrained only by possession of smartphone or laptop, a credit card and wifi hotspot. However, for a non-digital native, the true complexity lurks behind the simple facade and it is bewildering. In fact it was so bewildering to start with that I suffered from immediate overload, shut down and kept postponing actually getting started, as the task seemed too daunting. I was acutely aware of the fact that I didn’t even know where to start asking – to paraphrase Donald Rumsfeld, the unknown unknowns were overwhelming. Dave Allen in his bestselling book “Getting Things Done” points out a valid truth that we automatically postpone activities if there is any lack of clarity or indeed faulty logical in what the Next Step is. I had a vague idea of what the end might look like, but defining the next step appeared impossible – given my lack of knowledge on both the technology and the way-to-market.

I found help with the first step through a friend in Germany with whom I started a small mastermind group of seasoned entrepreneurs who wanted to tackle this digital business phenomenon and we assisted each other in stumbling through the first steps. I had come across a course-creating expert, Danny Iny founder of Leveraged Learning in Canada whose book “Teach and Grow Rich” was an excellent primer on the evolving market for true teaching in a digital environment, and so we more or less followed his recipe. Danny recommends not getting too bogged down with technicalities or perfection (always good advice at any time) to start with but to the float the basic idea of the course to potential prospective users, capture their response and then adapt the concept. Then he suggests co-creating a pilot course with a handful of those prospectives, charging them a deeply discounted price for the privilege of their insights, constructive criticism and feedback, which is what I did.

With the help of my friend and few supporters from my business network who had encouraged me to transform my experience into the course in the first place, I managed to cobble together a small group of 7 paying guinea-pigs who signed up for a live 10 part course in german, hosted by me via GoToMeeting (initially, later Zoom). The course design and a three page summary of the purpose and content of the course was prepared by my partner’s agency, which received 20% of the proceeds of the income from those participants sourced from his network. This then became my first affiliate marketing relationship. The three-pager and a QAD landing page was all the marketing material we started with and was communicated to the participants as part of the acquisition phase. I created the actual course presentations in Keynote on a just-in-time basis, locking myself away in a fabulous co-working space close to my offices in Wuppertal, Germany every Thursday morning from 0830 to the end of the day, in time for the one hour (+/-) course at 1730. As my flight back home to Dublin was at 2100 from Dusseldorf airport, roughly a one-hour journey all-in, I had a hard stop at 1830 which proved invaluable as a disciplining force to avoid overrun.

Those one hour course elements broadcast between February and the beginning of April were exhausting: it was a strange and initially uncomfortable experience talking to my laptop in an empty conference room at a group of people whose expressions I could not see, talking through my presentation and hoping that they were still interested and indeed still there at the other end. The material was dense and the concepts required concentration, although I hoped I was making it fun to learn. The one hour sessions were recorded by the service provider and the presentation shared after the event.

I then repeated the whole pilot exercise after the summer break between September and early November with the support of a business network partner, Dr. Sabrina Starling and her “Tap the Potential” SME entrepreneur coaching network, who marketed the course to her clients. I was pleasantly surprised by the positive response (which is certainly a testimony to the strength of Sabrina’s relationships in her community) and the course ended up almost double the size (13 in all). It required me to translate and modify the original pilot program from a german to a US context, making some structural changes based on my experience of delivering the material and feedback from the first group. Of the pilot course guinea pigs all but two were from my affiliate marketing partner, one from the Small Giants Community and one from an enterprising employee at a start up venture in London and who had heard me talking as a guest on a UK podcast over the summer.

The feedback was very encouraging – the entrepreneurs and business owners confirmed to me in individual chats and conversations during and after the course that the material helped them widen their perspective on the job that they were doing and allowed them to move up to a 30.000 ft level for a time and to see their business and their own lives as economic agents in a different way. I was also greatly encouraged by the response that certain aspects of finance had been demythologised during the course and that certain core concepts around intrinsic value, business valuation and reading financial statements had become much easier to understand and valuable as a result. Quite frankly, that was the best result I could wish for as a teacher. Providing context and deep comprehension of how things connect is, I believe the key to ensuring that the material then has a chance of influencing habits and leading to lasting change.

As I headed into the end of the year, I had a decent level of feedback, I knew that the material was interesting and valuable to most of the participants, I had a hundred ideas of how to improve both the narrative and the delivery as well as recognition that I could and probably should split the course into (at least) two offerings, namely a Basic 101 and a Master course. What was missing was the ability to turn it into a professional download version and the infrastructure to supply course material, homework and tests. Follow my discovery path in the next post on this subject.

Debt, Austrians and Investment Strategy

I recently found myself reminiscing about the capital market doommongers of the past 30 or 40 years (my favourites are Ferdinand Lips, erstwhile Rothschild Zürich, the great Gold prophet of the late 70s and 80s and Bob Prechter of Elliot Wave fame who got it right once in 1987. Both ended up living in caves (metaphorically) eating baked beans and nuclear winter rations, having been made to look exceedingly foolish by subsequent events) and reflecting on how very dangerous it is for reputation, mental health and net worth to be a bear in a world of monetary expansion and how extraordinarily difficult it is to get the timing right.

The past year has seen an increase in my intake of literature critical of the current monetary and of the debt culture that appears to have infested itself into every nook and cranny of our western (or G8) culture. I have revisited (with growing joy, it has to be admitted) the classics from the Austrian School – Mises, Rothbard, Schumpeter and Menger, I have connected with an erudite, critical and intelligent community “FinTwit” community on Twitter, from Jim Rickards to Morgan Housel and Tim Price, who are not backward in coming forward with their harsh criticism of the current regime and I have enjoyed regular broadcasts from Grant Williams and his team at RealVision TV whose interview guests tend towards the skeptical and the critical of the sustainability of the status quo, amongst many others. At the same time, I have found myself increasingly unable to swallow much of what passes for economic commentary from the traditional sources – from the Economist, whose demise into a woke economics cheerleading rag is heart-breaking, the FT and most of the mainstream commentariat.

As a result I am currently unsure of whether I have manoeuvred myself into an echo chamber of a clique of like-minded value investors who can see clearly that we are in „Fergie time“ and thus close to a cataclysmic popping of the Everything Bubble (including money) or whether the current narrative (dangerously close to the end of the Everything Bubble, so man the life-boats) is now the popular view and therefore discounted? My view is coloured strongly by a moral conviction that what we have now (broken money, punishment of savers, risk free reward for insiders etc) is simply wrong and possibly even evil at a societal level, so what I think will happen and what I believe should happen (to purge the system of moral turpitude) are conflated at the margin. The technocratic disregard of the concerns and values of the saving classes personified in the ghastly Ms. Lagarde‘s most recent comments disgust me personally.

The question, as always, is what to do in times of great uncertainty and possibly at bifurcation points of historical dimensions, a point I have made elsewhere with reference to the need – borrowing from Howard Marks of Oaktree Capital – to “move forward, but with caution”.

My own view is that

a) looking for bargains is the only sensible way to shop for anything, but especially when you are shopping for capital replacements (ie things to swap your hard earned dosh into). As Seth Klarman said (sort of) either you get that off the bat or you never get it (“Margin of Safety”).

b) I like to be as close to the source of original cash production as possible, next to the spigot as it were. That means buying businesses in their entirety or at least as much of them as needed to ensure that the decision as to who gets to decide where surplus funds are allocated is indisputable (that would be me);

c) Owning more than one business, preferably in different industries is a pre-requisite for not getting involved at an operational level. Do that and you are dead in the water (well, I would be). Not being involved operationally is a pre-requisite for making rational decisions about where and how to reinvest cash flows or not, unless you are that rarest of creatures, an operationally brilliant generalist capital allocator – I have met exactly two in my life and I know for a fact that I am not one of them;

4) If you can‘t find a good new business to buy, your choices are between fractional ownership of a good public company (violating rule b) or buying a franchise of a well run and proven business and putting a manager in to run it. I happen to love the second path, but am happy to take the first one if we find ourselves in Christmas or Summer sale environment.

5) I look at gold as a currency and a genuine store of value or perhaps more accurately as an undated call option on everything. In ancient times (pre 2000) when cash and equivalents had a time value represented by an interest rate, gold, with its real cost of carry was a hard call to make, but today it is – as our US friends might say – a doosy (not sure if you spell it that way, but you get my drift). As John Butler writes most eloquently in his book “The Golden Revolution revisited” “All purely fiat currencies eventually fall to their intrinsic value of zero.” ALL – when the price of money falls to zero or less, then that would in my simple view of the world tell you all you need to know about the value of it.

6) Even if the rate of interest is nominally at zero (-ish) that rate is only available to insiders in the crapitalist system. SMEs and non-investment grade businesses are still paying 5-10% for access to capital (if it is available at all). Consequently secured lending on reasonably liquid productive assets (rolling working capital financing) is extremely lucrative and a great source of investment income available to everybody (no matter how small their capital base) if they are prepared to do the legwork – disintermediation is already at work in the digital world with crowdfunding just starting to scratch the surface of its possible applications. I would hate to be running a bank balance sheet in this environment, with the piranhas nibbling away at my raison d’eire in increasing numbers everyday (and there is nothing more painful than having your raison d’eire nibbled at).

7) Finally, I believe the days of easy returns and brainless investing are over for this era. Returns in the next era (which has already started and is overlapping the old one) will only be available for those with real business and commercial skills (not the parody of performance skills masked as commercial skills so visible in our large concern leaders and their minions). Ben Graham had a bit to say about that in Chapter 20 of the Intelligent Investor, of which I will write more another time.

Why I am intrigued by the Enneagram.

Ok I admit it. I am a sucker for “systems”. I am fascinated by models built to explain structures and connections, that attempt to make the complex discernible and the abstract tangible. I know: “All models are wrong, but some are useful” and it is absolutely necessary to read the disclaimer on the back of the tin of every model you ever get your hands on. But, when you do get one that works exceptionally well some of the time and reasonably well most of the time, then it is difficult (for this writer well-nigh impossible) to cease and desist from getting stuck into it in an attempt to master and understand it.

The Enneagram is a case in point.

I first heard of the Enneagram in 2017 when Michael Hyatt reviewed a book recently published by his Nashville friend and neighbour Ian Morgan Cron entitled “The Road Back to You”. It described a framework within which we can learn to recognise and appreciate the different personality styles – the Enneagram, as the name suggests, identifies 9 distinct typologies – in the world, with the primary purpose of understanding ourselves. I originally popped it into the same box as Meyers-Briggs and DISC systems of assigning certain characteristics to individuals thereby making them more understandable, better integratable into teams and generally more predictable and would probably have left my interest at that level. However, I took a rudimentary online test to ascertain “my number” on the scale suggested by the book and then begun reading around the results out of curiosity (and because we love nothing more to have experts tell us about ourselves), only to discover that unlike any other characterisation system the Enneagram language made a beeline for some very uncomfortable aspects of me that I would much rather not have had to confront. This speaking of undeniable truth to power could have elicited one of two reactions from me: summary dismissal and rejection or an urge to confront that reaction of discomfort and later shame, in the hope of finding solace, further down the road. Indeed the whole point of the Enneagram revealed itself as a guide to our brokenness and a map which slowly uncovers the narrowness and restrictions of the personality strategy we have unconsciously slipped into in order to survive in the world into which we – mewling and puking – are unceremoniously thrust.

My road back to me, the road we are all on whether we like to admit it or not, some of us travelling it faster, others slower, became a whole lot clearer when I started my reading of discovery of the Enneagram, began exploring the history of its evolution, the people who have shaped our understanding of it, their contributions, spiritual, psychological and analytical. As a system for organising my thinking it is a model that just keeps giving. Every time I think I have understood at least where the outer boundaries of its jurisdiction are, I read a new essay or discover another author who reframes or challenges or refines the model’s scope and gives new insights and perspectives.

It should come as no surprise that people have been curious about people since the world began. I am told that social anthropologists have determined that we human beings in our primitive pre-historic form, when we were hunter-gatherers living in small tribes, eating nuts, roots and the occasional mammoth steak and before we settled down and discovered the art of cultivation, had no concept of ourselves as individuals. Our identities, such as they were, were inextricably bound to the community in which we existed. The concept of an individual personality was as alien to our ancestors as the lack of it appears to us today. Evidently. But at some stage in our evolution – probably frighteningly close in years – we began to conceive of ourselves as individuals, distinct from the tribe and with clearly defined limits and a recognition of our separateness. With that discovery of the self, we started being curious about the other-selves surrounding us and began, I imagine, asking why some other selves were such bad-tempered unreliable idiots, others flighty and impractical, others still forceful or loyal or brave or poetic or whatever other epithets we came up with to try and comprehend who these “others” were with whom we somehow had to arrange ourselves – in friendship, enmity or just to keep the ball rolling.

The Enneagram has its roots deep in this soil of our ancient civilisation and can be traced back to writings and thinking traditions of the Sufis and the desert fathers from whom much of our Judeo-Christian and Islamic wisdom stems. The personality wheel with its archetypes and their mystic connections passed, as so much of our contemporary wisdom, through the tunnel of the dark ages (which I suspect were only “dark” for the northern European communities after the collapse of the Roman Empire and before the complete ascendancy of the church as a power both spiritual and temporal: everybody else was getting along just fine) and emerged to be discovered, embellished and protected in great secrecy by church scholars. Most notably it was the Franciscan monks who kept the secrets of the Enneagram as part of their canon of wisdom, imbued it with a spiritual significance and made sure it was kept under wraps until well into the last century.

At some point in the late 1960s and early 70s of the 20th Century, the Enneagram managed to climb over the abbey walls and escape into the open, where it was discovered, fed and nurtured by the psychologist community. There it underwent a program of spiritual detoxification and emerged, almost fully secularised in a parallel universe of self-discovery and modern personality analysis, where it resides today.

That is not to say – by any means – that the spiritual Enneagram is any less alive and well than its modern manifestation: the dividing line between modern psychology and modern Christianity is a broad one with many sojourners passing from the one community to the other and indeed colonising the liminal area between in seemingly increasing numbers. Great spiritual teachers of our time such as Fr. Richard Rohr, author of Immortal Diamond (amongst many others) and founder of the New Mexico Centre for Action and Contemplation have made the Enneagram the centrepiece of their model for personal reflection and integration. They are happy combining discoveries in typology refinement from decidedly secular experts such as Dr. Beatrice Chestnut, psychologist and author of the key Enneagram text “The Complete Enneagram – 27 Paths to Greater Self-Knowledge” to expand their understanding and application of the model.

Meanwhile and more recently, AI and the Enneagram have recently been combined by a team of IT and psychology experts in S. Africa to produce an online tool based on the 9 point motivation system at the heart of the Enneagram, blended with the Beatrice Chestnut’s Instinctual framework and several other character profiling models to produce a powerful personality analysis report for both personal discovery and professional coaching. The iEQ9 tool is currently the cutting-edge application, completely secular and aimed at organisations seeking to create a higher level of awareness amongst team members and to create a common language around personality types and perspectives. This they hope will lead to greater empathy, understanding and ultimately more productive workplaces, in which more than ever before the tapping of the group’s potential, creativity and intelligence hold the key to success (Disclaimer: I recently took the iEQ9 accreditation program and am in the process of being certified by them).

My fascination with the Enneagram is predicated on two primary aspects of the model: firstly, its depth and intricacy. You can approach it historically, philosophically, psychologically or spiritually or any permutation of approaches that your particular taste, worldview and intellectual curiosity seem most interesting. It is kaleidoscopic in its ability to reveal patterns and models of perspective from any angle you wish to approach it. Secondly, it is wholly dynamic. By which I mean that once you have uncovered the perspective or typology on the Enneagram with which you most closely resonate, then that is the starting and not the finishing point of your journey of self-discovery. The wonder of the Enneagram is the detailed map it provides for evolving beyond the limiting bounds of your personality as it is currently defined and for growing into the full storehouse of resources that each one of has at our disposal, if only we become aware of what is limiting us in drawing on them now.

This is the first time I have articulated my thinking around what up until now has been an intellectual hobby and I am aware, now at the end of this piece both that there is much more that I would wish to write and more importantly how helpful the Enneagram has been in my understanding of myself in my ability to be better as a husband, a father (particularly there), a friend, a partner to those I interact within business, even as an investor. So write I will and hopefully some of the joy and benefits that I have harvested from my short journey of discovery with the Enneagram will inspire somebody to take a look at and explore the system themselves.

There are of course many things that the Enneagram will and cannot do. I have noticed, for instance, that when it comes to eating croissants there are only two types of people:

those who manage to consume a croissant without a crumb or flake of pastry falling off or if some do, then only to land neatly on their plate and those others (that would be me) who, no matter how hard they concentrate, manage to distribute a wide circle of pastry flakes in the surroundings such that stray dogs come and feast on the remnants. The Enneagram has yet to provide me an indication – dynamic or otherwise – as to what method of self-improvement might lead to a more enlightened performance, but maybe I just haven’t read far enough yet.

If something cannot go on forever, it will stop.

We are living in an age of bad money. I originally thought that the rot set in in 1971 when Richard Nixon explicitly decoupled the US-$ from its legal gold anchor, in recognition that the USA’s deficits and debt, partially necessitated (if that is the correct word for a senseless and unnecessary foreign military adventure) by the exploding cost of financing the Vietnam War, were becoming a significant security threat to the nation. My recent readings around the Great Depression and the policy responses to it both by the Hoover and FDR administrations in the US and the beginning of the Keynes worship cult by the successive governments around the world, indicate quite clearly that the seeds of our monetary debasement were planted almost 100 years ago and showed their first blooms in the 30s and the aftermath of WW II. Rather than being ancient history with little significance for our modern age, the decisions taken and institutional structures erected then – both physically and in law – have a direct relevant bearing on the state of our money and continue to inform policy and the financial dogma today. We are merely experiencing the logical conclusion of almost 100 years of unsound monetary practice and debt accumulation as the age of fiat money draws to its ineluctable end.

Doom mongering is, however, a dismal occupation and particularly unhelpful if it is not accompanied by clear advice or guidance as to what to do next. As I have written elsewhere, modern prophets of the apocalypse – of whom there have been quite a few, specifically in the 1970s and 1980s, have a) seldom been right and b) made to look extremely foolish by subsequent events as they have played out over the last three decades.

“Don’t fight the Fed” was one the first maxims I learnt as I a rookie financial advisor in the mid-80s and given the growing power of Central Banks around the world and their seemingly limitless ability to expand their balance sheets to procure their politically mandated goal of permanent prosperity, heeding that advice has been prudent (and highly destructive to anyone foolish enough to challenge it). If asset prices and the ensuing wealth effect can be permanently rigged through the creation of fiat money without that monetary expansion spilling into the real economy and causing unrestrainable inflation (as we have today) then what’s to complain about? Nonetheless, it is becoming increasingly apparent – at least to a certain congregation within the financial community, whose views and orthodoxy is primarily informed by the Austrian economics school of thought – that this state of apparently riskless and endless debt financing and asset support operations to prop up increasingly distressed banks and profligate governments is, at best, unsound and at worst courting catastrophe. They surmise that the end of this system – if it can be deemed to be called a system at all – is due soon and that the collapse of the currency and the debt supporting it, along with all the assets and financial institutions propped up by those inflated asset prices, will be creatively destroyed, in the best Schumpeterish meaning of the phrase.

What remains devilishly difficult, if not impossible, to forecast is the timing of that collapse or repricing, particularly so given that we are in uncharted territory and have next to no historical data with which accurately to define upper limits of central bank balance sheet expansion. The Fed and the ECB, being the two largest and most economically critical institutions are currently retesting their previous upper limits, having come within sniffing distance of the $5 trillion mark in recent years. We simply do not know the level at which either confidence is withdrawn from the central banks’ ability to continue operations or monetary creation spills over into the productive economy, setting in motion a hyperinflationary spiral. Can governments and their agents continue to keep the plates spinning for another year? Two? Five? A decade? without having them crashing down around their and our collective ears? We simply do not know.

I belong unreservedly to the congregation of observers and market participants who believe that this will end badly, but I have no confidence in my ability to predict when that might happen. As I learnt very early on in my career, from the then head of investment policy at Morgan Stanley, the much-admired Barton Biggs “Being right too early is indistinguishable from being wrong”. I remember pontificating about the unsustainability of the Euro about 10 years ago, firmly believing that its inconsistencies and destructive deflationary effects would lead to its abandonment sooner rather than later. I had not considered the sheer bloodyminded determination of the EU’s politburo to trash every vestige of prudent money management by throwing its full political weight behind the “whatever it takes” policy. Don’t fight the Fed in another guise. So I have given up guessing or pretending to know when this will all end, instead asking myself the question of what to do until then and what to do afterwards.

Howard Marks the erudite Chairman and Founder of Oaktree Capital and author of a regular, highly readable memo wrote in January 2018 that his firm’s investment policy was to “move forward, but with caution.” This is excellent advice for any time, but today, at the start of 2020, it is even more prescient. Returns to financial assets have been way above average over the past few years, attributable almost exclusively to ultra-low interest rates and the financialisation (see Ben Hunt and Rusty Guinn at Epsilon Theory for much more on this) of equity markets in which share buybacks are replacing real operational profit growth as the key driver of valuation. As a result, caution is now needed in larger doses than ever before.

At the same time liquidating all financial and operating assets, converting the proceeds to gold and going to live in a nuclear bunker is also not a very practicable course of action, given the uncertainty of timing and the very real possibility that this state of affairs could continue for a good while yet. So here are my current guidelines for moving forward with caution.

Move forward…

  • Don’t obsess about things you cannot change and sail with the wind you have. Any good sailor will always have an eye on the weather and be making assessments as to the probability of change on the horizon. Weather forecasts tend to be accurate, market forecasts are invariably not. Sail with the wind you have and make headway while you can. That means keep doing what you are doing.
  • Do what you do best and extricate yourself from peripheral activities and investments. If there are projects, investments, ventures in which you are reliant on others, are a junior partner or just in it for fun, consider selling your stake to the lead investor, senior partner or significant stakeholder.
  • Tighten and hone your investment and capital allocation criteria. Whether you are a financial investor or an operating manager, this is good time to revisit your investment criteria and to make them more restrictive, focusing on bargain opportunities (components of assets are currently not priced as highly as finished investible assets – Tobin’s Q works in your favour at the moment), moat-widening investments and balance sheet additions that immediately add intrinsic value. The reason Berkshire Hathaway Inc. currently has $130bn in cash is primarily that they refuse to deviate from their fairly restrictive investment criteria. It looks like timing, but isn’t, it’s discipline. The countercyclical effects are the same, but one is speculative the other rational. Be rational.

…with caution

  • Use excess cash flows to pare down debt and strengthen your balance sheet.
  • Stress-test your business operations for a downturn. How storm-resistant is the business? How would it perform under a repeat of 2008 / 2009 or worse?
  • Consider building a stockpile – however small – of gold bullion or coin. Just don’t store it in the bank. Build the stockpile over the coming years to a defined maximum level of net worth. The opportunity cost of holding gold compared to cash or liquid assets is non-existent currently and makes sense irrespective of your perspective of the financial system. Remember the intrinsic value of every fiat currency is exactly zero.
  • Prepare mentally for the crisis. Assume that in a crisis of the magnitude that we may face repairing our debased currencies and unrepayable debt burden, the price of financial assets will be decimated (in the true sense of the word meaning reduced to a 10th of their previous price) or worse. Assume further that in the ensuing chaos, “when the smoke cleared from the economic rubble, a handful of wealthy people had become wealthier still, a vast number of ordinary people had become impoverished and a good number of the already impoverished had become even more so.” (John Butler, The Golden Revolution revisited, writing of John Law and the Mississippi Bubble). Being mentally prepared for a severe dislocation, will be the distinguishing factor in recovering and re-establishing personal prosperity, in whatever shape the world emerges “when the smoke has cleared”.

I will freely admit that I am working my through this whole subject at the moment and that reflections on the state of our monetary envrionment and the end of the age of financialisation will be a recurring theme in my writings this year. I will be reviewing literature that has helped me refine my thinking, interviewing thought-leaders and specialists in the Good & Prosper podcast and crafting guidance to help prepare for the worst. This I think is useful, even if I my hypothesis turns out to be completely misguided. Fire drills are important and need to be practised regularly when the sun is shining.

The End of the World (as we know it)

Here is a question I have been pondering: does a social system or political economy based on free markets and (capitalism) automatically result in unbridled consumerism and all the consequent ills of trivialisation, egotism, debt, and debilitation of our natural environment and morals? Or is the current mess we are in the result of some specific conditions of this particular strain into which what we still think of as free market capitalism has mutated.

I think I have been asking this question in some for or another for decades, but I am asking it with a greater sense of urgency now as I look at the voting patterns of the younger half of society in the UK in last week’s General Election and realise that, if the statistics are to be believed, the majority of under 45s in the UK would have preferred a socialist, categorically anti-capitalist party and leadership for their country than the conservative alternative.

This despite the fact that nobody is quite sure what sort of ‘conservative” this Conservative government is going to turn out to be, apart, that is, from the obvious signs that it is certainly NOT going to be moving the state leftwards along the Rahn curve or much further rightwards on the Laffer curve. Capitalism must indeed have an appalling reputation if over half the young population of an advanced western economy with an hitherto unheard of level of prosperity would prefer a model whose outcome in past live experiments has reliably ended in penury and serfdom, let alone the trashing of those individual liberties the younger generations esteem highly and take for granted.

Also feeding in to this need to ask and answer the question are the concerns of the environmentalists, particularly the many thoughtful and sensitive thinkers – from Terry Patten to Joanna Macey to name just two – who reflect openly on the damage being done to our souls and societies by the current environment and our societal priorities. In a recent interview in the beautifully produced austrailian magazine Dumbo Feather, Joanna Macey, author of Coming Back to Life, refers to Prof. Jem Bendell’s “Deep Adaption” paper in which he states that “Currently, I have chosen to interpret the information as indicating inevitable collapse, probable catastrophe and possible extinction.” , having explained what he means by each of those terms in the previous chapters. He goes on to state

Unfortunately, the recent years of innovation, investment and patenting indicate how human ingenuity has increasingly been channelled into consumerism and financial engineering. We might pray for time. But the evidence before us suggests that we are set for disruptive and uncontrollable levels of climate change, bringing starvation, destruction, migration, disease and war.” Jem Bendell, “Deep Adaptaion” (IFLAS Occasional Paper University of Cumbria 2018)


The West’s response to environmental issues has been restricted by the dominance of neoliberal economics since the 1970s. That led to hyper- individualist, market fundamentalist, incremental and atomistic approaches. By hyper-individualist, I mean a focus on individual action as consumers, switching light bulbs or buying sustainable furniture, rather than promoting political action as engaged citizens. By market fundamentalist, I mean a focus on market mechanisms like the complex, costly and largely useless carbon cap and trade systems, rather than exploring what more government intervention could achieve. By incremental, I mean a focus on celebrating small steps forward such as a company publishing a sustainability report, rather than strategies designed for a speed and scale of change suggested by the science. By atomistic, I mean a focus on seeing climate action as a separate issue from the governance of markets, finance and banking, rather than exploring what kind of economic system could permit or enable sustainability.” Jem Bendell, “Deep Adaptaion” (IFLAS Occasional Paper University of Cumbria 2018).

It occurs to me that there are two apocalyptically inclined groups of thinkers from, I suspect, diametrically opposed ends of the political spectrum currently formulating their eschatological hypotheses, namely the environmentalists and, for want of a better basket to put them in, the “sound money” proponents from the Austrian School of Political Economy. Both are predicting collapse and/or catastrophe in the short to medium term, although the sound money school don’t appear to have a view on the extinction option, possibly deeming it outside of their sphere of competence. Both schools see the “capitalist” model of society as it is currently evolved as the root cause of our problems and both have deep thinking traditions that stretch back into the late 19th century (although both would claim that their philosophies and world views can be traced back for hundreds if not thousands of years).

I have no understanding of climate science and have absolutely no idea whether the statistics bandied about claiming to validate one or other side of the argument are real or not. I am as deeply suspicious of the claims of big industry and their lobbyists that the whole thing is a hoax as I am of big government using highly selective data to increase the size of the state, impose draconian regulatory systems and increase the tax burden. Common sense and observations of the natural world around us tells us that our current trajectory is not a happy one. Our cavalier attitude towards the natural resources we have been gifted as attested to by litter on the streets, oceans full of plastic, food that contains no nutrients, animals tortured and pumped full of antibiotics and hormones, landscapes denuded and scarred, will not be without consequence for us. How could it be otherwise?

I am on firmer ground – as a christian libertarian with thirty years or more of business and finance experience – when it comes to the proximate causes of our economic malaise and this, I think is where we will find the surprising confluence of these two rivers of thought. In the island formed in the middle of the meeting of these two rivers there is ample room for an exchange of views and solutions between the two experts and their common calculation that the end is nigh and that our systemic demise will not be pretty.

The problem for both camps is money. The environmentalists abhor the profit only motive of multinational corporations: As Joanna Macey says: “ What’s scary to me is that corporations only have one variable they seek to maximise: profits and that is both toxic and time-limited….And when you get a system driven by one single variable .. it cannot stay in balance, it cannot self-correct.” That may or may not be true of all corporations generally, but it is undoubtedly true that when money (or capital) is placed at the centre of the value creation system then its unlimited demand for (and ability to) scale, soon drive all other considerations to the very edges of the organisational focus. The tidal wave of cheap capital sloshing around the system and available primarily to the largest of institutions (banks, multinationals, governments and their agencies) is the key issue behind our burgeoning environmental stress, not the nature of capitalism itself.

Simply put, we have allowed too much money to be created out of thin air by a fractional reserve banking system deeply in cahoots with a rapacious state which derives its mandate from promises that it can neither finance nor keep that go well beyond the power of the working (tax paying) population to fulfil. This status quo is then dogmatically defended by an increasingly authoritarian elite of technocrats espousing a high octane mixture of deeply flawed economic principles loosely based and selectively cherry-picked from John Maynard Keynes’ postwar and post depression-era recipes.

The policy environment in which we have been living over the past 50 years (longer if you want to extend the period of monetary irresponsibility back beyond Nixon’s severing of the US-$’s convertibility to gold in 1971) is neither liberal nor capitalist: it is a technocratic pseudo-liberalism or clientele capitalism (crapitalism being my preferred epithet) which becomes ever more statist and reminiscent of a centrally planned economy as it becomes entangled in the web of its own inherent contradictions.

Pretty much every ill we can observe in our society can be traced back to the increasing levels of what Ben Hunt and Rusty Guinn, in their excellent Epsilon Theory essays, have come to call the financialisation of our political economy and, by extension, lives. Excessive amounts of money produced by central bank fiat at an exponential rate are metastasizing and consuming the whole body politic – there is something rotten in the state of Denmark and the rot goes to our very core. It turns citizens into debt slaves, companies into insatiable, sociopathic forces of destructive, governments into the handmaidens of oligopolists and the environment into a refuse dump.

Crapitalism in this advanced stage of the disease is a direct consequence of a 50 year era of profligacy in which ‘higher and faster’ dictated the direction and priorities of a society whose entire existence is predicated on the belief that endlessly borrowing from tomorrow to finance today is somehow a sensible way to conduct its affairs.

The environmentalists see the consequences for our planet, it’s resources and our mental and physical health and enlist the help of a dour 16 year old swedish girl to write their Mene Tekel on the wall of the carousing babylonians. The sound monetarists – the Austrians – have no such spokesgirl, but use the statistics of monetary expansion, out-of-control debt creation and broken money to tell their story for them. (A story by the way that nobody is really listening to except possibly the Remnant – you know who you are.) Both camps recognise the simple truth that if something cannot go on for ever, then it will stop. One side wants the state to do more, the other wish the state would do considerably less, secure in the conviction that more state hardly ever produces the innovative technical solutions and competition of ideas which have so far secured our continued prosperity. One side believes we are heading for extinction preceded by collapse and catastrophe. The other side recognises the danger of collapse and of severe distress, but does not claim to envisage any apocalyptic scenarios beyond the demise of the current broken monetary system.

Those in power seem happy enough to embrace, encourage and highlight the increasingly hysterical extinction psychosis of the environmentalists, using them as a vehicle for an expansion of their sphere of regulation and interference (witness the ECBs recent public ruminations on the idea of expanding its remit to include climate change management), whilst dismissing out of hand and ridiculing the concerns of the sound monetarists (whist at the same time building up the largest stores of physical gold in its vaults ever witnessed). It seems to me though that the thoughtful proponents on both sides would benefit from talking to each other much more than they do in order to foster the four Rs of Prof. Bendell’s “Deep Adaptation”: Resilience, Relinquishment, Restoration and Reconciliation and work together dismantling the crapitalist system before – well, at least after – its inexorable collapse.

Endings and beginnings – some reflections at the end of the year and decade and start of the same.

Exactly a decade ago I was at the first phase of a wrenching period of my life. At exactly this time ten years back, at the end of 2009, I was 48 hours away from waking up on New Year’s Day with an excruciating back pain caused by an inflammation in my lower vertebrae, which saw me crawling on all fours to the loo in tears of pain and being incapacitated for weeks afterwards. I told myself at the time that the reason for my condition was years of mountain-biking which had worn away the discs at the base of my spine, but it wasn’t, or rather that may have been the proximate cause of the mechanical injury, but it wasn’t the root cause. That took a few more years of self-exploration and pain of a higher order to figure out.

Back pain is symbolic of overload, of carrying the weight of the world or your little part of it alone. I was never very good at asking for help, was living in my own mental construct of the world and not really used to things going elementally pear-shaped as they did when the Great Financial Crisis rolled over us all like a tsunami in 2008 and 2009. My world and all its certainties disappeared in that tidal wave: my business was decimated and the partnership it was founded on was smashed and didn’t even survive the first wave. I found to my horror that risks that I had not even imagined were present in my business, were manifesting themselves and demonstrating the awesome power of dynamic contagion, seeking out every synapse and connecting passageway in my little construction, finding every weakness and exploiting it to destruction ruthlessly.

When the debris settled in 2010, I discovered another unpleasant truth, namely that tax is no respecter of ill-fortune and that the second wave after the initial hits, is inevitably longer, more painful and possibly more life-threatening than the initial catastrophe. Dealing with the tax consequences of an erstwhile successful business operation in the aftermath of a crisis is the bigger crisis. Tax assessed in the good times comes due at the worst of times and in a crisis, the once dependable assets and cashflows budgeted to meet those liabilities have not-so-mysteriously vanished. It is like waking up in the Ritz and finding you only have a £20 note and no credit cards in your wallet – you know that somehow it is going to be an awkward checkout. In the end, it took nine years and more capital than I could spare to sort the mess out – divided into equal parts between the Revenue and the tax advisors necessary to deal with them.

I managed to salvage a lifeboat from the wreckage of my much larger business and began rebuilding from there and on the way I learned all the lessons that I should possibly have learned at a much earlier stage in my life. The first half of the past decade I was more or less in denial. I recently re-watched the film Company Men, with Tommy Lee Jones and Ben Affleck. Ben Affleck after he gets fired, that was me: raging against reality, maintaining my facade, desperate to keep my toys and my outward symbols of success, equally desperate not to let the sense of failure and loss overwhelm me and wholly uncertain of who I was without all of those things. And Ben Affleck’s wife, that was my wife: practical, loving, at times impatient with my inability or unwillingness to accept what is, patient to breaking point and – most important – never giving up on me, although I suspect I pushed that specific faith to its outer most limit. At one point during those ten years, she sent me a card with the words “Sometimes the bad things that happen in our lives put us on the path to the best things that will ever happen to us.” She is my lifeline.

The second half of the decade saw me still trying to reconstruct the world that I had lost in the previous period, but with declining levels of energy and enthusiasm. I obviously needed to learn Einstein’s dictum about madness being defined as doing the same thing over and over again and expecting a different result. I saw that eventually, and accepted it a little later (one of my great challenges in life is reducing the time between realisation (usually very early) and acceptance (only when I have been punched square in the face often enough) and meaningful change). I left Munich, Germany which had been home for 28 years at the beginning of 2015 – mid-decade – and moved the family to Ireland, as much to demonstrate to myself that I needed to change as to reconnect with my language, which I was sorely missing. But how steadfastly we cling to the image of ourselves, the one we have carefully constructed and present to the outside world! How loth we are to give that up, how painful it is to reveal our own Wizard of Oz to ourselves, to draw back the curtain on our vanity and see the smaller man. Only to find that the smaller man, is in fact the essence and larger than life itself, he just doesn’t look like the facade we have so carefully constructed.

Three years ago I attended a funeral for a friend – actually the husband of a dear friend – who had taken his own life. He was my age, give or take, popular and apparently successful, very well connected and well-loved by his wife and two children. The memorial hall at the cemetery was packed to capacity with the great and the good and all his friends and family. The coffin was groaning under the weight of flowers and a large photograph of his happy, beaming face was positioned behind the casket in the midst of a profusion of roses and wreaths. Everyone knew the general circumstance of his death, but no details and no-one mentioned it. It was the elephant in the memorial hall. The vicar, who had presided over his wedding and christened his children, knew him well and decided to shoot the elephant from the get-go. He started the service with a quotation from Christian Friedrich Hebbel “Der ich bin grüsst trauernd den, der ich sein könnte.” which roughly translated reads “The man that I am greets in sadness the man that I could be.” I can’t remember any of the rest of the service, as that quotation kept me occupied for the rest of the day, the days afterwards and still gives me gristle to chew on. I realised, sitting in the rotunda surrounded by 300 grieving friends of my friend, that if the distance between your reality and your image of what you could or should be, grows too large, then, at an age when you have more of your life behind you than ahead of you, the effort of closing the gap appears overwhelming and resignation and desperate sadness follow. Then taking the exit voluntarily makes sense if you have convinced yourself that closing that gap between who you are and who you might have been is impossible. All the love of family and friends counts for nothing once you have calculated that you cannot close that gap and that the pain and sadness will increase as your potential self “the man you could be” fades further into the distance. This especially true if your measure of you is primarily in units of material wealth and currency.

Only it is an illusion. There is no “distance”, just faith. And, as trite as it might seem, prosperity is not measured in money: using the right yardstick is key. If the last ten years have been good for anything (and they have been good for so much) it is this: The realisation that the “you you could be” is always there inside and close by. Time is irrelevant, distance is a false construct, and what you measure with determines the answer. In the sadness is hidden the energy to change. Resignation is comfortable and reality is just a question of perspective.

So, the day before the end of the year, with the prospect of a long hike along St. Kevin’s Trail tomorrow and all to play for, I am so looking forward to this next decade. Bring it on.

Capital Allocation – but where? A response to Millionaire Mentor @davidharrison

If you want to become a millionaire your most important job is allocating capital. The worst thing you can do is have your capital in things that earn no return or in bank accounts. Invest your money in risk adjusted returns of your choice – implying you must understand risk.” Millionaire Mentor (@DavidIHarrison, Twitter Tuesday, 28th May 2019)
The first thing I need to get off my chest is my continued sense of astonishment are the depth and quality of some of the outstanding thinkers and actors from all walks of life active on Twitter and willing to share their reflections, insights, experiences and wisdom on this medium. I have significantly expanded my sources of inspiration and thoughtful places to experience an intelligent debate by finding and following experts on Twitter. Kudos to all of you who make the effort to share and enrich the lives of your followers. One of the experts I follow is the UK based wealth manager David Harrison who goes by the handle Millionaire Mentor (@davidharrison). I have no idea whether he is good or great at his profession but he always posts thought-provoking comments and thinks deeply about his craft and its challenges. The following longer comment is one that I composed to David off-line in response to the Tweet quoted above.
Dear David Harrison,
I enjoyed your recent tweet because it throws up so many questions about the nature of wealth and, of course, its creation. We live in such a financialized economy and society and our concept of success has been so traduced to such simplistic concepts pertaining to money and wealth, through the grotesque inflation and consequent proliferation of both money in its broadest definition and financial assets, that we are forced to deal with cartoons of wealth against which we measure out relative success, with little understanding of where it comes from and skills required to create it. So, on reading your tweet, I was intrigued to know what exactly do you tell people about risk and reward in today’s challenging environment to enable them to make “better” capital allocation decisions. I don’t envy your responsibility one jot – there don’t seem to be many places to hide if you are a saver, even an enterprising one – who is not also practised in business.
I live and work in the midmarket /SME world – the messy world of entrepreneurs, family business owners and other holders of enterprises. I buy businesses in distress or in need of critical restructuring and I also teach business owners a course on finance which I have developed myself over the years to help them learn how to think like investors in their own businesses (so they don‘t end up as potential deals for me). I see the destruction of capital and wealth and the ignorance around the forces of nature that conspire to consume and destroy capital on a daily basis. I believe I have a pretty good understanding of the extraordinary power of value creation in a well-run business and also of the speed with which value can be destroyed. I am well-acquainted with the different forms which wealth can take and how inefficient, cumbersome, dangerous and misleading the path from £1,0 million in theoretical business value to £1,0 million in the bank is.
Whilst you are quite correct to point out that capital needs to be allocated wisely and put to work diligently, the fact is, that in today‘s zero interest rate environment, ludicrous valuations of financial and real-estate assets (a direct cause of the former) along with a sense of return entitlement running through all levels of society that is inversely proportional to the knowledge of where original return (and its commensurate risk) is generated, we have, collectively, rarely been less well-prepared to make those sort of capital allocation choices. In addition, the penalties for getting it wrong are likely to be higher and more deleterious than at any time in the recent past.
My own perspective is that generally, one needs to be as close to the cash-flow spigot as possible and to control its flow before it wends its way through the financialisation pipelines and dribbles out onto the plates of financial consumers. You appeal to owners of capital who wish to become millionaires and I find myself asking who these people might be and what advice you will be giving them.  If you are already a cash millionaire then you better be prepared to wade (back?) into the weeds and identify value-creating business opportunities if you want to put your money to work, otherwise, you are in serious danger of capital erosion, the further away you are from the source. If you are expecting your €100K (or whatever) to become £1,0 million (through investments or savings) then you may have to wait a very long time or work supremely efficiently before you have a cat in hells chance of achieving that goal.
And there is the question of what that £1,0 million will do for you. In the good old days (which I am naively assuming you remember not knowing how old or young you are) a gilt-edged portfolio of £1,0 million could be relied upon to produce a comfortable yield of £50K pre-tax – enough to supplement a reasonable pension/annuity. Today it is worth a fraction of that. That same income would require a capital base of £ 5-7 million which takes you into the top 0,5% of the population, possibly higher if you strip the non-doms out of the statistics. When Marilyn Monroe stated in 1959 “Some Like it Hot” that millionaires need to wear glasses because they ruin their eyes from squinting at all the little numbers in Wall St. Journal, a millionaire’s purchasing and income generation power was 6 – 10 times higher than today, tax rates were lower, and the relationship between various risk assets was intuitive.
So whilst I applaud the sentiment of highlighting the need for attentive and mindful capital allocation, I would love to discuss with you what that actually means for the investor not accustomed, trained or educated in the assumption of real commercial risk – the last place in which capital CAN be allocated with a semblance of favourable risk-reward parameters (as you have pointed out in your subsequent tweet.)
Apologies for the ramble – now you see why I wanted to take this off-line. You are making a really important point and I don‘t want to detract from it one iota, but I believe you should explain what that means and what people should do.
Best wishes,

The Best and the Rest Lessons for SMEs.

A recent study of returns in SMEs (Small and Medium sized Enterprises) came to some astonishing conclusions, which I would like to share with you. In one of the largest studies of its kind, Magdalena Pollok, of the University of Bremen, Germany examined the return profiles of 1,400 SMEs in the north west of Germany over a five year period from 2008 – 2012, grouped by sectors and then subdivided into specific industry codes. Looking at returns (EBIT) as a percentage of revenue, she then compared the average returns of each sector with the returns generated by the best in each sector, defined as the top 10%. The results are displayed in the graph below:

Across all the sectors, the average profit margin before financing costs and taxes is 2.7%, with surprisingly little variance. Equally, the results of the Top 10 average out at around 17.2%, a factor of approximately six times the average, although with much larger variance. Six times! And that is just the average. That average contains a 10% weighting of the Top 10%, which means, that if you strip out their oversized contribution to the average (which comes out at 1.72% points) then that leaves the other 90% sharing a meagre 1.1% of the average returns.

Whilst this research study is the most recent and also the most detailed one covering Small and Medium sized businesses, that I have seen, it ties in with results I have come across from studies in other countries, most notably the US and the UK. In most advanced economies, SMEs and small owner-managed businesses, defined as businesses with less than 250 employees and with less than 50 million in annual revenue, make up the vast majority of business entities. Somewhere between 93 and 99% of all companies in most large economies – and all european ones – are small or medium sized.

So how are we to interpret these dramatic numbers? What story are the statistics telling us?

Well, firstly, I suppose the really good news is, that there are extraordinary returns to be made in almost every industry and service sector, even in sectors thought to have horrible, commodity-type economic profiles and reputations. The second bit of good news is, that there is obviously a right way of going about capturing those returns and, by definition, a wrong way, probably lots of wrong ways. Thirdly, the rewards for getting it right are disproportionately high.

The frightening aspect of the research is the sheer volume of companies delivering subpar performance. If in a sample of 1,400 companies, 140 are taking the lion’s share of the returns (64% or two thirds of the average), then, by definition, 1,260 are having to make do with substantially less and my guess is, that the top 35% probably account for almost all of the positive returns generated, with a substantial number breaking even and a not insignificant bottom section actually losing money.

Again, this analysis is bourne out by evidence from international studies and from anecdotal evidence from the global SME sector. Most small and medium sized companies are doing an awful lot worse than they could or should be.

In his excellent book the E-Myth, Michael Gerber points out that “in the US people who own small businesses work far more than they should for the return they’re getting” and notes “that 40% of businesses fail in the first year and 80% will have failed after five years.” Of the 20% that make it through the first five years, another 80% will have failed before they can celebrate their 10th anniversary. A 20% survival rate on the 20% that made it to year five is 4% of the total.

Leaving aside for the moment the question of why anyone would want to embark on a venture with such miserable odds of success and with such a high cost of failure, the real questions are: What are the best doing, that is so much better than the rest and how, given their limited resources, could the odds be changed to give the rest a better shot of achieving significantly higher sustainable returns?

My friend and sponsor of the research report, Lutz Penzel, himself a keen student of SMEs and an investor in distressed businesses, is quite clear on the causes of this underperformance. He says “The fastest route to higher returns is in a concentrated and relentless focus on serving the needs of a well-defined target client or customer group – in a word ‘strategy’.” My business partner Dr. Kerstin Friedrich, a lifelong observer of SMEs and their struggle with strategy, is adamant that the spoils go to the specialist and that superior returns are only available to those who understand and embrace a strategy of laser-focused specialisation. She says “In a world in which everything is in oversupply, healthy survival and growth is only possible by creating rich seams of demand, which we do by evolving into specialists and focusing on the problems of others. Securing the rewards of specialisation whilst avoiding the risks, is the key to sustainable success and, strange as it might seem, smaller businesses are today at a significant advantage to larger ones.”

So, strategy and specialisation appear to be the keys to unlocking the door to lasting success. Unfortunately the word “strategy” has become almost meaningless through over- and misuse in the business context. It has come to mean whatever the speaker wants it mean. But if strategy is crucial and specialisation the key to evolving from the rest to the best, then we, the entrepreneurs, SME business owners and leaders and their trusted advisors need to recapture the term and fill it with meaning that matters.

So here is my definition: Strategy is the deliberate organisation and direction of available resources most effectively to achieve a stated objective.

And here is Tim Ferriss’: “Imagine if for every person you met, you thought of some way to help them, something you could do for them? And you looked at it in a way that entirely benefited them and not you? The cumulative effect of this would have over time would be profound: You’d learn a great deal by solving diverse problems. You’d develop a reputation for being indispensable. You would have countless new relationships. You would have an enormous bank of favours to call upon down the road. That is what [..] strategy is all about – helping yourself by helping others.” Tim Ferriss, Tools of Titans (p. 338)

Combine the two and you have a clear set of instructions:

  1. It’s not about you – it’s about putting yourself and your resources in service of others. If this means changing your attitude, then work on it.
  2. Define the problem** you are seeking to solve and articulate it. If you can’t, then you’re not focused.
  3. Define the specific target clients** for whom the problem is real and urgent. If you can’t, then you’re not focused.
  4. Be aware of the resources at your disposal** (hint: they include intangible, as well as tangible resources. Another hint: your time, enthusiasm and expertise are amongst your most valuable resources. How are you directing them?). If you are unsure, then you how can you focus them effectively?
  5. Define the innovative product/process/service** through which you are solving their problem / meeting their need. Answer the question: How can you better solve the problem / meet the need than it is currently being solved or met?

I call this process “enlightened altruism”. It is altruistic, because it is about serving others. It is enlightened, because it derives from a belief that, to quote Benjamin Franklin, “we do well by doing good.”

The top 10% of companies securing the largest share of the returns available in any industry are doing this. They are focusing their efforts entirely on serving the needs and solving the problems of their tightly defined target customers. They are strategically clear and highly specialised. Isn’t it time you were as well?