You are an asset owner
The first and by far most important step you will take is to start thinking of yourself as an asset owner. Most of us spend our lives exchanging our labor and time for money. And yet we only think about money when we need it — for a deposit for a mortgage, for a trip, or because we can’t pay the bills as the end of the month nears. We all think in terms of short term cash flows — this month’s salary, this month’s pension come in, and all these expenses go out. Until next month. Repeat.
And this is why so many people will never have savings. Unless you’re fortunate enough to inherit wealth, or have a salary so large that you cannot manage to squander it entirely, meaning that savings accumulate by themselves, you have to actively work to create your capital and put it to use over time. You need to understand you are an asset owner, you need to think carefully about it, you need to count it/account for it, and you need to develop a long term strategy for yourself — the corporation of you.
You have 100USD in savings? You own assets worth 100 USD and should do something with them.
You own a small beach house? You are an asset owner and need to think how to optimize this asset you own.
All you have to your name is a debt of 10.000USD to your bank? You are also an asset owner, and own a 10.000USD liability. You need to think of your -10.000 net assets and repay them in the most optimal way possible: all at once? As soon as possible? In advance of the loan schedule? Or should you buy out this loan with another loan, with a smaller interest rate?
We are all asset owners. We all own assets: a house, a portfolio of investments, or cash on a bank savings account. Or maybe all you own is a loan. In all these cases, you need to think like an asset owner in order to make the optimal decisions for how to manage your portfolio of assets.
Own the world
What do investors invest in? Simply the world around us. Most of us go through the world as thoughtless consumers — we want coffee, we buy coffee, we drink coffee. Investors go through the world by becoming co owners of the world they inhabit. They want coffee, they buy coffee, they drink coffee, but they also buy stock in the coffee company and become co owners of it.
You bought a coffee at Starbucks today? Starbucks is a public company trading at 105 US dollars per share. You took a flight from Los Angeles to New York today, or from Tokyo to Osaka, or from Berlin to London? American Airlines, Delta Airlines, JAL, British Airways, Lufthansa — they are all public companies whose ownership is traded on stock exchanges. You use Microsoft Word today? Microsoft is a public company whose price per share is 244.99USD at the time of writing. You just checked your iPhone? Apple is a public company trading at 135.37USD at the time of writing. You drive a Ford, Tesla, Mitsubishi, Renault, Volkswagen, Toyota? They are all public companies in which you can buy shares. You filled up your car with gas today? BP, Shell, Chevron, Total and many others around the world are all public companies. You took your Advil before reading my post? Or perhaps a little blue pill before your night out yesterday? Well, their manufacturer, Pfizer, is also a public company. You like Starbucks like me? You spend 4–5 dollars on a coffee there daily? Why not become an owner of Starbucks? Buy one share of Starbucks for 105 US dollars — this is equivalent to one month of coffees for the more addicted among us.
Right now you might be thinking — but how can I ever make sense of all these companies and know which ones to invest in? The answer is you don’t. I have no idea what BP will do or if Toyota is a good buy. Indeed, I generally prefer very general investing instruments that buy an entire stock exchange as opposed to selecting specific companies. I only follow a few companies myself at any point in time. What I want you to understand is that investing is not some weird, complicated, activity for pros. Investing simply means starting to own a small piece of the world around you — a small piece of the companies whose products and services you use in your daily life.
Investing simply means owning a small part of our world. And investing fundamentally works because in general, our world, our human species, tends to do well. Humanity is generally getting richer, consuming more, living longer — good things for your investment portfolio.
Just start investing
Just like with any activity — sports, painting, work, a hobby — the most important thing is that you START. You will never be “ready” to invest — but you are ready to start learning and experiencing today. You are not trying to manage 10 billion dollars for the national pension fund. You just want to dip your toes, to put a bit of money to work for you — this is it. And this, you can do today. This, we should have all done a long time ago.
At my former firm, our CEO always wanted everyone in the team to have an investment account, and at least one investment. What he really wanted was for all our team of engineers and scientists to have some money invested in the market, to have to follow the market as a result, and to start thinking like an investor. It’s very good advice.
As with everything in life, the most important thing is to start. It almost doesn’t matter where, or how you start — you can only start right. This is a life long journey. You spend your life working, compensated in money, you should also spend more of your life caring for your money and making it work for you.
So start. You cannot start wrong. The only wrong thing is to delay decisions and action. And if you invested in the past but then stopped and now forgot your account password etc. etc. (so many reasons not to do something!) — a common occurrence with people around me — don’t worry, start again today.
Here is your task this week, or for the next two weeks: read our choosing a broker guide. We cover several countries there, but perhaps not yours. Do a bit of online research for your country, following our guide. And pick a broker. Open an account. And buy something — anything. Buy 1 share of AMD (90 US dollars at the time of writing). Buy 1 share of Coca Cola (40 US dollars). Buy one share of a product that represents the 500 largest American companies (46 US dollars for the SPDR ETF product which is exactly this).
And tonight, or this weekend, celebrate. Treat yourself to a nice time. It’s the beginning of something special. Something you’ve long known you should be doing. And now you are. It’s a lifelong journey. It’s your beginning as an investor. It’s your beginning as an asset owner, as a capital allocator, as someone who makes money work for himself/herself.
Don’t be afraid
Many people are afraid of the stock market. We tend to think we are not experts, and the stock market is that big bad dangerous world where we can lose all our money. When you want to know what risk you are taking, I find that a good thing to do is to look at what is the worst that can happen. As such, let me summarize for you the 10 most recent financial crises covering almost half a century:
In average, assuming you invested just before a major financial crisis — right when it was starting, you would have lost 22.3% on your US equities portfolio from the top, to the bottom of the crisis. Not pleasant, but hardly something that would kill you right? And remember, these are the worst case scenario, and the worst timings possible, over the past 30–40 years. It is highly unlikely that you will start investing right before a major financial crisis starts. And of course, over this period the US market increased dramatically, so even if you invested right before one of these 10 crises, as long as you stayed invested, by now your investment portfolio would be up in value.
See, now that you know the worst that can happen, investing is not something to be so scared about.
Capital allocation
Once you realize that we are all asset owners it allows you to start thinking like a capital allocator. What is capital allocation?
Capital allocation, or how you allocate your capital, or how you invest your resources, refers to the decisions you make about your assets or resources. How to invest them best. Essentially how to increase your returns versus your risk, on your assets.
Let’s take the example of 200 USD. You can invest 200 USD in the stock market. Or you can buy yourself a new pair of glasses. Or you can use them to replace the sofa chair in your flat as your Airbnb guests complained about your current one. Or yet you can use them to reimburse part of a small loan you took 6 months ago. All these decisions are encompassed by what we call capital allocation. It is difficult to overestimate the importance of this process.
Capital allocation is essentially thinking about your entire portfolio of assets and how to best use/invest them. It is a top down perspective — you think about everything you own, and decide how to invest in in an optimal manner. You own a house — should you start renting it on Airbnb when you are out of town? You own 1000USD in your savings account — should you leave it on your cash savings account, or should you invest it in crypto? You own a 5000USD loan to an online lender — should you pay it back per the schedule, or should you repay it in advance?
Many analysts who study companies consider this to be the most important part of a CEO’s job. Similarly, I think capital allocation is the most important job for each of us — the CEOs of our own corporations of one. Whether you have -1000, +100, +100.000, or +1.000.000 in assets, this is equally important — the amounts may be different, the tools you have access to may be different, but the process is exactly the same, and equally important. What I want you to do is to start thinking about everything you own that can have a productive use (that can earn you money somehow) — this is your portfolio of productive assets. What most people do, is analyze each part individually — this is my second house, this is my car, this is my savings account. You will never arrive at optimal decisions if you think like this. You need to think about your entire portfolio of assets, and to make capital allocation decisions by thinking about your entire portfolio together, not just one part of it at a time.
Capital allocation is simply:
Writing down all your productive assets — what they are, what their value is, and what you could do with them. Think about your entire portfolio of assets, not only some of them.
Deciding how to put them to the best use — the one that gives you the highest return and the lowest risk based on your preferences, for your overall portfolio of assets.
Let me give you two concrete examples here of why you should always think like a capital allocator.
Why should you always keep a global perspective on your portfolio of assets?
Let’s take the example of someone who bought a flat 5 years ago, for 1.000.000 USD dollars. Every year, this person pays their bank 50.000USD back for the loan. In the meantime, the city has been doing well, so the value of the house increases by 5% every year. Now many people look at this situation and think: I owe my bank 750.000 US dollars (1.000.000 minus the 250.000 you paid back over the past five years). I am in debt. (they focus on the debt component and think they don’t own anything since they still have so much left to pay. Many people around the world, including families like mine that grew up in communist countries, have a visceral fear of being in debt — we are wrong, as I explain it here). A capital allocator thinks differently in this situation: I owe my bank 750.000 US dollars, but my house is now worth 1.215.500 US dollars (1.000.000 US dollar house growing in value at 5% per year for 5 years). I therefore am not in debt, on the contrary I have almost 500.000 US dollars of net worth/net assets — no stress (the current value of the flat 1.215.500 — what is still owed to the bank, 750.000). Oh and how can I invest these assets or somehow benefit from this net worth I have?
Now let’s look at the second part of capital allocation, which is putting every asset you own to its best use. Let’s take the example of a young couple that bought a house 20 years ago, repaid it, and whose only child, 18 years old now, has just left for college and does not live at home anymore. The real estate market has been appreciating nicely over the past 20 years and people are now talking of a “bubble” or a very high point, highest than the city has ever experienced. Most people will simply keep this house and hope it keeps appreciating in value until one day they pass it to their kids or to the charity of their choice (no need to spoil those brats too much hein — you’ve already given them more than they needed to succeed in life?). How would a capital allocator think? Well, it’s your house, but it’s also a valuable asset. You think the real estate market is red hot at the moment, and it might go back lower, maybe next year or maybe in a few years — you don’t know for sure, no one knows. But you know it’s a good market to sell in. A capital allocator would assess the sale value of the house, and would seriously consider taking advantage of this red hot market. Would think about selling this house and buying a smaller one, now that kiddo is gone to college, a few streets away. And use the difference between the two, let’s say 200.000 US dollars, to put them into a stock investing account. Or to buy that beach house in your favorite seaside town.
Now let’s imagine you bought that beach house, and two years later you’re told that due to tourism and Airbnb demand, it gained a whopping 30% in value and people are willing to buy it from you. What would a normal person do? Ignore it. What would a capital allocator do? Sell the house, pocket a 30% profits over two years, use part of the money to buy another beach house in a less touristy town 10min by car away, and use the profits made to add them to his/her investing account. You know how you often read in newspapers that some celebrity or hedge fund billionaire is selling this or that house? Do you think they need the money? Most of the time not really. But they, or their advisors, are simply smart capital allocators — they buy cheap and sell high, and don’t hesitate to pocket a nice profit when the trade is offered to them.
See capital allocation is an attitude, not an exact formula, and it incorporates your personal preferences. No one is telling you exactly what to do. It is simply an attitude to adopt in life. Regularly think about your portfolio of assets, and how to best make it work for you, your needs, and your preferences.
Tracking and accounting.
To be able to know where you’re going, you need to first know where you are. And to know where you are, you need to count. If any business owner on this planet, from your local baker to your bank tells you they don’t really “do accounting” and don’t really keep track of their businesses’ revenue, expenses, taxes — you would think they are foolish at least. You would run for the door.
And yet most of us find it perfectly acceptable to not do this for ourselves. We don’t apply to ourselves the same standards we apply to the businesses we work for or with. We expect the companies we work for to be well run, we expect the companies we work with to be well run, yet we completely mismanage our own corporations, ourselves. Most people have no idea what their bank account has in it now, what their brokerage account has in it, what their savings account has in it, what their house is worth. I myself grew up in a family where we never kept track of money or expenses and for most of my life we struggled to do this.
If you want to embark on a journey of financial mastery, you need to do this regularly. You can’t make good analysis, and good decisions, if you’re blind. However, here is the great part: you do not need to do it in more detail than you want to. Just the highest level overview, just a check up once a week or twice a month, is a good start. You are not a full time banker — you just need to know where you are.
Second best news: You do not need paid apps — although so much VC money has flown into all kinds of apps lately that if you can get the VC community to subsidize you, by all means go ahead. There is nothing like you a private person, living off those “sophisticated investors” here and there. Coming back to our point I know that nowadays the beginning of every great journey — improving your health, making money, meditating, liberating your country from dictatorship — has to start by installing some bullshit app. Of course right? How else would it begin? I think we should keep things simple, and use the tools we already have — free and versatile. A simple tool such as Excel or Google Sheets, or any other similar app that either you already have, and/or is free, is all you will ever need. Alternatively, you can create free portfolios on MSN for example, or yet Yahoo:
https://www.msn.com/en-us/money/
https://finance.yahoo.com/portfolios
Of course, there are plenty of great apps and widgets and what not out there so feel free to use whatever you like — just stick with it. Me? I’m old school: I use good old Word and Excel for all my needs.
Make it a habit to check your bank account weekly: final balance, but also get an idea of transactions or where your money goes. Maybe every Saturday or Sunday morning. You are investing in yourself and taking control of your finances by doing this. It’s not a chore, but something you want to do and are happy to do. Parts of our financial system rely on us not doing this. I can show you a stack of letters from my bank in France, an account I don’t often use, saying I had a tiny sub zero balance for more than 15 days, so they had to send me this letter and charge me an “intervention fee” of 20 euros. Sometimes my account was at -5 euros from having bought a coffee in a European airport with my French card and I paid 20 euros in bank fines as a result.
If you have a stock portfolio, either you are active and should check it daily, or you are a long term investor, in which case I would check it once a month — maybe last weekend of the month, so that the prices from the last day of trading — the last Friday (business day) of the month — is available.
If you have three loans with two banks and an online lender, check on it monthly to know where it is.
Overall, if someone asks you tomorrow:
How much cash do you have in your current and savings account?
What instruments are you invested in (maybe just a bank savings account, maybe some savings product in your country that gets you a tax rebate, maybe a diversified stock portfolio…)?
What interest rate do you get on your savings account?
What did your stock portfolio do last month (compared to the month before)?
What loans do you have, what is the interest you pay on it, how much do you have left to pay?
You should be able to answer these questions with information that is generally accurate.
You cannot know how to allocate your capital, if you do not know what your capital is.
You do not need to become a private banker, just to get better at it.
You do not need apps and websites, just a blank page and common sense.
You are an asset owner, and you are a capital allocator, whether you want to or not.
Personal finance involves simple algebra. You will never need more math than addition, subtraction, multiplication and division — what you learn when you are 7 years old in school. But, whether in your mind, or with a calculator, or with an excel spreadsheet, you do need to perform these simple calculations. People love talking and asking questions of a general nature “the bank said I can get another 100.000 euros loan — should I buy a studio and rent it out?” Stop speaking theory and hypotheticals, and start answering your own questions with basic algebra. You should work out in an excel any financial/investing question you have. For the above for example, take 30–60min, and create a small simulation of this project for yourself, and answer your own question.
