The Aspirational Investor
I am reading my friend Ashvin Chhabra’s book The Aspirational Investor. I am not much of a fan of business books or books about investing so you might ask “why are you reading that book?” And that would be a great question.
I studied finance at Wharton and learned a bunch of modern finance, investing and portfolio theory. I understand how people on wall street and the world of modern asset management approach investing but we have never embraced it on our own investing.
We earned all of our wealth taking highly concentrated positions in startups. We gave most of it back in the 2000 crash which is what happens when you take highly concentrated positions in risky assets. Then we earned it back the same way. We have diversified over the past decade but almost entirely into self owned and operated real estate and cash. We don’t own public stocks other than shares of public companies we backed when they were startups and Google. We don’t own bonds.
So I was attracted to Ashvin’s thinking on finding a wealth creation and management strategy that aligns with your own personal goals and needs and desires instead of one that is cookie cutter, formulaic, and generic. That is what we have done. And I am seeking to validate our strategy or at least understand what is right about it and what is wrong about it. After all, we created it on our own based on what felt right to us.
Ashvin’s Wealth Allocation Framework “shifts the focus of investment strategy from portfolios and markets to individuals and the objectives that really matter: things like protecting against unexpected financial crises, paying for education or retirement, and financing philanthropy and entrepreneurship”.
That sounds smart to me and so I am reading his book and enjoying it very much. If you think about investing differently or want to, you might enjoy it too. You can find it on Amazon.
All depends on your internal risk tolerance. Let’s be clear, for 99.9% of the population, investing in a no-load no fee mutual fund that replicates the S&P is the best way to go. You cannot beat the market unless you are “trading” off asymmetric information. Investing in VC is exactly that. On the other hand, once you know where your comfort level is, put aside those assets and then assume some risk with the other ones. Start small and grow tall.When I started trading on my own, my backer told me, “Keep 100k liquid in case you need it. As you trade bigger, increase the liquidity.” Boy was he right.
pointsnfigures:Diversification is protection against Ignorance. Warren Buffet.
you can’t beat the market if you are an average person doing their thing. It’s irresponsible to advise them otherwise. Warren Buffet is clearly 4 standard deviations away from the mean
Wealth Creation = ConcentrationWealth Preservation = DiversificationDiversification is a hedge for ignorance – Buffett and others. Thats Ok, ignorance is not used in a normative sense here…it simply means ‘not knowing’ in this context. And nobody, absolutely nobody, knows what WILL happen, so diversification is right in that sense.But then again…Wealth Creation = Concentration.Also, most critical is that your investing approach mirrors your personality.
Diversification is a hedge for ignoranceAlso a hedge for luck. (Ignorance often leads to luck in both directions ironically.)Also, most critical is that your investing approach mirrors your personality.Nothing that if you are married or have a partner, you have to also take them into consideration when making investment decisions. And those others can fall into many categories of risk tolerance, intelligence or general temperament. Such as but not limited to:1) Supportive to the extent that they don’t even questions what decisions you make with the family money. Not entirely a good setup.2) Generally non-supportive and always giving you a hard time such that you will miss out on many opportunities for fear of being blamed for making a mistake (kind of like working for a corporation in a way). 3) Clueless and adding their uniformed 2 cents to a discussion that they are not suited to even get involved in. Better yet asking someone else what they think of what you are doing with money or decisions.4) Clueless in thinking that you can’t make mistakes (resulting in #1) and causing you to get sloppy. And actually prevented since many investment decisions (such as real estate purchase and sales in two names) obviously require signatures from both parties….
LE:to write your posts are you using a computer or phone, word or docs?
Desktop computer and type right in the disqus comment window.
You forgot: “sugar momma”
For many, the concentration part is their jobs.
Risk tolerance should be applied to career choices too and often isn’t. If you’re working for a start up and banking on an exit you need to be cognizant of the company’s objectives relative to your own age, personal needs, life stage, etc. Without making proper career choices one may never be in a position to have the wealth creation that requires sound financial planning. Chasing the Holy Grail is a worthwhile pursuit as long as it’s not at the expense of one’s future and financial stability. Opportunity costs and risk tolerance need to be factored into career choices, too.
~45,000 public companies in the world.think about the incredible brand equity behind being the only one someone (smart) buys.
Thanks for sharing on this, Fred. Was just thinking the other day how this is so very true. The financial services apce has tried to “cookie cutter” this stuff and everyone has a different situation, goals and priorities. I am interested in this and just ordered the book to my kindle – thanks!
There is a tectonic shift in the FinPlan industry, especially with DOL rules in the pipe, on goal and objective based portfolio construction and management while creating a fiduciary atmosphere for the investment public that must adjust away from cookie cutter modeling. From the professional planning perspective the portfolio is viewed as the holistic accumulation of assets, debt, income, potential future liquidity events, occupation and its risks, stage of life and obviously much more. Phil Demuth, with an introduction by Ben Stein. published “The Affluent Investor” in 2013 which, like you describe, takes a very personalized and multi faceted situation based profile of an investor. The creation of personal benchmarks according to such goals helps to modify multiple behavioral biases and strengthen focus and discipline on the plan. How you invest then depends also on your life stage, who you are, what you do, and what risks your own career poses to your wealth creation while rationally creating a portfolio to counter balance those exposures. Much beyond the definition of an equation’s efficient frontier of financial instruments (not to minimize that in its own right). Your friend’s book seems like a welcome addition to the library. Thanks.
Timing & like minded people was not in the gift of my generation. “The essence of the independent mind lies not in what it thinks, but in how it thinks.” ― Christopher Hitchens
Everyone that I know that starting with nothing and accumulated a lot of wealth, did it through concentration. Many of them were unmarried when they started. For those with families, some failed from lack of support at home.I have a lot of respect for people that can live with the commitment and risks that concentration implies.
Two things to think about 1) Everyone that you know who lost a lot of wealth also did it through concentration, 2) Everyone who accumulates through concentration probably had were bright or lucky enough to pick the correct bucket.
Interesting to note: the book’s author Ashvin Chhabra was recently hired to run James Simons’ (https://en.wikipedia.org/wi… family office.
James Simons is an unusually successful and smart (or at least highly educated) hedge fund manager. His firm Renaissance Technologies has been so successful that it is not only closed to new investors ($25b AUM) but it also allegedly charges 5% management fee and 44% performance (http://www.insidermonkey.co…. Simons is a very interesting guy – he was trained as a mathematician and code-breaker and has also supported some very interesting philanthropy. If James Simons believed in Ashvin Chhabra sufficiently to hire him to run his family office, that is an unusually high endorsement.Links for more context on James Simons:https://en.wikipedia.org/wi…http://www.nytimes.com/2014…http://www.valuewalk.com/20…
the American technical aristocracy.
There’s a longer version of this, if this piques your interest.https://www.youtube.com/wat…
Fred:your investment style is fine if it works for you. Real Estate is a great wealth generator. There is no reason to reinvent the wheel. Advisors that we have followed have the best tools to guide you but you choose the map and direction.There were gems and jewels in this post and it wasn’t the endorsement of the book. Substance is important. Thanks
I haven’t read that book yet, but before you can “shift the focus of investment strategy from portfolios and markets to individuals and the objectives that really matter”, you need to accumulate some wealth as a starting point via more traditional means, whether it’s venture capital, blue chip stocks or other.It strikes me that the more initial wealth you have, the more freedom of choice and self-management you have.
VCs are paid very well when they underperform. VCs have a great gig. They raise a fund, and lock in a minimum of 10 years of fixed, fee-based compensation. Three or four years later they raise a second fund, based largely on unrealized returns of the existing fund. I read that most VC contributes only 1% of the fund size…is USV the outlier?
I think that gig takes a large toll on your health. Lots of pressure to remain relevant and find the next big thing don’t underestimate the downside.
And that should (theoretically) be a self-correcting problem. Funds that underperform can’t raise second funds and one hopes the system self cleans. I know it’s not always that tidy but ideally…
I read the other day that 2/3rds of the population lives paycheck to paycheck. Actually I will look that up now to see if I can find the source.I can’t find the original article that quoted 2/3rds but I am seeing figures of anywhere from 50% to 75% (maybe they just split the difference?). This article was interesting regarding payday lenders and how they service that .  http://www.wsj.com/articles…
http://money.cnn.com/2013/0…I think a part of it is that a world where you believe you’ll have a job next year is really different from one where you do not. Live through enough sunny days and you forget what the pain of a rainy one is. That and many people simply do not earn enough wages to cover their expenses and save.
Exactly. After being laid off in the first tech bubble, I never regained a livable wage. That was in 2002. 2014 was the first year I earned a salary that was greater than any salary I earned in the 1990’s. This has been true for many of my peers. We’ve been living below a livable wage for so long that we are lucky if we have anything left to save or invest. Personally, I’ve foregone saving to invest in my son’s education. To me that seems like the only thing worth sacrificing for at the moment.
Yup. Definitely. Saving money gives you lots of freedoms.
Yup, sad. I’m bullish on the opportunity to use microsavings to change that long term…but it won’t be a quick win.
Or wages for us regular people.
Thank you Fred – I love your recommendation, can’t wait to read it. I think I have read most everything you can on wealth management, investing in public equities, asset class allocation etc. I went off the beaten path when I was younger and followed entrepreneurship (very narrow asset class focus) and along the way expanded to other asset classes to create that diversification every prudent and smart investor recommends (i.e. real estate, public equities, infrastructure and so on). For me, the key was going off the beaten path early – taking that initial risk when I was young and then slowly adding to the more established (safer!?) areas to invest. Not novel or unique, but it seemed to have worked for me and I would recommend it to anyone. I think you need to both if one is able – go narrow (and go for it with entrepreneurship) and then expand out (buy that income producing real estate) as you accumulate. I love Buffett, Munger, Graham & Dodd, Fisher et al, but you, your partners and all the other great VC’s/investors (including Brad and his partners), are way up there as well on my list of people to follow, read and emulate.
what are your personal goals, needs, and desires?
My pyramid of investing starts with life, and its desired companion, vibrant health. I already have sufficient financial wealth, own my house and have no debt, it only makes sense to focus my efforts to increase healthy life span. This is the first time in history when it’s scientifically possible – and since 2003 that’s what I’ve been focusing on via Methuselah Foundation. This is the epitome of concentrated investing. To pursue this wealth goal we were the founding investor in Organovo in March of 2009, the absolute nadir of the financial collapse. ONVO is now on NYSE, and sells 3d liver and by Sept of this year, 3d Kidney tox assays. Human tissue, not pitri dishes, not mouse testing. Human. New parts for people are now inevitable. We invested in Silverstone Matchgrid in 2010 which developed NP! software to do paired kidney matching – and thus already at least 100 people are still alive due to getting kidneys they otherwise could not have gotten. We recently did the founding investment in Oisin in the brand new field of Senolytics – removal of senescent cells (“get the crud out”) that spawn system wide inflammation and autoimmune dysfunction – by delivering dna “smart bombs” to remove these targets cells.The point once again? At root, the prime thing that matters in wealth preservation in the mid/long run for our friends, families and selves. Restoration and preservation of Healthy Life itself.
David Gobel:Testamonial, Solicitation or Pitch?Reservation and skepticism sets in quickly here. Thank Theranos for that.
None of the above. Speaking from my heart and sharing a POV with facts/backup. Our exit with ONVO and Thiel support gave us what we need.I hear you on Theranos!!
Fred, you’ve commented before about your individual investment portfolio consisting primarily of RE and cash, which suggests a lack of confidence in the capital markets. How has being a VC colored your personal investment strategy?
Don’t want to answer for Fred here but I think he is in a unique position with respect to real estate investing by virtue of where he is located, NYC and what is happening there. That doesn’t exist in most places with respect to appreciation potential.The only thing I would wonder about Fred’s real estate investing is how diverse it is meaning how much is located in NYC vs. other areas. And how much is for appreciation vs. income.Real estate investing falls into many different categories just like anything else. My uncle bought some crap real estate in Philly in 1981 for peanuts. Ended up having to tear the buildings down because of all of the drug dealing in the area and create vacant lots. (City made them do that). The lots sat there until last year when someone came along and paid $3 million for them. The holding costs (taxes) were nominal. No grand brilliance or strategy (smart but doesn’t pertain to this). He bought some buildings for their business that they outgrew and just held on to them. My uncle died so viola his kids now own all of this and other places added for peanuts.
NY market is not dissimilar to SF, many parts of LA, Seattle, Vancouver, London as a subsection of places i’ve been over the last while.Don’t see it as unique at all.
So? You’ve highlighted a small part of the world of real estate. Those places you mentioned as additions are unique relative to the number of investible real estate out there in this country that have had those outsized returns.Fred did not buy in the 70’s he bought in 00’s. Even during that time period values grew greatly in NYC. Not to mention what happened with rents with certain types of real estate. I had a girlfriend in 2008 that owned a coop on the UES in a so so building that bought it in 2006 for $425k . The value now is roughly 700 to 750k.My “unique position” is simply because he is located in an area that he knows well, has capital to invest, and that area happens to be a hot area. As a general rule most of those three factors are necessary you can’t pick any two. Actually you can pick “hot area” and “capital” since it’s somewhat possible to use someone else for the “knows well” part of the equation.
def siding with LE in this beef. urban real estate is (1) NOT the predominant form of real estate based on the square footage of planet earth and (2) radically different in its investment nature than other forms of real estate. those who think real estate only goes up should try living for longer periods of time, or venturing out to the more forsaken neck of the woods to see how many buyers are clamoring for that stuff.
So:not urbannot recreationalnot agriculturalnot adjacent to urbannot remote from urbanWhat real estate are we taking about;)
your original comment suggested NYC real estate is not unique, presumably in the context of this conversation which is regarding real estate investing. this is simply not the case when one looks at the price chart.http://www.doctorhousingbub…and so while real estate investing in nyc, sf, or other big cities may have worked (though not always — parts of chicago and detroit have absolutely plummeted) that is pretty much a different asset class than other real estate (i.e. suburbia in the united states, parts of africa or south america going through severe political unrest and economic chaos, etc).
Downtown Detroit is actually a pretty good investment. Def on the way back, maybe not to glory days status, but def on the mend. Was there a few months ago.
Salt Shaker:Downtown Detroit can thank Dan Gilbert for the current RE valuations.
Doesn’t matter what market, all that’s required is foresight, balls and a little luck certainly doesn’t hurt. Right now, investment in the Bronx is very, very hot. One just needs time, money and patience (and oh yeah, did I say balls). My dad bought a few brownstones on the UWS/Manhattan w/ my uncle in the early 60’s for $28K or so a pop. Horrible neighborhoods. Let’s just say at the time the little park around the corner was known as “needle park,” which the book and movie “Panic in Needle Park” is based. My dad also was exploring investments in the Hamptons, way, way before most knew what the Hamptons even was. Unfortunately and sadly, he passed at a young age, though his early investments afforded my mom, me and siblings stability and a comfortable lifestyle. Feel very fortunate and appreciate that every day.
Hah not sure about that. The market that you decide to have the balls in does matter. You could have all of the foresight that you want but if you are located in Kansas (in most places) you will not approach the returns that you would have gotten in the NY Metro area. My dad bought small buildings in Philly (70’s). They appreciated greatly but nowhere near what buildings in NYC have appreciated. My dad bought one property down in AC thinking that a casino would buy the land and you know what happened there. It never happened. (It was right next to where they built a casino that is now closed.) He bought an identical small property in Sunny Isles Florida (literally at the same time) and he made a killing on that (after he died that is).Right now if you want to take a gamble buy in Atlantic City it’s like unbelievably cheap. Or Camden. Go analyze that (I am serious). What you will find is that it is a gamble essentially you are betting that AC (or Camden) will return to some viable use that will make the property you buy valuable. That doesn’t take a great deal of foresight only a conviction that if you buy cheap enough the upside exceeds the downside and carry costs.Similar though to startup investing and not withstanding what your Dad or my Dad did you’d have to make a great deal of bets for one of them to payoff thereby paying for the times that you are wrong.Separately if you say “right now Bronx is hot” means that prices have risen to the point where the risk is great relative to the obvious outcome.One of the other ways to make money in RE is to transform something. In that sense there are many more places that you could do that in. That is what many developers in NY and other areas do to make money but that isn’t investing as much as developing. Unless of course you are the money man for the developer that is doing the heavy lifting.
Of course, my point was good and bad RE investments can be found in any market. Need to have foresight to know what’s undervalued, what has growth potential, understanding of current/future rev streams, comfort in tying up capital and for how long, sound prop valuations, etc. Demand in most major urban markets has been pretty stable, but that obv can change. I’m in Seattle and residential RE here is exploding. The Bronx hasn’t gentrified yet, but it certainly will. Still pretty early in the curve.
I don’t know about Seattle but just found this:http://mynorthwest.com/2373…What in your opinion is driving this increase in demand since this article says it’s not speculation apparently.Could this be related to money flowing in the economy as a result of Amazon’s presence which extends well beyond their employees?
LE:The metrics agree with the AC RE purchase view but the return would be fifty or more years out unless there is inside assistance from Christie.
As a manager of a single family office we live this everyday. How do we best balance a portfolio across multiple asset classes? Always being mindful of how the world is changing and how to take a global approach in a rapidly changing world, all the while not risking the core wealth to give to philanthropy and provide for future generations. I don’t think I am 100% in agreement with wealth concentration equals creation and diversification equals preservation. I think calculated concentrations can lead to outsized returns, but diversified “steady eddy” investments can equal outsized returns over the long run. Also key is we employ our own tax professionals which help provide insight you may not be thinking about as you make investments on the daily, but need to be aware of to successfully manage wealth on a go forward basis. At the end of the day, its different for everyone as wealth varies, risk appetites vary and backgrounds vary.
Why do you want to be wealthy?Are you trying to preserve or create wealth?You’ll never get wealthy just saving your salary.You’ll never go poor by just saving your salary.
I found this book really opened my eyes up to the personal nature of financial planning: http://www.amazon.com/Are-Y…Basic premise is that your labor is a key part of your wealth and you should evaluate it as such.
> FrameworkFred: A word to the wise – whenever you see or hear a framework recommended (be it a financial or a software one ) …. Run, like mad, in the opposite direction. Or, at least, beware./JK, but only partially.Why, I hear you ask? Because frameworks, by definition (almost), stultify thinking. I say this even though I’ll probably release a (software) framework or three of my own at some point in the future.
I think this is an important topic. Although I admit that I am newer to angel investing vs. equities/bonds, it surprised me how smaller angels also want to invest and advise in the same way a large VC would. Too much would be riding on “liquidity,” which then means there is a big macro component due to liquidity cycles. Although many of my angel/VC friends disagree with me, I’ve been taking a more conservative approach to my angel investments bridging my knowledge from the public markets and applying it to how one should look at early stage investments. Right now we have been in a 7 year liquidity up-cycle, thus it prob won’t show, but I do believe there will be some truth in the way I’ve been investing (for like-sized angels) in the long-run.
The GOP’s Mexican Derangement by Bret Stephen’s http://www.wsj.com/articles…
So, you are trying to do financial planning over time under uncertainty and where you have some unique, personal data and considerations, e.g., assets, risks to those assets, expenditures, e.g., for college tuition, each year tax, IRA, etc. considerations, etc.Okay, suppose with what you have you could develop an Excel spreadsheet. So, for simplicity, say, each column of the spreadsheet is for one month, you have months enough for, say, 50 years, and the time is increasing from left to right.Then suppose for each of the relevant quantities you have a variable and a row, one variable per row.Then you fill in the cells of the spreadsheet. Each cell is one of three kinds: (1) A cell has a numerical expression in terms of cells in earlier columns. (2) Some cells have random numbers to model uncertainty. (3) Some cells are empty but need to have your decisions entered.Now,. you can guess at some decisions and type in the numerical values in the cells of kind (3). Then you can ask for an evaluation of the spreadsheet with Excel generating the random numbers. With the results, you can see how well you did over time with those decisions and the particular random numbers Excel selected.Next, you can have Excel do such an evaluation, say, 1000 times and get empirical probability distributions for each of the results over time.Next, you could do that over and over adjusting the decisions — you could do better but would get tired quickly.Next, you will observe that at best you are finding fixed decisions over each month of the 50 years with those decisions to remain fixed even though during the years the random numbers keep changing the real situation. You would be acting like a quarterback in football who called all four plays on first and ten and never changed the calls as the results of the earlier plays became known. Intuitively you would suspect that it should be possible to do better.Next, in some intuitive sense, in each month you would want to make the decisions for that month knowing everything that went before, both the random things and your decisions. But, then, how?Well, sure, first cut, it appears that each month, the decisions should be in terms of what went before. Without giving up too much, can argue that you need consider only the results of the previous month — that is, you can make essentially a Markov assumption, and with what we have described for the random number usage that assumption is essentially justified.Still there is a question each month of how to make the decisions considering that the random numbers of the future are not known.So, what to do?Okay, this is not nearly the first effort at this question. An early person asking this question was R. Bellman. IIRC his Ph.D. was from Princeton from work on the stability of solutions of initial value problems for ordinary differential equations. Later he did work in applied math, engineering, and medicine of wide variety.And Bellman found what to do.The work is called stochastic dynamic programming or discrete time stochastic optimal control. The key solution technique is to work backwards in time. If can make some linear, quadratic, and Gaussian assumptions, then the computations can become much easier. But, for practical problems, the computations can slow down a super computer for some days. Fortunately the computing accepts astounding amounts of easy parallelism. There are various techniques to make the computations somewhat faster.For the problem you described, likely an hour or so in a cloud could give some good results.Sure, there’s a SaaS startup opportunity here, but that’s not the startup I’m working on.There are some somewhat serious claims that in a fundamental sense such stochastic optimal control is the unique, best approach to artificial intelligence. There is a point here.Yes, my Ph.D. dissertation research was in this field, and there I was able to make the computations reasonable.
Contributors:Has anyone test drove Microsoft’s new software called “Planner”? A Trello competitor.Microsoft Planner, team collaboration software that lets you visually organize plans, assign tasks, share files, chat and more.
Contributors:Samsung new S8 will be rolled out soon but the real news is regarding a bendable phone series Samsung has developed. Why do we need a bendable phone?www.yahoo.com/amphtml/tech/…
Contributors:EX-NASA Chief Guides Chip Startup KnuEdge that has developed a new processor and related hardware and software.http://www.wsj.com/articles…
As a relatively new investor, I’ve been using this software “Trade Ideas” to allow me to start planning and reaching my goals. Their technology allows me to run a bunch of scans and alerts at once, and their algorithmic software is really impressive, see here http://bit.ly/1PhECxD.
Fred, I haven’t read this book but this is an excellent post as you are raising a bigger issue about 3 major problems 1. Most of us don’t have access to non correlated, asset based investments that may generate cash flow 2. Most people don’t have liquid cash & can’t invest the way you, HNIs or FOs can do (write 6 or 7 figure checks) and have appetite for long hold periods. 3. Most people don’t have the expertise or time to take your approach- self managed RE portfolio, so people do “nothing”. This leaves even financially responsible consumers over exposed to stock market volatility (401Ks, 529, ETFs), keeping money in cash (bad long term) or they simply spending it (we american’s love debt). This has created the biggest wealth management and financial planning crisis we are facing in generations. $14T of consumer debt. We faced the problem you raised for years with no easy solution, so we ended up starting YieldStreet to change that and democratize access to Accredited investors today and everyone hopefully soon.