I have worked with Finance all my life and started buying shares in my teens. At college I had a Science focus which was the thing to do in Sweden if you wanted to maximize your career options. This gave me a good understanding of arithmetic and numbers, something I think is very important for any finance industry participant. Post college I studied Law and Commerce and at the same time went through military training ending up Captain in Engineering troops.
Working and living in seven countries and held senior finance roles as CEO and General Manager of six banks including a role with the World Bank. My first job was with the City of Stockholm where I was City Treasurer for five years. In Europe my finance experience included the bond market and I was responsible for issuing bonds in many markets. I have also been involved with share issues and of course general corporate finance both as a borrower and also as a banker/ intermediary. My focus has been building strong teams and maintaining good market contacts and of course looking after customers and trying to build something better in all my roles.
As far as bonds are concerned I have issued fixed and floating rate bonds, extendible and retractable bonds, bonds with swaps attached and bonds with warrants in London, New York, Tokyo, Amsterdam, Stockholm, Kuwait and Frankfurt. When I worked for the World Bank in Kenya I was instrumental in the first issuance ever of government bonds in Kenya. My first bank job in Sweden was as relationship manager for the major clients and head of international capital markets and the new issues department. IPO’s (initial public offerings) in Sweden seem to always be successful and trade at a premium which I also found to be true in Singapore. My impression in New Zealand is that IPO’s are much less reliable for investors, as here it seems a matter of making the owners rich rather than adding needed capital to further some commercial success. Much of Northern Europe is technology driven rather than driven by finance and accounting and perhaps that is part of the reason.
In London, Singapore and Tokyo I was exposed to many financial planners who tried to sell financial solutions to well remunerated expats. It is easy to develop a dislike for some of their practices such as trying to shift your investment portfolio before they even know you, hard selling ideas that don’t even interest you, suggesting remote tax havens like Channel Islands or Bermuda Islands where you have no control at all over how things are done. Most ideas are centred on multi-year commitments with little or no ability to exit schemes should you change your mind. And how do you develop trust in someone you meet for the first time and who inevitably is driven by his commission rather than a genuine concern for getting the client what he or she needs or wants. And if something goes wrong or needs to be clarified later the person may not be there anymore.
Looking back at my now 40 years’ career I think I have done ok. I have done well with experiences and life rather than from brilliant investments
We all dream of striking it lucky, doing something extraordinary and then reaping the rewards and living the good life ever after. The media portrays people who seem to have achieved that all the time. But luck is by definition something you can’t count on and also it is exceptional. The David Beckhams, Opera Winfreys, and Bill Gates of this world are so few that it is almost illusionary to try to emulate them. They all epitomize a dream – but if you wish to do well you need a plan and approach separate from dream land. A vision, goal and a general plan may be helpful, but dreams rarely come true outside fairy tales. If you want to build equity and wealth you need to approach it differently.
Perhaps the first question you need to ask is ‘why do I want to get rich?’ And perhaps the main answer to that question is to become happy. This suggests that getting rich is only a means to something bigger. Achieving happy status may include many other things like love, friends, family, children, travel, study, respect, arts, sports and making a difference. This is where we need to be cautious that the pursuit of wealth doesn’t impinge on the more overarching and important goal of being able to do the things that gives us pleasure and purpose. Being rich with little ability to enjoy the things that make life fun and meaningful is not a success formula.
Getting a good education is a good start. It doesn’t guarantee you income, but on average it makes you better off and improves your expected net present value. Most people seem to envisage pairing up with someone else to create an economic unit (that may not be the purpose but legally a matter of fact). Through education you also have a chance to meet with and pair up with someone else with the benefit of higher education. If the average employment rate of men is around 85 % in advanced economies, that of women is trailing just a little behind in the high 70%. Clearing the hurdle for house ownership around major cities almost requires two reasonable incomes. Choosing a suitable partner also including his or her ability of financial contribution seems to make sense.
Otherwise perhaps the most important decision in life is to choose the right parents. No-one will doubt the head start good parents and a good family can give you, but of course this is a random factor rather than something we can really do much about. Betting on random events being in your favour is futile. Focus on what you can influence.
Most people have goals that override wealth generation. If I showed you an idea that was guaranteed to lose you money every year for 25 years, how would you feel about it? This is of course children. Most people seem to want the experience regardless of its financial impact. I have three sons and of course I love them and never regretted their arrival. But they do cost money so the pressure is on to earn enough that they can also get a good head start and realize their potential.
Until a few years ago I was married and had a small fortune. Now I am not married any longer and have a smaller fortune. But I am richer and happier. I had to walk away from half the money in order to be able to live the life I wanted and be happy. I have never looked back and am convinced it was the right decision. The reason I am having this discussion is that you are likely to have similar considerations as I have had, and anyone you deal with too. We are human, and being human comes with certain traits. If we understand what these are we can more readily put our wealth generating ambitions in perspective and ensure that only those means are chosen that really do assist us in our pursuit of happiness.
A key step in building equity is to start early and set aside money regularly to build for the future. During lean years we should set aside 5 – 10 % of our earnings towards the future, and during good years, perhaps double that percentage. Building economic freedom is as much about cost and spending discipline as it is about superior earnings. High earnings is good, by all means get it if you can, but the reality is that most people will not be (by definition) high income earners. A penny saved is a penny earned.
Many of the very rich entrepreneurs have a very cautious life style and spending pattern. Two examples that come to mind are Warren Buffet (the investor and fund manager) and Ingvar Kamprad (founder of IKEA furniture stores). They lead by example! Both these men are immersed in serving their customers well and if you portray extravagance and vanity this has the potential to start a rot among staff and erode customer loyalty and be detrimental to your success formula.
There has been a lot of discussion about the wisdom of buying a home when prices seem high. Here I think it is important to go beyond the analysis of what is recommendable to the economic man. Most people are not economic men. Normally investors consider an asset more attractive if it is liquid. However the risk is that liquid funds may be miss-spent on things you ostensibly can afford but perhaps don’t need.
I think that buying a home has many attractions. It gives one a sense of independence to own your home. It also forces cost discipline because you need to pay off your mortgage. What happens is that people seem to buy a house around the age of 30 and then gradually reduce the debt, possibly after trading up the home a couple of times, and you may have a debt free home and significant equity at the age of retirement. Even if an analyst can demonstrate that renting and using any excess funds for good investments will be better, the most likely scenario is that such excess funds will be spent and at retirement there is little or no equity, making it more difficult to live off retirement income. What looks good in theory becomes bad in practice once you factor in normal human frailty and behaviour.
When I was offered to be MD for one of the Swedish Government Pension funds ten years ago I considered how I would approach the role. Firstly I said I have never done anything like it before and was told that is not a problem, they were looking for general financial markets experience and good judgment. There would be a team of expert analysts and investors at my disposal. When asked what I wanted to be paid I said x dollars plus say 25 % bonus if certain agreed targets were met. I was told that I would be paid 1,25 times x but no bonus. I thought that fair enough and understand it an expression of a (Swedish and particularly anything government related) deep seated disbelief in bonuses, in terms of bringing out the right behaviours in people. This is the list of things I planned to focus on:
Adherence to ethics and values – who wants their funds invested ‘unethically’?
Return on Investment
Please note that in this list return on investment comes last. Of course I want to see the value grow but only within the confines of the previously listed points. All the points mentioned ahead of ROI are also designed to reduce erosion of capital. One must avoid the temptation to be a hero topping the return lists and focus on good solid sustainable growth. Making a genuine and significant effort to co-operate with the investor and explain and agree, to the extent possible, the course of action would be key. It is so easy to get carried away with your own importance when you represent billions of dollars of funds, and also easy to fall into the trap of serving the intermediaries who want to transact with you, rather than the core investors/ stakeholders/ future retirees.
Perhaps the most successful investor/ fund manager of recent times is Warren Buffett. The personal traits that characterize him seem to be:-
Simplicity – stick to what you can understand, avoid complicated tax driven transactions
Humility – reminding yourself that you are mortal and it doesn’t take a genius to invest well
Frugality – a lavish lifestyle – living like a king off small investors’ money – will always irritate the public and erode your credibility
Investment Horizon – forever, don’t buy anything which looks like a temporary success
Having an aim in life – for every ten people that know how to invest well, there is only one who knows how to spend well.
My friend from Nebraska told me that Warren Buffet doesn’t buy a new car for $ 100,000 but rather a twelve year old one for a very low price. With his long term average return of 21 % pa that $ 100K would grow to one million dollars over twelve years and Buffet says no car is worth one million dollars. Interesting logic!
The other thing I have picked up over the years is the strong inclination by many investors to stick to assets you already have even when they depreciate, wanting to avoid crystallizing losses. This is even true for currency dealers and of course it is crazy. We need to look forward and not backwards. If you don’t think an asset in your portfolios is worth buying, the sell it fast!! Crucial in all finance is to be honest with yourself, realize that mistakes are made and cut your losses. Hiding bad decisions can only end in catastrophe and of course is a dismissable offence in a bank – and so it must be. Bad news must be brought out in the open and dealt with resolutely lest severe difficulties will ensue.
Recently the ex governor of the reserve bank, Don Brash, wrote an article in The New Zealand Herald arguing that we don’t need compulsion in superannuation savings. I argued differently and got a letter published the next day saying;
There is something right about putting away resource in good years to help provide sustenance in leaner years
It is true that with the introduction of Kiwi Saver the need is less as this scheme catches the majority of income earners but it is still unsatisfactory that those who are most in need will be outside the system without compulsion. I think a cohesive and caring society needs to try to include all. Happiness and harmony is at least as much about how we feel as it is about conclusive numerical analysis. An issue like this needs more than strict economic analysis as it is also a matter of fairness and the good society.
When interest rates and investment returns get very low planning for retirement is affected and living off returns becomes more difficult. Many people have an aversion to use their capital to cover living expenses but there is nothing wrong with that. One problem in this context is that it is slightly complicated to calculate how much you can take out to avoid running out of money. Calculating annuities is outside most people’s capability. This is where good financial advice can be useful.
When you hit 65 years of age, and if you assume you will live to 85 you have 240 months to go. At 3 % interest you can take out 0.55 % of your capital (including interest) every month for 20 years before the money is gone. One million dollars pays you $ 5,500 per month, half a million dollars $ 2,750 and so on. Assuming you have some kind of pension or super income, every $ 100K you have put aside extra represents $ 550 dollars per month in extra income. It is not difficult to change the parameters in this arithmetic to suit each individual’s assumptions, but if you are not used to economic calculations it can be challenging.
Part of the big losses for savers in the recent finance company debacle may have been that people who didn’t want to deplete their capital desperately sought higher yields and unwittingly moved into risk territory which proved ruinous. If they were conversant with annuity calculations they could have remained with low risk assets and yet have sufficient means to pay their way.
The reality is anyway that as we add years to our life we become less prone to spend money. One of my friends suggested that after 75 years of age you don’t need much money as it takes half day to dress and half day to undress and in between there isn’t much time for lavish expenditure.
If you still have a mortgage on your home, the best investment is often to reduce the mortgage until it is gone. Banks and others who have suggested remortgaging your home for all sorts of frivolous spending or investment have caused a lot of harm. Partying on credit is generally not a good idea and entering into high risk investment schemes by way of home mortgage finance is also something good advisers should discourage.
Like a good doctor, the financial adviser needs to engage in a dialogue with the patient/ customers and show empathy and take a genuine interest in the outcome. The results for the customers must be the prime focus. When people are well supported and advised they can usually achieve healing and other great results by themselves. And the contribution by the adviser is likely to be recognised and rewarded by the longevity of the relationship.
We need to include the human aspect and element in everything we do. People are driven by emotions and feelings and it is good and useful to try to understand and cater to these feelings. In future it will be increasingly important to deal with trust worthy, values driven people because this is inspirational, motivational and confidence inspiring. These factors are necessary, even if not sufficient, for sustainable prosperity and success. Don’t be blinded by the appearance of superior yields and success. Even a good track record doesn’t guarantee anything for the future. Dealing with people before you have established their trustworthiness and reliability will always be high risk.