Investment Advice for Young(er) People

There are several advantages and several disadvantages to having reached 40. The disadvantages can be summed up as “you’re just not as young as you used to be”. You get tired more easily, your body deteriorates and you have more responsibility (and, therefore, things to tie you down).

The premium advantage is you have experience. This counts for a lot in every sphere of life and there is no way to fake it or speed up the receipt of it. It comes gradually – quite literally one day at a time.

I say all this to preface the remainder of this piece because I know when I was young I was given lots of advice that I ignored because I thought I knew better. Sometimes I ignored it because it sounded like advice for someone else from someone who didn’t understand my unique circumstances. As it turns out I was right maybe 50% of the time. A lot of what people tell you when you’re young is bullshit. But the other 50% I wish I had paid more attention to.

This article will help you immeasurably if you are under 30, and will have a declining impact the further over that age you are. Beyond 40 I have no business offering advice to anyone.

So let’s start with what exactly an investment is. Everyone talks about it as though it’s a concept we should all innately understand. Many people, including me, missed the memo on this one. I had no idea what investing was about for a very long time and thus I missed many opportunities to do so. I suspect others had an advantage growing up in families with more financial wisdom and aptitude than mine. I learned it all the hard way.

So an investment is nothing more complicated than a mechanism to take what you earn directly and have it gain value indirectly. The simplest example of this is putting your money into a bank account that pays interest. Theoretically you put your money in the bank who then uses that money to make bigger investments themselves. In return for that the bank pays you interest for as long as your money is there – growing your money by a small percentage over time.

Unfortunately the easiest and most obvious places to invest your money are also the places where the odds of you actually growing it are stacked against you. The interest on a typical current account is less than growth in the actual cost of living, or “real inflation”. So instead of gaining money by putting it in the bank you are, in effect, slowly losing value.

Money is a bizarre thing when you stop and think about it. It is essentially a mechanism of transferring your time and effort for goods of various kinds. The problem is that due to complicated and bewildering economic realities the money you earned yesterday can be transferred for fewer and fewer goods going forward. This gradual decrease in the value of money means you are compelled to keep getting more and more of it to buy the same things over time.

We all know this but few of us want to accept it. And the entire capitalist system is geared toward obscuring this fact. Why? Because it’s a horrible story that once fully comprehended should shift your behaviour away from buying stuff to ensuring you are getting ahead of the increasing costs. And no business is incentivised to do that – not even investment companies who also need you to make substantially less than you could in order for them to turn a profit.

There is nothing sinister going on here. Economically businesses have to make profits so that shareholders are happy. Shareholders would do other things with their money if the businesses they were invested in stopped making enough of a return.

So…it stands to follow that the best way to make money then is to own a successful business, right?

We’ll come back to that in a moment. But first…

1. Investment Strategy #5: Investing in Your Career

Because a lot of young people work for me I see them making a lot of career and fiscal mistakes. Most young people are motivated by their ability to increase their monthly salary as quickly as possible. Usually this is not because they are implementing one of the above investment strategies but because they want better cars, houses, clothes and gadgets.

The market is hungry for young talent and so escalating up the earnings ladder is eminently possible in your twenties. The incentive to change jobs, each time with a 15-20% increase, is thus strong.

The immediate gain, however, comes at a price which few people appreciate. Change is a setback. And many things only come with time and experience. If you change jobs annually and half of every year is spent learning the ropes in a new company, only half of every year will actually see you making progress in your career. This means that your early salary gains will, over time, be eroded by your relative lack of depth of knowledge and experience.

I’m not suggesting people should stay in jobs where they are being underpaid or exploited. But there is a bizarre contradiction in continually moving jobs for increasing money. In truth you are worth less over time because you are losing ground relative to people who are staying with it, facing the challenging and deepening their abilities. Eventually this catches up with you and you will look back over a career of lost opportunity rather than rapid income growth.

Often the most senior people (and therefore top earners) in any business are those who have been there a long time, know the business well and are in a position to make the greatest impact when they are handed the responsibility.

Take out: always be sure your career is advancing. You’re getting smarter, better, more experienced and better skilled over time. Make short-term sacrifices for longer term gain.

2. Investment Strategy #2: Your Own Company

Business ownership offers three direct ways to earn income over and above your salary. This is crucial: as a salary-earner, even at the top of your game, you have a fatal flaw. One day you will stop working and your salary will cease. If you’re healthy you could live for between 20 and 40 more years with no salary. Imagine that for a moment and see if that doesn’t freeze your blood.

Business ownership:

  1. Gives you a direct share in the profits of the business – known as dividends, these are literally the dividing of business profits among the owners;
  2. Let’s you benefit from the labour of others: each salary earner, in a good business, creates more income than they cost in overheads. This surplus is the profit that the business generates and can be distributed as bonuses, dividends or higher salaries for shareholders;
  3. Gives you the opportunity to sell one day – to someone who believes your business can go on making good profits. This allows you to sell the product of your investment for a lump sum well in excess of what you earn from a monthly salary.

Needless to say: owning your own business isn’t for everyone. In fact, the minority of businesses that are started succeed. And few succeed to the level where they are distributing great dividends or are able to be sold for a lot of money. So I am not advocating going out and starting a business unless you’re confident you have a great product, a way of selling it and the wherewithal to manage an organisation required to keep that up.

Most of us will end up as employees. And that’s ok. But make no mistake: the real, real money is being made by those who own a stake in their own futures.

Take out: If you can start a successful business, you should. It’s about the hardest thing you can do but if you succeed there is nothing else like it. 

 3. Investment Strategy #2: Passive Income

Passive income is, for many people, the holy grail of investments. You put your money somewhere and income starts flowing from it without you having to do anything further. Interest on a bank account is passive income – it’s just not sufficient for you to make any real profits. But as a starting point, and if you have no other options, it’s better to have your money growing in a bank account than wearing it in a pair of expensive jeans that are worth nearly nothing the moment you purchase them.

Everyone should get some form of passive income as early in your life as possible. All that is required is a sufficient saving against your monthly expenses every month so that you have some spare money to invest. How much you can save depends on your individual circumstances, but if you have a reasonable middle-class job you can save.

There are many different kinds of passive income sources. The ideal kind shows capital growth as well as ongoing income. A great example of this is owning a rental property. Over time, and once you’ve paid enough of the place off, the overall value of the asset increases and you earn rent from it each month. If you’re smart the rent can pay the bond and eventually you have a (mostly) passive source of income. (I say mostly because property does bring some expenses and effort).

Another passive source of income is owning shares in someone else’s company (private or public). Here your money is being used by someone else to run their business. You are tethered to their success but if they do succeed you go on the ride with them.

Lastly, and most simply, you can invest money into a unit trust fund or long-term investment vehicle which returns both dividends/interest as well as long-term growth of your initial investment.

Take out: always be on the lookup for passive income opportunities. It may take a few tries but it is easier to crack this than it may initially seem.

4. Investment Strategy #3: Capital Growth

Capital Growth is differentiated from passive income in that the return comes much later and, usually, with a lot less tax. Again a lot of people are exposed to capital growth in the increasing value of their properties. The problem here is that unless you downscale you will be moving this capital from one property to the next for most of your life.

Other forms of capital assets include investments such as fine art, wine or long-term investment funds such as a property fund.

As with passive income it is easy to find something that will gain in value over a long period and put some of your money into it. Property is, once again, the easiest option but certainly not the only one. The benefit of youth is that you can take time to learn and grow your assets slowly as you do. You may know nothing about art or property now, but in 10 years you could be an informed investor.

Take out: a part of every investment plan should include appreciating assets. A car is not an appreciating asset.

5. Investment Strategy #4: Insurance-type investments

The world is full of sneaky insurance salesmen who want to make a commission on selling you an insurance product. Many of these products are fundamentally ok: a retirement annuity, for example, or a provident fund, are forced investments that pay you a lump sum when you’re older. There is nothing wrong with that.

Others – like disability cover – are more classical insurance products that make life less risky by ensuring you an income if something bad happens to you and you can’t work.

The problem is that the insurance guy wants you to be over-insured so that he can get his commission from all your monthly insurance bills. Buying life insurance, for example, in your twenties is insane unless you have a partner or children who will need the money if you die.

Even a retirement annuity needs to be carefully thought through. If you can invest your own money more wisely than the fund manager (who is going to charge you for his efforts) then its possible to build a retirement plan without one of these vehicles.

It is good to know, however, that there is a lump sum somewhere in your future that you can more or less depend on. It is hugely unlikely that it will be enough money for you to live on for the rest of your life so this kind of investment is a part, rather than all, of the investing you need to do.

Take out: some degree of insurance cover and structured retirement product is a good idea. It’s just not a great idea.

6. Whatever You Do, Make a Plan

This piece is just a thought starter. There is no single investment plan that suits everyone. But it does start with asking the question, as young as possible: how am I going to grow my money in my lifetime? Formulate a plan, that’s really where it begins. Earn enough to create a surplus and use that surplus to grow a source of income not directly tied to your labour.

This all sounds easier than it is. Or maybe it doesn’t sound easy at all which, in point of fact, is the truth. But while you have youth on your side – and therefore many years for investments to slowly grow – it’s time to start planning.

Four Things I Wish I’d Known 15 Years Ago

Today I thought I’d jot down some of my learnings from the past fifteen or so years of running smallish to biggish businesses. I sincerely believe that many of these are lessons you can only learn from experience – and that if you have your own business you probably have to make these mistakes yourself before you can learn them. But nonetheless I’d characterise these as: the things I’d wish I’d known 15 years ago.

1. Medium is Beautiful

Good businesses grow. They have to for two key reasons: first, they have to keep pace with the increasing costs (and thus threats to profits) in the economy; and second they have to remain competitive for work and skills.

Unfortunately this often means they grow in staff size and costs at the same time. The phrase “victim of your own success” is never more true than in a services business where the more you succeed the more work you win, the more people you need to do it, the bigger the office space required etc. Wrapped up in that “etc” is a lot of other expensive shit.

My contention is that the perfect size for any business is 50 people or less. In other words, the number of people you can fit into one large room. At this size you barely need any systems or processes, you know everyone well (and they all know each other), and weak people are obvious and quickly pushed out.

This is tough because the need to grow puts pressure on small businesses to get bigger – and at first it seems like doubling a recipe. Twice the sugar, twice the flour and you have a bigger cake. But there are exponential complexities that emerge from growth that make this a terrible analogy.

We have solved some of this challenge by breaking our business down into semi-autonomous units. There may well be other, better ideas out there but I’ll say it again: find a way to keep it small. Or at least medium.

2. Great People are (Really) Hard to Find

This may sound obvious but I’m not sure most business owners understand just how hard it is to find a truly great person to join their company. So most of us settle for finding “people with potential” which is usually code for someone who doesn’t fit ideally but who we hope eventually will.

Sadly, I bring the news that you cannot turn someone “ok” into someone “great”. And “great” is not an absolute measure of someone’s worth in the world – most people are great at something – but it’s a measure of their fit with you, your other people, your business’s goals, your customers, your style of working etc. Another “etc” packed to capacity.

We all spend a long time, with many errors, choosing a life partner – wife, husband et al. And of course that is a critical choice in all of our lives. But it’s worth considering that the people we work with can be people we spend even more time with, under even more stressful conditions, than those we’re married to. Would you marry someone after one date? Because that’s often what happens: one great interview and off you go.

In South Africa “firing” someone is tough. The process often also triggers a fight or flight response from an employee which makes them cling even harder, despite it being worse for them than simply moving on. And so hiring ought to be a much bigger deal than many of us make it.

Suffice to say if you own a company you will only rarely hire truly great people, people who fit perfectly. And if you’re finding them faster than this you’re making hiring errors that will ultimately drop the standard of your business.

3. Service is a Verb

Ok, well it is actually a verb so this is no great revelation. But if there’s one truth I wish I could hardwire into every employee, vendor and member of the human race, it’s that you have to work at doing great service. And, if you’ll forgive that bad grammar, this is something most people screw up. And it’s not hard to understand why. It’s extremely hard.

Great service has, at its core, the ability to empathise. And empathy requires that we step out of our own perspective and judgements and look at things from another’s point of view. And this is an unnatural ability that has to be practised and refined. Our natural inclination is to be defensive, self-interested and to win our side of an argument. These are sure fire ways to break any relationship, no less so one with a customer.

I say “natural” but actually different countries and cultures have different relationships with both empathy and service. South Africans, in my estimation, are particularly unwilling to see the other’s point of view in a service context. Perhaps someone can offer a psycho-historical explanation for this but to me it seems an obvious fact. It is far too easy to provoke us into annoyance in situations where we are supposed to be servicing.

The ability to service well is a selling point for any business at any time. Great service becomes legendary and poor service is instantly viral.

It is profoundly difficult to get everyone in a big organisation (refer to point 1) to offer great service to its customers, particularly since many people simply do not find any inherent value in providing it. Most people want to be right and want to win. Great service requires that you let the other person be right and that you not only lose, but that you love losing for the sake of the relationship. And if you bristled at that last comment you have some small idea of why great service is hard.

4. Everything has a Solution

There is no such thing as an unsolvable problem in business. Or in human relationships. In metaphysics, maybe. But business and relationship problems, whilst they may be “wicked problems” (http://en.wikipedia.org/wiki/Wicked_problem), can be overcome. What they demand, though, is not logic or talent but perseverance and patience. They require a steady heart that is willing to return to the problem again and again, trying multiple strategies, and which, despite repeated failures, is never entirely drained of the energy to return. There are times where it’s not worth it, of course. The return on all that time investment may just not justify it. And being able to tell when it’s economically sensible to get the hell out is another important life skill. But I do know that if you return to something enough times with continual hope you will eventually find your way through it. At least in business and other human endeavours. Metaphysics not so much.

Remaining hopeful – which is another way of saying this – is terribly difficult. Hopelessness is another natural human response to repeated defeat. But whilst you may think what lies ahead is even more defeat, most things do eventually yield. Which is why the winner is often not the smartest or fastest but the one with the best pacing.

Life can be hard.

Good luck.

Thanks to Sarah Blake for putting me onto the literature on “wicked problems”.