BLACK SWANS REQUIRE LARGE CASH RESERVES

One of the many business mistakes I have made in my career, and I've made a ton, involved not having a large enough cash reserve for an "extremely rainy day." Today's inter-connected, lightning-fast business world requires a war chest much larger than previously thought prudent. Nassim Taleb's book, "The Black Swan," lays out the premise that all of the impactful events in business, economics, and world history could have never been predicted. The book title emanates from the simple story of how European encyclopedias listed swans as always white until a global explorer discovered black swans and forced the scholars to change the facts. This true story is a metaphor for "we don't know what we don't know" and "we won't predict what has never happened before."
As a result of our blindness, the events that truly disrupt our organizations are always the events that the consultants and the attorneys never imagined. One school of thought totally shuns financial advisors, risk consultants, and economists while claiming they never foresee the truly impactful events at the edges of the Bell Curve, except on subsequent talk shows giving their Monday Morning Quarterback analysis.
This is why today's highly-connected and highly-regulated environment requires a much larger cash war chest. I failed to predict our Black Swan. With our investment firm, I had prepared for terrible market swings and poor economies, and we had weathered many of these cycles over two decades. But, I missed the government regulatory backlash after the 2008 Financial Crisis. Following this worst crisis since the 1929 Great Depression, the Government regulatory state responded with never-before-seen fines, indictments, and forced closures. A common misperception is that the Government did not exact a great revenge on the financial community. This perception was only correct for the large, visible Wall Street companies. For the rest of the community, the Government closed over a thousand firms and brought a large number of civil and criminal actions against mid-tier and boutique firms and individuals. The large public corporations mostly wrote the Government substantial checks (with shareholder dollars) anywhere from $10 million to Bank of America's $17 Billion in order to satisfy their regulatory investigations.
Our firm was caught in economic purgatory - too big to remain off the regulator radar screen, and too small to be able to write a substantial check to make the regulators move onto the next company. After resisting what we felt were baseless allegations, and us demanding arbitration hearings, we were suddenly notified that the last five year's of our financials had been "re-audited," and now we were mysteriously "out of compliance." These were the same financials which had been audited annually by four separate regulators, including our accusers, but suddenly we now had our own Black Swan. We could not rectify these contested millions in the forty-eight hour window given, and we were shockingly out of business on Monday morning (See "Fall of MICG," Ash Press 2017, Amazon Books). Today, it still seems impossible. I had let down so many employees, shareholders, and a community which had relied on our success. Multiple attorneys have subsequently advised me that if I would have had a war chest of $10-12 million in liquid cash to "write the check," our firm would have paid a fine and made it through this period. We had recently spent a great deal of our excess capital taking advantage of the market turmoil and purchasing successful investment practices from Merrill Lynch, UBS Securities, and multiple regional firms. What I should have been doing was building up a large war chest in case I did not know what I did not know. The media has always incorrectly claimed our closure was the result of nefarious hedge fund activities following the Bernie Madoff hysteria, but that was not the case. We would have weathered that. It was not having the cash on hand to write an immediate check.
Your war chest has to be cash - not investments, not credit lines, and not even money market accounts. In our 48-hour emergency our regional and community banks had already suspended most firms' credit lines in an attempt to survive themselves, our hedge funds and real estate investments had suspended redemptions for our shares, and you might remember that even money market funds were frozen while we all discovered these not to be as daily liquid as we had believed. A friend of mine called me in a life and death panic himself only two weeks earlier claiming that Wachovia Bank had given him thirty days to repay his $16 million loan on his new condo development project even though he was in full compliance with all loan covenants. The small print allowed this during Black Swans. Yet, even Wachovia did not survive. Gold and silver bars are also potentially good options during these periods for a whole separate list of reasons (Another Post).
I have given you my personal experience, but let's look at other recent examples: Chipotle "food poisonings" derailing a tremendous growth story, recent sexual harassment allegations closing multiple organizations, the Obama Administration shutting down the pay-day lending industry and independent "for-pay" colleges based purely on its ideological preferences, and disruptive technology radically changing the future of retail, taxis, and truck drivers. We have all witnessed the successful restaurant crowded every night until suddenly the doors are closed because even though they thought the P&L looked fine, they simply ran out of cash. Read Phil Knight's recent book, "Shoe Dog," which details the numerous times Nike almost ceased to exist because the successful growth actually depleted the savings account.
Now my economist buddies will tell us that an oversized war chest of cash hurts the company growth rate, reduces our Return on Equity (ROE), and reduces a bunch of other fancy ratios we like to use. But, in today's world of big government, social media instant response, and Black Swans coming at us from every direction, I urge you to consider maintaining a much larger war chest than you previously thought was prudent or conservative. Please learn from my mistakes.
Wells Fargo was just fined another $1 Billion this month by Elizabeth Warren and her gang. I hope that stage coach has a lot more gold bars inside! 

"Whom the Gods wish to destroy they first call promising." - Cyril Connolly

* This Post contains excerpts from Jeff's book, "How to Lose a $Billion," Ash Press, 2019 Release.

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MONEY ILLITERACY BY DESIGN

     The great majority of Americans are money illiterate, and unfortunately this is by intentional design.  The 1%'ers hire Family Offices to protect, manage, and grow their wealth.  These unique organizations not only provide traditional investment services, but also implement hands-on education for the next generation, the children.  These children are taught to understand money, business, investments, retirement, and philanthropy.  These families know that without this education over two-thirds of wealth is destroyed by the middle of the third generation.  Translation - Senior builds a successful business which creates substantial wealth, Junior becomes a services professional such as a lawyer or doctor and remains a good steward of the inheritance, then "Trey" blows the trust money on Bon Jovi for his 21st birthday bash and other indulgences, and now the money is gone.  These 1%'ers understand that money drives everything, and they must teach their family to understand how to create it.
     But then why does the American public education system not include money-economic education as an integral part of everyone's "3 R's" beginning in the first grade?  The answer is a structural error in our system - half nature and half nurture.
     First, Nature.  If we all knew just how easy it was, we would all be creating money, working for ourselves, creating investments for rainy days, and funding our own retirements, all without any involvement required of The State.  If we figured out how easy it was, we would not need the massive number of Government employees who now consume 21% of our National Revenue (fyi, this number was only 2.5% in 1890).   Let's also not forget that the 1%'ers would get quite upset if we  all created brilliant ideas, products, and companies to compete with them.  If we know how to make money, they all lose control over us.
     For thousands of years, those placed in power, whether through violence or religion, have controlled the money.  Religious leaders have told us that "the love of money is the root of all evil."   Yet, if we all took the time to actually read the document ourselves, such as the Bible, instead of letting someone else tell us what it says, we would discover that it repeatedly promises great wealth and comfort as a reward for hard and honest work.  The Bible stresses that money is good.  It is the reward with which you may take care of yourself, your family, and your neighbors, and you all need not be a slaves to the Pharaoh, the Mayor, or the Roman Emperor.  "Render unto Caesar the things that are Caesar's, and unto God the things that are God's."
     If The State educated us to understand rugged individualism and self-determination, then there would be no need for The State.  Today, although Americans enjoy the highest standard of living in the world, more than 90% of us have a zero net worth.  With the loss of one or two paychecks, we are insolvent, bankrupt.  Those checks we wait on are our Pharaohs, our Caesars.   No one ever told us that this is not how it was supposed to be.
     Second, Nurture.  Donald Rumsfeld, President Ford and President George W. Bush's Secretary of Defense, stated, "A's hire A's, and B's hire C's."  Let that settle.  Even if the motivation was present, our public structure, and the good people we have working in this structure, are not prepared to provide this education, this ideology.  But, they could be!  One workforce study determined that over 85% of Americans perform their occupation primarily for the money and claim that if they didn't need the money to survive, they would do something different.  Yet, even the other lucky 15% of Americans who select their occupation of choice understand that they may only continue their passion if they also create, save, and manage enough money.
     Another aptitude study concluded that the majority of American workers who claim to "not like math," or to be "bad with numbers," actually score above the national average in this category.  Therefore, these misconceptions and insecurities are simply learned behaviors attributed to parents, teachers, and social norms controlling our expectations.  This correlates exactly to money.  How many times have you, your spouse, or your best friend said, "I'm just not good with money!"?  That's ridiculous.  You are good at it!
     Also, one recent education study ranked U.S. children 27th in world rankings for science and math, while spending the highest amount on education per student.  This is the definition of structural failure.  Charter Schools, Magnet Schools, and select Academies and Public Schools have attempted to incorporate financial literacy programs, but these great efforts are drops in a bucket.  We must understand that money will survive without the arts, but the arts will not survive without money.  Us products of public education (Walter E. Stebbins High School Indians!  Can we still say "Indians?"  Another Post), and current parents trying to provide for theixr children, need to help drastically change the landscape of financial education in America.  Starting in the First Grade, we must teach children to understand money, then how to manage a household and life's economic challenges, followed by lessons in starting and operating a business, and by their Senior Year achieving an understanding of investments in order to save, manage, and achieve an independent life.  This education in no way should be subservient to Pascal, Einstein, or Hemingway.  And remember, almost oxymoronic, throwing more public money at this mission is not the answer. It requires a paradigm shift in ideology, along with the motivation to achieve this parity of knowledge.
     I urge us to educate ourselves in what we will find are simple, financial fundamentals, and I urge us to provide our children with programs, books, and exposure to money and economics.  Through allowances and teenage jobs which pay for performance instead of by the hour (Another Post), we can teach our families to not fear money, but to embrace it as a tool which may equalize all of our circumstances.  No matter where or when or to whom we are born, if we educate ourselves about money, we can level the world's playing field.  We are not asking for equality of outcomes, but simply equality of opportunities, and knowledge is always free to provide this.  Take back this control.

"One's mind, once stretched by a new idea, never regains its original dimensions." - Oliver Wendell Holmes, Sr.

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CHAMELEON COMMUNICATION

    Chameleon Communication is arguably the most important skill for building a successful career, positively influencing your community, and even achieving rewarding personal relationships.

     We must start with the understanding that there is no reality. There are only nine billion different perceptions of reality held by the people we are attempting to influence on this planet. Therefore in order to be as successful as possible, we must constantly adapt our communication style, words, and non-verbal tendencies to align with each individual as closely as possible.
     In our investment company, we conducted Chameleon Communication training programs for rookie financial advisors and service specialists, and then we would provide Chameleon Refreshers during company meetings and annual retreats. We understood that without first mastering effective communication, we could never help our clients reach their goals, and we would never realize our own organizational goals.
     For example, when sitting down with Grandma Kennedy, we would speak a little slower, enunciate clearly, and use terms such as "safety and security." We would sit next to each other at a small round table - never across from each other. We would take off our suit jacket, drink coffee, and periodically break to discuss the grandkids. Most importantly, we would patiently listen without interrupting or attempting to finish her sentences.
     Later, when CEO Jack stopped in for his appointment, we would give him a very solid handshake, look him in the eye just a split-second longer than normal, keep our suit jacket on, and sit at the same round table - just not as close. We would speak louder and quicker, use terms such as "growth and return," and if afterhours even offer Jack two fingers of single malt scotch. Most importantly, we would attempt to listen through his ego and defense mechanisms in order to truly understand his goals and fears.
     Marketing studies for service organizations claim that 87% of a customer's decision to do business with you is based on "how" you look and "how" you speak. Only 13% of your success in landing that big client is based on what you actually say! Think about it. Do we ever really understand what the lawyer, landscaper, or plumber tells us about how they're going to do their job?
     At our company retreats, I would pass out pictures of employees from the Goldman Sachs Annual Report. We would study CNBC to dissect "how" they spoke and what specific terminology they would repeat most often. Then when current clients and new potential investors attended our evening seminars, or visited our offices, their experience emulated the look and feel of what they believed represented investment success. Our language and appearance (the 87%) connected with them at a subconscious-neural level and told them that they were dealing with the right company.
     If you make a strong commitment to educate yourself on how to effectively communicate and influence, along with a never-ending drive to be the smartest technical expert in your industry, your success will know no bounds.
     Now, C-Players will call this "manipulation," and when you demonstrate your drive to constantly better yourself they will call you "narcissistic." This only highlights their lack of education. Remember that he who helps the most people, wins. If you believe that you are "doing good" in the world, it is your moral responsibility to then influence as many people as possible. Or, as Coach Belichick would better state it, "Do your job!" 

     In our firm, we believed deeply that each family who became a new client would then achieve a better retirement, their children would attend better schools, and their communities would profit from their success. This alignment with our mission gave us congruency and boundless energy to attract substantially more clients than our competitors. You are not manipulating people. You are giving them the best possible opportunity to understand how you can help them. If they cannot hear you, they cannot receive the help. Ignore the C-Players. Do not entertain their gossip. Your place is not among them.
     Whether in consulting services, plumbing, landscaping, running Big Brothers Big Sisters, or simply attempting to influence your teenagers to do their homework, Chameleon Communication will enable you to lead and serve more effectively. I urge you to allocate a great deal of attention and energy into mastering this skill set, and I wish you the best of luck influencing the world this week. "Do your job!"

This Post is an excerpt from Jeff's upcoming book, "Building Special Companies: Everything You Never Learned in Business School," Ash Press, Fall 2018.

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THE CRITICAL FIRST DAY

     In my current transitional living arrangement, new roommates are constantly arriving. The other evening as I witnessed the normal "Non-Welcome Wagon," I was reminded of our investment firm's critical first day strategy. The amazing team of our firm had made a commitment to "Make First Days Great." If the new teammate's first day in your company, charity or civic group is not carefully scripted to be exemplary, the remainder of the relationship will be weaker for it (remember the rules on first impressions). 
     Yet, how is this most-critical task handled at most companies today? First, they get a lucky break. The all-star performer, Joe, that they have been recruiting for two years goes through a difficult corporate merger, feels unloved, and now takes them up on their offer to join the company. They finalize all the details and schedule Joe's first day two weeks down the road. They then go back to managing the sales problems in the Cleveland office. 
     That fateful first day, Joe is up early and nervous. His wife, Susan, selects him the perfect tie, and he promises to tell her all about his amazing day over a celebration dinner tonight. Joe says one last time, "I hope I made the right decision." 
     Susan smooches him on the cheek and tells him, "I'm so proud of you." 
     Joe arrives at the office. The busy receptionist lets him know that his boss is in Cleveland and directs him to take a seat. After forty-five minutes, the HR assistant greets him and leads him to an empty cubicle. His office is not yet ready, and she's not sure which one is his anyway. She tells him, "Everyone's in meetings all day, so please read the Personnel Handbook. Sorry it's 300 pages, but we have a lot of rules." 
     Joe makes sure not to bother anyone. He skips lunch because he's not sure of the office protocol. But, he does consider sneaking out to the corner tavern for a few drinks while he contemplates what he has just done to his promising career. 
     At 5:05 he slides out the back. Susan rushes to the door to greet him and find out every detail of his amazing day. Joe sulks into the house and says, "It was fine, but I sure hope it gets better tomorrow." The two sit quietly over dinner wondering what the future holds. 

     Or instead, if Joe was joining our team of A-Players, here is how we attempted to flip this script. First, I would send out an internal email the day before Joe's first day explaining the new position, and providing a little information about our new teammate so that everyone was in the loop and prepared to give a warm welcome. 
     Joe walks into the office wearing that perfect tie, the receptionist jumps up, introduces himself, and gets Joe a coffee and a danish to welcome him to the office. The best receptionist ever was Justin, a 24-year old good-looking guy who talked his parents into helping him buy some new business suits. He would leap to his feet, smile, shake hands, and treat all visitors like Kings and Queens. I can't count how many compliments we received about Justin. 
     Back to Joe - his new assistant, Robert, hurries out to greet him and lead him to his new office. Along the walk, Robert stops at each desk and introduces Joe to the Team. Each associate puts their call on hold for the greeting and mentions one familiarity, "I see our kids are in the same soccer league!" and, "Oh no! Not another Georgetown grad in the firm!" 
     Over Joe's new office hangs a welcome banner, balloons float inside, and on the table is a gift basket with New Zealand sauvignon blanc (How did they know?). Two goody bags for the kids hold company t-shirts, hats, and treats. Lunch is scheduled with three members of his department. At two o'clock Joe meets with his new boss and receives three projects in desperate need of his brilliance. Suddenly, it's six PM, and Joe remembers that he promised a special dinner with the family. 
     At the door he's greeted by an excited Susan. Joe says, "Let me tell you about this amazing firm!" 
     Susan interrupts, "Wait until you first hear about my day! Two nice women from your company surprised me at my office with a welcome basket of goodies, balloons, and my favorite cabernet! You must have told them! I was the hit of the office. Everyone spent the day asking me about your new company!" 
     Joe, Susan and the kids have a special dinner and have that feeling inside that they can't quite describe, except that everything just feels right. 
Just how many people do you think Joe and Susan told about their amazing first day and this wonderful company? Just about everyone who would listen, twice! Always remember that everyone just wants to be inspired. Everyone craves to be part of something special, and the critical first day sets the tone for the entire mission. The First Day Strategy is so easy, costs almost nothing, and provides a priceless reward. 

"He who has a Why to live for, can bear with almost any How." - Nietzsche

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THE GOVERNMENT HAS NO MONEY

Recent generations of Americans have been raised and educated to view the Government as an omnipotent and never-ending caretaker, as if it is "the Alpha and Omega, the beginning and the end." We personify this caretaker with fatherly characteristics and responsibilities. We state, "They should pay for the poor...They should tax the rich...They should increase Social Security...They should pay for my childcare..." Why do we believe that because we were born, that some entity behind the green curtain should pay for our comfort, much less our survival? Is this belief inherent, or is it instilled? 

     Remember that we must localize all monetary transactions in order to begin to understand how things actually work. In this situation, what we do not realize is that there is no "They." There is only you, me, and our neighbors. If I want someone to pay for my childcare, I should walk over to Mrs. Johnson's apartment once she gets home from work at the bottling plant and let her know that I need her to write me a check. Now, I will need to be prepared for the fact that she might belt out a little Michael Jackson, "If you can't feed the baby then don't have the baby," and moonwalk herself back into her apartment. But, at least I would feel like I had show good character and asked her directly for her money. 

     Governments are pass-through entities just like the Limited Liability Company (LLC) which you set up for your amazing Rodan & Fields skin care side business. "They" only have the money that you agree to give them (and yes, you have to agree - Another Post). "They" produce nothing, create nothing, and cannot survive without you - not the other way around. 

Now follow me on some of these numbers. A tip - read the numbers slowly and attempt to digest what they really mean. Human nature forces our eyes to glaze over when reading big numbers, and this is exactly what "They" are counting on. The U.S. federal budget this year is approximately $4 Trillion. This is the amount of your money which "They" are going to spend. But, it gets worse. You are only agreeing to give them $3 Trillion, so "They" are going to borrow another $1 Trillion from the Chines, the Japanes, and the Germans so "They" can pay for all of the things we believe that "They" need to give us. Now since Mrs. Johnson gave you the moonwalk instead of a check, and since you still feel that someone else should pay for your childcare, "They" knocked on her door for you and took her money under threat of a long list of punishments, to include federal prison. For the rest of the money that Mrs. Johnson couldn't come up with, "They" went hat-in-hand to foreign countries and bartered away more of Mrs. Johnson's, and your, future in order to get the rest of the money. 

     Now stay with me. since World War II, taxes have grown 15% per year faster than Mrs. Johnson's paycheck from the bottling company, and the federal government's spending has grown a shocking 50% faster than her paycheck. So each year, the IRS Agent knocking on her door takes a larger slice of her pay. But, "They" still don't have enough, so they travel the globe and beg other countries for more and more every year. 

Now some big numbers again. Because of this trend, the National Debt (our Collective Mortgage) is about $20 Trillion, which equates to $50,000 for every man, woman, and child (so get Junior to work!). But, this does not count Social Security and Medicare, which also have no money. It will cost you and me another $80 Trillion to make up the shortfall we have not saved for the Baby Boomers. This is on top of the Social Security and Medicare taxes we will already be paying out of our paychecks for the indefinite future. This fiasco is called an "unfunded liability." 

     Very important. When "They" tell you that Social Security will "run out of money" in 2032 (or whatever year they keep changing it to), what that really means is that will be the first of many years in which annual worker payments into the system will not be sufficient to make the payments out to the recipients of the system. There is no money sitting in a Social Security bank account holding all of the contributions you gave them out of your paycheck for all those years. The extra "savings" was raided by politicians years ago. There is no money. 

     So because we thought it would be rude and even outrageous to personally ask Mrs. Johnson for her money, and we instead got "Them" to do it by force, we all now collectively owe $100 Trillion, not to include the money we are already obligated to pay each year into the future. I don't even know how many zeroes are in $100 Trillion. Fourteen? 

In another Post we will address different options for possibly saving this amazing country from bankruptcy, or at least a painful devaluation, like so many other countries have had to do throughout history. But until then, we need to understand that all economics are local. If you want to ask your neighbor to cover some of your expenses, then do it. If you want to pay someone else's bills, that would be a wonderful gesture. Just understand that there is not a middleman who is paying for what we feel we deserve. Not only that, but that guy has even already blown all the cash we gave him to hold for us! 

"The perfect political party would promote as small a government as possible along with pure capitalism, while not promoting their personal beliefs on me." 

     - Jeff Martinovich 

"Just One More: The Wisdom of Bob Vukovich," Ash Press, Spring 2018.

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